Why Dealership Used Cars Cost More

Dealership cars are consistently 15-20% more expensive than the ones you see being sold in private party, even when the cars seem identical.

Why Dealership Used Cars Cost More

It's finally time to buy a car. You're looking for the perfect car in your budget and you've been doing your research. Looking at dealership used cars, you noticed that they are more expensive than cars sold by individual owners. Why is that?

Dealership cars are consistently 15-20% more expensive than the ones you see being sold in private party, even when the cars seem identical.

There are a number of reasons, some that add value and some that don't. Let us break them down for you:

The Positive: Value-added Benefits for Buyers
I. Reconditioning
  • Average Dealership Cost: $300 - $500 [^1]
  • Average Retail Mark-up: $600 - $950

Ever notice that dealership cars shine just a bit more? That's because they've been "reconditioned". Dealers employ people to wash the cars weekly, fix the small dings and dents, and they take the car through the mechanic's shop to do an inspection on the car. Those that don't pass the inspection get sold to wholesalers and auctions. Those that do pass inspection may have small issues fixed, and then the cars get put "on the front lines" for sale.

II. Certified Pre-Owned
  • Average Dealership Cost: $500 + $500 (reconditioning cost)
  • Average Retail Mark-up: $900 - $1,200 [^2]

It is similar to reconditioning, but Certified Pre-Owned vehicles go through more stringent and thorough inspections backed by the actual manufacturer. For a car to qualify for a Certified Pre-Owned program, the car has to be within a specific year and mileage range. If the car fits and passes the inspection (or get repaired up to standard), a dealer can pay to have the car "certified". The certification extends the manufacturer's warranty and can provide you as a buyer with some real value.

The Negative: Dealership Profit & Expenses
I. Dealership Inventory
  • Average Dealership Cost: $3.2 Million worth of vehicles in stock
  • Average Retail Mark-up: $600 - $1,000 per vehicle

Cars don't come cheap. All the cars you see on the lot? They are owned by the dealership itself. All that inventory costs money, and the more inventory a dealership carries, the more "inventory risk" they have. Not all car sales are money makers (yes, a dealership can lose money on a deal, though rarely), but that means the dealer has to make up the losses somehow. Which means they will increase the retail mark-up in order to smooth out on the "thin deals".

II. Dealership Capital Cost
  • Average Dealership Cost: $11 Million lifetime investment [^3]
  • Average Retail Mark-up: $900 - $1,500+


Step into a dealer and look around you. That coffee you're drinking? It's added into the price of your car. The monster showroom with lights and A/C running 24/7? That's added into the price of your car too. Then there's property taxes, building maintenance, and yes, the Wacky Waving Inflatable Arm-Flailing Tube Man balloons... Same thing. Everything is added into the price of your car. Dealerships are very expensive to run. They average about $11 million in capital investment over their lifetime (even more for "franchise" dealers). That investment has to pay off somehow, and money needs to be made.

III. Dealership Employees
  • Average Sales Person Salary: $60,000 per year
  • Average Finance Manager Salary: $100,000 per year [^4]
  • Average Sales Manager Salary: $100,000+ per year [^5]
  • Average Retail Mark-up: $700 - $1,000+

Sales people, sales managers, finance managers and everyone else that works in the dealership needs to be paid. On top of their salaries, there are also commissions that have to be paid somehow. So all that is packed into the price of the car you want to buy.

IV. Dealership Profit
  • Average Retail Mark-up: $700 - $1,000+

Dealerships are businesses. All businesses need to make money. A dealership profit model is unique because they don’t make constant margins on every car they sell (as negotiation is expected when you shop for a car). That means they have to try to maximize their profit with every buyer that walks through the door. They do this by adding some value to the process (like an inspection and reconditioning), and by adding margin on top for their profit.

If you’re getting a Certified Pre-Owned (CPO) car, this margin can mean an additional $7,000 of cost on your car, while you're getting roughly $1,000 worth of value. If the car is not Certified Pre-Owned, then you’re paying potentially $5,500+ over what you’d be paying for a private party, in exchange for ~$500 in value for an inspection.

While it may require some additional time and effort, getting an inspection and reconditioning from a local mechanic can save you thousands of dollars when purchasing a used car directly from the owner. That being said, there are other reasons people like to go to dealerships. It depends on your own preferences. But now you know why exactly used cars are more expensive from a dealer, you can make an informed decision on what works best for you.



References

Buying Tips
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Valentin GuiValentin Gui

Founder and a car nut. Born and raised from Detroit, Michigan. Val managed 12 dealerships prior to founding Instamotor.

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