#110 - Why Are Auction Prices So Crazy?

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.

Hello, and welcome to this episode of the Independent Dealer Podcast. Luke and I coming to you live this week, gonna turn off my ringer, and we are going to have an episode today. It is the week of Memorial Day. Luke. I've been in and out of the office. I know we missed our Monday minute. I got some text messages from my friends that said, hey, where were you on Monday? I was biking around Bear Lake. Just having a good time, man. How was your weekend?

Oh, it was great. We were down in Atlanta spending some time with some family. That did look interesting, that ride you did there, Jeff.

Yeah, 50 miles around the lake. The caveat is it was an E bike. It was one of those E mountain bikes.

Oh, my gosh. That's not riding bikes. Come on, man.

There's no way I would get an actual mountain bike. 50 miles, that's not my style. But these little E bikes, pretty cool. Anyways, so great week, man. But I get back to the office and it's been busy, man. We have been busy. What about you guys?

We've. We're on pace to have the best May we've ever had, and honestly, the first five. The best first five months we've ever had in business.

Wow. Okay.

I'm worried, though, Jeff.

Yeah.

Yeah. I'm worried about inventory. Ah.

So let's go back. And if my memory serves me correct, we, as a dealer body, I guess we were a little concerned two, three, four months, man. Maybe even just a month ago, two months ago, that we were going to be sitting on aged inventory that we weren't going to be able to get out of the cars at the price. And everyone was kind of theorizing on what this was gonna do to the supply of used cars and the prices. What are you seeing right now? You're selling out of inventory and you can't replace them.

Yeah. Let's go back because, you know, we've heard a lot of stuff over the last three months. And in March, I probably sat on this podcast and said, stop buying. Cause I'm stopping buying. I probably said that. You did, actually.

Yeah.

And I stopped buying. But then I saw that business didn't slow down except for maybe a week. And then April, I went all in buying again. And I bought a lot of cars in April. I bought 42 cars or 44 cars in April, and so our inventory had gone back up. Well, I think maybe I was Three weeks ahead of buying inventory again. And also some of the states that were shut down for that two to three week period started opening back up. And when I saw that, the prices skyrocketed. And so we're in that skyrocketing price period. And I bought 20 cars this month. And we're almost through with a month. So I've bought half the cars. And we sold 40. We're gonna sell 40. So I've bought half the cars. I need to replace the cars. We're in a buy now.

So I remember back then, we knew that the big buyers had gotten out of the market. Right. The carmaxes, the Carvanas, drive times, whoever it was, we didn't see him in the lanes. And we knew that prices were soft. Right. There was probably a two to three week period where everyone was kind of shut down. Nobody was selling cars. If you could get to an auction or a simulcast, you could do okay for the ones that were getting cut, nothing, not a lot was getting caught. Right. I mean, no sale was through the roof. So if you came close to a reasonable number, you were taking that car home. And that's what you're saying was kind of the heyday in April?

Yeah, I mean, we're just buying cars like crazy. And honestly, you're buying cars 1500 back of that MMR. And MMR is based on the last 30 days of sales. So that MMR was still pretty high. Yeah. And so we thought we were cars. And we were honestly, I mean, the grosses, the grosses we had in late April and all of May, I mean, this is the best grosses I've seen in probably seven or eight years, Jeff. Just crazy amounts of money.

So you feel like when you got them here, you weren't so desperate to get out of the cars that you were discounting them too much. We didn't discount them all. And the book values were still there where you could get a full gross.

The book never, in my opinion, Nada never dropped.

Reflected that.

Never reflected. And you remember we had the people on from Nada. They were talking about how they were maybe cushioning the fall. Right.

They just weren't gonna chase auction numbers. They were looking for more real, real life transactions.

And the auctions dropped, but the retail side didn't. And I think that created. It created the perfect storm for people who were retailing cars. Cause we were able to make good gross, but now we can't buy the cars, replace it.

Ah, so here. So. So I guess that's my concern is I would look at it from both ways. I'd say during the. During the shutdown, we were saying, hey, I'm getting these things a grand, 1500 back of MMR, which we know was delayed. Now, are you telling me MMR has adjusted based on April's number? And now we're all freaking out and pissed because now we're buying a thousand to fifteen hundred over MMR?

That's definitely happened. So Mr. Dropped, and now it's leveled off. When it's gonna be a bit before it goes back up?

Yeah, but. So you think it's a month. So that car today, that you have to pay $1,500 over MMR in a month, that might actually be MMR, probably will. And you're still gonna be paying $1,000 over the new MMR. Because I'm looking at, like, as an example, my wife's Yukon. It's time to swap her out, right? And I'm looking at I can buy two years newer for the exact same price of what I bought hers for just six, eight months ago. Right? That's MMR.

Yeah.

But the buy it now price is like two or three grand over MMR, which I know is the actual value of that UConn, because that's what it was two months ago. You know what I'm saying? MMR has taken a little dip. So I'm like, oh, well, if I can get it for mmr, then I'm doing great.

