Drive Virtually Free: Smart Used Car Buying Advice

It may go against your instincts since appearing powerful seems like the more effective way to negotiate, but having the final say in a decision actually weakens your bargaining position.

Car salesmen know this – if you’ve ever been haggling at a car dealership, you’ve seen them do it in every single negotiation.

Here’s the scene: After 30 minutes to an hour of haggling, the sheet of paper with four squares on it is covered in random numbers and “calculations.”

Salesman: Mr. Johnson, if I sell this car for a dollar under $25,224.43, I’ll get fired!

Customer: I truly can’t afford more than $24,000 for this car.  That’s the best offer I can make.

Salesman: Well, I’ll see if I can convince my manager to go for it.  He’s not going to like it, but I’ll see what I can do.

[Salesman leaves, to go "plead with his manager" (often, the salesman just sits in the office and the manager doesn't talk to him at all, just continues working and ignores him)]

10 minutes later…

[Salesman comes running back, panting from exhaustion]

Salesman: Well, I talked to my manager.  He says that $24,000 is $1,000 under invoice, so we can’t possibly go that low…

…And the negotiation continues like this for another 2-5 hours.

The point is that the dealership has intentionally created a situation in which the salesman is not the final decision-maker.  He has to get everything approved by his manager.  By doing this, he is able to pretend that he’s really on your side (good guy/bad guy), trying to help you out and convince his “crazy manager” to “give a break to a good person like yourself, just this once.”  Of course he’s not on your side – he’s working for the dealership, trying to earn a commission!  Using this tactic is a way to leverage the negotiation more in his favor, putting pressure on you without being confrontational.

How can you use this in car buying or selling?  After all, you don’t have a sales manager who needs to approve your decisions, it’s just you.  I’m sure some of you will cry out that this is unethical, but in order to use this very common negotiation tactic yourself, you will have to make it appear that you are not the final decision-maker, even if you are.

If you’re buying a car, you can use your significant other as the higher authority: “I think I can give you $14,500 for it, but I need to check with my wife first.  She would kill me if I didn’t check with her first.”

If you’re selling a car, you can potentially do the same thing – say that you are helping your friend sell a car, or that you need to just check with your significant other before letting the car go for that price.

Also, you should be aware of other people using this negotiation tactic against you and try to neutralize it as soon as possible by establishing that they are the final decision-maker early on.  Car salespeople will do this by asking you something like, “If I can find you the car that you’re looking for, is there any reason why you can’t buy today?”

I’ll leave you with a scene from the movie Boiler Room, which is about extremely aggressive stock brokers selling shares of fictional companies.  The main character, played by Giovanni Ribisi, is trying to remove a potential client’s higher authority to buy stock:

“I need to talk to my wife first, and then I’ll call you right back.”

“No, you don’t need to do that Harry…”

“I need to talk to her first.”

“Tell me, Harry, you’re at work right now, aren’t you?  What do you do for a living?”

“I’m a purchasing manager at a gourmet foods company.”

“So does part of your job involve making decisions?”

“Of course.”

“So, when you’re making a lot of these decisions, do you call your wife and ask her what you should do?”

“Of course not, but that’s a little bit different…”

I’m not advocating being a slimy salesperson, but you should always be aware of when the other party is using a higher authority to negotiate with you and try to remove that excuse before they get a chance to use it.

When you are shopping for a car or trying to decide whether to keep your car or move to a newer one, there is one simple concept that you must understand: total cost of ownership.

Total cost of ownership takes into account depreciation, operating costs, repairs, maintenance and insurance costs.  To make comparisons, you would calculate a cost per mile driven or cost per year of ownership.

Depreciation

I’ve already mentioned depreciation, and will continue to mention it because it is just so important to keep in mind.  This cost will be the single biggest contributor to the total cost of ownership if you are driving a relatively new model (within 5 years old or so). If you made the mistake of buying brand new, it will be an even larger contributor.

Operating Costs

Operating costs are things like fuel, tires, brakes, and oil changes.  These are wear items that are consumed on a day to day basis and make up a large chunk of your costs as well.  Fuel will be the biggest cost here.  If you drive a car that has different tire sizes on the rear compared to the front, you should break those costs out separately since they will wear at different rates.

Repairs

It’s hard to know how much repairs will cost you since they are by nature unpredictable, but you can get an idea based on how expensive the car itself is, its reliability rating, and by reading surveys from Consumer Reports.

