#105 - Ask Luke n Jeff Episode 2

You are listening to the Independent Dealer Podcast with hosts Luke Godwin and Jeff Watson. Thank you so much for tuning in. Let's do this. All right. Hello and welcome to this episode of the Independent Dealer podcast. Guys, Luke and I are fired up. We're bringing you our second installment of the Ask Luke and Jeff show. We've got a handful of questions that we've been asked, some by private message, some by email, some by. Some we've pulled out of the forums that we'd like to just go over, talk about best practices, our opinions, input, disclosure. Luke, we are not certified accountants.

We may not even be professionals. Jeff. I'm not sure about it.

I doubt it often, man. You said something the other day, Luke. What did you say? You said something to me where I'm like, well, crap, Jeffrey. Yeah, what was it? Oh, maybe it was my inventory issue. Yeah, I got so in full disclosure and I'll tell you guys this. Oh yeah, this is a learning experience. I've got 120 cars in inventory right now. Let me just look at this. Yeah, 119 in inventory. Probably 80 of them are frontline ready, let's say because of the slowdown. How many days inventory is that? If you are selling 25 cars a.

Month, that's four months.

I've got a solid four months worth of inventory and I think my average age unit is like 80 days right now.

Oh yeah, what's your average sold? What's your average day sold? I like to look at that too.

Average day two sold.

Yeah. So if you took the last 30 days of the cars you sold, tell me, how old were they when they sold?

Yeah, that's probably the sad part. If it's probably like 7 or 10 or something stupid because we're only selling the new stuff and letting the old crap sit forever.

Well, so what I. What I find, and I know this is before we even. But typically all my sold units for the previous month, it averages out to be about 60 months in stock or 60 days in stock. Oh, 60 months. That's crazy. So you know, you need to look at that as well as your day supply. If, if you've got a really big day supply and your average sold last month was 10 days, you got a real problem. You got what I'm saying?

Of course I got a bunch of, I got a bunch of friggin lemons out there that nobody wants that are dragging down my right.

And, and you got. People say you got your salespeople only selling new products and not even looking at the old products. So then you have some real issues that you need to look at. So, you know, it's not a supply.

I do spiffs on aged units at 100 days. 200.

Stop doing that.

300 days.

Stop doing that.

Why? I'm trying to encourage them to look at the old stuff and get it out.

Well, so to me, the new stuff's easy.

The new shiny stuff is always easy.

Sure. But to me, that means you probably don't have those price right or something. There's something else going on there. And sometimes salespeople wait on the stiff. You know what I mean? It's.

Yeah. Well, it's a double. It also hits me on both sides because now I got a 300 age unit that I've also discounted. I'm losing money on, and then I'm paying a $300 spiff on top of the commission. So it's a $600 commission car on something where I just lost $1,000 for sure?

Yes. A couple years ago, I started doing. Once a month, I'd pick one and put $500 on it. It'd be the first dang one that sold, you know, so.

But you got it out. Is that okay?

No, because I think the salespeople were waiting on that. You know what I mean? And it was like, huh, Are they working the system? So I think that spiff sometimes make. Make sales people work the system.

Well, of course they're gonna work the system. Right. I mean, that's human nature. But is it. Do you build the system to where it's an advantage to the dealership? So that's what you got to do.

That's what you got.

Back to my original argument. Yes. I've got too many cars, and they've been here too long. I got very aggressive with my over 200 days this week. I'm gonna just try to get them out at cost.

Yep.

Hopefully retail. Buy here, pay here if I have to. Absolutely. I don't want to take him to the auction and take a bath on them Right now.

Let's go back to what Chuck said a while back. And I brought this up before, and Chuck talks about buy here, pay here, supposedly. Not supposedly, but wanting to produce income. Right. So $400 a month. Right. So if you have a car that you've had to reduce to no profit just to get them on the books and then pay them $400 a month, that produces a lot of income. Because if you kept it in stock for, let's say, 180 days, you miss $2,400 in residual income. Right. So there's always benefit just to get those cars on the road, even at a break even, because it starts generating that $400 a month.

