Buying a used car on the Internet: pitfalls and lessons learned

This is an unusual topic for me but since I never really found a single article on the web that explained these concepts to me, I thought I’d cobble together some knowledge from my recent used car purchase. Enjoy!

Background: my wife and I owned an old, 1997 Pathfinder that recently failed emissions due to a faulty knock sensor. Repairs would cost more than the car was worth, so we decided it was time for a new, used car and we’re donating the old one to charity.

Step 1 – Decide on your price range and shop around for your loan: there are a number of  car payment calculators out there, and everyone from your local bank, to web banks to the dealer will offer you a loan. When picking your price, determine the most you want to pay and make sure you factor in tax, title and license fees (about $1500 total for our car). You’ll need to back these out of your max price to find your bottom line price – the highest price you’re willing to pay a dealer for a car before these required extras. Having that in hand will guide your search and will help you negotiate with the dealer (‘sorry we can’t pay that extra paperwork fee – it would break our budget.) When picking your loan, make sure there is no penalty for early payoff. If your work might take you overseas like mine, some countries have restrictions on the model year of car you can import, and few banks will let you take a car with a lien out of the country.

Step 2 – Research, research, research: We generally knew we wanted a small SUV that we could take camping, throw a couple of bikes or a carseat in, was easy to park in the city, had higher clearance than a car, and had AWD. We also wanted a car with good reliability and safety. I wanted a V6 for the power, but it wasn’t critical. Find your must haves and nice to haves. Two sources were invaluable for this search.

ConsumerReports.com is an astounding source of information on used cars. For ~$7/month you get access to road tests, specs, reliability and safety information for each model year of every car. They poll users annually to get real customer feedback on car reliability. They have lists of the best used cars in each category and in each price range. They can tell you that the 2009 Toyota RAV 4 has only average reliability, but starting in 2011 their reliability becomes excellent. You’d have no way to know this otherwise. Subscribe and look here first and often when shopping.

Edmunds.com has a treasure trove of information on all kinds of cars and usually has road tests for every model year. It’s a good resource for determining the different feature packages on the different versions of the same car.

These were the two sites I found most useful, but I also consulted Cars.com, KBB.com and the other major used car websites. Searching the web for the brochure for the car you want can also help you splice apart the different versions of the same car. This helped us zero in on a couple of different models that fit our needs.

Step 3 – Search the inventory: If you have a trusty dealer you could just go there, but you’re likely only looking at a few cars. There are seemingly TONs of cars listed for sale on the Internet. But really, I found that a lot of the same cars are on the Internet in lots of different places.

Craigslist.com has a seedy reputation, but it’s the primary listing site for private party sales where you potentially can get a much better deal than you can from a dealer. But it also comes with more concerns about scams and fraud. See our story about potential fraud below.

CarGurus.com was an interesting site, because they blend car ads with their market price analysis. However, beware that what they call a fair price was about $2200(!) more than what our appraiser determined was a fair price for our car, and it was in good shape – only missing run flat tires which cost around $500. So you should focus on getting the ‘great’ price or better. If you’re paying their ‘fair’ price, you’re probably paying too much because their ‘fair’ price is based on the average of what cars are listed at. And listings are not the bottom line price, even when they are ‘Internet Special’ or no-haggle prices (see below). I referred to this site often for a reality check.

AutoTrader.com is the standard for car listings. They had many of the same cars as CarGurus. Cars.com is also a good site with lots of used cars.

Dealer websites: most dealers have websites which list their used inventory (at well marked up prices). The sites above typically link to dealer sites. If you see a car you like, make sure to visit the dealer site. It frequently has the VIN which you can just plug into CarGurus to get pricing info (very handy!) and they usually have the CarFax report which shows vehicle history and importantly, how long the dealer has had the car. (But google around about the reliability of CarFax and AutoCheck reports – they’re not always totally accurate. Caveat emptor).

Step 3: Determine pricing: this is the most baffling part of the process. Edmunds.com has a True Market Value which is much, much lower than other sites like KBB.com or NADAguides.com. For example, the TMV for our car was $15.5k for a private sale, and 17.0 k for a dealer sale. Our appraiser said the car was worth 16.9 retail, so Edmunds nailed it. NADA was much higher, claiming the trade in value is $17.5 and the dealer retail is $20.5. KBB said the fair market range was 17.6 for a good condition car, 18.1 for very good and a whopping 17.2-21.0k for dealer retail. Basically- trust Edmunds, and use the low end of the range for the others. If you paid the ‘fair’ or ‘average’ price according to KBB, NADA or CarGurus, you’d be paying wayyy too much. That’s why dealers love to quote you the ‘blue book value’ and hate to see Edmunds prices.

