Why do auto dealerships balk at cash transactions, but real estate companies prefer them?
In: Economics
Car dealerships get commissions for referring loans to banks, so they prefer a buyer who will take a loan and earn them a commission.
A real estate seller is a home owner, not a company, and the seller doesn’t get anything from the buyer’s lender if the buyer takes out a mortgage. They prefer the quicker closing time frame and lack of potential that inability to get approved for a loan or a low appraisal could derail a purchase requiring a mortgage.
If you have cash for a car, never say that when establishing the purchase of the vehicle.
Get them to that single out the door number and drop “I will wire this to you today”
They start taking about a new one time cost; grab the quote they gave and just walk.
Dealerships don’t make the bulk of their money on the sale price of the car. They make it on all the extras they try to sell you (extended warranty, paint protection, tire protection, window tint, etc.) and on the financing if you finance it with them.
When someone comes in and pays cash, the dealership automatically loses any profit from financing. A cash buyer is also gonna be more aware of price increases due to addons. If you’re financing, they can throw a few thousand in addons onto the deal and your monthly payment only goes up 30-50 bucks.
There’s just more money to be made overall on non-cash buyers these days.
Real estate agents like cash deals because they don’t make more money if you finance. There are no addons and they aren’t getting a cut of any interest rates. As well, cash buyers don’t have to worry about loan approval and issues that can come up at the last minute, which can kill a deal the day of closing.
In short: real estate agents are selling houses, so the sale of the house is what makes them money. Financing doesn’t affect them other than to make a deal more likely to fall through. Car salesmen aren’t selling cars. They’re using cars as a foot in the door to sell customers lots of other crap. A cash sale cuts out most of that opportunity
I would love to walk into a dealership with the exact amount of money I plan to spend. The salesman can dicker and add and go talk to the boss all day if he wants. I will still pay the amount I brought and no more.
The car dealer is often also the bank. Real estate companies are not financing the deal, they make no money, it just takes time and hassle and possible road blocks. Dealers call it front end and back end. Front end is the money they make on the car. Back end is the money they make on the loan. They make WAAYY more on the back end.
They sell finance and insurance products.
Income from the loan is typically less than 10-15% of their F&I income, which usually represents 30-50% of variable operations income.
The real reason they don’t want cash transactions, is that most of the F and I Managers are we sales people, and can’t close a customer to buy other products on a cash transaction. It is typically easier to convince someone to buy a two or $3000 insurance product when it is broken up into just an extra 5 or 10% of your payment cost.
Has anyone been treated differently buying a car with cash? I bought my Lexus last year and they didn’t act different at all when I told them I wanted to pay cash and they still negotiated the price down, I never understood this sterotype
You’re confusing real estate companies with Mortgage companies.
If everyone paid for homes in cash, then we wouldn’t need mortgage companies. If the realtor also sold the home loans (like car dealers) they would absolutely encourage financing.
Because at a dealership the car isn’t what they are selling. they sell loans and get way more kickbacks and money from that then they do the cars.
much like retail places like Walmart, lowes, Home Depot or any store with a credit card the companies make money off your balances get money from the credit issuer for signups and a percentage of interest paid, just like auto dealers. It’s a new revenue stream and it’s quite healthy for them. If you pay cash they dont see any of those kickbacks, which is why you almost always get a better price when you finance with them.
It depends on how self-interested they are with the loan. 1) if they handle the loans themselves (i.e, they own the debt along with all the pros and cons of doing something like that) or 2) a bank is doing it instead and they have a partner$hip with the bank. if either is the case then they are earning money from the loan itself and may price the cars cheaper to account for the earnings they will make on the loan itself.
of course they will not offer the same “discounted” car price if you don’t take up the loan then. they shouldn’t really have a problem with offering you a higher price for cash-only. but it does make them look bad and it is probably also more paperwork if they aren’t prepared for it already.
for real estate, the quantums are much higher and time horizons much longer. this is the kind of risk only banks will take and of course they are not going to share the rewards of such an endeavor with real estate people. they might throw a one time kickback to them though, in one form or another, for the loan referal. without bank involvement, the full cash process is much faster, less paperwork, they get their commission immediately and then can forget about you the same day.
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