How to Negotiate With Car Dealers as Prices Keep Rising

I needed a car and there were no cars.

Having just moved across the country, from a city to the suburbs, I started my search for a new car with the self-assurance of most U.S shoppers, who have grown to expect that they can get everything they need with two-day delivery from Amazon or a quick drive to Walmart.

I figured that armed with some Internet research, I’d be able to find a compact SUV that would drive better than our small Honda Civic on the slippery roads of the East Coast, and that, unlike my sedan, would fit my toddler and his (un)necessary gear comfortably.

Yes, I knew that car prices had gone up since the beginning of the pandemic—I’d read (and written) about chip and parts shortages, and yes—I knew that because of these shortages, inventory was low and finding a car might take a little longer than usual. But it had been more than two years since the pandemic began, surely things were settling down, I thought. I have a Consumer Reports login. I once convinced Target to charge me half price for an ottoman. I could negotiate.

Reader, I could not negotiate.

Months after we began the hunt for a new compact SUV to combat the isolation of the suburbs, my husband and I paid $34,447 for a 2022 Subaru Forester Base model with some added features. That’s $3,002 over the Manufacturer’s Suggested Retail Price (MSRP), the sticker price that for years, buyers were counseled to never exceed. We also paid $800 in fees that I later learned were up to the discretion of the dealer.

It might sound like I’m a terrible negotiator, but the truth is that supply chain snafus have turned the car market on its head. Low inventory of housing and cars due to the supply squeeze has taken away much of the bargaining power that buyers might have had, even at places like dealerships where most things are negotiable.

“This has been an unexpected bonanza for new car dealers,” says George Hoffer, emeritus professor of transportation economics at Virginia Commonwealth University. “It’s like the real estate boom—it’s essentially a seller’s market.”

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When I first started looking for a compact SUV in May, dealership after dealership told me that there were simply none of the cars I wanted—a compact SUV for under $30,000— available, and that the earliest they could get me one was November. In July of 2022, there were only enough cars on lots in the U.S. to meet demand for the next 37 days, or 1.09 million new unsold cars, according to research firm Cox Automotive. That’s a dramatic drop from July 2019, when there were 3.69 million new unsold units, or 88 days worth of supply. The lower the price of the car, Cox finds, the less inventory is available.

The reasons that so few cars are available may, at this point in the pandemic, sound familiar. After much of the world shut down to quarantine in early 2020, car manufacturers slashed their orders of semiconductors—or chips—and other parts, worried that there was going to be a worldwide recession. Chip makers started making semiconductors for other, more lucrative customers, so by the time consumers started trying to buy cars again in mid-2020, manufacturers couldn’t get the parts they needed.

Manufacturers are still struggling with supply chain issues. Ford, for example, said on Sept. 19 that by the end of the third quarter, it will have 45,000 mostly-completed vehicles that it won’t be able to ship to dealers because of a lack of parts.

Car dealerships, on the other hand, appear to be benefiting from the shortages. While dealers are selling fewer cars, they’re hiking the prices to compensate. The average gross profit for dealers for a new vehicle was $6,244 in the beginning of 2022, an 180% increase from 2019, according to the research firm Haig Partners. Many dealerships posted their highest profits ever in early 2022, Haig Partners found.

How car dealers are boosting profits amid shortages

Any good shopper knows that if something is sold out in stores, you might be able to find it online, which is where I started looking after dealerships told me I’d have to wait until November for a less expensive new car. I went to Subaru’s website and picked out the tier of features I wanted, which manufacturers call a car’s “trim level,” but I couldn’t actually buy a car online. Subaru’s website just kept sending my details to local dealers, who would only communicate by calling me on the phone, and even then wouldn’t answer questions like “How much does that car cost?” Instead they’d volley back a question of their own: “When can you come to test drive this vehicle?”

I would have preferred to just buy the car online, directly from the manufacturer, but that’s not allowed in the U.S.—unless that car is electric. That’s because each state has franchise laws dating back to the middle of the 20th century, when small dealerships argued that “Big Three” automakers—General Motors, Ford, and Chrysler—were taking advantage of them in a variety of ways, including forcing them to buy cars they couldn’t sell. The franchise laws prevented manufacturers from opening up their own showrooms and undercutting mom and pop dealers. Today, there are many more automakers than the Big Three, and dealerships have gained a lot of political power, but franchise laws still prohibit manufacturers from selling directly to consumers in most cases.

