Preparing for the Road Ahead

For many dealers, 2009 has been a kick in the teeth. However, one group of dealers, buy here pay here (BHPH) dealers, haven’t been hit as hard as some dealers who’ve fought to keep their doors open. Many BHPH dealers have persevered without significant losses.

All hasn’t been rosy in the BHPH industry throughout the past year, though, as unemployment has kept many BHPH customers out of the market. The four BHPH dealers who spoke with Auto Dealer Monthly have all seen a decrease in sales.

At Mike Carlson Motor Company in Fort Worth, Texas, sales have decreased by about 15 percent over the past two years, according to President and CEO Roy Carlson. His six BHPH lots currently average about 300 deals per month. “The blue-collar workers are losing their jobs, have really tightened up and they’re not buying,” he said, adding that blue-collars make up a large section of his customer base.

Ben Donnarumma, president of AllStar Auto Sales in Marlborough, Mass., said his volume is off by 22 percent year-to-date, “mostly because of lack of down payment and underemployment.” He added that profitability is still good, though, “mostly due to the tax season and being as diligent as we can when buying cars.”

In Dixon, Ill., monthly volume has decreased by four to five deals throughout the year at Instant Car Credit. The BHPH dealership is currently averaging 15 deals per month. General Manager Alan Mosher attributed the decrease to two things—customers lacking down payments and the dealership’s tightened underwriting in an attempt to avoid increased charge-offs.

Gene Daughtry, general manager of BestRide Buy Here Pay Here in Russellville, Ark., said his dealership sales are only slightly down compared to 2008, adding that, for 2009, the store is “on target to match 2007 unit sales.” He said, “In 2008, the credit crunch began and we saw the increase in traffic during the last four months. We tightened up our underwriting in 2009 to take advantage of the better customers entering our market due to the lack of special financing available.”

Underwriting at Instant Car Credit has also been affected in the past year. Mosher said, “We used to emphasize customer stability. A five- or six-year job or residence or [being a homeowner] could overcome other flaws in their profile; however, those things mean much less now with deeper layoffs and high foreclosure rates in the current economy.” As a result, the dealership has tightened up its underwriting.

For three of the four dealers, collections in 2009 haven’t been as strong as in the past. Daughtry said, “We have experienced an increase in delinquencies. Since gas went over $3 a gallon, we have been fighting the economy.” In early 2008, 15 to 13 percent of the store’s accounts were one-day, $1 late. Now, 23 to 25 percent are one-day, $1 delinquent. Accounts 30-plus days delinquent are currently around nine percent, compared to four percent in 2008.

One positive change Daughtry noticed in the second half of 2009 was decreased repossessions. “The ‘repo fest’ has slowed considerably. I think the economy has stabilized at a level just above miserable, and everyone has made the adjustments in their personal budgets to survive.” BestRide is also focusing more on recency. “We have been working with our customers more on shorter payment agreements. Instead of setting up a LPA [late payment agreement] for a month, we set one up for one or two payments, so the customer knows we need to talk to them again then,” he said, adding that the LPAs give the agreement more importance in the eyes of the customers because it’s a signed contract, as opposed to just a verbal promise.

Mosher said collections at Instant Car Credit “remained fairly steady” during the first half of 2009, but were “more difficult” in the last half of the year. He stated, “More customers are out of work and trying to live on unemployment income, and some are nearing exhaustion of their unemployment benefits. Most of our customers end up making their payments within the month they are due, but seem to have to juggle finances and move things around more, so they tend to be later than their due date.” Delinquencies started rising towards the end of the summer in ’09 and have increased four to five percent since.

At AllStar, Donnarumma said, “Our past-due list has been a little longer [in 2009], but pretty much what we expected under these conditions.” One-day, $1-late delinquency is currently hovering around 32 percent, compared to 22 percent in 2008. One reason the dealership’s past-due accounts have increased is that the dealership is working with many of its customers to keep them in their vehicles. He said, “This is probably the first time since I’ve been in business that people are legitimately unemployed and legitimately don’t have enough money to pay their weekly payment, so we’ll work with them.”

The dealership has managed to keep its repossession rate down through working with customers to get their accounts current. To get exceptions made, customers must keep promises. “I’ve got one guy who’s past due 340 days. I could have repossessed his car over a year ago, but I didn’t. His balance is down to $554 right now … from owing $4,000 to $6,000 … Granted, his whole balance is past due, but he does what he says he’s going to do. He’s been out of a job, got into an accident. It was all legit stuff, so we work with him because he’s had a pretty decent pay history.” However, if a customer breaks more than two promises, Donnarumma said, “That’s a big problem and we’re going to come and pick up the car in most cases.”

The one dealership that saw collections improve in 2009 was Mike Carlson Motor Company. Carlson said, “This year, the portfolio is performing as well as it ever has in our history,” and quickly added, “The year before that it performed the worst in probably the last 10 years.” He said a mixture of events caused his poor-performing portfolio in 2008—gas prices, the “financial debacle” and unemployment. “All of that coupled at about the same time. [It] was just a disaster.” But the issues corrected themselves in 2009.

Delinquency, which is something Carlson said doesn’t fluctuate a lot in his operations, is running about 20 percent for customers one-day, $1 short, compared to about 24 percent last year. The rate of repossessions was the statistic that really fluctuated from 2008 to 2009. In ‘08, repossessions were “incredibly high” at 40 to 45 percent. Plus, many customers were voluntarily giving their vehicles back. Now, ordered repossessions have returned to a more typical 20 percent.  

