I want to talk about this little pitch received from a car salesperson recently. I have some family members that are currently shopping around for a vehicle, and this is a proposed one-sheet they received from a local dealership.
If you ever wanted to know how to identify the bull crap in a car contract versus what is a legitimate line item, this might be a good starting point for you. Take this as an example for identifying dealer profit makers in a car contract and how to avoid them.
Let’s start with the one-sheet itself, and then I’m going to rip this dealer a new one.
The image on the left was sent via text message to my family member after asking about a used Volvo XC90. He made the mistake of mentioning that he was a stickler for maintaining his car, thus the two starred items.
First, we’re going to do some independent research to determine this vehicle’s actual worth. We’ll double-source our information so we know it’s accurate.
Second, we’ll itemize what a reasonable offer should look like. I’ll build an actual offer sheet that I would be comfortable proposing to a dealer myself. Then we’ll discuss all of the additional add-ons this dealer hoped to get away with and why it’s garbage.
Let’s get started.
Actual Fair Market Value
To get things started, we’re going to go to Kelley Blue Book and get the actual book value.
When you trade in a vehicle, auto dealers all use the same formula to get their numbers. They give themselves away a little bit when they send you emails with coupons or mailers with those fake checks offering you a cash amount for your vehicle. If you read the fine print on the coupons, you’ll notice they typically read “Based on KBB Good Trade-In Value”.
We’ll start there. Some dealers might insist that KBB is worthless and that their system uses Manheim Auto Auction data. Ignore them. Both KBB and Manheim are owned by Cox Automotive and use the exact same data set. It’s obviously good enough for their mailers, so it should be good enough for other uses.
Still, we’ll double-source this vehicle offer just to be sure. After going to both KBB and Edmunds, filling out the required forms, and plugging in “Good” and “Average” car conditions in each site respectively, we get pretty similar offers from both websites.
This means that if a customer were to trade this car in today, the dealership would offer the KBB low trade-in of $33,700. But you know what, we’ll let this slide. I’m willing to cut the dealership a little slack here. We’ll assume the dealership bought from a tough negotiator and set the car’s actual value at the flat $35,000.
Thirty-five grand it is. Not the forty this dealer is asking for. Five grand discrepancy, and it’s only going to get worse from here.
Nope. Not paying this line of bull hockey. And nor should you. Ever.
Documentation fees go by many names. If you ever signed a contract and saw line items like E-Filing Fee, Processing Fee, Service and Handling Fee, Dealer Processing Charge, or Electronic Registration Fee, I’m sorry to say that you got hit by the exact same thing. Maybe even multiple times. All of these names are just shorthand for the same service. It pays for the dealership to assemble the paperwork for your purchase and submit it to the DMV, something you could do on your drive home if you were willing to make a stop there yourself.
That’s right. As the buyer, you could buy your new car, collect the paperwork, and register your vehicle at the DMV yourself. The documentation fee is a convenience fee for the dealership to deal with the DMV for you. In this case, the dealership is telling us that assembling a bunch of papers and registering the vehicle with the DMV will cost the buyer $799.
Does that seem like a fair charge to you?
State law governs how dealerships are allowed to charge documentation fees… somewhat. Every state is different, but what this normally means is that dealerships must charge all customers the same amount, and the dealership will be happy to remind you about this. In order to be compliant but still preserve profits, dealerships typically charge an absorbent fee to all of their customers.
This way all customers get over-charged equally. Everyone gets ripped a new one. Perfectly fair!
Instead of paying this document fee, I would recommend choosing an amount that you consider fair for this process. I would also factor in how satisfied you are with the dealership’s dealings. If they’ve been fair and honest to you, well, maybe offer them $100 and tell them to take the remainder of this “document fee” out of the sales price of the car.
For example, we know that our offer for this vehicle will be $35,000. If we’re willing to give this dealer $100 for the documentation fee, we tell them to take the rest out of the cost of the car. Our offer adjusts to $34,301 ($35,000 — $799 + $100). This is now our new offer price for the vehicle.
State law remains in effect. The dealership still gets their $799 documentation fee on their books. But as the buyer, we’re only paying $100 net. If the dealership refuses, leave. They’re counting on the customer either being ignorant about this fee or being unwilling to walk away from the vehicle over a mere 800 bucks.
Let me reiterate that — if the dealership won’t play ball and insists on overcharging you, leave. They’re not worth your business.