So, I mean, that maybe goes down a road that I've seen some people mention. Well, buy here pay here guys can pay more for cars because they don't really need to make money on the sale. They'll make money on the financing.

Well, no.

Right. Because the traditional buy here made buy here pay here model is cost times two plus a thousand. That's the old tote the line conversation.

I do not agree with that. But okay.

But there is also the issue of. Yeah, you need to find that fine balance between marking the car up too much and never collecting.

Yep.

Because sure, I could charge six grand over and some of these people would sign up for it, but I'm never gonna collect on it charging too little, but being able to move a lot of units. But I'm not grossing enough upfront to make any money, even though I think I'm making money on interest, you know. So as a buy here, pay here and a more forward thinker, where do you, where do you strike that balance?

It depends on your loss ratios, honestly. So if you've got a buy here, pay here model where you can just churn and burn cars and you're recycling those cars a lot, You're charging too much for your cars, typically. Okay. Because you're never collecting it. So that's one model. But your losses are so huge, you've got to have a big markup. Right. But if you go to the buy here pay here model, kind of like what I try to do to run a very low loss percentage, you can stand the front end to be less because you're making. Because people are paying longer, you're making more interest and you're not having huge charge offs. Now, that might change with a new economy right this second, but I don't think it will. But it's two different business models, honestly. There's the old school buy here pay here low ACV cost plus call some two plus a thousand. You know, that model is different than my model and other people's models. But I think there's a fine line in there. But if you get enough accounts on the books, you can continue to shrink that, that mark that upfront. Gross, I think, because your losses tend to squeeze down a little bit.

And part of the magic to your sauce is that you're dealing, you're selling a car that people want to hold on to. Longer, or at least you're getting 24 months or 30 months worth of payments before they trade it in. And then you can resell that car again, you know, whatever the route is. It's a little hard to sell a $3,000 hooptie at a thousand dollar markup when you know you're gonna have to step in and do a bunch of repairs for them and the chances are they're not gonna pay through. So demographic, you know, the people you're selling to, the quality of your inventory. Sure. If Luke only makes $2,000 on his $14,000 car, he's making a whole lot of interest in the first 30 days, you know, and sometimes that can help out.

And that's, you know, I know we kind of went off a tangent here, but not every model is going to fit your inventory. Not everybody buy your pay here model is going to fit your demographics. Not every buy here pay your model is going to fit your geographic region either. So there's, there's always so many. You can't just talk about the retail industry, the buy your pay here industry. You got to almost break it down within itself. Yeah.

And what is the character of your dealership?

Yeah, because my, if I had a retail dealership, it might be vastly different than Freeman Motor Company in Oregon. Right. Because I might be selling 10 to $12,000 car where they're selling a really high end European car. So you can't even put those retail, those retail people in the same spot, same boat. Everything's so different.

So along those lines, Luke, one of our questions is as a buy here, pay here, when is it prudent to sell my notes off? And under what circumstances would I take the cream of my crop and sell it to a finance company at even 80 cents on the dollar, even with no recourse? When does that make sense?

I don't think it ever does. Let me caveat that if you are in a cash position where you cannot get out of it, they're going to take your house, you're going to take your lot, they're going to put you in jail because you didn't pay your taxes. You don't have any choice, right? Yeah, you don't have any choice. But I think the better model here is to slow your growth down. Okay. If that means going two or three months with selling four or five cars, in the long run, I think it'll be better off for you because you can pull. It's pretty simple. And buy here, pay here. If you need to generate cash, there's One thing you can do, you know what that is, Jeff?

Stop selling.

Stop buying cars.

Yeah.

Only way you're gonna sell cars is to buy cars, so you can stop. So let's just say you're spending $100,000 on inventory every month. Okay. Which, that might be a low number. It might be a high number to y', all, I don't know. But let's just use that number.

It's pretty low.

