CPA Turned BHPH Dealer Finds Success Through Processes

The Buy Here Pay Here (BHPH) business can be tough even for the most seasoned dealer. To succeed and prosper in it, you must have the financial insight to understand the monumental task of funding it, as well as the people and processes in place to make it a seamless operation of sales and collections. But what if you aren’t a seasoned sales person or dealer—can it still be done?

One dealer with whom I recently had the opportunity to speak, convinced me it can be done and done well. Ray Lyle was a CPA for 25 years with a thriving private practice who envisioned his children joining him in his business one day. Today he is a successful BHPH dealer, with five locations surrounding Chattanooga, selling 400-500 units per month. Ray loves working with his family and doesn’t miss the suit and tie days he left behind when he sold his practice.

Ray designed his stores on a “Reverse Math Theory” he firmly believes in. First you look at what your customers can afford to pay, and you let that dictate what you will sell. For Chattanooga and the surrounding area where Nice Cars is located, textile and carpet is the job market. The Chattanooga area produces 80 percent of the world’s carpet. This means a lot of potential customers earning $11 to $12 per hour. Using his reverse math theory, Ray determined his customers could afford a higher quality vehicle than most of his competitors were willing to sell.

Selling a higher quality vehicle would cause many in the BHPH industry to cringe because that decision has a ripple effect. More money in inventory, more money on the street, more underwriting issues, more collection issues, more insurance issues and the list goes on. So how did Nice Cars tackle all of these issues? Let’s walk through their operation one item at a time.

Inventory-What should a dealer stock, and how does it relate to customers and sales?

Nice Cars stocks 100 to 150 vehicles at each lot. The average selling price of a unit is $10,500. Each unit is pre-priced with the required down payment, and they have a no-negotiation policy in place.

“By purchasing a better quality vehicle we have few mechanical issues; everyone knows customers don’t pay for what doesn’t run” Ray said. “Our customers can afford to buy a better vehicle. We also offer a free limited warranty, 1,000 miles or 30 days that covers all major components, as well as CarFax services to build more buyer confidence.”

Financing-How do you fund a BHPH operation that sells 400 to 500 units per month?

“Go to a national lender. The number one thing I ever did was negotiate a line of credit with a national lender,” Ray said. “There wasn’t a local bank that could loan at the level I needed.” This decision is what has allowed Nice Cars the cash necessary to grow their loan portfolio to over $73 million.

Employees-Every dealer knows one of the most important aspects of your business is your employees. If you treat them well, train them well and pay them well, you get your money’s worth and more from them. Ray’s key components here start with his family. Deuce (Ray Lyle Jr.) is his collection manager and Robby Lyle is his general manager. These two young men are responsible for keeping everything running in the right direction, and all employees report to one of the two. Ray’s wife and daughter also work part time for Nice Cars.

“I’ve even been known to put the grandkids to work to show them the value of money,” Ray said.

Each store has two to four administrative assistants (who are also credit analysts) handling the title work and cashier duties. There are only 10 salespeople and four collection specialists total for all stores. The manpower, or lack there of, to run this operation successfully is astonishing. These 10 salespeople and four collection specialists manage 6,300 accounts and sell 400 to 500 units per month. Thus, there has to be an enormous amount of efficiency in the organization.

Ray claims he has almost no turnover thanks to a generous pay plan for all employees and a five-day work week. Each employee is eligible for daily incentives, monthly incentives and a portion of the profits that are split among the employees in addition to their pay plan. Daily incentives are based on seven units sold per day from a store with $500 split among all employees at the store. At 11 units per day, it moves to $1,000. The store that has the best performance in a month insures that each employee receives an extra $1,000 in pay for that month. Last but not least, 10 percent of the store’s profits are split among all employees. Incentives are clearly a motivator at their stores. That five-day work week is unique for a car dealer when all employees work the same days: Monday, Tuesday, Thursday, Friday and Saturday.

Advertising- How do you advertise to sell 400 to 500 units per month?

“Spend a lot of money” Ray said. “We are relatively new with only six years of business under our belt. We still spend $60,000 per month on television, radio and a little print.”

Over 80 percent of his ad budget is on television. If you don’t own a TV you might have missed their commercials, but it’s not likely with the number of commercials they run in a month.

“Our goal is to get the customer to the lot, with phone calls and Internet. We sell four units for every 10 individuals who come to our lot. Our repeat business is up to about 37 percent after six years, and our referrals are at 20 percent. When we get to a combined 70 percent, we expect to be able to cut back significantly on our advertising budget.

The first question asked of the potential customer is “What caused you to stop here?” Obviously huge portions respond with television. To glean more details, Ray’s employees ask for the customer’s favorite television shows late in the credit process, which usually tells them which stations they saw the commercial on.

Sales Process-Advertising has paid off and the traffic is on the lot, but how can you deliver that many vehicles? Salesmen have a single objective with a customer-“asphalt qualification.” This is the usual qualification process for most BHPH dealers—“Do you have a job? Are you current on your rent? Have you lived in the area for six months? Have you had continuous employment for six months? Have you had a repossession within the last year? Within the last 60 days, have you consulted counsel regarding filing bankruptcy?” If the customer answers all of the questions correctly, they are escorted to a credit analyst. That is the last the salesman sees of the customer until the customer is ready for the delivery. The salesman also performs the job typically assigned to a porter.

