Below we’ll look into the different areas of the transaction that yield savings and show you what information you’ll need to exploit those areas, transforming you from a blind negotiator to an empowered one. We’ll also sprinkle in some philosophies, points of view and tips that will help you counter their objections and improve your negotiating swagger to the point you begin to have fun with your new found confidence. When it’s all said and done, you’ll realize that using the word negotiating is really a misnomer, since you’re simply just not letting yourself be taken advantage of as a result of a little bit of inside knowledge gained on the car buying process.

Still, there are those who find it uncomfortable to interact with the dealership and would opt to not have to go through the negotiating process. For those individuals, there are several services we endorse, including AAA Edmunds and CarBargains.

(True) Dealer Cost

The largest area of negotiation, not surprisingly, is the actual selling price of the vehicle. To negotiate effectively on the price, you need to ascertain the dealer’s cost. Most people think of dealer’s cost simply as being the dealer’s invoice figure, however there’s more to it than that. To find the true dealer’s cost, you’ll need to compile the following pieces of information:

•the dealer invoice figure
•the dealer holdback level
•the factory to dealer rebate

For example, the true dealer’s cost on a hypothetical vehicle with an MSRP of $19,243; a 3% holdback threshold; and a factory to dealer rebate of $1,250 per unit sold, would be figured as follows:

Dealer Invoice 17,985
Less Dealer Holdback - 577
Less Factory to Dealer Rebate - 1,250

MSRP = 19,243            True Dealer Cost = 16,158

A mark-up of $3,085

Below we discuss each component in more detail and show you where to find the actual figures for the vehicle you’ll be purchasing.

Dealer Invoice

Getting the dealer invoice for a particular vehicle has become pretty straight forward and can be as easy as going to Edmunds.com and looking up the make, model and trim level you’re interested in. Edmunds will return the MSRP along side the invoice price for that particular vehicle. This is the easy part.

The not so easy part is getting to the dealership and learning that the particular vehicle you’re interested in buying doesn’t conform to the same numbers you saw on Edmunds, which is most usually the case and a result of different option package bundling, etc. The way to deal with this is to keep in mind that the same percentages of mark-up are in play regardless of the vehicle you’re choosing, provided it’s the same make and model. For example, let’s say you’re interested in buying a 2010 base model Cadillac CTS which is listed on Edmunds as having an MSRP/invoice of $35,165/$33,231 respectively. First figure what the difference (mark-up) is, which in this case is $1,934. To figure out that mark-up as a percentage, divide the $1,934 by the original invoice price of $33,231 and we get .058 or 5.8%. Now, just to make things a little more complicated than they have to be, the base vehicle mark-up percentage and that of the option packages may vary widely, usually being much higher. For example, using the same vehicle, an option package has an MSRP/invoice of $2,750/$2,420. Doing the same math the percentage of mark-up on this $330 spread is .136 or 13.6%.

Okay, so now it’s all great that we have the percentage of mark-up, but now when you’re on the lot how are you going to work that backwards to figure out the dealer’s dollar mark-up so you’ll know how much to offer for the vehicle? Using the base vehicle portion of the Cadillac CTS above as an example of how you want to run the numbers backwards (remember that you have to do this twice for the base vehicle price and then the options package since they have two different mark-up percentages), let’s say we just walked onto the dealer lot and see the base MSRP on the window sticker is $35,165. We know from doing our homework comparing MSRP versus invoice price that for this particular model the mark-up is 5.8 percent (.058). Now, all we have to do is figure out the dealer’s invoice price in dollars and we’ll be closer to starting negotiations. To do that without having to experience high school algebra equation flashbacks where you’re solving for “x”, just add the .058 to 1.000 to get 1.058 and then divide that by the MSRP you already know and you’ll have $35,165/1.058 which gives you the dealer’s cost of 33,237. If you go back and check the numbers above, you’ll see that this calculation is $6 off the actual figure, which is the closest you’ll get short of running the algebraic equation to get the number to the exact dollar. If you want try to figure that out we’re rooting for you, but we’ll be doing it our way!

Dealer Holdback

It has become common manufacturer practice to “hold back” 2-3% of their dealer’s profit on a sale and then cut a check for this amount ($400 to $600 on a $20,000 vehicle) at some point after the transaction, which could be immediately after the sale, or on a quarterly basis, depending on the manufacturer. Dealer holdback is the money that’s “tip-toed” around at the dealership, which everyone is supposed to pretend doesn’t exist, including salespeople, for whom this topic is conspicuously absent from their training programs. This is consistent with notion that at most dealerships, salespeople are treated on a need-to-know basis regarding management financials, with their seldom being privy to such figures.

