How to Finance Your First Exotic Car

[Ryan]

Craigy wrote:

Ryan wrote:

Craigy wrote:

Ryan wrote:

I watched this as most members here probably did– to see an alternative view on something that I’ve already formed an unchangeable opinion against doing. His framing of the depreciation you pay as a first owner just being the dealer’s profit– I wonder if that’s more true for exotics than “commodity” cars. Anyway and as expected, the rest of the video was wholly irrelevant .

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It’s true of all cars, except it’s magnified as the price gets larger.  There might be $50k of room on a $300,000 car, whereas there might only be $3,000 of room on a $30,000 vehicle.

I believe he’s just referring to the initial “drive off the lot” depreciation, which is essentially 100% the dealer profit.  If Adam buys a 2018 Honda Accord DX for $22,000 and Bob buys a 2018 Honda Accord DX for $20,000, resale book value on both used cars is only $19,500 on day 1, Bob’s saved $2,000 on “depreciation” thanks to being a better negotiator while Adam left a lot of money on the table for the dealer profit and salesman commission by overpaying.

Of course after that initial drive-off period, days, weeks, first few months or maybe a year, everything continues to depreciate beyond that dealer profit margin.  If Adam and Bob each drive their Accords for 10 years, and book value is now $9,500, they didn’t lose another $10,000 to dealer profit, they lost it to true depreciation from a variety of other factors.

Same thing as paying a big commission on anything.  If you buy a $20,000 mutual fund and pay a $2,000 load/commission, you could say your $22k investment lost $2k of value, but you really just paid a $2k profit to your broker/fund manager.

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“Price over market” does not just go to the dealer. The dealer gets price after his costs, which you’re assuming equal market costs. Maybe they do, maybe not. Here’s to hoping somebody can present data.

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The whole price goes to the dealer.   

Dealers buy their cars wholesale – from the manufacturer/manufacturer’s distributor.  I’m not sure what “market costs” you’re referring to.

 

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Well since nobody mentioned "market costs" until now, I'm not sure which ones you're referring to . My question was about where the price-over-market surplus goes in exotics versus new commodity cars. After the car leaves the dealer, its value "depreciates" to its equilibrium market price (the surplus disappears). For exotics, the video states that that depreciation is "dealer profit." Okay. But what about for commodity cars like Carmrys? Do dealers still get most of that surplus profit? Was most of it built into the wholesale price? Is there even much surplus at all? Those last questions are in line with what I'm asking.

[Craigy]

Ryan wrote:

Craigy wrote:

Ryan wrote:

Craigy wrote:

Ryan wrote:

I watched this as most members here probably did– to see an alternative view on something that I’ve already formed an unchangeable opinion against doing. His framing of the depreciation you pay as a first owner just being the dealer’s profit– I wonder if that’s more true for exotics than “commodity” cars. Anyway and as expected, the rest of the video was wholly irrelevant .

Click to expand…

It’s true of all cars, except it’s magnified as the price gets larger.  There might be $50k of room on a $300,000 car, whereas there might only be $3,000 of room on a $30,000 vehicle.

I believe he’s just referring to the initial “drive off the lot” depreciation, which is essentially 100% the dealer profit.  If Adam buys a 2018 Honda Accord DX for $22,000 and Bob buys a 2018 Honda Accord DX for $20,000, resale book value on both used cars is only $19,500 on day 1, Bob’s saved $2,000 on “depreciation” thanks to being a better negotiator while Adam left a lot of money on the table for the dealer profit and salesman commission by overpaying.

Of course after that initial drive-off period, days, weeks, first few months or maybe a year, everything continues to depreciate beyond that dealer profit margin.  If Adam and Bob each drive their Accords for 10 years, and book value is now $9,500, they didn’t lose another $10,000 to dealer profit, they lost it to true depreciation from a variety of other factors.

Same thing as paying a big commission on anything.  If you buy a $20,000 mutual fund and pay a $2,000 load/commission, you could say your $22k investment lost $2k of value, but you really just paid a $2k profit to your broker/fund manager.

Click to expand…

“Price over market” does not just go to the dealer. The dealer gets price after his costs, which you’re assuming equal market costs. Maybe they do, maybe not. Here’s to hoping somebody can present data.

Click to expand…

The whole price goes to the dealer.   

Dealers buy their cars wholesale – from the manufacturer/manufacturer’s distributor.  I’m not sure what “market costs” you’re referring to.

 

Click to expand…

Well since nobody mentioned “market costs” until now, I’m not sure which ones you’re referring to . My question was about where the price-over-market surplus goes in exotics versus new commodity cars. After the car leaves the dealer, its value “depreciates” to its equilibrium market price (the surplus disappears). For exotics, the video states that that depreciation is “dealer profit.” Okay. But what about for commodity cars like Carmrys? Do dealers still get most of that surplus profit? Was most of it built into the wholesale price? Is there even much surplus at all? Those last questions are in line with what I’m asking.

Click to expand...

If we define market cost or market price as what a used-but-virtually-new car sells for, and assuming a normal car with normal demand, I would say yes, the price you pay over that almost-new market price is virtually all dealer profit and dealer overhead.  Let's say a new car has a MSRP of $23,495 and a nearly-new car has a value of $20,000 on the second-hand market.  Wholesale after all incentives "triple-net" the dealer probably paid $19,500 for the car, and a good negotiator really squeezing should be able to get it close to $20,000, but most people probably pay $21,500-$22,900.    For real analysis on real numbers, you'd probably need to subscribe to autonews, have an account with manheim and be working on your phd dissertation in automotive marketing. 

If you look at a lot of car ads and auction results for in-demand vehicles from quality brands, a virtually new car sells for within a thousand or a few hundred of what an aggressively discounted new car sells for.  This isn't really a surprise since it's virtually the same product, virtually same warranty, even the same new car smell.  There is some market premium for a new vs a nearly new car, and the used car market is generally unwilling to pay more than what they can be had for new (with exceptions).

From an economic perspective the value of the new car should be something resembling the lowest reasonably available price, in this case, what a reasonably good negotiator shopping across a large selection of dealers can achieve.  Manufacturer margin is really a non-factor until the manufacturer starts shedding this in the form of incentives and rebates, which essentially turns potential manufacturer profit into potential dealer profit.

Any extra dollar you give to the dealer that you didn't have to is really just lost when you sign on the dotted line, drive off the lot.  It's not so much the fact that you've turned a new car into a used one, but the fact that ultimately you paid the dealer more than it's worth (again, economically, more than what the lowest reasonably available price is, assuming it's a product with normal demand). On the other hand, if we're talking a pink Pontiac Aztek, or an EV with heavy 1st-owner tax incentives, throw all of this out of the window  :lol: