Tuesday, October 30, 2012

The Problem With Buying Services

Hey!  Have I gotta deal for you!

Buying a new car is a raw deal from so many angles.  In addition to the horrific depreciation you take, the first ten minutes you own the car, there is the issue of pricing.   Or more specifically, you really don't know how much you paid for the car.

In response to one of my previous postings on buying new cars, a youngster commented that he just bought a new (generic crapmobile targeted at 20-somethings) and got it for "$500 under invoice!" and he knew he was getting a good deal, because the salesman told him so.   The salesman is always a good source for pricing information, of course.

The problem is, like with anything else, we tend to self-report purchases based on a certain pricing number which is, by no means, the actual price of the product or service.   So, for example, many people tell me that they pay $79.99 a month for their smart phone, which is only the price placeholder for the basic service.   They "forget" that their actual monthly bill is closer to $100, with taxes and service fees and access fees and the carrier universal service charge.  We lie to ourselves about prices, because, well, we'd rather not think about what we actually paid.

And most retail transactions work this way - and work to the disadvantage of the consumer.  Airlines fought like hell to be allowed to offer "$39.99 fares!" which actually were closer to $99 once all the fees, taxes, and other add-ons were, well, added on.   And then you zing them for a carry-on baggage charge and a $5 diet soda to boot.

And to some extent, you can almost (almost) feel sorry for the airlines.  After all, why are they being singled out?  If I go to the drugstore and buy a six-pack of beer, it might say "On Sale!  $4.99!" but when I check out, the price is over $5 as I have to pay County, City, and State sales taxes.

Or, if you go on a cruise that is listed as "$199!!" you may end up spending over $2000 when it is all said and done.   And yes, I have met people who tell me, with a straight face, that their cruise cost them only $199, when in fact it cost far more than that.   We all want to lie to ourselves and kid ourselves that we are smart consumers and are getting "good deals" when in fact we are getting screwed most of the time.

And I suppose this is human nature, after all.   If we thought about how we are getting hosed, on a regular basis, most of us would just break down and weep profusely.

Car buying services are one attempt to get around this phantom pricing problem.   You go online or to a wholesale club or your local credit union, and for a small fee ($100 or so) you are given a coupon or other paperwork, and you go off to the dealer to get the "pre-negotiated price".   I used such a service once, to buy my pickup truck.  It was not easy to use, as dealers hate these sorts of things.   Why is this?  Because it takes all the "fun" out of the transaction, for them.

A dealer wants to make money, and they do this by chiseling you a little bit on the margins.  You really need to read "Confessions of a Car Salesman" on Edmunds.com before you ever, ever set foot in a dealer showroom.

The car salesman doesn't just tack on $500 or $5000 to the car price and say "pay it".   Of course not.  No consumer is that stupid.   Instead, they use a number of tricks to get you to pay more without realizing it.   They will pay you $500 less for your trade-in that it is really worth, and you might not notice that, or perhaps you are so eager to unload your "clunker" that you take it.  They tack on "document fees" for doing the deal - maybe only $100 or so.  But then again, they tack on a similar fee for doing a loan.   They jack your interest rate by telling you that you have bad credit - when you don't - and pocket more change.   And they get a kick-back from the loan company for doing this.   They tell you that you are getting a deal for "below invoice" and show you an "invoice" that in no way reflects what the dealer actually paid for the car.   They pressure you into buying floor mats (often the ones that came with the car!) or undercoating or paint sealant, often claiming that the treatments were "already performed on the car" and thus a non-negotiable part of the price.  They nail you in the front-end, the back-end, the trade-in, the financing, and even on the "tags and title" - often charging a $100 service fee, which pays for a young immigrant to stand in line at the DMV all morning, processing 15 titles for cars sold that week - if they don't just mail in the paperwork.  Almost pure profit, for them!

No one outsmarts a car dealer - ever, ever, ever, EVER!   No cow ever outsmarts the stockyard and the slaughterhouse, either.   Thinking that you are a smart cow who will avoid the abattoir is just foolish thinking.