Maintenance

Maintenance costs are predictable, since typically you know how much you drive in a given period, and that your car will require an oil change every 3,000 miles (or much longer if you are using a synthetic oil), your car gets a certain number of miles per gallon, etc.

Regular service inspections also fall under this category – these might be every 30,000 miles or so and cost in the neighborhood of $1,000 each, depending on what kind of car you are driving.

Insurance

Before moving to a different car, you definitely will want to know what the insurance will cost you.  You can find this out most often by requesting a free quote online from major insurance providers.

A recent study by Consumer Reports uses slightly different categories than I have just described, but the basic conclusion is the same: depreciation and fuel are the biggest costs during ownership, making up 46% and 26% of the total cost of ownership, respectively.

Source: Consumer Reports, 2008

Focusing on reducing depreciation, therefore, will lead to a huge savings over the course of your owning a car (Ramit Sethi would call this focusing on the Big Wins).  This is why, when gas prices were up around $5 last year (as they will undoubtedly be again in the future), selling your car to buy a brand new Prius just didn’t make sense since the depreciation hit outweighed the fuel cost savings.  We tend to focus on the costs that we see every day, such as gas prices and repair bills, but there often isn’t a lot we can do about them besides maybe driving less (and where’s the fun in that?).  Depreciation is the bigger worry here.

The moral of the story?  Buy used to save yourself from getting hit hard by depreciation, read this blog to learn more about how to buy the right car and keep its value as high as possible and stop worrying about fuel saving tips that will only make a 5% difference in your fuel costs (about 1% of the total cost of your car).

Here’s a spreadsheet I created to help you estimate your ownership costs and figure out what’s really costing you money. Yellow cells are for you to input, gray cells will be automatically populated.

Note: Insurance costs will expand or shrink based on how many miles you drive, so always update that with new information. The same with depreciation, but to a lesser extent since that is a function of both time and mileage. This worksheet is designed to illustrate the relative cost of different aspects of owning your vehicle, so if you’re an accountant and I have offended you by making approximations, count to 10 and stop hyperventilating.

Edmunds has a nifty tool called True Cost to Own that you should use when car shopping.

While car shopping, you may have seen a car that is priced considerably lower than other similar cars in the area.  You think to yourself, “it must be too good to be true… or is it?”  Then, once you read further about the description, you see the word “salvage” in the description.  Since the seller may have conveniently omitted the fact that the car has a salvage title, you should always ask them directly if the car has a clean title over the phone and also run a vehicle history report from a company like CARFAX or Experian AutoCheck before going any further.

Your gut tells you that the deal is, in fact, too good to be true.  The side of you that’s trying to get a deal, however, is thinking that maybe, just maybe, you’ve stumbled across a bargain that others have missed.  Listen to your gut on this one.

A salvage title means that a car has sustained enough damage that it has been declared a total loss by the insurance company.  This may have been the result of an accident,  a flood or in some cases, theft.  To be declared “rebuilt,” or “rebuilt salvage,” a car must be repaired to a condition that is deemed roadworthy.  A “junk” title means that the car is not roadworthy.

Some cars can sustain massive amounts of damage without being declared “salvage” because they were bought back before the insurance company took possession of them (typically to send the car to a salvage yard).  The owner is then responsible for repairing the car to meet safety standards.

If you think all of this sounds scary, it should.  A car with massive damage to the rear can be cut in half with a new rear end welded onto it.  Stories like that have convinced me that you should never bother with a car that has a rebuilt title, because they will never be the same again.  There may be some instances where cars are of little value (less than $5,000) to begin with and have sustained minor accidents which causes them to be declared totaled, but at that price point I think it is worth it to spend an extra $1,000 for the peace of mind alone.

If uncertainty about the car’s background and fear of repairs isn’t enough, consider that some insurance companies may not insure the car and you will have a much harder time reselling the car later on.

There are just too many cars out there to waste time and money on with one that has anything less than a clean title.  Leave that gamble for someone else who is feeling lucky.

To minimize the risk of getting a car like this, you should always take three steps before buying a car on the used market:

1. Ask the seller directly, “Does this car have a clean title?”
2. Spend the $15-30 for a vehicle history report
3. Spend $200-500 or so for a pre-purchase inspection from a professional mechanic of your choosing, not the seller’s

Generally, I recommend staying away from car dealerships as much as possible.  After working in the #1 dealership on earth for a particular German luxury car, I know enough that it’s not worth the hassle and almost always ends up costing you more – particularly if you buy new.

