Where I Stand On Dealer Holdback
I often get asked if the dealer holdback should be taken into consideration when it comes to the selling price of a vehicle. Before I present my opinion on this, let me give everyone a quick tutorial on what the dealer holdback is.
The holdback is an amount of money that the manufacturer holds in reserve, paid to the dealer after the vehicle is sold. These funds are designed to cover some of the cost the dealer incures...
One of the major expenses is the interest that the dealer pays on the vehicles they have in stock. When a vehicle is delivered to a dealer, the dealer usually borrows money from the manufacturer in order to pay for the vehicle. Like all lenders, the manufacturer charges interest on the borrowed money. However, as a way to encourage the dealer to "move the metal," the manufacturer will reimburse the dealer for the interest paid using the holdback rebate.
If a vehicle is sold soon after it arrives on the dealer's lot, the dealer will not have paid very much interest on the loan, and they can keep the bulk of the holdback. However, if a vehicle languishes on the lot, the interest paid racks up and the holdback money gets spent. Generally speaking, if a vehicle is on the lot more than 90 days, the amount of interest the dealer has paid tends to eat up the holdback.
In addition to the interest paid on their vehicle stock, the holdback is also often used to help pay for expenses like dealer advertising association fees, salesperson contests and incentives and even to help pay for such mundane expenses like utilities.
So when should you work the holdback amount into your negotiations? I personally feel that unless you have factory ordered a vehicle and buy it the day it comes in off the truck, or you just happen to be on the lot when the vehicle you choose is coming off the truck, the holdback should not be considered fair game. Since you generally have no idea how long a vehicle has been on the lot, you can't say for sure how much of that holdback money has been eaten up from the vehicle just taking up space on the lot.
I typically order my vehicles, and I use that fact to my advantage in pricing negotiations. I make it very clear to the dealership that since I will take delivery the day the vehicle comes in, they can keep the holdback as additional profit. This helps mitigate the fact that I am asking to pay the invoice price. Since this can be well over $1000, I can usually find a dealer who is willing to take that kind of profit on a relatively easy sale.
Then again, I am not the type of negotiator who will try to grind every last cent out of a deal. Some people are willing to go back and forth for hours doing this. It is simply not worth my time or effort. Plus, I like to try to build a relationship with the dealers I get cars from, since it makes being a repeat buyer easier (although that didn't work with our Audi, but that story is for another time).
For most buyers, the holdback is like that bowl of fruit you might see in someone's house or in a hotel. You know it is there, you know you could eat it, but you also know it is mostly for show and not to be touched.
In order to reduce the costs that the holdback may have to cover, why don't dealers simply advise most customers to order their cars? The dealer would then keep very few cars on the lot for customers who can't afford to wait, reducing costs and the risk of having to reduce price on cars that stay on the lot for too long.
I would think ordering is a win-win situation for the customer, manufacturer and dealer. The customer gets to order the car to his/her exact specs and the dealer gets to save on costs associated with inventory (not to forget risks like theft and hailstones)........ The manufacturer gets to produce cars that they know are already sold!
Also, wouldn't such a system based on customer ordering have the same advantages as the venerable just-in-time production methods?
Except for one vital variable, the buyer. Most buyers want their car now, not in the 4-9 weeks it can take to take delivery of a vehicle that has been ordered.
In addition, there are other more complex issues at work, like the need for manufacturers (mostly domestic) to keep factories working due to union agreements.
lee
1) when you say you pay 'invocie' is that including taxs/fees, or invoice + taxes and fees?
2) what motivation would a dealer have to give you a deal on a car thats been on the lot for 90+ days?
-Since you never know all the manufacture kick backs/bonuses etc. .. long story short, I go for every penny. I dont buy cars often, we hold them on for years, so by the time i'd come around the sales guy will be long gone, heck even the dealership might be gone. And I know that the are working to make the most money off of me, so why should I not work to save the most money?
OP - Since I lease, taxes are paid on the monthly payment. As far as dealer fees, I don't pay them. Never have and never will. Or should I say, if a dealer wants to charge a dealer fee on paper, they have to work it into the number I have already told them I want to pay. For example, if invoice is $20000 and they have a dealer fee of $550, they can sell me the vehicle for $19450 and then on paper show me paying $20000.
As far as motivation to move a car that has been sitting longer than 90 days, remember that the dealer is still paying interest on the loan for that car that is sitting on their lot. Every day that car sits is that much more interest they are paying.
I have no problem with your working a dealer for the lowest price. Like you said, you may not see them again, ever. However, I tend to help lots of people out with car deals, sometimes 3 or 4 a month. So having a relationship with certain dealers means that they can count on getting a referral and I can count on getting a good deal for those I help. Plus, since I lease, I am back in the market every 3 years or so.
As always, do what works best for your individual situation.
leescott - in your case, I'd probably be more like you.
the dealer I got my sunfire from. (i was 18 and got ripped off, but helped my sister buy a car, and it was a fight over 400 bucks).
But the dealer i got my car from is no longer there, and its been 8 years now since I bought my car. The lastest purchase was my fiance's scion... and it was a very plesant experance, no haggle, they did try to switch the rate on us, one of those 'opps we wrote done the wrong number' righhttt. So expect for that, I think I enjoyed the no haggle more so then any other car buying experance.
I've also heard the holdback described as a way that the dealer can keep money from the salesman. Basically, it's 2-3 percent that they eventually get in profit, but they keep it from being eligible for commissions. It's a strange complicated system -- but what else is new in buying cars?
Phillip,
The way in which salesmen are compensated varies from dealer to dealer. It's probably not a good idea to make generalizations about how the dealer treats the salesman. I good salesman in a good dealership can make an incredible amount of money. A bad salesmen in virtually any dealership is eating Raman for dinner. If you know a specific dealer that's screwing the salesmen, you've a very valid point. However, that same dealer will likely lose all their good salesmen and be stuck with pond scum.
I like the idea of building a car, and having it delivered. I have run into situations with friends that make this an impossibility. For instance, you go right ahead and try to build a car from an American manufacturer. They will most likely laugh at you.
Also, a friend wanted to buy a new 2007 Lexus LS460. He did NOT want the "L" version which is 90% of what the dealers have on the lot. He wanted to order his color combination, and options. He was told no. Really. The dealers answer was that Lexus does not take orders for cars, and that they would do a search for the vehicle. Ultimately it took 4 months for Lexus to build, deliver, find, and ship the car to Chicago for him. I find that crazy.
Just a year and a half earlier he replaced his 24 year old Mercedes (which he custom ordered with a manual transmission no less) with a new 2005 Mercedes. He ordered the car, had it built and delivered in 6 weeks. That was his expectation from Lexus. How hard can it be?
euro companies are big on ordering cars. Most have euro pick up plans too, that can save you big money.