True Confessions Of A Recovering Car Dealer

Steve Pomeranz: My guest today is Earl Stewart.  Earl is the owner of one of the top Toyota dealerships in the nation and has been in the car business since 1968.  After learning the ropes, Earl realized that the business he was in was full of high-pressure haggling techniques, deceptive advertising, manipulative tricks of the trade that gave the dealership a significant advantage over the customer.  He decided to change the way that he did business.  He changed the way his dealership sold cars, and he became even more successful doing so.  About four years ago, Earl wrote a book geared towards the consumer titled, Confessions of a Recovering Car Dealer. He’s here to talk about it.  Earl Stewart, welcome to the show.

Earl Stewart: Thank you, Steve, it’s an honor to be on National Public Radio.  I am really flattered that I was asked to appear.

Steve Pomeranz: You know, Earl, this is a great book.  I’m going to recommend it highly to my listeners, I’m going to put it up on our website OnTheMoneyRadio.org and list it as one of the top books that I recommend.  It’s a tell-all book on how to buy a car without getting ripped off and you revealed the inside information on the car dealer’s playbook when you walk into the showroom.  How do your fellow dealers take into you revealing all of these secrets?

Earl Stewart: Well, Steve, I’m not very popular with the dealers.  I’ll never get elected president of the Dealer Association.  They’re resentful, and I can understand why.  The car dealers have been the last—if they ever do enter the 21st century in terms of consumerism—so they resent my posture position since I’m talking about something they don’t like to talk about.

Steve Pomeranz: You know buying a car is a harrowing experience, I think, for most of us.  You’re a consumer and you’re at an immediate knowledge disadvantage.  The salesmen are selling cars day in and day out and they’re getting training on sales, they’re honing their skills every day, and consumer goes in, what, once every four years or more?  With just one simple desire, “Hey, I want to buy a new car.” How do you take this uneven playing field and make it more even?

Earl Stewart: Well, unfortunately, it’s a lot of hard work.  In a nutshell, what I advise my listeners and my blog readers and my book readers is essentially to do their homework.  The best and surest way to get a fair price on a car is price comparison.  You think you’ve got the exact car you want to buy, and you never vary the car, when you decide what you want, get prices from at least three dealerships on that car.  Competitiveness is on the consumer side but never ever buy a car from the first or even the second dealer you talk to.

Steve Pomeranz: One advantage you can create for yourself is by getting dealers to compete against each other.

Earl Stewart: Exactly.  Competition is intense in the car business and there are really too many car dealers and their price competition is unprecedented.  Unless you take advantage of that, you’re not going to get a good price.

Steve Pomeranz: When I go to choose a car, what are some of the important factors that I need to consider?  You know there’s the purchase of the car, there’s the actual enjoying the use of the car, and then there’s that value in the end, the trade in value or the residual value. Should I consider the purchase through the sale as the cost of my total purchase or just concentrate on the purchase?

Earl Stewart: You have to look at the real price of the car, the advertised price or even the price that you pay, as not the true cost of that car.  That car, when you purchase it, is going to depreciate over three or four or five years, however long you keep it.  You should determine the resale value of that car, and there’s a very easy way to do that.  That’s by the Auto Lease Guide, ALG, Auto Lease Guide.  Every dealer uses the Auto Lease Guide;  every leasing company’s bank uses that.  You can determine the residual value of your car, and if you’re going to keep it for three years, you can find out whether your car is going to be worth 60% or 65% of the purchase price or only maybe 25 or 30%.  Huge difference.

Steve Pomeranz: You may have car A and car B, and maybe even car A is cheaper to buy, but the residual value at the end is much lower, so when you add in all of the costs together, you think you’re getting a good deal by buying it for less- car A for less- but, in fact, you’re not.

Earl Stewart: Exactly, I mean there are cars that will depreciate 38 to 40% in the first year of ownership, and there are cars that will depreciate maybe only 5 or 6%, so there’s a huge difference between the depreciation of cars.  You need to know that before you make your buying decision.

