If You Know Their Rules ...
You Can Play Their Games

"Close we are to tissue." Once the car is sold, the manufacturer sends the dealer a check for the "hold-back."

One of the interesting side notes on this "hold-back" process is that it has negatively impacted many sales commission checks. Usually the salesperson earns a commission based on the total profit in the deal. Even though the "hold-back" is, in fact, profit, many dealers are not figuring that into the salesperson's commission. Needless to say, this does not sit well with the salespeople.

Your Trade- in as a Dealer's Profit Source
If the dealership has a used-car operation, your trade-in can also represent a source of additional profit. Let's say that a new car has a sticker price of $18,000 and that the dealer's price, or invoice, is $16,000. Further, let's assume that the buyer trades in a car with a wholesale value of $8,000 and that the dealership agrees to put that $8,000 of used car equity against the new car. The buyer turns over the used car and a check for $10,000. The dealership now has to pay off a floor plan on the new car. The floor plan would be the invoice plus whatever interest has accrued.

For simplicity, let's say that the dealer's payment to the bank or financial institution amounts to $16,200-the invoice plus the floor plan interest, which will round off to $200. Because $8,000 of the deal is in the equity of the trade and $10,000 is in cash, the dealer has to make up the $6,200 difference. That "difference" will come from the used car. If he has given the customer $8,000 as a trade-in allowance, it's probably because he knows that the car will bring at least that and probably more at auction. However, if it's a nice car, he may sell it himself in order to improve his profit on the transaction. It would not be unusual for him to put, the car on his used-car lot with a price of $10,995, which is about a 3 7 percent markup. If he sells it for $9,995, that means he has received $10,000 in cash and a trade-in, which as a result of the resale grossed him $9,995 for a total of $19,995. Subtract what he paid the bank for his floor plan-$16,200-and his total profit on the new car transaction is $3,795.

Now, factor in the back end of the deal, hold-backs, and possibly even a factory-to-dealer incentive payment, and the total gross profit to the dealership could be several thousand higher. You see? There is a reason why car dealers live in big houses.