As of mid-October, repossessions got a little simpler for Mike Carlson Motor Company. Carlson said, “[GPS is] one thing we have done this year that I said I probably would never do unless it got cheap enough … When they were $450 [a unit], the math wouldn’t work. I always said if they would get under $200, I’d start considering it. Well, now they’re down to $150.” All the vehicles on the six lots are now equipped with GPS units.  

Fewer repossessions at Carlson’s and Daughtry’s dealerships may also be the result of their dealerships seeing customers with better credit. Daughtry said he’s “always catered to a better BHPH customer than most in our business,” but added that he is seeing a higher number of customers with credit scores over 600. Carlson’s operation has an internal scoring system, and he said the average score has gone up compared to years past.

While Mosher expected and planned for an increase of better-credit customers, they never came. “We started the year stocking a few more expensive units waiting for the influx of special finance customers who could no longer get bought at the new car store and were predicted to be turning to BHPH,” he said. “It never happened for us, and any vehicle we display with a down payment over $1,000 just doesn’t move because our customers don’t have that kind of down payment.” The dealership resumed buying inventory in the $2,000 to $2,800 ACV range with down payments of $500 to $800.

Getting inventory for Instant Car Credit, which is part of a dealership group that includes new car stores, isn’t as difficult as it has been for some dealers who rely on auctions. Mosher said, “All of our vehicles are our own repossessions or trade-ins from one of our new car stores. We have not purchased an auction vehicle in over a year.”

Conversely, both Donnarumma and Daughtry purchase the bulk of their inventory from traditional auctions. Donnarumma also looks at other sources. He places ads in the local classifieds, searches craigslist for good buys, and purchases from private parties and wholesalers. Sometimes he’ll even put a mini retail deal together just to capture a trade that will generate above-average profits.

Daughtry stocks vehicles under 100,000 miles with an average ACV of $6,800. The most expensive vehicles he purchases cap out at an ACV of $8,500. He prefers the traditional auctions “due to the volume they handle, and you can drive and touch the units before buying them,” adding that online auctions are “a bit dicey because you cannot see [the vehicles] or listen to them before hand.” He also purchases some of his inventory from private parties and other dealers.

Throughout 2009, trucks – a staple on the BestRide lot – have been more difficult to find, and he’ll go up to 120,000 miles on trucks. “Crew cab, four-by-four, full-size trucks have gotten out of our reach, and in 2008, it was almost all we stocked in trucks … In September 2008, gas started going back down. Within two weeks, the truck prices shot back up, and they were scarce.” He surmised that the prices on these trucks has remained high due to two factors—fewer trade-ins going to auction (caused by the decrease in new vehicle sales) and more used car dealers vying for the same inventory. “You factor in the number of franchise dealers turning independent, thanks to our government, and there are more buyers to buy less inventory,” said Daughtry.

Carlson has two main sources of inventory—auctions and wholesalers. He said, “All of our inventory comes from Manheim auto auctions and also from about three wholesale groups that we buy from. I don’t buy from independent wholesalers … I usually go to the bigger groups that have five, six or seven wholesalers working out of one facility, and they gather up cars for me. Then I go through and buy the ones I want.”

Recently, he’s also been buying inventory directly from rental car companies. “The rental car companies are having a difficult time selling all their late-model inventory because there’s not many people buying them … and they are cheaper than they’ve ever been before … That’s the upside of the down economy for us.” As most dealers know, not all inventory is cheaper than it has been in past years, and Carlson has encountered this when buying vehicles with ACVs of $5,500 and less. The cars on his lots range in model years from 2002 to 2008, and he bottoms out at an ACV of about $4,000.

Previously, he didn’t stock many 2007 and 2008 vehicles, but when better-credit customers started visiting his lots, he took notice and widened his inventory range to appease and capture those higher-scoring customers. The vehicles on the Mike Carlson Motor Company lots, in most cases, have fewer than 80,000 miles, but like Daughtry, Carlson will make mileage exceptions for trucks—big sellers on his lots. About 40 to 45 percent of sales are trucks, SUVs or minivans.

At present, the dealers are gearing up for the 2010 tax season, which they predicted to be off compared to years past. Daughtry said, “I expect our sales [during the 2010 tax season] to be less than last year due in part to folks holding onto their money or paying off other debt. I believe inventory will determine our sales numbers. Inventory has always been scarce in the first quarter, and this year, it will be worse.” He normally keeps 60 to 70 units on the lot, except at tax time, when he aims to stock 90 vehicles. “What this tax season will look like is a mystery.”

Mosher has overheard his customers talking about “getting caught up with their past-due bills with their tax money, not going out and buying something new.” To counter what he believes will be a weaker tax season, the dealership will offer incentives to its customers to use their tax money to pay on or pay off their vehicles.

Carlson has scaled back preparations for the coming tax season, especially after a weak one in 2009. Because he saw fewer sales last tax season, he won’t be building up his inventory as much as he has in past years. Previously, he kept all lots full (with 80 to 100 units per lot) and between 400 and 500 vehicles on reserve on storage lots. In 2010, the dealerships will have about 200 units on reserve.

Even though the general consensus is that the economy seems to be looking up, the industry isn’t out of the woods yet. Dealers are optimistic, however. Even though the tax season may be down compared to past years, it will still be a boost over what these dealers saw in 2009. Donnarumma said, “2010 looks great, and we look forward to the new challenges that are sure to arise.” He added that it looks like vehicle prices are starting to come down and that consumers’ mindsets have changed to align with the market. “Our customer base took a little while to realize they have fewer finance choices than before and wanted too much vehicle.”

Vol. 6, Issue 12