Steve Pomeranz: One feature that you mentioned in your book was choosing the right color car, and I was kind of surprised to see that.  Tell us why that’s important.

Earl Stewart: People tend to want to buy the car that’s in their favorite color, and a lot of us have peculiar colors.  Some people—my wife, for example—love purple.  She went out and bought herself a purple Lexus.  The resale value of that Lexus in four or five years would be thousands of dollars less because most people don’t like a purple Lexus.  You should look for the popular colors with the brand and style of car.  Black, silver, white are the three most popular colors, but if you’re buying a sports car, red or a flashy color would be suitable.  You need to find the popular color of the model and make of car you’re buying.

Steve Pomeranz: Know that if you do make a decision based upon your emotions and your feelings about a particular color, there’s a good chance you may pay the price at the end.  If you’re willing to accept that price, go for it.  Right?

Earl Stewart: Exactly.  The wrong color can cost a car 3 thousand dollars in resale value easily.

Steve Pomeranz: My guest today is Earl Stewart, he’s the owner of one of the top Toyota dealerships in South Florida, and he’s also written a tell-all book called, Confessions of a Recovering Car Dealer. This is what we’re talking about with Earl today.  By the way, Earl has his own radio show, local to the South Florida market.  The call letters are 900 am and he’s on Tuesdays from 4 to 6, so he’s a fellow radio guy.  Also got into it not being a radio guy, just like me.  I was an investment advisor who became a radio person for the last 15 years, myself.  Earl, the manufacturers.  It’s not only the salesmen and the sales managers in the dealerships that have the advantage or are manipulative.The manufacturers have manipulative techniques, too.  One of them is this thing you call, “stair-step pricing.” What is that?

Earl Stewart: That’s an insidious, very very anti-consumer incentive plan that manufacturers have for their dealers.  What it does is it puts a very high incentive that is accumulated up to a certain quota that they must sell.  The manufacturer tells a certain dealer he must sell 100 cars in a month.  They might put $500 bonus on every car he sells, but they don’t collect it until they hit their 100th unit and that’s retroactive.  That would be a 10 thousand dollar bonus that he would collect, or 100 thousand dollar bonus that he would collect, on his last car.  That makes it unfair to the people that buy cars early in the month because the bonus doesn’t occur until the last of the month.  It causes crazy pricing and makes it very difficult for the consumer to plan their car shopping and partially because the car that’s bought in the early part of the month is the one higher than the cars bought at the end of the month.

Steve Pomeranz: I mean, I guess the salesmen can say in good faith that this is the best price they can give you, let’s say, on the beginning of the month, knowing that there’s a strong possibility, but not necessarily—I mean is this information passed down to the salesmen?

Earl Stewart: I tell my listeners to my radio show, and that sounds like an old wives’ tale, but the fact of the matter is the end of the month is positively the best time to negotiate a good price on a car.  I tell people to do their homework earlier in the month, but don’t make their purchase until the last two or three days of the month.

Steve Pomeranz: Yeah, because that’s when the pressure mounts for them to meet their quotas.

Earl Stewart: Yes.

Steve Pomeranz: Are we talking calendar days of the month?

Earl Stewart: We’re talking actual- sometimes the manufacturers end their month the first or second or third of the next month.  Typically, if they fall on a weekend, they’ll carry their fiscal month through Monday or Tuesday.

Steve Pomeranz: If, at least, you wait until the 30th or the 31st, if there is one, and the first, you’re in the ballpark there and that’s the key.

Earl Stewart: Yeah, 31st or the first or the second, you’re in pretty good shape.

Steve Pomeranz: What is the best time- now that we’re talking about the best time to buy a car, so we talked about the month.  When during the year, in terms of the new models, is the best time to buy a new car?

