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PDtax
PDtax, CPA, MBA
Category: Finance
Satisfied Customers: 4308
Experience:  Tax professional and business consultant for 35 years.
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I just recently started a wholesale car business. I did all

Customer Question

I just recently started a wholesale car business. I did all the necessary things to make it legitimate. My friend opened up a retail car dealership. She needed inventory and I thought it was a good way for me to get my feet wet in the business. Especially since I have a full time job that I am going to be transitioning out of not soon but it's coming. So she said she could be a representative for me at the auction and she would pick the cars and consult me and she would pay the curtailments and repairs. If she made a sale on a car that was $7000 or over my commission is $500 and below $7000 is is $400. Does this seem fair?
Submitted: 1 year ago.
Category: Finance
Expert:  Jawwaad Ahmed replied 1 year ago.
If the commission is $500 it is around 7% of value and if it is $400 it will be around 5.7%. But the question is why the commission is paid to you, is it for the amount of money you have invested. Then you have to calculate return on investment if suppose your investment is $25000 for one year and there you receive commission of an amount of $3600 (500*4 + 400*4) in a year it means that the return on investment is 3600/25000 = .144 or 14.4%, now you have to compare this 14.4% with the return on investment you can earn from another opportunity, if suppose you can put this money in bank or you can buy the stocks from stock exchange. If your return on investment from other opportunity is lower than 14.4% then this is justifiable, otherwise you can negotiate for better commission.
Expert:  PDtax replied 1 year ago.
Hi from Just Answer. I'mCustomer and thought I could shed more light on the question. The wholesale car business is one I know very well, which is why I am so against the arrangement you propose. I think it stinks. Do not do it. The dealer makes out like a bandit in these arrangements, and you do not. Here's how: Car sale paperwork is prone to writing up at any price the two parties decide (a $7,200 car sale can be written for $6,700 on paper and $500 cash, costing you $100). You are paying for the car from your funds or using your auction credit to buy cars. The dealer has access to the same financing. Why cut you in, unless they can't buy on their own credit? Fixing cars is a big profit area for the dealer. Let's say a $5,000 car requires $1,500 in repairs, and sells for $6,500. You will be presented with $6,500 in costs, and talks you out of your cut. The dealer makes on the repairs. Wholesalers make money by buying and reselling cars. From dealers who don't want to liquidate at the auction, from other sources, but it's the rare wholesaler who can profit by buying at the auction and reselling to dealers. They can go to the same auctions. The wholesale end might be your arrangement to buy trades from a new car store, skipping the auction. You then have product to sell. I know a wholesaler who buys just that way, then trucks the vehicles to his lot an hour away. His competitors come and buy at his cost plus $500 or so, and they have nice product. It works for him because his area is remote, and there are no other local sources for cars. If this was as simple as doing the math, then the first Expert's response would have been fine. The problem is you have no protection for this business arrangement, and I guarantee you will regret it. I was notified you asked for me initially, which is why I responded. Since multiple Experts have responded, please rate one of us to close out your question. I'mCustomer