“We believe the sales staff should know everything about the vehicles. Making them responsible for the test drives, cleanliness and repair transportation gives them that knowledge,” Ray said. The salesman’s job is really the first step in the underwriting process.

Underwriting- Delivery ration of four out of every 10 customers. That ratio tells you something about their underwriting skills—It’s not just anyone who can buy from Nice Cars. “The credit analyst has an important job. They must determine the ability and stability of our customer. Upon determining that, a vehicle can be selected that works for what they can afford. Not necessarily what they want. No one is allowed a monthly payment unless they are the sole source of income and their income is paid monthly, such as government or some teaching professions in the area. In fact, 98 percent of all notes are weekly payments.”

After the decision is made to deliver a vehicle, the after-sale and collection turmoil begins. With vehicles on the street with the larger ACV there are some significant issues to resolve. What about insurance coverage? What about mechanical issues? What about customers who don’t make payments?

Insurance-BHPH dealers continually struggle with this issue. If you require full coverage insurance to deliver the vehicle, the customer usually secures it and then promptly drops it. Or they just can’t afford the vehicle and the insurance. You don’t want them to have to choose between the insurance premium and your payment. Many dealers have someone at the dealership that continually stays on top of this issue.

Ray has taken a different approach. He went to an insurance carrier and purchased full coverage insurance on all vehicles he holds a note for with Nice Cars as sole beneficiary. Claims are over 70 percent to premiums but he gets his high-end vehicles covered and insures he won’t get stuck with a non-paying customer and no collateral.

Mechanical Issues-Back to the customers who won’t pay for a vehicle that won’t run. How do you address repairs after the sale, especially when you do not have a service facility of your own?

Ray said, “I will never have a service department. All service work is sublet out.” With the sheer volume of work available, he gets the service he wants from the vendors he chooses to work with.

“Our policy is that the customer is responsible for the repairs and maintenance of their vehicle but we understand that sometimes that is not easy for our customers. We will arrange a repair at one of our vendors and set up a side notes for the payment. We will have to pay to repair the vehicle either way, if its repoed, we repair it. So why not get it repaired and collect it from the customer?” Ray said all side notes are handled exactly like vehicle payments—same pay cycles and same collection terms.

Collections-Nice Cars has had a stern collection policy in place since the beginning.

“With the higher valued vehicles on the street it had to be,” Ray said. “Repossessions came quickly. In the beginning, we used collectors to try to keep up, but as we grew it became harder and harder. The average collector can only work about 300 accounts, which meant growth in manpower.”

As anyone who has been in collections knows, it is a tough field to be in, and turnover is usually high. The need to focus the collectors’ energy is what caused Ray to invest in starter interrupt devices, and it has become his tool of choice for managing his 6,500 accounts with just four collectors.

According to Ray, there are three types of BHPH customers. First there is the good customer, who has some credit damage, but will pay you as agreed. Then there are the fence straddlers, who could be either your good customer or your nightmare depending on how you handle them. It’s this group of individuals that the starter interrupt devices are designed for. With the devices in place you cause this group to become good customers. Then there are the credit criminals, those who will never make their payments in a timely manner. You do as much as possible in the underwriting process to avoid these individuals.

Payment protection devices such as starter interrupt devices train your customer to make payments on time. Most individuals who purchase from a BHPH lot have never been taught financial discipline. The starter interrupt devices teach that discipline.

Ray instituted the payment protection devices from PassTime in Oct. of 2001 and claims it was the second best decision he ever made for his stores. Ray is a firm believer in complete disclosure at the point of sale.

“If you make the complete disclosure up front, explaining how the device works, you rarely have customers walk away from the sale. We have sold approximately 12,000 vehicles with these devices installed over the years, and we have had probably two customers walk away from the sale. We probably didn’t want or need those customers anyway because they had no intention of ever paying.”

The devices are really technology at its finest, and it wasn’t available until the 1990s. A customer makes a payment and receives a six-digit code. The customer uses their device (think television remote for a visual) and enters their code. They can now drive their vehicle for the next seven days. They also receive two emergency codes with each payment; these codes are only good one time and only valid until the next payment is made. So if the customer fails to make their payment on Friday when due, they could use the emergency code on Saturday and the other on Sunday, but come Monday morning, they cannot go to work without a new code and they can’t receive that unless they make a payment.

“The added bonus is that the devices don’t need pay raises, vacations or have bad days, and delinquencies were cut by two thirds and repos went down by 25 percent,” Ray said.

To the negative crowd who believe customers will not purchase vehicle with these devices, Nice Cars sells between 400 and 500 units every month.

What happens when a vehicle devices is tampered with by the customer? The store has a great way of dealing with that. When they suspect it is happening, they give the customer a false code, knowing that it won’t work. If the vehicle starts, the vehicle is immediately repossessed.

Devices can cost less than $200 per unit installed and can be reused again and again with a simple reset of the system. Failure rate, if the customer is not tampering with it, is rare.

If you spend time with Ray Lyle of Nice Cars you walk away with the sense that anything is possible if you have all the pieces in place. Inventory, Employees, and Processes. It’s all about knowing what you need to do and making sure it gets done.

Vol 1, Issue 4