Earl Stewart: A lot of people think the best time to buy a car is during the mop-up cleanup toward the end of the year when the dealers are moving out last year’s model, you save money upfront on that, but you pay in the long run because of depreciation.  You’re better off to buy a current, fresh model, and I recommend a month or two into the new model year and buy the new model.  The prices have come down by that time, and if you negotiate well, you’ll get a good price on that car.  The extra depreciation that you get from buying last year’s model offsets the gain from the discount the dealer advertises.

Steve Pomeranz: Let’s view that.  Let’s go a little bit deeper because I’m not sure people follow.  If this is, let’s say, November of 2015 and dealers are trying to get rid of inventory, knowing that the 16s are coming out in January—just making up some dates here, guys.  I buy a 15, I get some discount because he wants to mop up his inventory, like you said, but as soon as the calendar turns January 1st, my car that I just bought two months ago is worth a lot less because now it’s a year old already even though I’ve only owned it for months, right?

Earl Stewart: Exactly.  When you trade that car in, they don’t care when you bought it, they only know it’s either a 2015 or 2016.  You might have bought it a week after it became 2016, but the 2015 is a year old at that point.  It sounds like a good deal when they say, “I’ll give you an extra thousand dollars off the price of the car,” but, in reality, it’s going to cost you twice that in terms of extra depreciation.

Steve Pomeranz: I guess you could go in—again being a novice, I don’t know if this is realistic—you could go in and say, “Hey, I’ve looked at the depreciation or what I’m going to lose,” and negotiate a price down to the depreciation loss, I suppose.

Earl Stewart: You could try.

Steve Pomeranz: Okay, you don’t even have to expand on that.  I think that says it all.  Let’s change gears here because in the book, throughout the book, you talk about one fee that really tees you off.  It’s called the “documentation fee.” The- what do you call it?  There’re 22 names-

Earl Stewart: You’re good to be confused about that because of the fact that there’s probably 25 different names for it.  Dock fee, dealer fee, dealer prep fee, administration fee, handling fee.  The only thing they have in common is that dealers like the word “fee” very much because it fools the buyer into thinking it’s a government fee like a sales tax or a license plate.

Steve Pomeranz: The salesman says to me, let’s say, there’s a fee of $795, I say to him, “Well, what is that?” He goes, “That’s our fee to take care of all of the documents, all of the filings,” and you say, “Hey, wait a minute, that’s the cost of doing business, that’s not a real fee.”

Earl Stewart: If a business can pass along all their costs on the product they sell, they can pass along their light bill, their water bill, the salesman’s commission, their rent bill.  You can’t pass along your cost to your customer.  You have to include them in your advertised price, in the price that you quote the customer.

Steve Pomeranz: What if the dealership says, “This fee is not for negotiation.  We have to- if we charge one person, we have to charge everybody else.  It’s not for negotiation.” What’s my comeback for that?

Earl Stewart: Well, the comeback is you don’t care what fee they charge you, as long as you include it in the price that you advertise and the price that you quote.  When you’re doing competitive shopping, you say, “Listen, it’s okay if you want to add a fee, I want to know my out-the-door price.  You give me the out-the-door price, I’m going to talk to two or three other dealers, and if they give me a lower price, I’m going to buy from them.  If you feel like you want to give me that dealer fee, be sure it’s included in the price you quote me.”

Steve Pomeranz: In other words, you could charge me $795 as a dealer fee, but you should reduce the price of the car by $795.

Earl Stewart: Exactly.

Steve Pomeranz: Now there is a problem here in regards to what the salesman’s incentive is and what the dealership’s incentive is because the salesman makes a commission on the price of the car, and the dealer fee is gravy to the dealership.

Earl Stewart: Exactly.  That dealer fee is pure profit that goes right into the dealer’s pocket.  The salesperson or the sales manager gets no piece of it, so in their mind, they don’t want to discount the car because that comes out of their pocket.