Holdback usually is earmarked to offset financing costs of keeping vehicles in inventory for dealers, but whatever the use, the holdback money offers the dealer a built-in mark-up which represents the absolute worst case scenario as to their profit on a particular vehicle. Do know however, that chances are almost none (barring a situation where you’re buying a car late in the month and the dealer needs your sale to meet a sales level that will retroactively trigger a higher manufacturer to dealer rebate on all prior vehicles sold that month) that dealers will negotiate into their holdback, as the word “sacred” is commonly used to refer to this pre-allotted profit.

It is however necessary to know about holdback in determining a fair dealer profit level that you’re comfortable leaving the transaction with, which in our opinion would be a nominal amount above the holdback profit, say an extra 1% ($200 on a $20,000 vehicle). If you’re buying a particular model which has been languishing on the dealer’s lot, you may want to consider your offer as only being the holdback amount. Conversely, if you’re buying a hot new model that’s flying off the dealer’s lot (rather rare) you’re going to need to offer significantly more than the holdback amount. In short, you’ll need to adjust your offer along with the demand for the vehicle you’re purchasing.

Below is a list of manufacturers with their corresponding holdback percentages:

Acura 3% of MSRP
Audi None
BMW None
Buick 3% of MSRP
Cadillac 3% of MSRP
Chevrolet 3% of MSRP
Chrysler 3% of MSRP
Dodge 3% of MSRP
Ford 3% of MSRP
GMC 3% of MSRP
Honda 2% of MSRP
Hyundai 2% of MSRP
Infiniti 1% of base MSRP
Isuzu 3% of MSRP
Jaguar None
Jeep 3% of MSRP
Kia 3% of base MSRP
Land Rover None
Lexus 2% of base MSRP
Lincoln 2% of MSRP
Mazda 2% of base MSRP
Mercedes-Benz 3% of MSRP
Mercury 3% of MSRP
Mitsubishi 2% of base MSRP
Nissan 2% of MSRP
Porsche None
Saab 2% of base MSRP
Subaru 2% of MSRP
Toyota 2% of base MSRP
Volkswagen 2% of base MSRP
Volvo 1% of base MSRP

* MSRP = Entire MSRP of the vehicle including options.
** Base MSRP = Portion of MSRP prior to the inclusion of any options (this should be sub-totaled on the window sticker)

Factory to Dealer Rebate

Factory to dealer rebate money is the dirty little secret that the car store doesn’t want you to know about. Just as the name implies, a factory to dealer rebate is a monetary incentive the dealer gets for each unit of a particular model they’re able to sell (sometimes sales thresholds are set that the dealer need first attain to qualify for the rebate, and once reached the rebate will apply retroactively to all prior vehicles sold). The manufacturere will leave it to the dealer as to how much, if any, of this rebate will make it to the consumer. The theory here is that whether the dealer uses it to motivate the sales force, or as extra room to come down in price for a customer, the net effect should be more vehicles sold for the manufacturer. Of course the dealer wants to hold onto as much of this money as he can, actually all of it if possible, and he will unless the customer knows it’s in play. The dealer knows that if a customer is wise to a factory to dealer rebate, it may as well had been a factory to customer rebate, since most, if not all will be diverted to the customer.

The first place to look for the secret factory to dealer rebate information is on Edmunds.com. Click on the “new cars” tab and then click the “incentives and rebates” tab. Next, navigate your way until you find the vehicle you’re interested in and click on that model. The column you’re interested in now is captioned “manufacturer to dealer” and if there’s a rebate being paid by the factory to the dealer, there will be a link to click on which will say “marketing support” (code for dealer rebate). Click on that and the dollar figure will be displayed along with the duration of the rebate and the terms. Do read the terms to be sure there are no provisions affecting your dealer’s receipt of this money.

Automotive news, an industry newsletter put out by Crane publications, includes a section entitled “Incentive Watch” which lists factory to dealer rebates and incentives.

Consumer’s Checkbook, a subsidiary of The Center for the Study of Services, a non-profit consumer information & service resource, publishes a bi-monthly newsletter on roughly the 15th and 30th of each month that we like called CarDeals, which offers a comprehensive listing of factory to dealer rebates and incentives. One caveat we want to share with you is that if you purchase the latter listing of the month, your information will only be good for 24 hours and worthless thereafter, so steer towards the 15th and purchase your vehicle in the second half of the month. This is something which GreatCarBuyingTips.com brought to the attention of Consumer’s Checkbook, so if the publication dates change to the 1st and 15th like we’re hoping for, we’d like to think we had something to do with it!