With that said, there is one instance where buying from a car dealership can pay off, and that is by buying a Certified Pre-Owned car that is still quite new.  If you buy a Porsche, for instance, which has only been driven for a year and less than 10,000 miles (which is not uncommon) under the Certified Pre-Owned program, the warranty will extend to 6 years and 100,000 miles.  You can find a list of CPO warranty programs here.

To me, this is like having your cake and eating it too.  Since the car has already suffered its initial depreciation, you don’t have to worry about it shedding thousands of dollars in value on your drive home.  With the extended warranty, you don’t have to worry about getting stuck with an unreliable car, especially since it is backed by the manufacturer.

A car that has only been driven for a year or two with low mileage (preferably around 7,500 miles per year or less) will in all likelihood be indistinguishable from a brand new car.  You will also have the same amount of time to drive the car under warranty as someone who bought a new car.  The only difference will be that you can save somewhere in the neighborhood of 30-40% on such a car versus the brand new price.

Returning to the Porsche, Edmunds TMV puts the value of a 2006 Carrera 2S at $52,034 today (full dealer retail price).  Not bad for a car with a base price of around $80,000, especially with a warranty good for 3 more years.  Even if you can’t afford a Porsche, the same principle applies.  Your total cost of ownership will be drastically lower since the depreciation is not nearly as steep as buying new and you’ll still be fully covered by the manufacturer warranty which will prevent you getting stuck with big repair bills.

As long as you can deal with the high pressure salespeople in the dealership and keep your cool while negotiating, buying a relatively new CPO car is not a bad way to go.

It sounds obvious, but most people just don’t spend the time to do it.  Going into a negotiation without information about the car you’re looking at or the person who is selling it is foolish.  Now, collecting information for information’s sake is not the goal.  You need to answer very specific questions before you go into the negotiation so that you know where you stand and will be able to better predict how the other side will respond.  You can do much of this beforehand through online research, and the rest over the phone with the seller.

Questions to answer on your own:

• What is the estimated market value of the car? Use tools such as Edmunds True Market Value and Kelley Blue Book to estimate the value of the car.
• What is the average posted price of similar cars in the area? Search Autotrader, Craigslist and Cars.com to figure out what similar cars are listed at.  Print these out and bring them with you to the negotiation to show that you did your homework.
• What did similar cars sell for recently? When you are calling sellers during your car search, you will probably find that some of the cars have already been sold.  Ask them directly what they ended up selling the car for and keep a record of this.  eBay Motors will also list the price of completed items if you log in.
• What are the must-have options? You can tell what the favorite options are by looking at the most common options are with other cars for sale and also by reading articles in car magazines about that particular model or manufacturer.  If the car is missing something considered valuable to most people but you don’t care about, use this to your advantage since it does in fact reduce the car’s resale value.
• What are the recalls or problems common to the cars you are looking for? Call the service department of local dealerships to find out or ask friends who have the same car.  Knowing that a recall should have been completed but wasn’t, or that the suspension bushings are prone to early failure will help you gain leverage in negotiation.
• Is there anything in the vehicle history that would make this car undesirable? Use a service like CARFAX or AutoCheck to find out if the car has a junk, rebuilt or salvage title, has been in any major accidents, or has anything else in its history that would hurt its resale value.  This is just part of due diligence when buying used, and you might find something about the car that makes you decide not to buy at all in the process.

Questions for the seller:

• How long has the car been up for sale? You might know this ahead of time if you have been watching the classified ads for a while.  You can use the knowledge that a car has been on the market for a long time to your advantage, because it indicates that there is something that makes the car seem undesirable or overvalued, and the seller will usually be more flexible on the price.
• Why are you selling the car? Knowing what motivates the seller will help you during negotiation to improve the deal with the seller in exchange for him making concessions for  you.  If he needs  a quick sale because he is moving, for example, he may be flexible on the price if you can buy the car within 24 hours.

There are, of course, many other questions to ask yourself and the seller, but these are a good start and show the importance of going into a negotiation armed with knowledge.

If you are the seller, the same rules apply.  You should know everything that the buyer knows and then some, so that you are not caught off guard.

One of the most effective and probably simplest ways to increase your sale price (through a private sale) is to use the principle of scarcity; items in short supply are considered more valuable.

The way it works is simple in principle, but slightly more difficult in execution.  When you have written an ad that generates sufficient interest in your car that multiple people have expressed interest in seeing it, schedule the prospective buyers to come at the same time.