And that is why buying a late-model used car from an individual is such a better deal.    When you are dealing with someone like yourself, there is less of chance for tomfoolery.   Of course, this means really dealing with someone like yourself, not some foreign-born part-time car salesman who is "curbstoning" and pretending to be selling his own car, when in fact, he is basically operating as an unlicensed dealer.

And it goes without saying that you should walk away from dreamers, high-pressure people, and just plain assholes.   When someone tells you that their used clunker is worth over book value (as one person tried to tell me) because "they didn't make many in that color" you just have to walk away.

There are good deals out there, but you do have to look for them.   But you will never find a good deal at a car dealer - new or used, so don't kid yourself.

Getting back to buying clubs, they are problematic for a number of reasons.   The dealer will try to fudge the prices, for starters.   And the dealer will try to get you to ditch the buying club, claiming they can offer you a better deal.   Two experiences, one from 15 years ago, and one from today, illustrate the problem.

In 1995, we decided to buy this pickup truck.  We looked at over 20, new and used, and decided we wanted this particular model because of its features, color, and accessories.   So I went to the Patent Office Credit Union and looked up the price in their buying guide, which was a telephone-book sized binder that had the spec sheets for most every car for sale.  I added up the price of the truck and all the options, and it came to $22,500 at the buying club price.

So I got the certificate from the Credit Union and lined up financing with them, and set off to the dealer with a cashier's check in hand to buy the truck.  What could go wrong?

When I got there, the salesman told me I was an idiot for using the buying club, as "if I had just asked him," he could have "beat their price!"    But of course, to beat their price, he wanted me to finance through the car dealer - at a staggering 15% interest (staggering for back then, even).  I said "no thanks!" and he never did get around to telling me how he was going to "beat their price!"

You see, saying real numbers is never in the interests of the salesman.  They will say "$1000 below invoice!" or "beat the price!" but never something as concrete as "$22,250.89" .   They want to hook you, without making any promises.

So, after an hour of screwing around with him and him having to "talk to the manager about this one" he came back and said, "OK, we'll do the deal!" and wrote up the contract for $23,850, which was over $1000 more than the buying service price.   When I pointed this out to him, he said, "No, that is the price, I have the book right here!"

So I left, and went back to the credit union, and looked up the price again  in their books.   My calculations were right - down to the penny.   And I immediately saw the trick he was using.  He had listed the discounted price for the truck - the base price - but then added in all the options at the full retail list price for each.   Naturally, this came out to a higher number, while still allowing him to argue that he was giving  me the discounted price on the truck.

The dealer didn't want to let that truck go for a low price.  It was fully optioned (for back then) and a real eye-turner.  It generated a lot of showroom traffic, and as young men came by to look at it, they could be transitioned into the sale of a lesser truck or Ranger or whatever.   You never let the "eye candy" model off the showroom floor for cheap.   And compounding this, 1995 was one of those years when car sales were UP (as they are today) and dealers and manufacturers were not offering much in the way of discounts.

So, after a few phone calls with the buying club, I got it all straightened out.   At first, they wanted me to buy the truck at the price quoted by the dealer, and then have the price "audited" and a refund given, if one was warranted.   I told them I was not going to buy the truck in order to find out what the price was.  Finally, they called the dealer and threatened to take them off the buying club list, if they didn't play square.

I went back the next day with my cashier's check, and closed the deal.   It still took two hours, as they wanted to sell me undercoating, paint sealant, and an extended warranty.  Listening to the pitch for extended warranties is like listening to a pitch from Mitt Romney.   Never mind what I said ten minutes ago!  Listen to me now!    So when they are selling you the car, they tell you how great it is, how durable and indestructible and reliable.   They close the deal and then try to sell you an extended warranty - but now the car is as fragile as an egg, with a transmission that is like a hand-grenade with the pin removed.   And they say this without shame, with that same shit-eating grin that Mitt Romney has.   And most people fall for this - they fall for salesmen - which is sadly why Mitt Romney is gaining so much in the polls.   Scratch a Romney supporter, and you'll find someone who leases or buys new cars every three years and thinks they are getting a "deal".

