Reasonable dealer profit on Used Truck

[father of 3]

When it comes to new cars, everyone wants to know dealer invoice, incentives, etc. Once this is known, haggling over a "reasonable" profit ensues.

But, if you plan to buy used, knowing what the dealer paid is much tougher (correct?).

Hypothetically speaking, if you did know how much a dealer paid for a used vehicle (trade-in or auction), what is a "reasonable" profit margin? Dealers seem to want much larger profits on their used vehicles. Your thoughts on this are appreciated.

[mhollack]

I would start with using the trade in value on edmunds, kbb and/or nada and go from there. Kinda of like starting with invoice on a new one.

[Cliffy1]

Profit on a used car? Let me ask you this. If a dealer had two nearly identical cars on his lot, which one would be worth more? Let's say we're talking about a 2003 Tundra with 45,000 miles and in the same color. The dealer paid $17,000 for one of them and 13,000 for the other. You can buy either one of them for $19,000. Which one is a better deal? Which one do you as a consumer get better value from? It doesn't matter, does it? Dealer profit is totally irrelevant on a used car.

The dealer may be "burried" in a used car. He might have to write down the value in order to sell it. The amount of money he has in the car doesn't determine how much a customer will pay for it. The thing that matters is what other similar vehicles are selling for in the same area.

[calgarydave]

Originally Posted by Cliffy1

The thing that matters is what other similar vehicles are selling for in the same area.

Exactly the right answer. It's purely Ecomomics 101, regional supply and demand. Looking for a used vehicle in middle USA will almost always show a lower price than closer to either coast due to regional ecomomic conditions. There are variances but this rule holds true 90% of the time.

[father of 3]

I believe that I understand your points (Cliffy & CalgaryDave). However, my question (imprecisely communicated ) is not addressed in your answers. I'll try to clarify some of the loose terminology that I used in my original post.

Short response/question:

Is the "reasonable profit" the average difference between the Dealer purchase price via trade-in/auction and the avg selling price for the area? If so, disagreements can occur if the buyer knows the avg selling price and the dealer refuses go below it or close to it.

Long response/question:

Let see. Cliffy stated that: "The thing that matters is what other similar vehicles are selling for in the same area." I understand this. Dealers want to maximize profits. They can attempt to accomplish this by selling their used vehicles at a price point (determined by demand, region, etc.) that is greater than the priced paid for vehicles from consumers/auctions (if they can properly forecast the "price point" number).

In Cliffy's example:

"The dealer paid $17,000 for one of them and 13,000 for the other. You can buy either one of them for $19,000. Which one is a better deal? Which one do you as a consumer get better value from? It doesn't matter, does it? Dealer profit is totally irrelevant on a used car."

I'm confused as to why "Dealer profit is totally irrelevant on a used car." In the scenario Cliffy describes above, the dealer makes a profit on each vehicle (different amounts, but profit nonetheless). Are you saying that 19K is their lowest price they'll take? If that is so, they've got 30k invested in the two vehicles (avg 15k), and they are looking to make an avg profit on each of 4k. Would this be a suitable way to define "reasonable profit" on a used vehicle?

In other words, if I know what dealers are paying for their vehicles (avg 15k). AND, I know what the avg selling price happens to be (say 19k). I'm assuming that these prices are in fact different with the avg price the dealer pays being LESS than the AVG price consumers are paying. Would this difference between the two figures equal what the dealer's view as a reasonable profit?

[Cliffy1]

What's reasonable and who gets to define it? Better yet, who cares? If a dealer gets the vehicle for free and sell it for fair market value, is that unreasonable? There are times we stumble on to amazing wholesale deals on vehicles. Other times, we bury our used car department so deep in trade-ins that they can't possibly make a profit. None of that impacts what a customer is willing to pay and therefore, what the market will bear.

If so, disagreements can occur if the buyer knows the avg selling price and the dealer refuses go below it or close to it.

If that happens, one of two things are going to happen. Either the customer buys the car and thereby raises the average or the dealer sits on his inventory because nobody is willing to pay his price. A dealer who refuses to sell at a consumer defined price is gambling that the customer in front of him is wrong about the value of the product in the marketplace. If he's right, he'll not care if you made a low offer because he found a customer willing to pay his price. If he's wrong, you'll get a call in a few days offering to accept your price and then its in your court to decide if your ego is willing to return.

Used cars is a pure market driven system. New cars is not, but its close. New cars is driven more by manufacturer wholesale prices and incentives. There are certain levels that a dealer just will not sell a car, even if the market will not pay more. With used cars, its probably the best example of a supply and demand dynamic. Profit is totally irrelevant.

