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What is a pre-purchase inspection?
Some things in life are worth checking twice. For example, when you leave your home it isn’t a bad idea to double check that you locked the door. Checking twice can save you a lot of headache, right? The same principle applies when purchasing a used car, and it’s exactly why you need to consider getting a pre-purchase inspection (PPI) on any used car you’re thinking of buying.
We’ve recorded countless videos for our YouTube channel talking about pre-purchase inspections and their importance. The long and short of it is that pre-purchase car inspections are 100% necessary for used car purchases. If you’re buying a used car, you need to get a pre-purchase inspection on it first, no ifs, ands, buts, or maybes.
Let’s dive into the details of what a PPI includes.
What is a pre-purchase inspection?
Simply put, a pre-purchase inspection is a vehicle inspection that occurs in advance of a vehicle sale. There are no set parameters for what constitutes a pre-purchase inspection (that is to say there isn’t a universally accepted “checklist” of things that a mechanic needs to review to complete the inspection).
Pre-purchase inspections (commonly referred to as PPIs) are simply a mechanical review of a vehicle in advance of a sale.
When should I get a PPI?
As the name suggests, you should get a PPI conducted in advance of purchasing a vehicle. Specifically you should have a PPI conducted the same day, or within a few days of taking delivery of a vehicle.
The last thing you want to do is have a pre-purchase inspection conducted only to have an issue crop up a few days later unexpectedly. Taking ownership as quickly as possible after your PPI is conducted is a best practice.
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Where can I get a pre-purchase car inspection?
There are a few options for where you can get a pre-purchase inspection completed. First and foremost, if you have family or friends who are auto mechanics, ask them to help. If not, fallback to your trusted local mechanic. If you don’t have a local mechanic who can help (or if you’re buying the vehicle from out of state), consider using a national service like Lemon Squad.
We recommend Lemon Squad because they have been in business for a decade and have an “A” rating with the Better Business Bureau. We don’t get compensated for saying that, we simply think they’re a viable option if you don’t have a trusted family member, friend, or local mechanic.
What should be inspected?
It’s important to keep in mind that there is no universally accepted “checklist” for what is inspected during a PPI. That being said, there are a few things your mechanic will absolutely pay attention to. Specifically they’ll inspect:
- The vehicle dashboard
- Tires and suspension
- Fluids
- Brakes
- Engine
- Transmission
- Exhaust
- The body and frame of the vehicle
- Lights
- HVAC
At the end of the day each mechanic will have a slightly different pre-purchase inspection process. Bear in mind that most mechanics will find at least one thing that should be done on the car. Remember, it’s their job to find things and make you aware of them!
A PPI is similar to a home inspection on a house. You want your mechanic to be thorough (just like you want the home inspector to be thorough), and so you’d almost be disappointed if there wasn’t anything wrong with the car (or the house). Keep this in mind when you receive the pre-purchase inspection report. Your mechanic will make you aware of what is really important, and what is lower priority.
How much does a pre-purchase inspection cost, and who pays?
If your mechanic charges you more than a couple hundred dollars for the pre-purchase inspection, you may want to ask them a few questions. Depending on the vehicle, a PPI should range anywhere from $100 to $300.
Considering the vehicle you’re thinking of purchasing is most likely worth tens of thousands of dollars, the investment upfront in a PPI is well worth it. The headache you save, and the peace of mind you gain makes a pre-purchase inspection a worthy investment.
Do you have other questions about pre-purchase car inspections? If so, let us know in the comments down below.
What really happens when a car salesperson goes to ‘talk to the manager’?
Trust is at the crux of any human interaction. Whether you’re navigating the aisles at the grocery store, having a conversation with your significant other, or interacting with your boss at work, trust plays a critical role in how we approach each and every aspect of our life. Seemingly, there is no trust in a car dealership (not between the customer and the salesperson, and not even between the salesperson and the sales manager). For decades now, car salespeople have constantly gone to “talk my manager” for permission to negotiate during the sales process.
This tactic, paired with countless other dealer antics is very frustrating for customers. If you’re unfamiliar with your salesperson saying “let me go check with my manager,” you’re lucky! If you’re not, it means you’ve certainly spent countless hours at a dealership before being frustrated and disappointed that the process is so drawn out.
Today I wanted to provide some insight into why salespeople have to go talk to their managers to ask them questions when negotiating with a customer, and what really happens behind the scenes. If you prefer to watch instead, consider clicking on the video above.
It starts with trust
It’s important to recognize that car dealerships have been operating in a similar manner for nearly one hundred years. The manufacturer to dealership model has been in place since before you were born, and the tactics and strategies dealers deploy to maximize profits are ingrained in dealership culture.