Yeah. Let's say you're. Let's say you're, you've got 400 accounts on the books and you're, you know, you're selling probably 15 cars a month, you're collecting 160,000amonth or so. Well, if all of a sudden I ran into a cash problem and I quit buying cars, I'm going to generate $260,000 in cash in 30 days, more than likely. Right. Or something to that effect, or $160,000 in cash really quickly. And if that means, if I don't sell anything, so I'm not taking down payments or anything. So a dealership that small can generate cash really, really quickly. A bigger dealership, and of course you have your overhead, but hopefully you've got that right. Right. Yeah, but I mean, I can generate $300,000 in cash very quickly without buying cars. Right.

Just not going to the auction, selling what you got, reducing your days in stock, those types of things. So better alternative than to go hawk notes on the open market or through a third party seller, whether you service them yourself. Obviously there's the argument that you lose connection with the buyer if you're selling the note and they're collecting. You think that maybe if you collected and you share profit with, with a cash infusion type company that's buying your notes, but letting you collect now, it sounds like you're doing all the work.

Yeah. And 5% is nothing. So you cannot collect those payments for 5%. I'm just gonna go ahead and let you know that especially if you're a smaller dealer, if you're a bigger dealer and you're selling a bunch of notes, maybe you can. But years ago, and this was before I really, before I took over our dealership here back in the late 90s, early 2000s, I decided to start collecting my dad's notes because he had let. At the time, Wells Fargo had these little small shops and they were collecting money and they were taking 10%. That adds up really quickly. But honestly, I think it costs between 10 and 12% to collect accounts. So 5% is not enough. If that company's buying in front of you cash at 80 cents on dollars, which is 87 the principal dollars, really low, they're making all your interest and you. And they're only paying you 5% to collect those accounts. I think that's a raw deal. That's my.

Well, yeah, they're paying you 5, 2% to collect their notes because they don't want to employ their own collectors to collect their notes.

But because it's gonna cost more than 5%.

Yeah. Okay. So along the lines. And then we'll be done with buy here, pay here. When. How do we handle these voluntary surrenders? That's the question coming up. I am personally seeing a slight uptick in voluntary surrenders. We've done everything possible to keep people in their cars. Deferrals. We're working with people where we're doing everything we can to not have people give up any tips or tricks or ideas or things we can do to try to slow.

It's gonna happen. I typically see the most in July, August, typically when we come back from Niada, they'll start hitting as what I've normally seen.

And also everything slows down. People are coming out of summer. They just. They did.

They gotta go back to school, they gotta buy school supplies, these things. And just things go sideways for some reason.

Right.

And we even see them in December sometimes. So there's not a lot you can do except for try to get to the root of the problem. And sometimes even when you get to the root of the problem, like it needs an alternator, the tires worn out, this, that and other. In my experience, I've tried to repair them and keep those people on the road. And in the end, when they decide that they want to turn their car in, they're going to turn their car in either this month or next month. So I think if a customer calls you and says they want to turn their car in, the best thing to do is take the keys. Hmm. Because they could keep driving it and tear it up, right?

Yeah.

Because they're not gonna pay you. When they finally decide that they're done with it and they want to turn it in and you say, ah, let's work this out. It's not gonna work. Take the keys, be done with it.

Ultimately you look at it and you say, okay, am I a good? Am I a good finance company? Is my collector good? Did we communicate everything humanly possible upfront? Do they know they can talk to us? Do they know they can get repairs done through the all us? They Know all these things and yet they still want to give me the car back. Yeah. Then I better yank it.

Man, you brought up such good points there that if you. If you know your processes are in place, the only way to prevent a turn in ontari repo is on the very front side before that customer makes their mind up. So make sure that your. All your processes are in place to collect the customer. Right. To take care of the customer with repairs and to do those things. If you don't do those things and they tell you they want to turn in, take the keys or if you have done all those things and they decide just take the keys.

Yeah, yeah. You got to know that you've exhausted all resources. Yank it, Luke. I know this is something you guys just implemented at your dealership. I do not charge credit card processing fees. Any payments, whether that's a recurring payment on my buy here, pay here portfolio, or actually, I take that back. I do charge a fee on down payments if I take them by credit card, which I try not to do. But there is a situation where maybe they have their tax on a card or maybe it's a smaller amount, or maybe I just want to get the sale done. I'll try to add a little fee in there for the credit card processing. You do it across the board though now. Right.