One benefit to this is that it will save you a ton of time dealing with different buyers separately.  If you schedule buyers to come at different times, you might take up your whole weekend showing the car, because you are constrained by the fact that you need to be around when they show up.  Inevitably, people will cancel or try to reschedule, which makes selling the car even more of a pain in the ass because you will probably have commitments at other times in the day which are conflicting.

Even more time is saved because you are greatly increasing the chances that the car will be sold each time you show it.  When a buyer comes and sees someone else looking at the car at the same time, he will see that there is a real chance he might not get to leave with the car unless he acts quickly to capture the deal.

The first time I heard about this technique from a friend, I thought it was a truly novel idea.  I soon found out that in Robert Cialdini’s book Influence, he discusses this exact method of selling cars in a chapter dedicated to the principle of scarcity.  He says that his brother used this technique to flip cars and pay his way through college by buying undervalued cars one weekend and then selling them the following weekend after cleaning them up a bit.

Schedule 2 or 3 prospective buyers to show up at the same time (writing an ad that will do this is really the most difficult part).  When the first buyer shows up, he will begin inspecting the car as you would normally expect.  Once the second buyer shows up, however, mention to him that he will have to wait for the first person to complete his inspection of the car since he arrived first.  Tell buyer #2 that if buyer #1 decides not to purchase the car, they can have a look at it and decide if it is right for them.  If a third buyer shows up, repeat the same process with him.

This does several things to help you sell your car:

• It applies time pressure to the buyers
• It clearly demonstrates the demand for the product (social proof that it is valuable)
• It takes something originally considered abundant and turns it into something scarce

Cialdini points to several experiments indicating that the principle of scarcity is most effective in raising the perceived value of an object or freedom when it is readily available and is subsequently taken away rapidly.

Car salespeople use this technique every day to encourage people to buy, mentioning usually that a car has a unique and highly desirable set of options, or that the model itself is in high demand and/or short supply.

While you own your car, you should always keep a close record of maintenance.  While this helps you a great deal to keep regular service items such as oil changes on track, it is arguably even more valuable when it comes time to sell your car.

If a car doesn’t have a full maintenance history backed by receipts, I don’t even bother to look at the car anymore.  It just isn’t worth the hassle, and is too much of a gamble.  Detailed maintenance records tell you a lot about a car and its history.

One thing that becomes readily apparent is how organized the seller is.  Someone who has sporadic records of maintenance probably was also sporadic in their upkeep of the car, which is definitely not something you want to suffer the long-term consequences of as the next owner.  A seller who hands you a neat, organized file full of receipts with a spreadsheet summarizing the items projects the image of someone who took care of their car day in and day out.

Since the vast majority of the fear associated with buying a used car comes from uncertainty about the vehicle’s history, keeping a log of maintenance records is a must if you want to ensure potential buyers that they have nothing to be afraid of.  Basically, you don’t want to give the buyer any easy excuses to not buy your car.

Keeping maintenance records is not difficult, as long as you are systematic about it.  Half of the work is just labeling a folder and making a spreadsheet to keep track of the maintenance.  After that, keep putting every receipt related to the car in the folder and update the spreadsheet with a few items every time.

My suggestion for what to track in the spreadsheet includes:

• Date
• Mileage
• Description of Service
• Shop/dealership name
• Parts Cost
• Labor Cost
• Total Cost (summation of the previous two items)

In all of 30 seconds or less each time work is performed on the car, you can have a nice, organized file which could make a difference of hundreds or thousands of dollars when it comes time to sell the car.  Since many buyers will not have the vehicle history recorded and neatly organized, you will raise the value of your car and differentiate it in the eyes of the buyer, encouraging them to buy from you so that they have peace of mind.   Not only that – they will appreciate what you’ve done for them if they ever need to refer to the car’s history for any reason.

Feel free to use this to keep track of your car’s maintenance:

When most people think of negotiation – particularly over the price of a car – I’d venture a guess that they envision a hard-fought battle with their opponent.  The best negotiators know that learning to compromise and make the deal more of a win-win situation is what negotiation is all about.

If you can give something to the other side which you don’t care about, or were going to do anyway, you can ask for a concession from the other party to improve your deal.  An example of this when negotiating with a private seller would be that if they are in need of a quick sale, you can bring payment immediately in the form of a cashier’s check or money order.  In exchange for making the deal happen quickly, you might ask for a reduction in the price or that they perform a major service before you take delivery of the car.