Traditional dealership culture is anti-consumer — that is to say most dealerships operate in a way that isn’t transparent, friendly, or buyer oriented. Dealers are tasked with one primary goal: maximize profits, and in that quest, a lot of antiquated practices have become the reality of the car buying process.
The way dealerships are structured from a staff perspective is worth noting. There is an owner (either a mom and pop owner, or a big corporation), and then below them are the staff. There is a General Manager, a New Car Sales Manager, and a Used Car Sales Manager, and below them are the salespeople.
The structure may be different depending on each organization, but generally speaking, this is the typical formation of a dealership’s sales staff.
If you’re thinking about buying a car, you might enjoy this article: Buy or Lease: How to Decide For Your Next Automobile
The New Car Sales Manager is responsible for (and their pay is tied to) how much gross profit the dealership makes in any given month off of new car sales. That means that the managers goal is to work with their salespeople to get the most profit out of every new car deal.
Now that you know that, it should be clear how the “let me go talk to my manager” tactic came to be. Managers don’t trust their salespeople to maximize profits. Instead, they fear that salespeople will jump right to the bottom line number right after shaking hands (or I guess elbow bumping) their prospective customer.
Most sales managers operate out of fear. Their compensation is directly tied to how much gross profit the dealership generates on any given month, and the idea of giving up “control” to salespeople to be able to make their own independent decisions during the negotiation process is a foreign concept to them. Instead, sales managers typically try to retain as much control over the process as possible, and that’s why you see salespeople frequently doting to the sales managers office.
Most customers prefer to deal directly with a decision maker
This control dynamic is ironic, however. Car buyers don’t want to be dragged into some strange power struggle between a salesperson and a sales manager. Instead, they simply want to deal with the actual decision maker from the start.
This makes sense considering most buyers research their purchase for 14 hours or more. To then be stuck at a dealership negotiating with a salesperson who really can’t make a final decision, only to drag on the process even more … It’s no wonder that buying a car can be a tiring event.
The construct of “let me go ask my manager” also allows sales managers to mitigate their fear of becoming irrelevant. As many car dealerships pivot towards one price selling, sales managers fear that they won’t be able to retain their roles within the dealership.
Car salespeople are trained “whoever has control wins”
Everything in life starts with trust, but in the car dealership it also starts with control. Antiquated training has led to salespeople and sales management staff being reliant on the concept of “whoever has control wins.” This “us” versus “them” mentality is not pleasant for anyone involved, but as a car buyer it is important you understand just how deeply it is rooted within the dealership.
For example:
- Salespeople don’t want to give up control to the customer
- The sales manager doesn’t want to give up control to the salesperson
- The finance manager doesn’t want to give up control to the sales manager
- The owner doesn’t want to give up control to … anyone!
As you can see, trust is lacking across the board, and when that’s the case, getting anything done at a dealership comes to a standstill.
The sales manager is trying to think two or three steps ahead to try and get the deal done
So what really happens when the salesperson goes to talk to the sales manager? The sales manager quizzes the salesperson to better understand how likely the customer is to make their purchase today.
If it’s likely they can close the deal today, the sales manager will work the salesperson to retain as much margin in the deal as possible. If the deal feels shaky, the sales manager might coach the salesperson to negotiate a slightly lower price to see if they can move the needle.
At the end of the day in the sales manager’s office the word they are most concerned about is “now”. “How likely are they to make the deal now?” Everything is about getting the deal done today, and it’s not only the sales managers responsibility to coach the salesperson to get the deal done now, but also with the most gross profit possible.
So there you have it, that’s what really happens when the salesperson goes to “talk to the manager.” Is it frustrating and annoying when it happens? Absolutely. Do you now understand why it happens? I hope so. Patterns of behavior that have been in place for decades will take time to erode. Let’s hope that this one goes away in the not too distant future.
How Much Should I Spend on a Car? Follow This Easy Rule.
For many, buying a car is the second most expensive purchase they’ll ever make. Buying a depreciating asset (a vehicle) for tens of thousands of dollars is a major financial commitment. If you’ve ever asked yourself, “How much should I spend on a car?” You’re not alone. Knowing how much you should spend on a car is an age old question, and one that we’re going to address today with the 10% rule.
If you search online, you’ll find many different opinions on how much you should spend on a car. There is no “right” answer, and there is no “wrong” answer. At the end of the day, you have to make a decision that you feel comfortable with.
That being said, we do have some advice we’d recommend you follow. We’re here to help you learn about the 10% rule, and how it helps you determine how much you should spend on your next car.
