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Kelley Blue Book: How to avoid car dealers’ high markups

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While finding a new car today can be tricky, striking a good deal is tougher. It’s a seller’s market. In other words, even the fairest dealers don’t have an incentive to dicker, so be prepared to pay sticker.

With that bit of folksy poetry fixed in your mind, you’ll need to guard against any dealers treating today’s short supply like a winning lottery ticket. Many are tacking thousands of dollars in dealer markups to the manufacturer’s suggested retail price. By law, window stickers on every new car available for sale must display the MSRP.

With dealer lots looking emptier than a year ago, many vehicles arriving on transport trucks will often be presold or at least promised. It’s a difficult market for car shoppers.

In this article, we’ll explain why dealers started marking up the prices of vehicles beyond MSRP and what, if anything, you can do about it.

What’s supply got to do with it?

If you start shopping for a new car, you may encounter dealers who refuse to budge from the vehicle’s posted window sticker price. In other words, they aren’t willing to negotiate. This isn’t mule-headed stubbornness for many dealers but a matter of good business sense.

New car inventories remain exceedingly tight due to the semiconductor chip shortage, supply chain disruptions, and other factors. Many of today’s popular features like touchscreens, navigation, and power-adjustable seats require microchips.

According to data from Kelley Blue Book’s parent company Cox Automotive, the current new vehicle inventory was 1.07 million units at the start of March. That may sound like a lot, but inventory was 1.5 million units higher a year ago. Translated into days of supply, currently, it’s 34. It was nearly double that last year.

Every car a dealer sells today will be unavailable to sell tomorrow. That’s always the case. However, dealers today can sell only a handful of vehicles on-site with potential buyers lined up like it’s opening day for “Spider-Man: No Way Home.”

Car prices determined by supply and demand

If you never pay much attention to the fundamental theories of economics, you may not realize the current marketplace works like a Petrie dish for the effects of supply and demand. In an open market, the price gets determined by demand. The more of a thing people want (like cars), the more they are willing to pay for them, and the higher their price. That higher price motivates additional production of that thing, and the price eventually falls.

Car dealers do not exist in business to break even. When you find your dream car and the dealer wants the full MSRP — or more — you can always walk away in this market. Waiting for that dealer to come back with a better offer probably isn’t the best use of your time. If it’s a popular model, someone else will probably snatch it up if you wait.

These days, a dealer demanding the full MSRP isn’t cheating you. You’re paying the price the manufacturer assigned to that car. In this economy, it’s probably a good deal.

Brands with the deepest inventory may have dealers more inclined to negotiate or stick with the MSRP. Brands with the most cars right now include Audi, Volvo
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+0.72%
,
Ram, Jeep, Buick, Lincoln, and Mazda
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-3.14%
.
According to Cox data, Kia
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+3.47%
,
Lexus, Toyota
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-2.13%
,
and Subaru
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-1.61%

have fewer cars available for shoppers.

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What are dealer markups?

For our purposes here, we define a dealer markup as a selling price above and beyond the car maker’s MSRP. Often such markups appear as a second window sticker separate from the MSRP. Sometimes these markups include the cost of dealer add-ons like seat-fabric protection, VIN etching, undercoating, and pin stripping. You could often negotiate such traditional add-ons out of the final transaction price. Even that is tougher to do today.

Then there are those dealer markups often referred to as “Additional Dealer Markup (ADM)” or “Additional Dealer Profit (ADP).” You might see it called a “market adjustment.” These costs are the ones to look out for and, if possible, avoid.

A dealer tacks these arbitrary amounts onto the MSRP to increase profit on high-demand models. Historically, you would find them primarily for highly anticipated all-new or redesigned models. Such dealer markups take advantage of a model’s high demand and short supply when first launched.

Read: This is when you can hope for new car prices to start going down

Manufacturers warn dealers about markups

High demand gets spread across nearly all vehicle makes and models in today’s market. The temptation to price gouge is simply too great for some dealers to resist.

Manufacturers like Ford
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+0.60%
,
 General Motors
GM,
+1.63%
,
 Subaru, Hyundai
HYMTF,
-0.11%
,
and others began cracking down on dealership pricing.

Crowdsourced website Markups.org reveals just how drastic the price increases look, offering specifics on dealerships and providing, in some cases, visuals to go along with the markup information. Although a solid number of vehicles don’t show any dealer markups, many others do. We found one as high as $35,000 that a Maryland Ford dealer tacked on a new 2022 Ford F-150 Raptor.

Ford’s CEO Jim Farley recently warned dealers to “cut” the markups. Speaking to investors on Ford’s earnings call in January, Farley said, “We have very good knowledge of who they are, and their future allocation of product will be directly impacted.”

Hyundai sent warning letters to dealers and mentioned specific practices, including:

Advertising one price online, then naming a different price when the customer starts to negotiate.

Affixing window stickers with markups included as itemized parts of a vehicle’s price.

“All of these practices result in the sale of vehicles for above-MSRP prices, in some cases way above-MSRP prices,” the letter said, according to a report on Automotive News. That risks “damaging our brands’ long-term ability to capture new customers and retain loyal ones.”

What you can do about high markups on cars

Wait: Although new car inventories will remain tight throughout 2022, this market won’t last forever. If you aren’t desperate for a new car, wait for more favorable times.

Contact several dealers: The more dealers you contact, the better your chance of scoring the best deal. To simplify the process, use KBB’s tool to obtain a free price quote from dealers in your local area.

Be prepared to compromise: The Rolling Stones said it best — “You can’t always get what you want.” If you are going to buy off a dealer’s lot or from those coming in on a truck, remain flexible. The odds are you won’t get exactly the color you want, with the engine you want, or with the accessories you want. Decide what is most important and be willing to compromise on everything else. (See: To save money on a new car, can I get the dealer to remove accessories or factory options?)

Don’t take dealer ads at face value: New car advertising typically comes with many disclaimers and caveats regardless of the market conditions. If a new car price seems too good to be true, it probably is. When you see a specific model advertised, call the dealer and make sure it’s there before making the trip. When an ad claims they have several units of the same model on hand, don’t count on it. Often those numbers include vehicles that have yet to arrive, are already spoken for, or are sold.

Consider ordering from the factory: Except for some electric brands like Tesla
TSLA,
-3.00%

and Rivian
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-2.95%
,
most car makers still require you to order a vehicle through a franchised dealership. However, you can specify precisely the color, model, and options you want. You will probably still pay MSRP or maybe even a little more. But at least you’ll have the exact vehicle you want. The issue with special ordering is that the car may take six to nine months to arrive. (See: Buying a car from the factory sounds expensive, but it can actually save you money. Here’s how to do it.)

If leasing, watch for fees. Many leases contain a vague list of fees and costs related to the upfront charges and picking the purchase option when returning a lease. Check your lease contract and know your rights. Some dealers started charging market adjustment fees on leases. Question everything, shop around for the best deal, and don’t pay anything not listed in the contract.

This story originally ran on KBB.com

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