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MANUFACTURERS HOLDBACK | DEALER TRICKS & SCAMS | HOLDBACK EXPLAINED
What is Dealer Holdback?
Dealer holdback is a percentage of the MSRP or Invoice of a new vehicle that is paid to the dealer directly by the manufacturer to assist with the dealership's profit margin. The internet has "let the cat out of the bag" so to speak with regards to giving the consumer access to previously unknown dealer secrets and tricks. By knowing about the holdback, you can use it as a negotiating tool in many cases.
The total invoice cost of the car is due to the manufacturer, payable by the dealership, when the vehicle is ordered, not when it is sold. Since car dealerships must have an inventory on hand so you can browse and select a vehicle, they must borrow money from the bank to pay for that inventory (called "flooring"). The manufacturer pays for financing and maintenance for the first 90 days the vehicle is on the lot, in the form of a quarterly check called a holdback. After the first 90 days, the dealership dips into its own pocket, and into its own profit, to finance the car. However, we all know that most cars don't stay on the lot for three months especially Toyota's, Honda's and your more popular vehicles of today.
This amount is unknown to you - until now. If the car sells within 90 days of the dealer taking delivery, he is guaranteed a profit even if the vehicle is sold to you at cost. Because of the holdback, the dealer can advertise a car at $1 over invoice and still make hundreds if not thousands of dollars on the sale.
However, the true "profit" of holdback money depends on how long the car has been on the lot. If our hypothetical Chevrolet had been sitting there for 45 days before you bought it, the dealer's holdback profit is only half of what it could have been, or only $300, cutting total profit on the deal to $840. At the 90-day mark, holdback profit has disappeared.
Dealer holdback allows dealers to advertise big sales. Often, ads promise that your new car will cost you just "$1 over/under invoice!" In addition the dealer stands to reap further benefits if there is some sort of dealer incentive or customer rebate on the car. Generally, sale prices stipulate that all rebates and incentives go to the dealer. Using the example above, let's see what happens when there is a rebate.
Suppose the car described above has a $1,000 rebate in effect. You need to subtract that $1,000 rebate (remember, the dealer is keeping the rebate) from the dealer invoice of $18,000, which results in a new dealer invoice of just $17,000. Now, you must calculate a fair price.. In this example, TMV (the market value) measures 3 percent of dealer invoice at $17,510, which means that the price you should try to buy the car for is $510 over invoice, plus destination, advertising, taxes, and fees. The dealer is still making as much as $1,110 and you're paying $2,490 less than the MSRP. Remember, the longer the car has been in the dealer's inventory, the less money the dealer is making.
Almost all dealerships consider holdback money sacred, and are almost always unwilling to share any of it with the consumer. Your best strategy is to avoid mentioning that you know the holdback amount and what it is during negotiations. Mention holdback only if the dealer gives you a hard time about not making any money when you know that isn't true.
So how can you benefit from the dealer holdback information? If the dealership doesn't have that special shade of blue you're interested in, and they can't find it at another dealership in the area, they have to order it directly from the manufacturer. If that's the case, make sure that they know that you know about the holdback. If a vehicle is special-ordered, holdback money is pure profit, and you will need to consider this when well into negotiations.
When calculating a holdback, use the following guidelines.
If a holdback is off of the:
Total MSRP, you must include the MSRP price of all options before figuring the holdback.
Base MSRP, you must figure the holdback before adding desired options.
Total Invoice, you must include the invoice price of all options before figuring the holdback.
Base Invoice, you must figure the holdback before adding desired options.
Following is a current list of makes and the amount of the 2001 dealer holdback.
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2008 WheelsDirect2U