In most cases, the single largest expense in operating a buy here pay here (BHPH) business is the cost of vehicle inventory, so it makes good sense to monitor your inventory closely.

Acquiring used vehicle inventory has become a much bigger challenge in the recent years, as a result of sluggish new vehicle sales, a shortage of trade-ins and the Cash for Clunkers program, which removed approximately 680,000 vehicles from circulation in 2009.

Finding affordable BHPH inventory has become an even bigger challenge, largely due to the fact that many BHPH dealers source vehicles in the lower-price tier. On average, these vehicles are six to 10 model years old. Several key factors that demonstrate the increasing challenges that dealers face were demonstrated in a presentation by Tom Webb of Manheim Consulting this past May. Webb illustrated that in 2009, the average mileage on a vehicle in the $3,000 to $4,000 wholesale range was approximately 105,000 miles. Year-to-date statistics in 2011 show that vehicles in the same $3,000 to $4,000 range have slightly more than 120,000 miles. Webb also illustrated that in April to May 2009, the average mileage at time of sale for a wholesale vehicle in the $4,000 to $6,000 range was just slightly over 85,000 miles. In April to May 2011, a vehicle in the same $4,000 to $6,000 range had an average mileage of just under 112,000 miles. Similar contrasts were reported in other price tiers.

Another indication of the challenges facing dealers in search of affordable inventory is the distance they are prepared to travel to acquire that inventory. In his presentation, Webb illustrated that in the $4,000 to $5,000 wholesale price range, the percentage of dealers purchasing vehicles from auctions more than 300 miles away was approximately 15 percent in 2011 YTD. Clearly, one of the realities of the inventory challenge is accepting the fact that on average, you will see more mileage on the vehicles you’re buying in 2011 compared to previous years, and you will likely have to travel further afield if you hope to buy vehicles in any quantity.

One again, dealers experienced the volatility of gas prices in the wholesale vehicle pricing equation. Until recently, gas prices hadn’t eclipsed $4.00 per gallon since May 2008. Manheim Consulting reported that gas prices climbed from below $1.75 per gallon in early 2009 to prices approaching $4.00 per gallon again in May 2011. This trend was partly responsible for year-over-year price changes that were experienced in selective market classes when compared to April 2011. Webb reported that prices of compact cars were up 17.7 percent during that period. The price of mid-size cars increased 13.3 percent, while the year-over-year price change for pickups fell 2.7 percent and SUV/CUVs fell 3.5 percent. Fortunately, we have seen some relief from rising gas prices in recent months.

Amidst all of the turmoil and uncertainly, where should a BHPH dealer look to acquire inventory? The answer to that question depends on how hard you’re prepared to work, how creative you can become, and how far afield you’re prepared to go. The largest and most obvious source of inventory is wholesale auctions. The important thing to determine before attending a wholesale auction is the percentage of vehicles in your price range that auction will run. If you’re like many BHPH dealers, attending a wholesale auction that features late-model vehicles, off-lease vehicles and rental cars, you’re not likely to see many vehicles in your price range. Do your homework ahead of time. Go to auction websites and research how many vehicles run each week on average, what model years they run on average and the average price for vehicles sold. The time spent doing research could well save you a ton of time and expense. Find the auctions where the vehicles fit the average acquisition cost for your business model.

Another viable option for sourcing inventory is to develop a network of new-car dealers in your area who will agree to sell you the trade-ins they don’t want. Chances are the six- to 10-year-old trade-in with 120,000 to 140,000 miles is not a vehicle they want to keep. These relationships take time to develop, and generally speaking, you will have to buy the junk cars as well as the vehicles you really want if you’re going to have any success with this plan. However, it’s a tradeoff that can produce some decent inventory.

More and more dealers tell me they are having great success buying vehicles from private sellers. One of the keys to success for this plan is to advertise, “We buy vehicles from the public” boldly and prominently at your location, on your website and in your advertising. Many private sellers don’t stop to consider the option of selling their vehicles to dealers until they realize you’re willing to buy them. An increasing number of two-car families struggling though this tough economy determine that selling one of the two vehicles is a smart economic decision for them, which creates a new source of inventory for your store. There are many different options for finding vehicles for sale from private sellers. Craigslist has become a popular website for posting all kinds of articles for sale, including vehicles. Other websites such as AutoTrader.com and Cars.com can also be good resources for finding private sellers.

Another source of inventory getting more time and attention from BHPH dealers is recycling and selling their repossessed vehicles. Understanding that used car values continue to climb, many dealers are making the decision to properly charge off the repossessed vehicle and assign it a realistic actual cash value. As long as the repossessed vehicle does not require major mechanical or body work to get it in resale condition, reconditioning the vehicle may be a better option than trying to replace the vehicle. The advantage you gain by recycling and reselling your repossessed vehicles is that you know the mechanical history of the vehicle and the reconditioning work that was done prior to advancing a loan on the vehicle.

The prognosis for sourcing BHPH inventory is not likely to get better anytime soon. Successful BHPH dealers will work harder, be more creative, and go further afield to acquire vehicle inventory and adjust to the market conditions.

Vol. 8, Issue 8