[TunTac]

Father of 3,

I'll see if I can shed some of my experiences on this situation based on what I've encountered in the used-car market.

BTW, Cliffy... I understand you're logic completely... makes very good sense.

As an example, I'm helping my friend look for a used FX35. For the year and options he's looking for, the car retails for around $35k. I had always been told that there is about 20% mark-up on used cars, but just thumbing through the thousands of used FX's on-line, many dealers have this vehicle priced between $25-$29k, with the higher number being already about 20% off retail, meaning that they're having trouble moving them and thus have to price them out with little or no profit.

It's because of prices like this why people don't get anywhere near wholesale on trade-ins.

P.S. - Cliffy, what happens to a vehicle that simply can't be moved?

[Bakemono]

"Reasonable" is a relative term. However, I very much have a problem with a dealerships taking a vehicle in on trade and giving the person $5,000 and then the next Monday that exact same vehicle is sitting on their lot with a pricetag of $10,000 or more on it.
My father is a mechanic who works for a Ford dealer and lemmie tell you, they put as little money as possible into a vehicle they take in on trade. Other than doing a safety inspection, an oilchange and doing a poor job of detailing the interior; they dont do much to the vehicles they take in.
I personally dont trust dealerships and I think the way they assess value to used vehicles is a bigtime scam.

[Cliffy1]

Originally Posted by TunTac

P.S. - Cliffy, what happens to a vehicle that simply can't be moved?

If they can't be moved, the dealer "writes it down" and keeps reducing the price until he finds the point where somebody will buy it. Sometimes, this means taking it to auction and just taking your lumps.

Your point about wholesale and retail is also right on. The guides you see are not always correct. Currently, the used car market is in freefall. At least it is in my area. You can throw all the books out for both retail and wholesale right now. Used car managers are so scared, they are looking at the most recent auction reports and backing off by another 10% in order to keep from taking a wholesale loss when determining the value of a trade. Its rough in the used car market right now.

[Cliffy1]

Originally Posted by Bakemono

"Reasonable" is a relative term. However, I very much have a problem with a dealerships taking a vehicle in on trade and giving the person $5,000 and then the next Monday that exact same vehicle is sitting on their lot with a pricetag of $10,000 or more on it.
My father is a mechanic who works for a Ford dealer and lemmie tell you, they put as little money as possible into a vehicle they take in on trade. Other than doing a safety inspection, an oilchange and doing a poor job of detailing the interior; they dont do much to the vehicles they take in.
I personally dont trust dealerships and I think the way they assess value to used vehicles is a bigtime scam.

That's one way to look at it. Another is that the person who traded it at $5000 had their reasons. They might have known about a pending mechanical problem that was about to cost several thousand dollars. They might have been trying to sell it on their own with no takers. They might have just been in such a hurry that they didn't particularly care (yes, it happens). Meanwhile, the dealer might have 4 other cars in inventory where they overpaid and the one they "stole" is used to average the inventory costs of those cars. They might be overly optimistic about the $10,000 and it will sit on the lot for months. Who knows?

Let me give a specific example of how things really end up working. I traded my 2003 Tundra Limited when I bought my 2007. They gave me $18,000 for it and I thought that was ridiculous. I thought the real value was closer to $16,000. It had 60K miles and they were not easy miles. I use a truck fairly hard. I considered the $18,000 to be a perk of working in the business.

The truck sat on the used car lot for 2 months. Every week, the GM asked me who put the money on it and I had to remind him that he was the one who authorized the $18,000. He was really upset about it. We were flooded with used trucks and every time we turned around, somebody else was trading in a nicer one than the one I traded. Nobody was interested.

Then, the right customer saw the truck. While others hated the color and the tool box, this customer was extatic. The miles didn't bother them. They had been looking for this exact truck. Every other truck they looked at just didn't meet some idea that they had. Based on their experience, they offered $22,000 for the thing. They couldn't be happier when we agreed. They drove off satisfied.

So what happened? Did the customer who bought it get ripped off? They made the offer! To them it was worth every penny. Did I get ripped off? Nope. I did the research and I was happy with the $18,000 and felt lucky for it. The dealership made about $3000 on the truck (it required about $1000 worth of things to keep the shop happy) which is more than is normal on a used car that sat for more than 2 months, but that doesn't mean anybody got taken. It was just a supply/demand issue for all involved.

