Buy Here, Pay Here: Times Are A Changing

Gone are the days of portable trailer offices on unpaved lots in the shady part of town. Todays buy here, pay here dealer is of a different ilk. Once was the time when buy here, pay here dealers represented the bottom rung of the ladder, not only for their profession, but for their breed of customers as well. But things have changed. Its an industry that has come a long way. Just ask Ingram Walters.

Walters family has operated franchise dealerships in and around Charlotte, North Carolina for more than 50 years. Today, the family business has nine franchise dealerships in the area. However, thats not really what Walters is interested in.

He began testing the waters of the buy here, pay here industry about 15 years ago. We were looking for additional business and potential profit centers, says Walters. He struck oil. Hes done so well, in fact, that he now operates five buy here, pay here stores in the Charlotte area. He says he sells anywhere from 180 to 200 cars each month, more during tax season. Three of his lots operate under the Griffins Quick Credit moniker and the other two, Monterey and La Fiesta, target Hispanic customers (65 percent of all his buy here, pay here business).

When it comes to financing-that ever-important component of a successful buy here, pay here operation, Walters has created his own finance company, Union Acceptance, to handle the paper at all five dealerships. And a significant amount of paper it is.

Were selling 180 units or so per month. Cars around $6,995 and trucks and vans between $7,995 and $8,995, so you can do the math, he says. Figure in interest, and thats not small potatoes.

Walters is indicative of a new breed of savvy dealers (many who have a background in franchise dealerships), who see the vast potential in buy here, pay here operations. When its done right and managed well, it can be quite profitable.

Shrinking new car margins are forcing dealers to look for alternate revenue streams, says Walters. Add to this problem the declining creditworthiness of more and more Americans who still need basic transportation and youve got a hot market.

People with bad credit still need cars, says Walters, and there are a lot of good people with bad credit who are good payers.

Ken Shilson, a CPA and the founder of the National Alliance of Buy Here, Pay Here Dealers (NABD) agrees saying, More and more Americans dont qualify for a new car purchase but they can qualify for a used car. Of course, the risks can be higher for the buy here, pay here dealer but, because of higher interest rates, so can the rewards.

Shilsons group tracks industry numbers and conducts educational conferences for buy here, pay here dealers. He has his finger on the pulse of the industry. One of the other things that continues to drive the buy here, pay here market is the fact that new car dealer profits on new vehicles are so low, while the profit potential from used cars sales and financing are much higher.

Despite all this, the buy here, pay here picture is not completely rosy.

Challenges

Shilsons latest industry benchmark data (just released in April) finds that for 2006, buy here, pay here dealer profitability and revenue were slightly down. Shilson attributes this, in part, to a rising wholesale cost of used vehicles over the last 18 months, increasing overhead costs for dealers, and more customer defaults.

This is still a good industry, and theres still profit in buy here, pay here, but dealers have got to be smart and have access to capital, says Shilson. He says the capital sources market has heated up because banks, financing companies, and other lenders have taken note of the exceptional return potential in buy here, pay here.

There are also an increasing number of dealers joining the buy here, pay here ranks, reducing the amount of available inventory, driving up wholesale costs, and creating more competition.

One thing were seeing, says Shilson, is more franchise dealers holding on to their used car trade-ins and selling those themselves, rather than unloading them at the auction.

Thats something Bill Ackerman, VP of franchise operations for the used car franchise company, JD Byrider, has also witnessed. Theres no question that franchise dealers are holding on to their trade-ins more now. They know theres profit in those used vehicles.

Walters agrees with Shilson and Ackerman concerning used car supply. Certainly wholesale prices have gone up and supply is always a challenge in this business, he says. These arent truckloads of appliances- we have to find and buy inventory one car at a time. And, unlike televisions, or new vehicles, no two used cars are alike.

Ackerman, too, sees used vehicle supply as a challenge. Its getting tougher to find a good quality used vehicle that fits the buy here, pay here lot and customer, he says. The continued growth in this segment of the industry means fewer cars for everybody.

With the influx of capital investors and sub-prime lenders, another challenge for buy here, pay here dealers has emerged. Some franchise dealers are now beginning to sway former buy here, pay here customers away from the used car and into an economy model new vehicle. Thats something Stan Schwarz, president of PassTime, the starter-interrupter company, has witnessed.

There are a few really low cost new vehicles out there, and weve seen more franchise dealers put buy here, pay here customers into a inexpensive entry model new car for roughly the same cost to the customer as a used vehicle down the street at the buy here, pay dealership, he says. And, who wouldnt want a new car when he or she can get it for the same cost as a used one?

