It’s an age old question … How much do dealers pay for used cars? As if buying a car wasn’t tricky enough, the used car market is somehow even more mysterious and unknown than its new car sibling. As I always like to say, “no two used cars are the same,” and for that very reason, pricing for used cars is nearly always a crapshoot.
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). No, 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. In the video above we walk through three examples of actual used cars that are on dealers lots. I highly recommend you watch the video to see how we go through each step of the process.
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.
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?
Well, the Service and Parts departments number one customer is the Used Car Sales department. Everytime a new used car comes in, the Used Car department sends it over to the service department for inspection and reconditioning. Any parts they need to replace, or maintenance that needs to be done is billed to the Used Car department (or the manufacturer if the vehicle is under warranty).
Do you see it? Dealers love to get used vehicles “retail ready” because it allows them to increase the amount of revenue they produce.
As a round number you can estimate with, a dealer will spend $1,500 (and sometimes a lot more, especially if it’s a more expensive brand, or a certified pre-owned unit) to recondition a used vehicle.
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.
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.
Another auction specific fee, if a dealer buys a car in Salem, PA, and their dealership is in Baltimore, MD, they need to pay to get the vehicle back to their storefront. As an estimate we can say this $200 per car, but obviously this amount can and will change depending on the number of vehicles being shipped, their size, and the distance travelled.
How Much Do Dealers Pay for Used Cars? – Toyota Camry
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 this 2017 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.com, enter the vehicle information, and identify the low-end number they show.
In this case you can see the value is $12,791.00. 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 $12,000, or maybe $12,200 ($500 to $700 below KBB). If the dealer bought it at auction it’s likely it was 10% less than the KBB suggested value, so more like $11,511.90.
If the dealer bought this car at auction for $11,511.90, they then incurred $400 in auction fees, and $200 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.
Considering the KBB fair purchase price of $15,006.00, you can start to see why this vehicle may only have $500 in “wiggle room” from the dealer perspective.
How Much Do Dealers Pay for Used Cars? – Mercedes- Benz E400
For our next example let’s look at a more expensive vehicle, a Mercedes-Benz E400 Coupe.
As you can see, the list price is $30,495, and the KBB trade-in value is $24,802.00. That’s already a much larger gap in price than the Camry.
If we add up all our fees, and increase our reconditioning to $2,500 (because after all, all things Mercedes are a bit more expensive), we end up with an auction cost of $26,101.80, and a trade-in cost of $27,982.00.
The KBB fair purchase price is listed at $28,938.00, which means that at the list price of $30,495, we can feel fairly confident that the dealer is making a very good profit on this vehicle.
As you can see this method for estimating how much dealers pay for used cars can be helpful in understanding if you are getting a fair deal or not. When it comes to used cars and knowing how much you should offer it can be very confusing and mysterious. Our hope is that now you feel more comfortable estimating how much dealers pay for their used car inventory.