Assess your financial situation
First things first, to determine how much you should spend on a car, you need to assess your financial situation. This means auditing your monthly gross income. How much gross (before taxes) income do you make each month?
I say monthly income on purpose, because most car buyers are shopping for a monthly payment that meets their budget. This is as good a time as ever to mention that if you can afford to buy a car in cash, and you intend to keep it for decades, please do that. That is the most financially responsible car buying decision you can make (i.e. no interest payments).
Having said that, most of us aren’t in a position to pay for a car in cash upfront, and most of us want a little variety when it comes to what vehicle we’re driving in (we’ll get a different car in two or three years). If that’s you, then start this exercise by analyzing your monthly gross income.
Write that number down, we’re going to come back to it.
Ask yourself “why” you need a car
Are you buying a car because you need transport from point “a” to point “b,” or are you getting a car to make a statement?
I remember when I worked at an Acura dealership in the early 2000’s and a customer came in and purchased an Acura RL in the top trim. This was an expensive and luxurious car. The same day this customer took home his new car he came back. Why? Because his wife wanted him to buy a Lexus instead. To her, the Acura didn’t portray the image she wanted to her neighbors (it wasn’t “showy” enough).
In this case, the “why” behind purchasing a car was to make a material statement, not to simply get from point “a” to point “b.”
If you’re trying to make a statement, it’s my strong recommendation you figure out a cheaper, more fiscally responsible way to make that statement. Consider buying a watch, a house, a painting … literally anything other than a car — they simply lose value too quickly.
Factor in all cost of ownership expenses
Buying a car entails a lot more than making a monthly car payment. Insurance, gas, maintenance, depreciation, the list goes on and on. If you’ve ever owned a car before, you know just how expensive it is. Plus, insurance costs are rising quickly.
That being said, it’s critically important to consider the total cost of ownership when thinking, “How much should I spend on a car?” Your monthly car payment should include:
- The lease or loan payment;
- Insurance;
- Maintenance;
- Wear and tear; and
- Depreciation.
When you factor each of these items into your monthly car payment you see that a $500/mo car payment is actually $1,000/mo. And this is where the 10% comes in. I counseled all of my clients over 43 years to consider spending 10% of their gross income on their car.
That means that if you make $60,000 per year ($5,000 per month), you can aim for up to $500 per month to go towards your car payment. That doesn’t mean you can afford any car that has a monthly payment of $500, it means the combined cost of the payment, the insurance, and the maintenance (I purposefully leave out depreciation from the 10% rule because if I included it you wouldn’t be able to afford a car) all needs to be $500 or less.
Some personal finance gurus suggest that you can afford to spend much more than 10% of your gross income on a car, and banks will even loan you the money you need to purchase a car so long as your debt to income ratio is below 40%. The 10% rule isn’t a commandment, it’s simply a suggestion. Spending more than 10% of your monthly gross income on a depreciating asset is a tough pill to swallow, but for some it’s worth it.
Don’t buy, lease instead
I highly recommend you consider leasing a car instead of buying it. Leasing has some distinct advantages compared to purchasing; mainly you know exactly what you are signing up for. The cost of depreciation and maintenance are built into the lease, whereas when you buy a car outright neither of those factors are known.
The 10% rule applies to leasing. For example, I am retired (sort of), and my monthly income is a bit more than $4,000. My Mini Cooper lease is $380/mo, and when you factor in insurance and gas costs, I am just a bit over the 10% rule. Just like you, I’m human, and I want things that I can’t necessarily afford. In this case, I made the conscious decision to bump the 10% rule to 12%, and I am happy.
👉 Our (free) Consumer Guide to Leasing
Leasing allows for a certain level of cost certainty since most lease terms are in the 36 to 48 month range and most cars are under warranty for most, or all of that time. Some brands even include free scheduled maintenance during your lease term, essentially making the monthly payment and the cost of fuel and your insurance premium your total car expenses. Trust me, cost certainty is a beautiful thing, once you experience it you will wonder how you ever lived without it.
A car is NOT an investment!
Ultimately how much you spend on a car comes down to how much money you are willing to set aside on a monthly basis. Additionally, always remember that when you buy a car, it will lose value. These are not investments.
How do you play it smart then? My recommendation is that you follow the 10% rule. It’s fair, it’s reasonable, and it’s not overly constrictive. Plus, when you drive somewhere in your new car, if you follow the 10% rule, you’ll still have some money in your pocket to pay for things when you get there!
You can drive a really nice car, and you might not be able to afford to enjoy the other aspects of your life. Or, you could drive an inexpensive car and you can afford all kinds of things, but you hate what you drive. My suggestion is to find a balance that allows you to do both, and for many people who ask themselves “How much should I spend on a car?” The 10% rule does the trick.