Did I get a good "deal"?  Well, I could have bought a similar truck in a different color and different interior, one year old, with 20,000 miles on it, for $17,000.   That's about $5000 in savings, and it would have lasted as long as the truck I bought.   Another fellow locally had an F-250 which was loaded, that he wanted to sell for the same price as my F-150.  He bought it on a whim (typical car buyer) and when he got it home he discovered it would not fit in his garage, it got only 15 mpg, and his wife was furious with him.  It was probably a good deal (only 300 miles on the odometer) in retrospect.

Trying to get a good deal out of a car dealer is impossible to do, by definition.  I did not  "win" in that transaction, I merely paid an "OK" price for a very overpriced product.

Now, fast-forward 15 years.  A friend had decided to buy a brand-new car.   Their old car, a Mercedes-Benz, is 20 years old and is more suited to a collector than a daily driver.  So they sell it and decide to buy a new mid-level Japanese sedan.   They do the research and pick a make and model, and also what options to get and even the color.  They go to the buying service, figure out the price, and decide it is what they want.   The buying service gives them the paperwork and they set off to the local dealer to pick up the car.  They have cash to pay for the car.

What could be simpler?   Oh, wait, it gets bad.

The salesman says he can "beat the buying service price" by an unspecified amount.  He says he can sell the car for "$1500 below invoice" but fails to state what the "invoice" price is.  So they agree to this, as who wouldn't want a lower price, right?  Or at least that is what the salesman said to them, "Why would you pay more for the car when I can sell it to you for less?"

Makes sense, right?  No one is going to say, "Gee, I think I'd like to pay more...."

So he goes and "talks to the manager" and an hour later they are set to do the deal, but he has bad news.  He can only do the deal if they buy a car off the lot - not the car they wanted.   He shows them one in the same color as they wanted, but the interior is a different color and the options are all different.  Right away they are comparing Apples to Oranges, and trying to compare the price of the car they picked, versus the one presented, is nearly impossible.   You can't compare, dollar for dollar, the LE to the SE, when one has navigation and the other a cassette deck.

So they hem and haw some more, and agree to go through with it.   It has been hours now, and there is a pit in their stomach, not only from lack of food, but from the feeling that a simple deal has gone awry.

Another hour and another trip by the salesman to "get final OK from the manager" and he is back with more bad news.   He is trying to help them!  But the darn manager is such a cock-blocker!   He can do the deal, but they have to finance it through the dealer.   The interest rate is 12% and there are about $500 in closing fees on the loan.   But he is still beating the buying service price!

Well, actually, no.  He isn't.   He is taking a car they don't want, selling it to them for more than the buying service price (since it is a different model, the buyers can't compare prices effectively) and then tacking on more fees in the financing.

My friends are smart.  They get up and walk away, even though they already sold their old car and arguably "need" one pretty soon (never a good spot to be in, as the dealer will use this pressure to get you to sign on the dotted line).

The salesman starts calling them.   He can make the deal work!  "Wait!  I'll talk to my manager!"

But he never just breaks down and says, "I can do the deal with the buying service" like he should.

And the sad thing is, probably a week from now, my friends will turn up in my driveway with their new car.    Not the one they wanted, of course, but the one the local dealer had in stock.   And they will crow about how they "put one over on the dealer" and got it for "$1500 below invoice!" while at the same time having no idea what they actually spent on the car.

Is there a way to beat the dealer at his own game?  Hell, No!   Buying services are a nice try, but if you decide to try one, don't kid yourself you are getting a bargain, as even at their prices, the vehicle will depreciate dramatically in the first few minutes of ownership.  

If you do try such a service, beware of the salesman - they will try to steer you away from the buying service, arguing that they can offer you a better "deal" - without actually offering you a deal at all, in terms of actual numbers.

If you use a buying service, use a dealer in a larger city.   Small-town dealers pay more for cars and thus have to make more on each sale.   They tend to attract the most odious sort of operators, at least here in this small town.   They push lease deals and "free gas!" and other gags.*

But frankly, I think the best way to avoid being ripped-off by a dealer is to avoid dealers entirely.

* I think the problem in our small town is that most of the salesmen are local good-old-boys, who consider it a patriotic duty (to the confederacy and the klan) to pull one over on a Yahnkee whenever possible.   As a Northerner, you should never do business with a Southern Redneck.   Go to Savannah, Hilton Head, or Jacksonville, and find someone who isn't "from here".