Steve Pomeranz: It’s actually a double whammy because the dealership is getting the fee and keeping most of the profits, and the salesman is cutting their commission, so there’s a big disincentive for them to do anything, they’re not going to fight you.

Earl Stewart: Exactly.  They come up with some imaginative answers as to why the dealer fee exists because they know that you don’t want it, and they can try to come up—they’ll say that all the dealers charge it, or that it’s illegal for me to take it off.  They come up with all of these creative answers which none of which are really true because a dealer fee is something a dealer decides on, nobody else.  He can take it off, they can charge one customer and not charge another.  It’s entirely up to him.

Steve Pomeranz: What are some of the most devious statements made by car dealers that you know about and that you’ve written about?

Earl Stewart: The worst ones are about leasing.  Leasing is where more people are taken advantage of than purchasing.  One of the most cruel things that dealers will tell people that lease cars is that if you change your mind and you don’t like the car, you can just bring it back.  That’s usually said in the negotiation, it’s never put in writing, of course, and a lot of elderly people are victimized by this.  A lot of elderly people go into a car dealership with the intent of buying a car, most of them don’t even want to lease, and then the salesperson tricks them into saying that, “We can get your payment down $200, and you can drive the car for only this much.” They make the person think it’s like a rental.  You rent a car for two weeks, you bring it back, and that’s the end of it.  When you sign that 48-month or 36-month lease contract, you owe 48 or 36 payments.  You can’t get out of it if you change your mind two weeks later.  You still owe all of those payments.

Steve Pomeranz: I think one of the reasons that leases are mostly sold is because the monthly payment is so much lower.

Earl Stewart: Yes.

Steve Pomeranz: Go through with that a little bit because that can be very misleading.

Earl Stewart: When you buy a car, of course, you’re building equity.  It doesn’t happen for about a year and a half or two years because you have the extreme depreciation when you drive that new car off the showroom floor, but if you keep a car for four years, usually about a 36 month, you’re building equity.  You’re building capital.  When you lease a car, you don’t own the car, the leasing company owns the car, and you’re paying rent on the car.  You’re building zero equity so, therefore the car belongs to the leaser when you’re through with the lease. They take it out and they’ll sell them for several thousands of dollars, which you could have sold it for had you purchased.  There really is no economic advantage to a lease over a purchase.  The payment is lower, for a very good reason because you have no equity.

Steve Pomeranz: There is this feature that they’re guaranteeing what the residual value is whereas when you own the car, you now have the responsibility of either they’ll tell you, “Well, you know if you don’t like our deal, go to another dealer.  If you don’t like their deal, sell it privately.” That’s a big hassle.

Earl Stewart: Exactly.  There are advantages to leasing.  One leasing advantage is if you have an accident, car is damaged, that’s the liability of the leaser, whereas if you own the car and you have a three or four thousand dollar accident, even though it’s repaired perfectly, a damaged car is never worth an undamaged car.  The leaser has to absorb that.  There are advantages to leasing, I think that it’s more complicated and it’s more easy for the dealer to trick people when they buy a lease.  There’s a lot of fees.  There’s a lease initiation fee, there’s a lease disposition fee, there’s also the normal wear and tear fee that you have to pay when you turn your car in.  If you go over a certain minimum number of miles, they charge you 18, 20, 25 cents a mile for over-mileage.  There’s a lot of minefields, pitfalls to leasing that you have to be aware of.

Steve Pomeranz: The book is Confessions of a Recovering Car Dealer. My guest is Earl Stewart, owner of one of the top Toyota dealerships in the nation.  I guess somewhat of a pariah to other dealers.

Earl Stewart: That’s a good word.

Steve Pomeranz: Maybe your next book will include “pariah” in the title.  Earl has really decided to go the honest route, and he’s actually created a company that has done that and guess what, folks?  It has increased the sales over time.  Earl, thank you so much for joining us, we’d love to have you back on the show later.

Earl Stewart: Steve, I’d love to.  Thanks so much for having me on.