[TunTac]

Originally Posted by Cliffy1

If they can't be moved, the dealer "writes it down" and keeps reducing the price until he finds the point where somebody will buy it. Sometimes, this means taking it to auction and just taking your lumps.

Your point about wholesale and retail is also right on. The guides you see are not always correct. Currently, the used car market is in freefall. At least it is in my area. You can throw all the books out for both retail and wholesale right now. Used car managers are so scared, they are looking at the most recent auction reports and backing off by another 10% in order to keep from taking a wholesale loss when determining the value of a trade. Its rough in the used car market right now.

Thanks for the insight, Cliffy!

Here's another question I've always wondered: What happens when, say, a manufacturer inflates the residual on a vehicle for a promotional lease term? Take BMW for example; virtually all their vehicles have inflated residuals, so what happens to all those lease returns that are nowhere near the lease-end value?

[Cliffy1]

Originally Posted by TunTac

Thanks for the insight, Cliffy!

Here's another question I've always wondered: What happens when, say, a manufacturer inflates the residual on a vehicle for a promotional lease term? Take BMW for example; virtually all their vehicles have inflated residuals, so what happens to all those lease returns that are nowhere near the lease-end value?

That question is the reason Nissan almost went bankrupt about 7 years ago. Back in the mid to late 90's, they leased a huge number of cars. They all came off lease at the same time and all had residuals of $2000 to $4000 above wholesale value. It cost them a huge amount of money and nearly sunk the company.

This is also the reason Toyota nearly dropped out of the leasing game completely in the early part of this decade. Toyota was loosing an average of $1200 per car at auction. Toyota has a lot better cash reserves than Nissan and they weathered the storm a lot better. As a result, Toyota lowered the residuals and I think they lowered them too much. With residuals that low, there was no monthly payment advantage to a lease. We are only just now getting back into leasing as they bump the residuals a bit.

Different leasing companies handle it different. Some will negotiate residuals with the customer. Others will negotiate it with the dealer. Others just suck it up.

[BaBalouie1958]

Originally Posted by Cliffy1

That question is the reason Nissan almost went bankrupt about 7 years ago. Back in the mid to late 90's, they leased a huge number of cars. They all came off lease at the same time and all had residuals of $2000 to $4000 above wholesale value. It cost them a huge amount of money and nearly sunk the company.

This is also the reason Toyota nearly dropped out of the leasing game completely in the early part of this decade. Toyota was loosing an average of $1200 per car at auction. Toyota has a lot better cash reserves than Nissan and they weathered the storm a lot better. As a result, Toyota lowered the residuals and I think they lowered them too much. With residuals that low, there was no monthly payment advantage to a lease. We are only just now getting back into leasing as they bump the residuals a bit.

Different leasing companies handle it different. Some will negotiate residuals with the customer. Others will negotiate it with the dealer. Others just suck it up.

Thanks for your expert opinion your posts really shed light on things for me about the dealers side of things. Where were you when I bought my 06 Seqouia I bought it in Springfield great dealership thanks again !

[TunTac]

Originally Posted by Cliffy1

That question is the reason Nissan almost went bankrupt about 7 years ago. Back in the mid to late 90's, they leased a huge number of cars. They all came off lease at the same time and all had residuals of $2000 to $4000 above wholesale value. It cost them a huge amount of money and nearly sunk the company.

This is also the reason Toyota nearly dropped out of the leasing game completely in the early part of this decade. Toyota was loosing an average of $1200 per car at auction. Toyota has a lot better cash reserves than Nissan and they weathered the storm a lot better. As a result, Toyota lowered the residuals and I think they lowered them too much. With residuals that low, there was no monthly payment advantage to a lease. We are only just now getting back into leasing as they bump the residuals a bit.

Different leasing companies handle it different. Some will negotiate residuals with the customer. Others will negotiate it with the dealer. Others just suck it up.

Thanks for the info, Cliffy! You're now officially my second favorite person on this site, behind my boy SFTundraMan, of course. haha...

All joking aside, I really do appreciate the insight. It's invaluable.

[Cliffy1]

Originally Posted by BaBalouie1958

Thanks for your expert opinion your posts really shed light on things for me about the dealers side of things. Where were you when I bought my 06 Seqouia I bought it in Springfield great dealership thanks again !

I apprecaite the business! I was here and in the same position I am now. I don't actually get involved with the sales process for the trucks or Toyotas. I train the salesmen on trucks, handle orders, manage inventory and occasionally will assist a salesman with a truck customer. My main job at the dealership is handling all aspects of the Scion sales from start to finish.