Documentation (“Doc” Fees)

There’s nothing more distressing to us than the truly egregious old dealer standby used to make extra profit – the documentation fee or “doc fee.” This may be referred to by other names (i.e. pre-delivery fee, dealer prep fee, etc.) however, the first constant to remember is that whatever name it’s assigned, it will typically appear on the purchase agreement and/or buyer’s order as a pre-printed dollar amount that in our experience averages $500 and up. The second constant is that this is a nearly 100% bogus charge, serving no purpose other than to build-in extra automatic profit for the dealer on your transaction. We say nearly because we’d be able to stomach a $25 - $50 fee for the dealer trying to offset some of his cost of doing business, unfortunately, the customer routinely gets exploited for 10-20x what should could reasonable be justified, especially when you know that it’ll be the dealership’s lowest paid clerical employee processing this paperwork.

This fee has been exploited so vigorously, with so many customers in the dark as to its lack of validity, that some states have capped the amount dealerships are allowed to charge. As of last check, California is the lowest at $45, with the 9 other states capping dealer document fees as follows: Illinois $150; Louisiana $50; Maryland $100; Michigan $190; Minnesota $50; New York $75; Ohio $250; Texas $50 and Washington $150.

These fees will typically have an accompanying asterisk near them, which actually makes for some very amusing reading once you’re in the know about dealers charging this fee. Below is an actual purchase agreement from a GreatCarBuyingTips.com staffer’s vehicle purchase, as well as an actual buyer’s agreement (two different names for the same form) from another purchase at two completely different dealerships, selling vehicles from completely different manufacturers:

First, we’ll discuss the purchase order where in box 4 there is $499 being charged for “PRE-DEL FEE.” Once the corresponding asterisk is found, given its placement at the bottom of the page, coupled with its small text (which we’re sure was just an oversight on the dealership’s part) it reads: PRE-DELIVERY FEE This charge represents costs and profits to the selling dealer for items such as inspecting, cleaning, adjusting vehicles and preparing documents relating to this sale. On the surface, this actually looks like it means something, but the reality is a little different however:

First off, you’re buying a new vehicle and there’s really not much for the dealer to inspect, as he has the reasonable expectation he’s received a perfect unit from the factory, coupled with the fact that any cosmetic defects he’ll just leave to you to find upon delivery, which if not found during the vehicle walk-around will later be chalked up as something which appeared subsequent to your driving off the lot. Any mechanical problems that might occur are actually good for the dealer in that it’s future business for his shop reimbursed by the manufacturer, so he’s not going to waste any time testing anything. In short, the dealer has little interest in spending the time inspecting much of anything up front and will deal with issues as they’re presented to him should they come up.

Secondly, cleaning (which is the most pre-delivery work your new ride will ever see before you get it) consists of a few sheets of protective plastic being ripped off of the interior sections and the most expensive car wash your vehicle will ever have.

Third, anything that really needs adjusting you will probably be doing yourself (i.e. mirrors; seat; etc).

Next, the “preparing documents relating to this sale” part is our favorite, since what amounts to a little bit of paperwork is actually the dealer’s cost of doing business, and nonetheless will be processed by the lowest paid employee in their place, assuming that wasn’t already the guy who washed your car.

Lastly, what amounts to possibly the most hilarious thing you’ll ever see on a buyer’s order, is where the fine print reads that the charge is “OPTIONAL” with the presence of a blank space asking for your signature to “ok” the charge! Wow! Sure, why not voluntarily give an extra $699 of your money (a week’s worth of pay for the average American) to the dealer…you weren’t going to do anything with that money anyway! This is just about where we start thinking how ridiculous it is that only 10 of 50 states have stepped in to stop the bleeding by capping this fee.

In short, absolutely refuse to pay the documentation fee, or pre-delivery fee, or dealer prep fee, or whatever else they may happen to be calling it the particular week you’re buying your vehicle. Tell them it’s their cost of doing business and that you know it’s a bogus fee designed for no other reason than to create profits out of thin air. Do be forewarned however, that the dealership will not relinquish this without a fight and that you must remain adamant that you are not going to pay it. They will persist, most likely busting out the tired old dealer line that we hear most every time we refuse to pay this fee that goes something like - “but everyone pays this…it’s not permissible for us to charge others and not you.” First off, that is absolutely false and you should feel free to let the salesperson know that. The counter tactic that we use every time we hear this garbage is to say that we’ll agree to pay the $499 or $599 or $699, but want it taken off the back end of the transaction independent of those previous discounts or negotiated costs that were made making paying the fee a wash. This pretty much stymies the salesperson and once you’ve gotten to this point he or she knows that you know, and will back off and waive the fee, as has happened to use every time we’ve bought cars for ourselves, for our family or for our friends. Should it take 15 minutes of enduring the back-and-forth dealership nonsense, based on the averages, you’ve probably paid yourself the equivalent of close to $2,000.00/hour to stay firm. Plus, you did that all the while confident in the knowledge that you didn’t let them pick your pocket!