If the seller needs a few days to find a new car before he sells his current car, accommodating him in that respect would also be grounds for a concession.

Roger Dawson, in his book Secrets of Power Negotiating, cautions that taking a confrontational or argumentative position at the outset of negotiations can be disastrous.  His advice is to use the widely known “Feel, Felt, Found” pattern in which you would say something to the effect of “I understand exactly how you feel about that.  Many other people have felt exactly that same way as you do right now.  But you know what we have always found?  When we take a closer look at it, we have always found that…”

If you ask for the seller, for instance, if he would be able to pay for a warranty extension since he is the original owner and he reacts by telling you that it is usually the responsibility of the buyer since he will be benefiting from it, you might respond with:

“I understand how you feel about that.  Many other sellers have felt the same way. But you know what I have always found?  In today’s market, owning used car without an extended warranty isn’t worth the risk, and having that warranty will really help to put my mind at ease.”

By defusing the situation with this dialogue, you can help to avoid negative feelings which will lead to a lack of concessions from either party, which hurts both of you.  A side benefit is, of course, that it’s much more pleasant to go through a negotiation this way rather than the normal high-pressure win-lose situation that typically transpires.

Depreciation isn’t a popular topic of conversation, because it just isn’t very sexy.  If you bring it up at a party, you will probably be rightfully ignored as being painfully boring.  Due to the fact that depreciation typically makes up more than half of the cost of a car over the course of ownership, however, it does deserve some attention.  So bear with me.

The biggest problem with buying new, besides the annoying and time-consuming task of dealing with car dealers, is that your car – one of the biggest expenses for most people – instantly loses thousands of dollars when you drive it home.   If you tried to sell your car with 50 miles on it on the used market, you would be at a loss of about 20% of the total purchase price.  This rapid decline in value is the depreciation of your car.

According to bankrate.com, a car typically loses 15% of its value each year.  This of course slows down over time, but the depreciation of the car after just a year of ownership can easily be 35% of the out-the-door cost once you take into account the taxes and fees.  That’s $8-9k gone from a car that cost $25,000 to begin with, which is nothing to sneeze at.

This sounds like bad news, but just the fact that you are aware of how much money can be lost in depreciation has armed you to become a much smarter consumer.  Even if you just buy a car that is one year old, you will have saved yourself thousands of dollars.  If you are shopping for luxury cars, the same rules apply, perhaps even moreso since luxury car buyers usually want to be the first on the block with the newest cars.  In the current economic climate, this is even more applicable, as people are trying to save money and buy fuel-efficient cars.

You can take advantage of this to buy cars which have been barely used at a huge discount.  It’s pretty difficult to tell the difference between a car that’s brand new and one that’s a year old, besides of course the much sought after new car smell.  Even then, buying a car from someone who is forced to sell because of a bad financial situation into a market with no demand might mean that you can land a car that even still smells new without suffering the big depreciation hit that the original owner did as he drove home.

A BMW 335i can be had for around $28,000 these days with the extended Certified Pre-Owned Warranty (6 years, 100,000 miles) to boot, if you are patient and negotiate well. One hell of a deal, if you ask me.

Myth #1: Used Cars are Unreliable
Fact: Manufacturers improve the reliability of cars every year, and cars that are still reasonably new offer reliability very close to brand new cars.

Myth #2: Used Cars Don’t Have Warranties
Fact: If you target the right cars, you will also have the benefit of full factory warranty coverage. Newer used cars still have warranties, and there are many factory and extended warranties available if you should decide to keep the car for a longer period.

Myth #3: People Only Sell Cars When They’re Breaking Down
Fact: People sell their cars for all kinds of reasons – not just when they are on their way out. For many people, this is simply a matter of having the latest and greatest of everything as a status symbol. For others, the reasons include having children, relocating or needing to buy a different car to suit business needs.

Myth #4: Used cars are out of fashion.
Fact: First of all, think about how much fashion is worth to you. Are you willing to trade fashion for financial stability, or at least thousands of dollars in savings? Secondly, most of the time if you buy a car that is used, but still new enough to be covered by the factory warranty, you will still be driving the current generation of the car and hardly anybody will know the difference. The last generation BMW 3-series was a great example of this. It kept the same body style from 1999 to 2006, of which I have owned two. The only question I have been asked is how I was able to afford such a nice, new luxury car. The fact is, I wasn’t able to afford the cars new – I let someone else take on the depreciation and bought the cars for less than half price.