How Much Do Dealers Pay for Used Cars?

Written by Ray Shefska

My career in the retail automotive business started in 1977. Buying a car doesn’t have to be anxiety inducing, stressful, or painful. Instead it can be confidence inspiring, fun, and convenient. Let me show you how.

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:

  1. Customer trade-in
  2. Wholesale auctions
  3. Direct from wholesalers
  4. 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.

Reconditioning fee

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.

If you’re thinking about buying a used car, you might enjoy this article if you haven’t read it already: How We Negotiate a Car Deal by Email (with Real Life Examples, Templates, and More!)

Detail fee

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.

Auction fee

auction fees affect how much dealers pay for used cars

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.

Transportation fee

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

used 2017 Toyota Camry LE

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.

KBB values are a good starting place to identify how much dealers pay for used cars

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.

all those costs to factor when estimating how much dealers pay for used cars
Estimated dealer cost if bought at auction.

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.

used 2017 Toyota Camry LE dealer cost if bought at auction
Estimated dealer cost if traded-in.

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.

used 2017 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.

used 2017 Mercedes-Benz E400 Coupe KBB value

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.

used 2017 Mercedes-Benz E400 Coupe dealer cost for auction

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.

used 2017 Mercedes-Benz E400 Coupe dealer cost for trade in

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.

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3 Comments

  1. Eric Law

    I’ve heard that dealers never sell their own trade-ins because they don’t want their customers coming back to bring their new car in for service or something, and seeing their old car for sale on the lot for way more than the trade-in allowance they got. It sounds like you’re saying that’s not true?

    Reply
    • Zach Shefska

      Eric, Zach Shefska here. I’m not sure who told you that dealerships don’t sell their trade-ins, because that couldn’t be further from the truth. Trade-in used car sales are lucrative for the dealer since they don’t have to pay transportation fees, or auction fees.

      Reply
  2. austen

    I feel like the dealer selling the car I want is over valuing the vehicle. For one, I pointed out that they had mistakenly listed it as an Automatic, whereas it’s a manual, and so when he reran the ‘wholesale’ price check, it dropped from $12,995 to $12,071.
    On top of that, it’s had an undeclared accident (Carfax is clean) resulting in a poor paint job on the replacement bumper and some other minor issues (no structural issues though).
    He also told me that they acquired the car through a repo from somebody local who couldn’t maintain his payments so there have been no transport/acquisition fees.

    They still have the price advertised as $12995 – what’s my best tactic for negotiating this down to closer to $10k?

    Reply

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