How to Figure Out a Dealer's True Cost

There are simply too many hidden variables involved. For example, the dealer's financing cost increases by a small amount each day a car goes unsold. You would need to find out how many days that car has been sitting on the lot, in addition to knowing some other hidden costs and possible kick-backs they receive from the manufacturer. It's nearly impossible.

The good news, however, is that we can get a very good idea of a dealer's true cost - it simply involves 3 things: Invoice price, Holdback, and Factory-to-dealer incentives.

Invoice Price

The dealer invoice price is what the dealer actually pays to the manufacturer for the vehicle. This is not the dealer's true cost - there are many factors that lower their cost, sometimes by several thousand dollars below invoice price.

Invoice prices for each vehicle model, trim level, and options are easily found on all the major car buying sites - however, I've noticed that not all sites display the same information. These numbers can sometimes be off by several hundred dollars due to small regional variations and price changes throughout the year.

In order to know the real invoice price, you will need to see a copy of the actual invoice provided by the dealer. Some dealers will provide you with a copy of their invoices if you ask for it (although it's like pulling teeth to get them). Here is what a typical invoice looks like:

Each option is broken down by invoice and MSRP price. The destination fee is always a pass-through cost to the buyer and is not marked up.

Dealer Holdback

Dealer holdback is something that most dealers don't like to acknowledge - because it's basically a hidden profit. Holdback is usually an amount equal to 1% to 3% of the MSRP price. The dealer gets reinbursed for this amount by the manufacturer for each vehicle they sell.

On a $50,000 car, this can be up to $1,500. They could sell you the car at invoice price and still make a profit of $1,500. Not all manufacturers offer a holdback, but most do.

Factory to Dealer Incentives

A major factor that can affect a dealer's true cost are incentives they receive from the factory. Each car manufacturer offers their own version of incentives, called "dealer cash" or "dealer allowance", which encourage dealers to sell more vehicles.

Many of these programs involve monthly sales goals which can add several hundred dollars profit for each vehicle sold. There are also hidden dealer incentives on slower selling vehicles. These usually range between $500 and $3,000, but I've seen them as high as $15,000 on some popular luxury models and even up to $60,000 on ultra-luxury models such as the Mercedes Maybach.

Let's take a look at an example of what a dealer may actually pay for a typical vehicle:

Although the vehicle you're interested in may not have such high hidden incentives, the point is - dealers do have access to these hidden profit sources, so next time they complain they're not making any money on the deal, you can point these out.

A typical dealer's true cost is usually several hundred to several thousand dollars BELOW invoice price - keep that in mind next time you negotiate.