How Much Do Dealers Pay for Used Cars?
Have you ever wondered how much dealers pay for used cars? As if buying a car wasn’t tricky enough, the used car market is somehow even more mysterious than the new car market. As I always like to say, “no two used cars are the same,” and for that very reason, used car pricing is not an exact science.
Unlike new vehicles, used cars don’t have a Manufacturer’s Suggested Retail Price (MSRP), nor a Monroney label that tells you exactly how much each component of the vehicle costs (or at least should cost). When you buy a used car, the price is generally set by a computer algorithm that looks at what other dealers have listed similar used cars for sale, and then suggests an amount to the dealer.
Like I’ve talked about in the past, as a general rule of thumb, dealers mark up their used car inventory a few thousand dollars over their cost. This is far from a hard and fast rule however, as some used cars have been known to net dealers five figures (or more) in profit.
Today I want to focus on a technique you can use to estimate a dealer’s cost to own a particular used car. Let’s dive in!
How do car dealers source used car inventory?
Before we get too into the weeds on how much dealers pay for used cars, I want to take a moment to share with you the four ways car dealers source their used car inventory. By this point you are familiar with the concept of a Used Car Manager. This is the staff member who is responsible for all used car sales at a dealership. They’ll source their inventory from four places:
- Customer trade-in
- Wholesale auctions
- Direct from wholesalers
- Trades with other dealers
The two primary sources are customer trade-ins and wholesale dealer auctions. Some dealers also get used cars directly from wholesalers, and occasionally dealerships have been known to “swap” aging units from one store to another to see if the other dealer has better luck selling the car.
For our purposes we’ll be focusing on estimating how much dealers pay for used cars from trade-in and auctions, since those are the two highest volume sources of inventory.
What are dealer costs for used cars?
There are certain costs associated with preparing a used vehicle for sale, aka getting it “retail ready.” Some costs are only associated with used vehicles purchased at auction, and don’t apply to trade-ins, but other costs are fixed, regardless of where they were sourced.
State inspection fee
Every vehicle a dealer sells must pass the state’s vehicle worthiness inspection. Fees associated with this inspection are non negotiable and differ from state to state. You can look up what a state inspection costs in your state to get an idea of what it costs a dealer, but on average we can say it’s around $80 per vehicle.
Reconditioning fee
Every used vehicle incurs some sort of reconditioning. Reconditioning is industry jargon for repairs and maintenance. Nearly all dealerships perform some type of reconditioning because it allows them to sell the vehicle at a higher price than if they sold it entirely “as is.” Dealers also like reconditioning their vehicles, because they are able to increase their revenues. What do I mean?
As a round number you can estimate with, a dealer will spend $1,500 (and sometimes a lot more) to recondition a used vehicle.
Detail fee
Dealers also must pay for a full detail of a used car before selling it. This typically is billed at $100 (or more) for a used car.
Auction fee
As the name suggests, this fee is associated with vehicles purchased at dealer auctions. Although each auction house charges a different price, a general rule of thumb is that a used car costs around $400 to buy from an auction.
Transportation fee
When a dealer buys a used car in a different region, they need to pay a transporter to get the vehicle back to their storefront. This amount varies widely, and will change depending on the number of vehicles being shipped and the distance traveled.
How Much Do Dealers Pay for Used Cars? Let’s Run Through an Example
Let’s walk through an example of how you can calculate an estimate as to how much a dealer paid for a used car. We’ll use a 2022 Toyota Camry LE listed for $15,995 to start. Get ready, you’re about to have a much better understanding of how much dealer pay for used cars.
The first thing you’ll want to do is locate the Kelley Blue Book trade-in value. Simply go to KBB, enter the vehicle information, and identify the low-end number they show.
In this case, the value is $14,791.00. Now, that’s not the actual price the dealer paid to get this car. If they sourced this car via a trade-in it’s likely they offered $13,000, or maybe $13,500. However if the dealer bought it at auction it’s likely it was 10% less than the KBB suggested value.
If the dealer bought this car at auction for $12,000, they then incurred $400 in auction fees, and $300 to transport it to their dealership. Add in $80 for the state inspection, and a conservative $1,500 in reconditioning work, plus $100 for the detail.
We’re up to $13,791.90 in cost for the dealer.
There is then one other factor we need to consider, which is called protected against commission (PAC). PAC is profit built into every car deal that is not commissionable to a salesperson. Dealers add in at least $500 in PAC on used cars, some more. This goes towards paying for non-revenue producing employees.