Tax and Non-Tax Fees
This category is a little suspect.
Obviously, the final tax number will differ in our case, because we are not going to accept an offer of 40 grand for this vehicle. I’m not overly worried about that number. It’s this second number that concerns me, mostly because it seems intentionally fuzzy on what it means.
Most likely, this number is a total to cover the title and registration fees that are required for any vehicle purchase. These are numbers you, as the buyer, can easily look up yourself and check against the dealership.
And by the way, I highly recommend that you do so.
In our case here, given this vehicle is being sold in Virginia (it’ll be titled elsewhere, but the dealership did not know this at the time), we should only need a total of $50.75. That’s $35.75 for the registration fee and fifteen bucks for the title.
This is why I believe this non-tax fee is suspect. I don’t know what the other $85.84 accounts for, and the dealership is intentionally not telling us.
This is a bit of a racket practice by dealerships. Any time you see fees or charges lumped together like this, I would insist that the dealer itemize. In our case here, they’re charging more than double what they should for required state non-taxable fees, so my guess is they’re intentionally trying to pad a few extra bucks here and hoping we don’t notice.
In any case, should we purchase this vehicle and title in the state of Virginia, we would only offer $50.75. Nothing else. If the dealership balks, well, we walk. But they won’t argue too much here. The law is the law, and they know it.
They just hope you don’t.
So-Called “maintnence” and “cpo wrap unlimited” Warranties
This is several layers of utter garbage, and I’ll explain why.
This vehicle only has 27 thousand miles on it. The default Volvo manufacturer warranty is for four years or fifty thousand miles, and we haven’t hit either of those numbers yet. This car is still under the manufacturer’s warranty. So this is problem one.
The second is that this vehicle is already in the Volvo Certified Pre-Owned program. As such, it comes with a five-year, unlimited mile warranty. Here’s the dealership listing, just for evidence:
I mean, it’s in black and white right there.
So if this is true, and I have no reason to believe it wouldn’t be, then this vehicle should already be covered by the Volvo CPO Program, which is a pretty darn good one on paper already. This program is offered by Volvo, not the dealership. So it’s not like this is going to cost this dealership a penny.
So instead, this dealership is attempting to lump together a flimsy maintenance package and double-dip on the manufacturer’s CPO warranty program. Essentially, this dealership wants to try and scam the buyer into paying four-fold for maintenance and warranty, to the tune of a slick $7,600.
All of this before we even go into how difficult dealing with extended manufacturer warranties can be in the first place. Most of the time, these warranties require you to have all work and services performed at the dealership. Failure to do so may void the entire warranty, or at the very least, deny your compensation.
Also, keep in mind that wrap-around warranties might be reimbursive. That is, you pay for the service out of pocket, and then the warranty company will pay you back. Eventually. That requires you to have the cash in-pocket to take advantage of the warranty. Always read the fine print.
Some people prefer warranties for peace of mind. Frankly, I’d rather stick that $7,600 in a sinking fund account, add another fifty or so every month, and have the entire total available if and when it might be needed.
This car only has 27 thousand miles on it and the default warranty still in effect. The buyer won’t be paying out of pocket anytime soon. Both of these line items are a joke.
All right. Let’s add up all the numbers, and I’ll show you just why this picture was so offensive:
To be perfectly fair, I would also lump in a small amount extra on the purchase offer of the vehicle. Cars do cost money to inspect, maintain, and prep for sale. A $500 add-on charge is perfectly reasonable in this situation.
I’m pro-consumer but not anti-corporation. I do not believe companies should operate at a loss. Depending on my experience with the dealership, a mark-up between five and ten percent of the purchase price of the vehicle is also very reasonable.
If a ten percent tithe is good enough for God, it’s good enough for a car dealership.
Marking up the purchase price of the car by five percent brings the offer price (before taxes) to $35,911. With the $500 prep charge, we come to $36,411. Run that through my calculator, add back in the state fees, and we get $37,972 and some change as a final offer.
Which is still an absurd $13,200 below what this dealer was hoping to make off this sale!
The simple moral of this story is to take every line item a dealership gives you as suspect. Every single one is negotiable. As I’ve mentioned before, consumers line up and open their wallets without asking. Customers seek ownership first and negotiate.
I’m sure you know which your chosen dealership would prefer.