So we don't do it on down payments, and we take majority of our down payments as that. But I don't think it's necessarily legal in South Carolina to do that. But we did start it on payments and several reasons we did that. I mean, it was costing me close to $50,000 a year to collect these payments. So just think about this. Every time a customer made a 400 and something dollar payment, it was costing me nine bucks. That's a lot of money. Right? Okay. So I just, I couldn't stomach those fees anymore. Also, customers were continually calling the office to make the payments. And it would tie up our collector for a lot of the day, especially on a Friday when they need to be collecting. It would time up for most of the day just accepting payments. So we had to figure out a solution where we no longer help the customer take the payment and we try to recoup some of that money that was cost us in credit card fees. And our solution was to go with. With a company that, that could set up an IVR and set up a new system where the company's actually getting a fee. I'm not making the fee. The credit card company is getting the fee. And I'M getting my whole payment now or most of it. So. But if you have you set up a reoccurring, it doesn't charge you. If you do. If you come into the office with cash, they don't charge you. If you come into the office with a money order, it doesn't cost you. So we've cut out a lot of the time spent by our collectors and we've also lowered our credit card bill merchant services fees.

So I could definitely buy here pay here having a convenience fee, because obviously I think that's the legal right. You can't charge a percentage. It has to be a convenience fee of a dollar amount. Right. So you just say, hey, I process X amount of cards. My average monthly processing is $2,000. So I'm going to add $4 as a convenience fee. If you want to go through the payment portal and make your payment one time, if you go on auto pay, then you can avoid all those convenience fees. Right?

Right. And this is not something you can do yourself. In most states and maybe even nationally, you need to partner with a company that sets this up so that they're taking the fee, you're not actually taking the fee. And they actually have to set the number. It's not for us to set the number.

Right.

Okay. So they have to look at what you, what your transactions have been and where you are. You know, I'll give out these numbers real quick. Okay. Just to kind of give you an idea of what it was costing us. Well, I won't do that. I'll give percentages. Okay. We just for April compared to March, our fees are 90% less. Yeah. That's a big number.

Not your fees.

Yeah.

Your cost.

My cost to process credit cards is 90% less than it was. That's just one month.

Yeah.

So it's a big number.

Yeah. Yeah. So say it was $4,000 a month and now you're at 3,500, 3,600 less. 3,600 times that by 12.

It'S going to save us probably $30,000 this year.

Yeah. So as a buy here pay here customer, or as a buy here pay here client, is having a processing fee on the payment portal going to be a hindrance to me making the payment? Does it slow them down? Because that's the argument. Just charge more for the car. Don't nickel and dime your customers with fees. Don't give them an excuse not to pay. You know, where did, where does that come in?

Our customers are a lot of times used to going to places to make payments. So all it is is if they don't want to make that fee, they don't have to pay it. All they have to do is come to my store.

Right, right.

It was just going back to the old school. Buy here, pay your model is all. Right.

But doesn't that create the problem though? Because then now they're in there bugging your receptionist and trying to make a payment by cash in person.

Well, not right now because we've got everything locked down. You can't even come in the office. But we have a Dropbox. You can, you can put the money in Dropbox and leave. It's not a big deal. We do have somebody at the front desk, so. Yeah, but honestly, we haven't seen a change in. Now let me, let me rephrase it. We have seen a change in people who are paying online and people who are coming in. But honestly, it gives us an extra chance to try to sell that person other car or get service work. So I'm okay with that.

Okay, that makes sense. I don't see any. I would not implement this now at my dealership if I decided to because I feel like the timing would get amount of backlash. Yeah. To try to hit your customer with the processing fee right now.

I don't know.

I'm just trying to get the cash anyway I can.

Yeah. So, you know, that was a. Maybe the wrong time, but we had already planned this and.

Yeah.

And we started on and had.

You warned them. And I really like the option of, look, get on auto pay and you'll have no fees. But if you're gonna be calling in or if you're gonna be doing these one time payments, you know, manually getting on the system or calling my girl to run it or coming in to run a card, then you're gonna have the convenience fee because you're frankly inconveniencing me.

