How Much Do Dealerships Pay For Cars?
Buying a car from a dealership can feel like a guessing game – how much did they pay for this car? What’s their true bottom line?
Understanding how dealerships acquire and price inventory can help buyers negotiate better deals, and that’s what I am going to help you do today!
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In this article, I will break down how dealerships determine used and new car prices.
Table of Contents
Determining Used Car Value
For used cars, the wholesale price dealerships pay depends on:
- Auction sales data – Dealerships buy many used cars at auctions. Tracking what similar vehicles have sold for recently at auctions helps determine market value.
- Listing prices – Dealers research used car listing prices on sites like AutoTrader and Cargurus to gauge demand and pricing.
- Make/model demand – More popular models tend to command higher used prices due to higher demand.
- Location – Used car prices vary regionally based on local demand.
To estimate a used car’s wholesale value, look up the:
- Recent auction sales prices for that make/model
- Local listed prices on car shopping sites
- Kelley Blue Book value range
In my experience, the dealer likely paid around the average of those three figures. Yes, sometimes dealers get a car super cheap, and sometimes they over pay,
neither should affect you because your goal should be to buy the car at a fair price, not “beat the dealer” or pay for the dealers mistake.
Researching Used Car Value
Getting multiple data points helps pin down what a dealer likely paid for a specific used car. Here are two options:
- Auction Records SearchUse the VIN to look up actual sales records from major auto auctions nationwide. This can show what other dealers recently paid for identical vehicles.
- Value AppraisalGet a value appraisal based on make, model, year, mileage, location. An appraiser can research auction data, listings and pricing guides to estimate what a dealer would pay.
Understanding Dealership Markups
Once dealers have purchased a used car, they invest in preparing it for sale. Typical costs include:
- Inspection – $50-$100 to certify the car meets safety standards.
- Reconditioning – $1000-$2000 for any repairs or maintenance.
- Cleaning/Detailing – $100-$150 for washing, detailing, polishing.
- Transportation – $200-$500 for delivery from auction or acquisition source.
These preparation expenses generally add $1500-$2000 to the used car cost.
Average Used Car Dealer Markups
The dealership then prices the car based on comparable listings and their desired markup. On average, used car markups fall around $2000-$3500 above the dealer’s costs. Higher demand models often have bigger markups.
Luxury brands are marked up at a higher dollar amount but often a lower percentage versus mainstream brands.
How Dealers Price New Cars
For new cars, the main number to understand is the Manufacturer’s Suggested Retail Price (MSRP). This is the sticker price set by the automaker to advertise the car’s value.
The dealer invoice price is what the dealership initially pays the manufacturer for a new car. However, the dealer invoice price does not reflect the final cost.
Why Dealer Invoice Doesn’t Equal Dealer Cost
Dealers almost never pay just the invoice price due to:
- Holdbacks – Manufacturers return a small percentage (1-3%) of the MSRP to the dealer after a sale.
- Incentives – Cash incentives from the manufacturer help lower the dealer’s cost.
- Bonuses – Dealers earn bonuses for hitting sales volume targets.
- Factory Rebates – Special rebates are offered on certain models.
- Promotions – Special financing or pricing deals lower costs.
Between holdbacks, incentives and attainment bonuses, the real dealer cost on new cars often ends up 5-10% below the invoice price. Luxury brands tend to have smaller margins between invoice and cost.
New Car Holdback Percentages by Manufacturer
|3% of MSRP
|2% of MSRP
|1% of MSRP
How High-Demand Impacts Pricing
When new models first launch or are in short supply, dealers may price them at MSRP or above. They know demand is high enough that buyers will pay sticker price or higher.
In these cases, researching invoice pricing is less useful since market demand overrides discounts. Waiting a few months until supply catches up leads to better deals as volume incentives kick in.
Getting the Best Price from a Dealer
Armed with accurate cost estimates, buyers have a target to aim for in negotiations. But the unique situation of local supply and demand means there is no one “right” price. Here are tips for getting the best offer:
- Start with a fair offer just above dealer cost – Don’t expect them to take a loss
- Be willing to walk away – Don’t overpay for convenience
- Ask for dealer fee breakdown – Question any suspicious charges
- Shop multiple dealers – Leverage competition between them
- Check for unadvertised incentives – Ask about any specials or rebates
- Buy near month end – Dealers may give better deals to hit quotas
My Final Thoughts
The market dynamics of supply and demand have a big impact on pricing. But following these guidelines can help buyers negotiate a good deal based on the dealer’s true costs.