How to buy a car when there are few. Tips on markups, trade-ins

John Patterson has sold thousands of cars in his near-30-year career in the auto industry.

When the owner of four dealerships was asked if he’s ever seen an inventory as thin as 2021, his answer is a succinct “never.”

Patterson says the lack of new car supply has led to some dubious sales tactics such as dealers marking up new vehicles $2,000 to $10,000 over the manufacturer’s suggested retail price or MSRP. He says this is a tactic he refuses to practice.

“It’s not how we go to business at any one of our four stores, but it’s happening every day,” he said in a phone interview Wednesday.

The Patterson OC Auto Group sells Mazdas and Hyundais at the Tustin Auto Center and Acuras in Mission Viejo. He also has a Hyundai dealership in Huntington Beach.

Despite the supply disruption, Patterson says there are opportunities out there for some car buyers who have good trade-ins as newer used cars can see $2,000 to $5,000 more in value than a year ago.

For now, he doesn’t see a let-up in the inventory situation.

“We just don’t know, right? It’s more than just a microchip issue. It’s a supply line issue,” he says. “We always talk about those boats that are backed up, and I don’t know that our manufacturers know enough to give us the intel that we need. They give us what they have, and oftentimes it changes, day to day, week to week and certainly month to month.

We asked Patterson to share some of his insight into the 2021 market. His answers have been edited for length.

Q: What are you seeing on the dealership lots these days?

A: So, the reality is the cars are just not as available as demand outweighs supply. And as a result, there’s an interesting dynamic in the marketplace.

There are certainly plenty of scenarios where you’re hearing about a dealer adding a markup of $2,000 all the way to $10,000 for a new car. I heard about a $20,000 markup on a car not too long ago. Each dealer has the prerogative to go about business the way they want to. They’re faced with not knowing how much inventory they’re gonna have, not just now, but for the indefinite future.

Q: So, no resolution until 2022. That’s a long time to fight over cars.

A: I want to make sure that we’re positioning this appropriately. The customers aren’t getting a raw deal here. In some ways, they’re getting a great deal. And here’s what I mean. If a customer has any kind of a trade-in at all, if they’re currently in a leased vehicle or if they’re currently coming out of a car and going into a car, they’re in a good spot.

They’re getting positive equity from their existing vehicle, the same vehicle that they would be trading in a year ago. Let’s say it’s a 5-year-old car and let’s say a year ago that 4-year-old car would have been worth $20,000. That same now 5-year-old car that was worth $20,000 right now is worth $24,000.

So, in a scenario like this, if that person comes into one of my dealerships, and they’re not paying over window sticker, they come out a little bit ahead in, if they are getting the right vehicle and the right price. And let’s say they were buying the car for a couple of dollars over invoice. Their situation is better now than it would have been a year ago.

Q: Are you having to pivot at all in terms of staffing?

A: We’re trying to keep attitudes high. From a service and parts perspective, it appears to be somewhat business as usual. The cars that we’re selling are coming in if we’re doing a good job of retaining our guests. In fact, one could argue that service is gradually increasing because in 2020 a lot of the folks weren’t driving at all, and now they’re driving more and going back to their office.

So they need to maintain their car at a higher level today than it was a year ago.

As it relates to sales, we’ve really had to be more efficient with every one of our teammates. We have to sell pre-owned vehicles at the highest level we possibly can and acquire them to the best of our ability, making sure that we’re pre-selling cars so that literally the minute they arrive, the service department inspects the car and they’re sold that day or the next day.

Q: Your dealerships are selling used cars, too. How is that going?

A: We’d like to sell as many trade-ins as we possibly can. Obviously, if the vehicle that we’re taking on trade has serious mechanical issues or serious body issues, we send it out to the auction and it finds another home. But if the vehicle has 50, 60, 70,000 miles, if it’s a vehicle that would be a great vehicle for somebody to buy secondhand, we’re more than happy to sell it. So long as we know that it’s mechanically sound and it’s going to be safe for the next driver.

Q: SUVs continue to be the most popular option. Is that true for Mazda, Acura and Hyundai?

A: At least 70% of our vehicles that are being sold are SUVs, so yes, they’re very hot. That’s the biggest segment that exists.

Q: How often are you seeing the inventory refresh?

A: We are pre-selling cars that are incoming every day. So, we have visibility of cars that are going to be coming in over the next week to four weeks. Once upon a time, we might be pre-selling 5 to 10% of our inventory. Presale vehicle purchases at our stores are now 80% of the time.

So Mr. Smith or Mrs. Smith want a certain car, no problem. That car isn’t gonna be here three weeks. We’ll put your name on that car and when it arrives we’ll let you know, and come on in and purchase it.

Tips from Patterson on buying a car

Do your research ahead of time. Give yourself a month or two, at least, to get the car. “Identify a car on Nov. 1 that you want before Jan. 1,” he says.

Give the dealer an opportunity to buy your existing vehicle whether it’s lease or purchase. Do your homework and make sure the offer is fair.

If you pay over the window sticker price, that is not going to be taken into consideration three years from now, when you want to get out of that car. The valuation on that car isn’t going to take into consideration that you paid $5,000 over MSRP because you want to get the right car.