Of course, as Walters points out, This boom in sub-prime funding that has happened over the last few years is often putting poor-credit customers into new cars they really cant afford. This leads to increased defaults, destroyed credit, and puts customers back on buy here, pay here lots.

As any buy here, pay here dealer will quickly tell you, if you dont have access to capital and you dont properly handle collections, you wont be in business long. That part of the buy here, pay here business will never change.

Rick Potter, president of CAR Financial Services, Inc., says he believes that part of the current influx of capital into the buy here, pay here market is a result of short-term focus on the secondary secured lending markets, namely auto and commercial real estate. He says bank and finance companies are, in essence, testing the waters again in this market.

But Potter believes its more difficult for smaller buy here, pay here dealers or those just entering the market to gain access to this capital.

Mainly because dealers dont always maintain adequate record keeping to qualify under the lenders credit approval process, Potter says. Lenders in the market today have a number of underperforming dealers, making scrutiny on new dealers even greater than in the past.

With the shift we witnessed in credit quality during the second half of 2006 and the increased cost of vehicles in 2005 and 2006 for the buy here, pay here dealer, the market had a bad debt bubble that impacted most all dealers during the second half of last year, says Potter. Those who maintained good records had difficulty explaining this trend to their lenders, while those attempting to enter the market were dealing with lenders who were on edge, given the general market performance in 2006.

The process of obtaining capital, underwriting, and collections are crucial for buy here, pay here dealers.

The buy here, pay here business is not about sales revenue from vehicles, its about financing and collecting, says Ackerman. Selling a lot of used cars does not make you successful.

Walters is one of the fortunate dealers. Because of his lengthy time in the car business, he has plenty of capital to put his customers in cars-but he understands that its just the beginning.

Its very important to collect on those notes, he says. Thats why he allows his customers to do things like set up automatic bank drafts straight from their accounts. He says he also encourages them to mail in checks or money orders. Other dealers accept credit cards for payment. Some are even experimenting with accepting customer payments on their Websites.

Ackerman says its important for dealers to be well leveraged and not in too much debt. If you have to borrow money it should be to grow, not to sustain your operation.

Thats why good systems and technology are critical for buy here, pay here dealers.

We spend a million dollars a month supporting the dealer management system weve created for our dealers, says Ackerman. He says the DMS system does the same things that a Reynolds and Reynolds or ADP system does for a franchise dealership.

Ackerman says dealers have got to have some kind of computer-based system that helps them keep track of their inventory-especially if they have multiple lots. You need records on every vehicle, where it is, how much recon is in it, service records, he says.

That sentiment is echoed by Allen Dobbins, president and founder of Autostar Solutions, a DMS provider that offers a number of tools to buy here, pay here dealers.

Youve got to manage your portfolios and collections in a timely, systematic manner, says Dobbins. Otherwise, he says, lenders wont come near you, your delinquency will get way out of shape and repos will increase-frightening terms for any dealer.

Its simply imperative that dealers use management systems that will fully integrate all their data and information, says Dobbins. He says todays successful buy here, pay here dealers can get their hands on real-time data-from accounting to inventory auditing and more-in their dealerships.

According to Dobbins, the proper DMS system can increase collections in the dealership by as much as 40 percent. Its all about monitoring and reporting information, he says. A good software program can take a dealers collections department all the way through the process with a few clicks of the computer keyboard. Furthermore, employees need to be well-trained and held accountable, says Dobbins.

A discussion of the buy here, pay here industry and collections would be remiss without the mention of starter-interrupt and GPS tracking devices. Theyve finally gained mass market acceptance in the buy here, pay here industry, both by dealers and car-buying customers.

Walters uses them at his buy here, pay here lots.

I fought the idea at first, but Ive started using the devices on all my cars and they work, he says. They have improved our collections.

At a cost of around $200 per car, dealers can use starter-interrupt devices to encourage more accountability and responsibility in their customers because the car can be shut off if the customer gets behind on payments.

I have found that my customers actually like the discipline that these devices force them to learn, says Walters.

Schwarz says that starter-interrupt device technology is evolving. It was kind of a novel idea when it all started a decade ago, he says. Since then, these devices have developed into more than just starter-killing boxes mounted inside the vehicle.

Indeed, today they are integrating with DMS systems and giving dealers the opportunity to interact with customers more and streamline oversight of the devices.

For example, today, after dealers receive payment from a customer, a DMS system can automatically text message the next months code instantaneously to the customer, says Schwarz. This can help maximize dealership personnel time.

And, say a dealer sells his paper to another credit source. The technology has evolved so that the transfer of all customer information is done smoothly and systematically.

