|For years I have claimed inventory is the second most critical component, behind only commitment, in having a successful Special Finance department or effort. For years I have had dealers roll their eyes as they say or think that there is nothing more important than people. For the same length of time, I have repeated that indeed, quality and well-trained personnel are vital to the success of any dealership department, but when it comes to Special Finance – those in the “seats” know – you simply must have the inventory to make the deals happen.|
When I started my first SF department back in December 1989, the only finance company I had available was Credit Acceptance Corporation. Their advances were based on one determinant – the customer’s down payment. They would advance 150 percent of the customer’s down payment. If they put $1,000 down, then you would receive $1,500, no matter what the vehicle booked for.
It became very simple – you had to work hard to find inventory that worked for that scenario (and still ran). As time rolled on, more finance companies cropped up, and the ability to receive advances based on the wholesale value of the vehicle came with them. At that time, trucks were the bane of SF. (It is a little bit easier today.) Back then, virtually every full-sized, automatic pickup with air would trade in our market for $400 to $600 over extra clean Black Book, which I assure you had no resemblance to NADA Average Wholesale or Kelley Blue Book for that matter.
Today, the differences between prime and sub prime credit have become very blurred, but the one constant that remains is auto finance companies advance from the “left side book” and you need inventory that is below that number.
Additionally, the majority of loans funded by all the SF companies are still below $400 per month. Yes, you will get plenty of payment calls from the upper tier (near prime) finance companies – I have seen them as high as $1,100 per month, but they are the aberration. It is quite simple – a customer with $2,000 to $3,000 of monthly income and FICO or Beacon scores of 500 or less is simply going to have to re-prove him or herself before a company is going to go that far out on a limb again.
When you are considering inventory for SF, think of one thing – collateral. What you are selling is the collateral of the Retail Installment Sales Contract that is assigned to the SF company. The key to the collateral is that at least 80 percent of it should be vehicles that will finance at full gross profit at $400 a month or less (slightly higher in the Northeast, DC, Southeast and California markets due to higher incomes and cost of living).
What does that mean? Well, it means that inventory must be in the $7,000 to $12,500 cost range. The sweet spot still remains slightly above $10,000. At that point, with SF companies advancing 115 percent to 120 percent of the average wholesale value (with sales tax, title and tags factored in) you will be well below $400. It even leaves room for up selling significant F&I products.
In reviewing information on a recent Ford retail group I was working with, each of their five stores had 40 to 50 units in that price range, but their sales and gross profits were stymied. What was the problem? They had no “spread.” At least no positive “spread”.
“Spread” is the difference between the NADA or Kelley Blue Book value and the general ledger cost of the vehicle. That number generally needs to be at least $500 positive. This dealer group had a negative “spread” on almost all of their vehicles. If you are on the wrong side of the book, it will take larger customer down payments to make the deals work. If you can’t make it happen at your store, then your competitor down the street will.
Finally, we must consider mileage. Obviously, longer term equals lower monthly payment, and the payment to income ratio set by the SF companies is often the most restrictive element of the deal. To make deals and earn more gross profit, we must have as much term as possible. More and more companies are now offering 72 month financing at mileages of 50,000 to 75,000.
Don’t fall into that comfort zone. The more leads you work, the more credit scores of 500 and below you will see. Typically, those are not the customers that will be offered loans for 72-month terms. Focus on vehicles under 50,000 miles, since they will work for extended terms with more companies. Often buyers do not see any significant difference in auction prices for a vehicle just over a mileage break. What buyers often don’t realize is that simple mileage break, which causes a vehicle to have its maximum term shortened by 12 months, will make all the difference in the world as to whether or not the vehicle can be financed.
So by now, we know that 80 percent of the vehicles must be between $7,000 and $12,500 in actual cash value on the lot ready to go, must be at least $500 below the average wholesale book value (of the finance company being used) and should be below 50,000 miles. Suddenly, many buyers or used car managers get shaky knees. They claim those vehicles can’t be bought.
What types of vehicles should you look for? First, think rental cars. With as many rental cars as I drive while traveling the country, I always think as I put my keys in the ignition, “In four or five months, this will be sitting on someone’s SF lot.” I am not wrong.
Additionally, don’t forget about the like-invoice vehicles. They are vehicles like the Taurus was. They are current year vehicles (generally the ones that dealers won’t accept during allocation from the factory, even at gunpoint). The ones that are being traded at auction but are not yet listed in the NADA or Kelley Blue Book. The finance companies work from like-invoice, then reduce the values by 10 percent to 20 percent, before using their multipliers of 115 percent to 120 percent. These make for some terrific “spreads.”
The most invisible car at an auction for most buyers is a one year old Taurus, usually silver in color, with “48K” wax-penciled on the windows. A buyer may actually get run over by one of them, they are so obtuse.
People tell me that these vehicles don’t sell. I always chuckle to myself. I have worked with dealers in every state in the country. The strong SF dealers are almost always selling the same thing. It is a state of mind just like asking for more gross profit is a state of mind.
Buyers tell me these vehicles don’t exist in their market. What I can’t tell them is that I have worked with a competitor in their market that has a field full of those vehicles, which is one of the biggest reasons that dealer’s SF business is successful and theirs is not. You simply can’t go to the factory sale and hold your hand in the air. You have to work hard to find these vehicles. Look at the smaller auctions, look online and look at buying directly from some smaller rental car operations. The vehicles are there; you simply must have the discipline to look for them. Some of the best SF dealers in the country have been buying 200, 300 or more than 500 units per month. They manage to do it – you can, too. If you don’t believe me, go pull an AutoCount or CrossSell report for your market and see what the SF dealers are selling. You can even look by lienholder.
This is also where the SF manager comes in. Work with the person(s) buying the vehicles to make finding the right inventory easier. Give them a list of vehicle makes and models, with a price they should book for, as well as a maximum purchase price after allowing for reconditioning. For years, we used a chart that helped us keep vehicles in particular payment ranges, telling the buyer what the vehicles must book for and the maximum they could pay. It made it so simple that we sent a lot porter to buy at a local auction in emergencies when no one else could attend. Get a copy of the buying grid here.
Having the right inventory is paramount to being able to make deals and hold gross. When I see departments struggling, I simply look at the inventory and the corresponding transaction prices. When either is out of whack, the department just doesn’t produce exceptional results. To the SF department manager, I continue to carry the torch for you! To the dealer, you can’t pay enough attention to your inventory. Get your SF inventory in line (no more than a 30 day supply, please), and watch your volume and gross begin to grow. I can’t make it any plainer!
Vol 4, Issue 2
Remarketing by Element has joined the NIADA’s network of National Member Benefit partners and will offer prime lane placement, among other benefits, to the dealer association’s members.