A note on book value: you can only really see the ‘Black Book’ value if you subscribe to the service dealers use. Cars.com claims to use black book value, but our car in average condition was $18.3 for private party, $16.9 for a trade in and $19.1 for dealer retail. Our bank also claimed to use Black Book, but their values were $16.1 for a private party, $16.0 for a trade in and $18.3 for average dealer retail. Our car was appraised at $16.9 and we bought it for $16.0 (yes, I negotiate hard… see below), so these ‘black book’ values were far above the market value. Lesson – get a mechanic who will also do an appraisal using the real black book (see below).

A note on condition: almost all cars that don’t have visible flaws are average, but every seller thinks they’re excellent, even when they have some paint chips, minor scratches, normal rusting, spots on the upholstery, etc. A car in excellent condition should really look and smell new. Otherwise it’s good or average.

A note on Internet prices and paperwork fees generally: these a an Interesting beast. Dealers offer what look like huge, huge discounts for a few cars in their inventory and advertise them prominently on the car shopping sites. There is always an * that refers to extra processing or paperwork fees in tiny print at the bottom of the page. Sometimes they advertise these as ‘no haggle’ prices. When you show up at the dealership, you find that the car listed for $15.5 actually has an additional $599 processing fee and a $900 MRP (or some other acronym) paperwork fee.

These are baloney. Don’t consider them in your price. You want to negotiate with the dealer based on one single bottom line price, plus tax, title and license. The paperwork/MRP/service/whatever fee that magically appears from nowhere can be negotiated away completely – don’t pay it. They may say it’s standard for the area. They may say they can’t change it. This is a lie. We didn’t pay it and you should consider it fluff that you can negotiate if you have leverage (see below). But if the car is a recent arrival or in high demand, the dealer may not budge. Still negotiate a bottom line price and let them move the base price to meet it.

Similarly, Internet prices have a ‘processing fee’ which the dealer is usually more upfront about. They won’t eliminate this, because, as they claim, if they do it for one customer word will get out and they’ll have to do it for everyone. Fine. But they can still lower the base price. Our car was listed as a $15.5 Internet price with a $600 processing fee. When we sat down to do the deal, the $900 service/paperwork fee appeared from nowhere. I stuck to $16.0 and they wound up dropping the base price to $15.4 so they didn’t have to forego their processing fee and eliminating the service fee. The bottom line is to always negotiate a bottom line price.

A note on leverage: how do you get leverage in your deal? Several ways: don’t be in a hurry or desperate to buy; don’t fall in love with one car; be prepared to walk away and lose a deal over a hundred dollars; be prepared to visit the dealer multiple times; look at a lot of cars. You’ll have less leverage on popular cars or cars that are new arrivals to the dealer lot. Our car had been on the lot for over 45 days, the point at which dealers start to hit the panic button and start dropping the price rapidly. You can get a great, great deal on a car that’s been on the lot for two months, because dealers are desperate to move the inventory. They make money through churn and a two month old car is preventing them from selling another car for that entire time. They want it gone. You (with your mechanic’s help) need to determine whether it’s there just because of bad luck or whether it’s there because something is wrong with it. I’ve also heard you have more leverage at the end of the month when salesmen are more willing to push the dealership for a good deal because they want to make their bonus level for x number of cars sold. But if they’ve already made their bonus, they may not be incentivized.

Step 4 drive some cars. You might even do this before step 3, but the problem is if you find a car you like and it seems like a good price, you won’t know for sure and won’t be comfortable enough to do a deal. So just go to a dealer or two that have the kinds of cars you want and drive a few of the different types. Don’t feel obligated – this is their job. Take them around the block, stomp on the accelerator full blast, go on a side street and check the turning radius, and take it on the highway to see what the road noise is like. If the engine sounds funny, you hear squeals, you can’t see out the back, or the road noise requires you to yell to have a conversation, you’ll want to know early on.

Step 5 pick a car and try to close a deal: I’ve previously bought two cars on Craigslist and had good experiences. This time was a nightmare. We found what seemed like a great deal on a CRV but it was an hour away in Sunderland MD. The ad had very little detail and no photo. When I called the owner, she seemed very rushed and a bit abrasive. But she was going through a divorce and had some medical issues, and wanted to sell the car since her husband wasn’t coming back to the states and it was unneeded. She seemed to be in a bit of financial jeopardy. Her story of why she was selling the car well under book value checked out, but I should have seen the warning signs.

She didn’t seem to have time to even sell the car. She wanted to rush. She had an appointment with the dealer to sell it in five days and we had to do the deal before then. So my wife and I did our best to scramble and make it work. She was nice enough to drop the car at a nearby mechanic. I paid for the inspection and the car was in good shape. But when we met to see the car, she didn’t want to sign a contract, claiming ‘this is just a simple deal, no contract is necessary.’ Say what? It’s not a toaster. After considerable and painful discussion, she finally relented and we notarized a bill of sale. Delivery would take place in two days.