Well, that was the biggest problem. Honestly. That was the biggest problem.

Yeah. Okay. When you send somebody on a test drive, Luke, do you get in the car and go with them? No, you do not. And none of your salesmen do. Your policy is you do not ride along in the vehicle on a test drive.

We do not. Only on specific vehicles under specific circumstances.

Okay.

I think that it creates issues. And I mean, I had, I had somebody get robbed on test drive one time. I had a person steal a car on test drive with somebody in the car and leave my salesperson on the other side of town. I mean, you know, if they're gonna steal the car, they're wreck the car rather than wreck it without one of my employees in it.

Honestly. Yeah. I really think it also comes down to too. I don't think today's customer wants that. They don't want. They want to be able to go on the test drive, talk to their spouse. I don't think people are coming out to test drive cars that just beat the crap out of them and leave them. Like Luke said, there is the caveat. Obviously we have a friggin Corvette on the lot.

Yeah.

Our salesman go on the test drive, it's a stick. We don't need people that don't know what they're doing out there burning up the clutch. So we do occasionally get a couple cars and I let the guys know this is specifically a ride along if you're comfortable. If you're not comfortable, get a manager, you know, to go with them. Yeah, I honestly, you know, a lot of it comes down to that liability. Man, I'd hate to send a salesman on a test drive and then have some allegations of misconduct, you know, and they think that, you know, your salesman said something to this girl lady that was by herself test driving a car. Like, I mean, seems like you're open to a lot more liability nowadays than you are from actual wear and tear damage to your car.

I agree. You know, I'm like you. If it's, if it is a high end sports car, somebody's gonna ride with you. And we sell, you know, classic car. We sell a couple of those, you know, people ride with you then. And you have to be fully qualified from us to even buy a car. So. Or even test drive a car. So we don't. People don't typically get in on a test drive unless they're ready to buy. They have to have a car here, you know, etc. Etc. Etc before we let somebody test drive. Yeah.

And with theft rising, guys, I think it comes down to again, make sure you're verifying. And if you don't feel comfortable sending them out, I mean, we don't send them out. We got a lot of good lines that say, hey, you know what, let me get you approved first. I don't want you to get disappointed if we can't get you approved for this car and you've driven it and you love it. There's always ways to go around it, so don't do it. And that leads us to our last question. Luke. Do you think that the test drive is a part of the future buying process? We've seen through this whole coronavirus scare that we can sell a car remotely, Right. The get approved over the phone, sign your paperwork digitally and we'll deliver it to your house. The Carvana model works and you can adjust it for your dealership. You might still need wet signatures. You might still, you know, deliver it on a trailer or not deliver it at all. You may have a one day guarantee. I would recommend some sort of a guarantee or exchange policy so that these people have some peace of mind.

I'm gonna give you a quick figure.

Seven days.

I'm gonna give you a quick figure. And this is from April. And we track everything. As you know, Jeff, we sold 30 cars, right?

Mm.

How many test drives you think we have?

Hey, everybody. Jeff here. Sorry to interrupt the interview, but I wanted to make sure everyone knew about the new and improved theindependentdealer.com website. It is the place to find out what is going on with the podcast. Check out all of our episodes on itunes, our social links. You can also give us your email and we will add you to our mailing list. So you are the first one to know about what is coming up new and exciting here at the podcast. Also, check out our video library. You can also ask us questions, find out more about myself and Luke and see our calendar of events, places we'll be speaking, where you can catch up with us and meet us in person. So the independentdealer.com and now back to the interview. I don't know. I would assume 30, 22. Okay.

So that shows you. Well, people have.

Of those 30, 22 drove.

That's it.

Okay. I'm sure you had other test drives that didn't close.

No, no, no, no, no, no.

Oh. You literally only sent 22 people on test drive.

Only 22 test drives. Okay.

Okay.

People believe in our product, number one.

Okay.

People trust that we're gonna sell them the right thing. Okay. And also, I don't know that people care a lot about test driving anymore.

Well, I think there's something to be said about A, your reputation. B, do you have a guarantee on the car that means something? C, do you have an exchange or return policy? Is there that peace of mind buying, you know?

