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How Can a Dealership Possibly Sell a Car Below the Invoice Price?

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Used 2017 Volvo V90 T6 Cross Country
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author photo by Doug DeMuro April 2017

Hello, Oversteerers, and welcome to this week's version of Ask Doug, which is a wonderful weekly column where you "Ask Doug" something about cars, and Doug Googles the answer and pretends he knew it all along.

If you'd like to participate in Ask Doug, you can! Just email me at OversteerDoug@gmail.com, and I will consider your question before laughing at it due to your obvious stupidity. No, I'm just kidding! What I will do is, I will carefully read your question, and the moment I see the word "alright" or "anyways," I will press the delete button without going any further.

Today's question comes to us from a reader named George, who began things by saying "Yo Doug." I hovered over the delete button upon reading this, but later decided to continue. George asks:

Yo Doug,
I was wondering what happens when the car dealers take a loss on a car they sell. When we bought our last couple cars the sales manager should us the invoice and the price we were buying at. We ended up buying both cars at around $2000 below the invoice price. Not the MSRP, but the price the dealership supposedly paid for it. Why would they do this? Don't they have to make money? Do the car manufacturers compensate them for this?
Sincerely,
George

Yo George! Good question. My answer is in two parts.

ANSWER PART 1: The dealership isn't telling you the truth about the invoice price. This certainly happens some of the time. Here's something to think about when you brag to your friends about how you got a car "under dealer invoice": Who exactly told you the invoice price? That would be ... the dealer. And they want you to think that a) you got a good deal and b) they absolutely can't go any lower. So they print up a little piece of paper showing you exactly what the invoice price is, and who knows? Maybe it's completely fake.

The problem is, George, you don't really want to go around quoting the dealer invoice price that was told to you by the dealer. You want a dealer invoice price that's been independently verified, and those are pretty hard to come by. Going off the dealer invoice price told to you by the dealer is like meeting a guy from Michigan and asking him which state is the best. People from Michigan love Michigan. He's gonna say Michigan. He's not correct.

However, there are many circumstances in which a dealer really will sell a vehicle below the invoice price, which leads me to...

ANSWER PART 2: Here's how this works, ol' Georgey boy. Let's say you run Yo George Volvo Hyundai, and you're selling cars. Well, your primary source of income from a new vehicle comes in two ways. One is the actual sale itself, when you have a person come in to buy a V90, and you sell them a V90, and you make a couple grand. But the other is something called "holdback."

"Holdback" is an industry term that refers to a portion of the vehicle's profit that is "held back" from the dealer until the dealer sells a car. So let's say you buy that V90 from Volvo Cars North America for $48,000, and the MSRP is $55,000. Well, Mr. V90 Buyer negotiates a pretty good deal, so you sell it to him for $49,000 -- meaning you only made $1,000 on the deal. But guess what? The minute you report that car sold (actually, at the end of the month), Volvo sends you the "holdback" margin -- maybe an extra few hundred or few thousand dollars depending on the car.

You can probably see where this is heading. Say the V90 isn't doing very well in your area, so you want to move them out of your inventory. So maybe you sell it to Mr. V90 Buyer for $47,500, which is below the invoice price. You've lost money on this deal, but then the holdback arrives -- and suddenly you're net positive.

There are two other things to consider here, George. One is the floorplan situation. Although most car buyers don't realize it, dealers almost never own the vehicles in their inventory -- they're usually being "floorplanned," which is the industry term for financed. In other words, dealers are paying interest on each and every car on their lots -- and over time, that interest adds up. A dealer might sell a car just under invoice and lose $500 or $1,000 on a deal just to stop the bleeding on the interest.

The final thing to think about is automaker bonuses. Most brands pay out huge bonuses to dealers if they hit a certain number of sales -- and in some cases, these bonuses are more profitable than selling the cars themselves. So, for instance, say you're running Yo George Volvo and Volvo tells you that if you sell 10 V90s this month, they'll give you $20,000 in straight bonus cash. Well, you can bet that after V90 number nine, you'd have absolutely no problem ditching V90 number ten for $2,000 under invoice, because you'll make that money back (and then some) on the bonus deal. Unfortunately, these dealer bonuses aren't visible to consumers -- but they're out there, they're common, and they're a great example of why you should probably buy your next car at the end of the month.

So there's your answer, George. Now enjoy your below-invoice cars, and please remember that customer service should be paramount at Yo George Volvo Hyundai.

Doug DeMuro is an automotive journalist who has written for many online and magazine publications. He once owned a Nissan Cube and a Ferrari 360 Modena. At the same time.

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Used 2017 Volvo V90 T6 Cross Country
Used 2017 Volvo V90
$48,800
This image is a stock photo and is not an exact representation of any vehicle offered for sale. Advertised vehicles of this model may have styling, trim levels, colors and optional equipment that differ from the stock photo.
How Can a Dealership Possibly Sell a Car Below the Invoice Price? - Autotrader