Before the pandemic, there were signs that the dominance of dealers might be fading. That’s been driven by Tesla, the electric vehicle manufacturer, which has waged legal battles across the country, winning approval in some states to sell cars directly to consumers. (In 2019, it began selling cars online only, for a non-negotiable price, but Tesla still has brick and mortar galleries where customers can go learn about Tesla’s vehicles). The company’s CEO, Elon Musk, argued that car dealerships don’t have an incentive to sell electric cars that compete with the gasoline-powered cars that make up most of their revenues, and that Tesla’s model of doing many service updates “over the air” challenges dealers’ revenues from servicing cars. Other electric car makers are following suit, meaning that as the U.S. car fleet gradually switches over to electric vehicles, dealerships may start to disappear.

“This is an existential threat to dealers—they realize they’re going to be cut out,” says Daniel Crane, a law professor at the University of Michigan who is also an expert in the laws that prevent manufacturers from selling directly to consumers. “Consumers want to deal with the company that made the vehicle, and they want to be able to make a decision without someone breathing down their neck.”

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But if dealers felt that their sales strategy was under attack, the pandemic has given them the confidence to keep relying on it. Even if you could buy a new gasoline-powered car online today, supply chain shortages mean that it would take months to arrive. Yet dealers have a pipeline of cars arriving from the manufacturer. Every month, manufacturers notify dealerships of their “allocation”—essentially how many cars they’ll receive the next month, and the trim level and model of those cars. Dealerships use that allocation to fulfill orders that customers have placed with them; whatever is left is available for customers to reserve.

It’s impossible for buyers to know which dealership is allocated which cars, so if they’re trying to get a certain car quickly, they have to resort to calling dealerships to find one that will be getting the trim level and vehicle they want. There are so few cars and so many buyers that many of the cars get reserved weeks or months before they even arrive at the dealership. Lower-priced models are especially difficult to find, because many manufacturers have focused on making higher trim level cars—which are more expensive and higher-margin for them—since the shortages began.

Even if a dealership has been allocated a lower trim, more affordable model, they can add on costs and fees at their discretion, and there’s little you can do about it unless you want to walk away and wait for your desired car to arrive at another dealership. That’s partially why, according to Kelly Blue Book, the average transaction price for a new car rose to an all-time high in August of $48,301.

Buyers should avoid ceding leverage, even if they think they have none

I finally found my new Subaru Forester in July by calling all the dealerships I could until I found one that had an incoming “base”model (read: least expensive). Another buyer had reserved it but then purchased something else that was more expensive. I was so relieved to find a car that was arriving the next month that I didn’t initially ask the salesman, who I’ll call Jerry, why the car cost $30,169, even though the base model was listed online for $25,098.

As my new car made its way from Ota Gunma Japan, where it was made, to the U.S., the details of just what I would be paying got fuzzier. I kept asking Jerry over email for detailed explanations about what the car cost, what features had been added, and how the dealership got to a price of $30,169, but he did not send me the sticker—which showed the manufacturer’s suggested retail price of our model was $28,617—until the week we were supposed to pick up the car. When he asked if I was having second thoughts about the car, I became paranoid that he was going to sell it to someone else and stopped asking questions.

By the time we sat down across from the dealership’s finance manager to sign the papers for our new car, the costs had started to spiral out of control. He presented us with an invoice for $34,447 and asked us to initial it. On top of the $31,169 price the dealership was charging us—including the cost of crossbars that Jerry had added on because of a misunderstanding—we were paying $2,677 in taxes, $300 for registration, $199 for something called VIN—vehicle identification number—etching and a $599 conveyance fee.

In normal times, I might have looked at the amount I was paying for a new car—about $5,000 more than we had hoped to pay, and walked away. Instead, I signed the papers, and left the dealership feeling like I had no bargaining power because I had moved to the suburbs at the same time that supply chain issues meant there were no cars. I expected at least to get some sympathy when I called professors who specialize in negotiation to see what I could have done differently. I got none.

“You had power, you need to know how to use that power, and how to be a negotiator,” Ashleigh Shelby Rosette, a professor at Duke’s Fuqua School of Business who teaches bargaining, told me. “It doesn’t seem like that is what happened here.”