The one time legal concerns associated with starter-interrupt devices have also all but disappeared. Dealers simply need to be mindful of right to cure laws and full disclosure to the customer.

Getting potential customers onto the lot remains challenging for any business, but especially for buy here, pay here dealers.

As Walters points out, his buy here, pay here operations have been around so many years now that word-of-mouth referrals continue to drive his business. Yet other dealers are coming to rely more and more on systematic lead generation and customer tracking mechanisms and technology. Many are turning to companies like Hyperdrive Technology.

There are a few buy here, pay here dealers who are still bicycling through the twenty-first century, says Eddie Coleman, founder and CEO of Hypredrive Technology. But others are becoming very sophisticated at all levels of their operation.

And one very important area is generating leads and reeling in customers.

Most dealers understand the importance of advertising and marketing, but its the ones who utilize all of the tools at their disposal who are gaining an edge. Surprisingly, say dealers and industry executives, the Internet has become a powerful marketing tool in the buy here, pay here segment.

The traditional buy here, pay here customer may be a lower-income, less educated individual, but does indeed have access to and uses a computer and the Internet regularly, says Ackerman. That finding has led JD Byrider to begin doing more marketing and selling online at its dealerships.

Coleman says dealers can reach customers via the Internet and online technology by building strong, functional Websites, driving customers to the sites, obtaining customer and pre-app information, and then following up and tracking. He calls it a seamless technology system.

You should consider having an Internet sales department, even at a buy here, pay here dealership, says Coleman. Theres no reason a buy here, pay here dealership cant be as marketing savvy as the big, sophisticated Honda dealership down the street.

The buy here, pay here business has become a crowded, competitive marketplace, with an influx of capital, a growing base of credit-challenged customers, and increasingly difficult to find inventory.

Shilson sums up the current state of the buy here, pay here market by saying, Dealers must match the right vehicle with the right customer. Of course, there are many variables within that equation.

National Buy Here, Pay Here Conference Hits The Las Vegas Strip

Buy here, pay here dealers will be rolling into Las Vegas May 14 &ndash- 16 for the National Alliance of Buy Here, Pay Here Dealers (NABD) 9th Annual National Conference at the freshly renovated Las Vegas Hilton.

More than 2,000 dealers, experts and service providers are expected to gather to hear nationally recognized speakers during the two and a half day educational program, exclusively for buy here, pay here, says Ken Shilson, CPA and conference chairman.

This years theme is Leading and Learning and Shilson says the agenda will be full. Indeed, three nationally recognized speakers: David Anderson, DJ Harrington, and David Walsh, will make presentations centered on leadership. Given the current economic challenges facing the buy here, pay here industry, leadership has never been more important, Shilson says.

The general education sessions will feature a single track and all vendor presentations will take place during concurrent breakout sessions where attendees can choose their topics of interest. These workshops will include subjects like: capital, software, the Internet, insurance and add-on products, sales and leadership training, payment devices, lead management, and more.

Attorneys Tom Hudson and Emily Beck will discuss legal and compliance issues and present a 12-step compliance program before opening up the floor for questions. Dennis LeVine, a bankruptcy attorney, will discuss ways to collect deficiencies and bankruptcies. And NIADA General Counsel, Keith Whann, will provide a regulatory update.

The general session will feature a question and answer session with IRS automotive technical advisor, Terri Harris. This session will dig into the details of all the latest tax developments and provide answers to compliance questions.

Shilson says, New car franchise dealers now see the buy here, pay here industry as an exceptional profit opportunity. In response, NABD will include a segment on Getting to the Next Level featuring Ingram Walters, a leading buy here, pay here and franchise dealer. This session will also examine the importance of twenty groups and the need for ongoing dealer education and networking.

Because buy here, pay here dealers need capital, John Nagy of investment banking firm, Stephens, Inc., will identify public and private capital market alternatives. Jerry Marks, a leading automotive analyst, will discuss and review capital alternatives, and Carl Ritter of CarBiz, will show buy here, pay here dealers how to capitalize on them.

Tom Webb, Manheims chief automotive economist, and Ron Smith, founder of Auto Remarketing, will join Ken Shilson to discuss used vehicle market economics, important industry trends and benchmarks, and what attendees should expect in the months ahead. Used Car News will provide important industry outlook information.

Auction executives will be on hand for a panel discussion on Finding the Right Vehicles at Competitive Prices. A separate workshop will discuss ways to finance vehicle acquisitions and reconditioning.

American Recovery Association will discuss new ways to maximize recoveries when customers dont pay and opportunities to liquidate repossessions for more money.

For more information, visit www.bhphinfo.com or call 713-290-8171.

Kenneth B. Shilson

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