Yeah, that's a big no. Yeah, that's the. If you're. If you're. If you have a guarantee, there's really no reason for anybody to test drive a car unless they're not sure whether they like a certain brand of car or not. Then you got people test driving. But I don't think test drives are what they used to be. Even. Even before coronavirus hit, we saw a slide into less and less test drives compared to buying.

So that would be the challenge, I think, for all of us is even before this hit, we were talking a lot about how can we do more digital retailing. We can, as independents, absolutely compete with the Carvanas and whatever that other place is that's out there delivering cars across every state line. However they get that done, I don't know, but we can do that. We just got to get out of the old mentality, oh, no, they got to come here and kick the tires and blah, blah, blah, blah, blah. There's a group that like that, but there's a bigger growing group that probably doesn't want to step foot on your dealership.

There is. And there's a lot of, you know, it started popping up several years ago where these warehouse model dealerships. Right. There's a couple people in the group that had these, and, you know, everything's inside, and they're basically an online dealership. This is even before Carvana and all these places. And, you know, there's 100 pictures, there's video, walk around. There's all these things you can do to really grab the customers attention and make sure the customers. We did a virtual. We did a virtual appointment with a guy from Oregon the other day on a. On a Corvette we have here, you know, and they really, really appreciated that. You know, we spent a lot of time with this customer, probably more than we would have spent with the customer in our dealership, which is funny. But I think we're gonna sell this customer to this car.

Yeah, I think that's so great. Here's the thing, guys. Fine tune the digital retailing with your local community. You know, e. Contracting virtual walkarounds, virtual test drives. Deliver the car, have a guarantee. And what that does is it opens up your customer base. Because guess what? Shipping cars is super easy. And it's very common these days. So if I can do that within the 50 mile radius of my typical customer base, now I can step out and advertise 2,000 to 3,000 miles away. And now my customer base is huge. Right. Because I'm the guy that can deliver anywhere.

Yep. And I actually, I bought a rollback today just for the simple way, for several reasons. But one of the big reasons is to be able to deliver cars pretty easy to customers, you know, nice.

You gonna brand it up and put some names on it?

Yeah, probably. You know, but it's. It's the things you can do. And another thing, don't be afraid to allow your, your car to go to another shop to be inspected because that gives you a third party kind of cushion. Right? Well, you picked the shop. We delivered it to the shop, they inspected it, they told you it was good to go. There's not much pushback at that point. Right? Yeah.

Yeah. That's a beautiful shift of responsibility or movement of obligation. Hey, you picked the shop. They gave it a clean bill of health. You know, you own it, buddy.

It's a big deal to do that. I think it just gives you and advertise that you do that. I see Jack Carter does that on his, on his Facebook post a lot of times that, hey, we would love you. We, we encourage you to get this car inspected. So don't be afraid to do that. Make sure it's a reputable shop too. Don't let them say anywhere. Everybody in their town knows what shops are good and what aren't. You know? Yeah, they say, take it to Firestone. You say, no, no, we're not taking it to Firestone. We're taking it to a place that's not gonna sell you stuff.

Yeah. Yeah, good luck finding a mechanic shop that's not trying to sell you stuff. But, well, anyways, Luke, the purpose is we want everyone to start thinking outside the box. Find the answers to those solutions. Don't get stuck. Think, you know, be forward thinking and innovating to keep our dealerships growing and thriving. We don't need to be pushed out by the Wall street backed mega dealers and continue to subscribe to the podcast. Tell your dealer friends we appreciate everybody getting the word out people that are subscribing to the email list, leaving us reviews. It's great. We'll do more of these.

Also, if you, if you know someone, if you know somebody that you want us to reach out and get an interview with, please send that in too. Jeff, I know that we're always looking for good ideas and we'd love to get those people on for y'.

All. Absolutely, Luke. Have a great week, buddy. And we will talk to you later. Thank you for joining us today. Hope this episode inspired you to take positive action. Remember to subscribe so you get each episode the day it comes out and we would love your help spreading the word. Leave us a review and share this podcast with your dealer friends. Dealers helping dealers learn and grow together.