One of the biggest sources of power in a negotiation comes from the ability to walk away, she says. I should have had a backup plan for what I would do if I felt that the car dealer was treating me unfairly, Shelby Rosette says, whether it be waiting a few more months or using public transit. My mistake was getting too wrapped up in the one car that was available. Once buyers become fixated on one car or one house, we lose our bargaining power. “There’s always an alternative,” she says, “you just might not like what you have to walk away to.”

Learning from where I went wrong

In the grand scheme of things, paying $799 in extraneous fees for a new car is not the end of the world—I could afford the additional cost. Even paying $3,000 over the sticker price was not as high as it could have been—the site Markups.org, which crowdsources consumer data, reports that dealers in places like San Diego and Florida have added as much as $16,000 onto certain Toyota models this year.

But even today, those extra costs irk me, because had I known better, I could have avoided them. It turns out that some dealers don’t ever charge over MSRP, even in the midst of a global pandemic. In Philadelphia, for instance, many dealerships don’t charge above the MSRP, while in New England many do.

“I am 100% against charging over MSRP,” says Jeff Glanzmann, the general manager of Glanzmann Subaru, a dealership in Hatboro, Pennsylvania. “It’s a short-term benefit to the dealer and a long-term reputation killer to your community and your customers.”

The dealership I bought from declined to comment, but Jared Allen, a spokesman for the National Automobile Dealers Association (NADA), argued that if customers always pay a set price, as Tesla requires, they’d also never have the opportunity to pay under the sticker price when market conditions favor buyers.

Dealers like Glanzmann also think that extras like VIN etching are not a good value. VIN etching is an anti-theft tactic pioneered decades ago in which dealers carve a car’s identification number on its windows to discourage thieves from stealing the car and selling it in parts. You can now buy a VIN etching kit for $20 and do it yourself and many dealerships don’t even offer the etching service anymore, since new cars have so many better anti-theft features. “It’s a product from 20 years ago that a lot of— let’s say ‘less progressive’—dealers still use,” Glanzmann says.

Our invoice had the word “optional” printed next to the etching charge. When I asked the finance manager why we were being charged for it, he implied that the etching had already been done. Dan Blinn, managing attorney of the Consumer Law Group, which brings lawsuits against car dealers, told me that he’d seen many cases where consumers are charged for VIN etching but the dealership neglects to actually do it, so I decided to check.

When I started to look at my windows for signs of the etching, I couldn’t find any. Neither could my trusted local mechanic, who worked for years at a car dealership. When I raised this with the dealership, a representative told me that because of “human error,” the VIN number had not actually been etched on my car. They apologized and offered me a refund.

Whether I was overcharged for the conveyance fee, which is added for processing documents, is up for debate. Blinn, the attorney, compares conveyance fees to going to a grocery store and being charged extra by the checkout clerk for the privilege of ringing up your milk and eggs. In the New England state where I bought my car, dealerships are supposed to inform customers of the amount of the conveyance fee and let them know that the fee is negotiable, Blinn says. There was a line printed on our invoice that said the dealer fee was negotiable, but we didn’t see it until after we’d signed for the car.

Every charge added to my bill was completely legal, though that doesn’t make them any less frustrating. But some dealers are ending up in court due to their practices. Blinn says this car market is creating an opening for lots of tactics that wouldn’t fly in normal years—including ones that violate consumer protection statutes. He normally files 100 lawsuits a year against auto dealers. Since the pandemic began, his case load has gone up 25%.

“It used to be, dealers would sell at market price to savvy buyers and take advantage of people who were less financially sophisticated, or people who didn’t have good credit,” he says. “Now, all types of people are coming in to say they feel taken advantage of. We’re as busy as we’ve ever been.”

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The unbalanced bargaining power between auto dealers and consumers during the pandemic has attracted attention from the Federal Trade Commission, which in June proposed a rule that, among other things, would require dealers to disclose the full price that a buyer would pay for a vehicle when the customer inquires, excluding only taxes and government fees. The rule is opposed by the National Automobile Dealers Association, which argues it would add extra time and complexity to the car-buying process, overburdening small businesses with more paperwork. Allen, the NADA spokesman, wrote to me in an email that the franchise system is “without question the most consumer friendly, automaker-friendly and market-friendly way to sell and service new vehicles in the U.S.”

It’s too soon to tell whether the rule will pass, and whether it will change the way consumers buy cars from dealers. But it might not matter. I walked out of the dealership resolved to never set foot in one again. I’m not planning to buy another car for a long time, but the next time I do—even if it’s a flying one—I’m going to buy it online.

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