That’s when it got very weird. She refused to sign my bank’s document which authorized them to pay her loan, and which instructed her bank to transfer the title. This was a huge red flag, because without that document, my bank could have paid her loan, and she would have retained title and been free to sell to someone else. We would have no recourse but to sue her. Was she scamming me? Was she just an incredibly difficult person and uncooperative? Or was she just a stressed woman going through difficult times who didn’t know the rules (she was foreign)? Who knows. But she refused to sign the form and breached the contract. She relented after I’d already called it off and then signed the form (with scratched out modifications) but at that point I had no faith she’d actually deliver the vehicle.*

We should have known. As Warren Buffet said, you can’t do a good deal with a bad person. So if the buyer seems fishy, uncooperative or not interested in following reasonable process, back off. There are plenty of cars in the world.

Our second effort was successful. We found a car we were interested in that had a good Internet price. The car was an hour away, so before I drove to the dealer I asked him straight away – what would a mechanic tell me is wrong with this car? I told him I’d need an independent mechanic to inspect it, and if he did, what would he find? A good salesman will tell you and not waste your time (but a few years ago I also drove 90 minutes to see a car that supposedly had no flaws which had an obviously rebuilt side panel – it had been in an accident). The salesman said that mechanically it was great, it had some scratches in the paint and the interior needed a cleaning, but otherwise it was solid. (Aside from the missing run-flat tires, this was all true)

I test drove the car and did a visual inspection. Consumer reports and a lot of other sites have checklists which tell you what to look for. Take a flashlight and magnet and be prepared to get under the car. Thoroughly inspect everything. Ask questions about everything and assume nothing. E.G. my vehicle is supposed to come with run-flat tires because it doesn’t have a spare. When I asked if it did, they said they didn’t know, and then said it did. Well, when I inspected the tires, it didn’t say run flat anywhere. That reduced the value of the car by $500-700. Trust but verify.

It was time to make a deal. I told them my price ($16k plus tax, tags and license) and they came back with 15.5 for the car, 600 for the processing fee, 900 for the dealer’s new TV fee, plus tax title and license. We were $1000 apart. I told them I thought $16k was a fair price and I wasn’t paying for extras. Cue stories about how they’re standard, required, unmodifiable etc. I told them they could drop their base price if they wanted to add fees, but I was only paying $16k. After 1/2 hr of back and forth (this is a game…understand how it works) they dropped the dealer’s new TV fee and offered $15.5 plus the $600 processing fee, or $16.1. This was annoying. They just wanted to milk me for $100. I told them if they wanted to lose a sale over $100 that was their choice. They had my phone number and I was going home. I was polite, but let them knew this was irritating.

Fifteen minutes after I left the dealer, one of the supervising salesmen called me and said he wished he had a chance to speak to me and he’d do the deal for $16k. We verbally agreed that I would buy the car, pending a cleaning of the interior, a minor fix to the bumper and my mechanic’s inspection. They agreed.

(See update below on AutoAnalyst.com)The next day I was lucky that Jeff at AutoAnalyst.com was available. He provides a mobile inspection at the dealer and within hours sends you a comprehensive report on everything – from fluids, to wipers to whether all the electrical systems and switches work. Best of all, he appraises the retail value for you so you know if you’re getting a good deal. I was. There are national services available, but I’ve heard iffy stories about them. If you can find a reputable local mobile inspector, or just take the car to a good local mechanic, it buys you peace of mind that the car isn’t a lemon and you’re getting a fair deal. Don’t ever buy a used car without an inspection. Jeff said the car was in good shape, minus the run flat tires, and I knew I was getting a good car. (Update: well, AutoAnalyst wasn’t the silver bullet I thought it would be. We found out after driving home that our horn didn’t work. The report said it did. Also, the rubber seal around the bottom edge of the windshield by the wiper blades was completely separating. We didn’t notice until we went to a car wash and the dryer blew it out of place. The report said the windshield was in good shape. I emailed Jeff about why he indicated these were both in good shape when they weren’t and he didn’t email back. So – definitely get an inspection, but not from Auto Analysts. For $170 I expect more attention to detail and a response to my email).

I closed the deal that night and the car was mine. The dealer probably didn’t make a lot on the car, but he got rid of a perfectly fine car that he’d just been unlucky enough not to sell, so he was happy. I got a great deal on exactly the car I wanted and I’m reasonably sure the car is mechanically sound. Win win.

Also, tip your salesman if he does a good job for you. This incentivizes them to treat customers well (paying it forward) and can also help you get a better deal. One ex-salesman I read about tells salesman in advance he will tip them well if he gets a good deal. Then the salesman is working for him as much as the dealer.
Good luck!

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* caveat emptor – she is also selling a boat, so if this story sounds familiar it may be a scam! Her name is Maria Tran, 410-610-8149, Sunderland, MD, mztran123@verizon.net