Now we are up to $14,291.90 in cost for this Camry LE that is listed for sale at $15,995.
If the vehicle was traded-in rather than bought at auction we can estimate that the dealer paid $14,971.00 to get it retail ready. As you can see, not a lot of margin is built into this price.
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Used Cars: Should You Buy a Rental Car?
It goes without saying that there are many different sources you can use to buy a used car. From Carvana, to CarMax, to the dealer down the street, used cars are everywhere, but one often forgotten source of used cars are rental vehicles. Should you buy a rental car, and if you do, what do you need to know beforehand?
We’ll explore those topics (and more) below. Please bear in mind that I have never worked for a rental car company before. I have, however, spent 43 years in the retail automotive industry having sold hundreds of millions of dollars in new and used cars over my career.
Why do rental car companies sell their fleet?
It comes as little surprise that rental car companies sell portions of their fleet annually. The rental car business (especially pre-pandemic) was a fierce business that required rental car companies to primarily cater to business travelers (with the exception of economy rental car companies). This meant that companies like Hertz, Avis, and Enterprise needed to find competitive advantages that would sway business travellers to rent their cars instead of someone else’s.
This competition led to the practice of rental car companies cycling their fleet every two to three years. Customers would always be in a relatively “new” model year vehicle, and the rental company could also sell the car near the end of the manufacturer’s warranty period. This was a win-win for rental companies, and it also supports the fleet sales operations of major automotive manufacturers.
How do you know if you’re buying a rental car?
From a consumer perspective, it can be hard at first glance to know if you are inquiring about a rental car or not. Knowing if you should buy a rental car first means you need to confirm if a used car was previously titled as one!
There are two ways you can confirm if a vehicles you’re interested in is a rental car:
- Ask the dealer where they purchased the car; and
- Confirm by looking at the CarFax for the vehicle.
I highly recommend you review the CarFax (not the AutoCheck) of the vehicle to confirm it was a previous rental car.
Now, if you’re purchasing the vehicle directly from a rental car company (Hertz Auto Sales, for example), then you don’t have to worry if you’re dealing with a rental car or not — obviously you are!
What to look for when you buy a rental car
As with any used car purchase, there are a few general “rules of thumb” you should follow. When you’re thinking about buying a rental car in particular there are two things you should “look out for” during your due diligence.
Ask for the vehicle’s service record
If you’re buying directly from a rental car sales department, ask for the vehicle’s service record. This record will show you every single service and maintenance the vehicle has undertaken, and there is no acceptable reason why the seller should not share this information with you.
If you are buying from a dealership that purchased the rental vehicle at auction, then they may not have the full service history of the vehicle. If that’s the case, then you need to ask for …
Ask for repair orders
If you’re buying from a dealer that bought the vehicle from auction, then you’ll want to ask for documentation about what reconditioning they did on the vehicle and all applicable repair orders they filed. Dealers will typically be thrilled to show you this information, because it helps “seal the deal,” and the truth is, it certainly can help.
In order to sell a used vehicle (rental or not), a dealer must ensure that the vehicle passes state inspection. State inspections vary from state to state, however some requirements are the same across the board (ie tread depth on the tires, brake pads, etc.)
With this in mind, if you are able to review the reconditioning purchase orders and repair orders for the vehicle, you’ll have some immediate insight into what you are potentially getting yourself into.
Are used rental cars cheaper than other used cars?
Generally speaking, yes. Rental cars have a stigma attached to them, and because of that they have a lower selling price than other (comparable) vehicles. As an example, this includes service loaners (essentially rental cars that the dealer uses for customers whose cars are being serviced). A service loaner will have a higher asking price than a rental car (it should also have less miles than a rental car), and this is because there is less of a stigma associated with service loaners than there is with rental cars.
If you’re thinking about buying a car, you might enjoy this article: How Much Do Dealers Markup Used Cars?
Used rental cars have lower resale value
It’s important to recognize that rental cars will always have a lower resale value because of this stigma. The cheaper deal you are getting by buying a used rental car means that if you go to sell it in a few years it will be worth less than a comparable vehicle with the same amount of miles that was not a rental car.
As long as you understand this upfront, you should be a-okay.
Should you buy a rental car?
As you can see, there are a lot of factors to consider when contemplating if you should buy a rental car. I would highly recommend you consider rental cars if they fit into your budget, but be sure to secure a pre purchase inspection of any used vehicle you consider buying (unless it is certified pre-owned).
I’ve bought service loaners in the past, but never a rental car. If the CarFax looks good, the dealership can show you the repair orders, and the price is fair, I think buying a rental car can make a lot of sense for you.