But mmr, I. You know, I hadn't seen anything that was worth a darn sell for MMR lately. Yesterday I was watching some stuff down in Florida auctions I usually work, and everything I had marked down brought two grand over mmr. So, you know, and it's. Some of it was ridiculous. And honestly, it appears to me that there's a lot of northern buyers buying down south right now. And I think that's really, really messing with the market. The one thing I don't understand, a supply is low at auctions. And I may have told you all this two weeks or so, the auctions I normally work, Florida, South Carolina, Georgia, Texas. So the supply, what they're running every week is really low. But when I was in Florida two weeks ago, I've never seen so many cars sitting at the physical auction locations. So there is something going on. And, you know, I'm just theorizing here, I don't know, but I think some of the banks are afraid to sell some of the cars they repossessed for maybe several reasons. Maybe one that they don't know what kind of bailout they may get. They may not know what the repercussions of selling that inventory is going to look like on their balance sheet. I don't know what's going on. Maybe Manheim is not able to produce condition reports fast enough to get these cars listed. I don't know what's going on. And there's so much rental inventory sitting. Something's got to give at some point. I continually, and I look at a lot of ove event sales and the inventory there continues to climb. But they continue to ask over MMR formula, way over MMR at some of the biggest, the big companies, Hyundai, gm, Ford, all these manufacturers still, you know, asking a lot of money. And maybe they're, maybe they're betting on the lack of new inventory coming out. And maybe they think, well, we can just hold these for a month or so. We're gonna sell these to our dealers. I don't know what's going on, but something. There's still a mess up in the market that has not corrected itself.

Luke, real quick, before we talk about Hertz bankruptcy and some of these other market prices, let's take just a really quick second. Take a pause. We're gonna thank our sponsors. Hey. This episode is brought to you by theindependentdealer.com this is our website. It's a great place to learn everything about the show, Stay in contact with Luke and I see where we're gonna be speaking next, and check out all of our back episodes and content from the Independent Dealer podcast. So visit the website, subscribe to our email list, and stay in contact with us. Back to the episode. Okay, so Luke Hertz filing bankruptcy. Now, from what I understand, and again, I'm not super educated. I don't read a lot of this, and I'm not in the know. When companies file bankruptcy, it doesn't mean they're liquidating all their stuff and they're dumping everything on the market. Hertz is going to reorganize. They're going to shed some debt, they're going to redo some debt, and they're going to be back in business. So if everyone thinks that their 20 or 50,000 rental pool is going to hit the market tomorrow, that's not necessarily true. It's just the typical cycle that all rental companies do with their fleets, Right?

So Hertz has been in trouble for years. This was the straw that broke the camel's back. And I think, I don't know for sure, but I think that they're Restructuring a debt, of course. But in that restructuring, Jeff, sometimes you've got to liquidate some assets. And so if they've got certain contracts that they've got to meet, of course this bankruptcy is going to help them out in those contracts.

They may have markets they want to pull out of completely.

Sure. And they may have buildings they don't want to lease anymore. They may have, they may really take their fleet from however many Hertz cars they have to however many 0.5. Right. You know, they may half it and say as we restructure our debt, we believe that this is the amount of cars we're going to need to service. You know, the amount of locations we have, I believe there's going to be, I believe there's going to be a huge amount of cars that come on the market. Hertz also has their retail locations and I would assume that those retail locations, some are going to exist, some aren't. So they may have all that, that inventory they have sitting on their retail locations that they've got to move maybe a prime time to buy Hertz cars as a retail buyer and maybe not as a wholesale buyer quite yet. I don't know. Interesting. So definitely something's going to happen.

We know we've got the rental cars coming on the market. Whether they keep them a little bit longer and try to ride it out because they're not getting the new stuff, the 20, 20, 20, 21s, from the factories, that's going to hurt new car dealers too. Right. I mean, what happens when these new car dealers have a three or four month hiccup in their supply? These salesmen and these dealerships, they're still trying to hit their numbers. They're going to be pushing CPO cars, they're going to be pushing near new. They're going to be keeping a lot more of their clean trades. Right.

That's definitely putting. I buy a lot of trade ins a lot. That's probably 80% of the cars I buy. And I can see it already. Every lane that I normally work that would have 150 trade ins. In Florida, they've got 75 and they're junk. I mean, they're keeping under a hundred thousand miles. They're keeping, you know, if it's got a little body damage, they'll sell, which I'm fine with buying that. But you can really see that, that switch that we didn't see right before this, Right before this, they were turning so many new cars that they had to keep the market moving. They had to keep those you know, they had to sell the trade ins to pay for and to buy new inventory and also to get it off their lot because they had too much. So right now that new course fly is going down and it's probably going to stay like that for another month and a half, maybe two months. They're going to continue to keep those cars. So it's really putting pressure on independent dealers to find good quality inventory at a decent price.

So you're getting less new car trades hitting the market. Now. The third factor of this, in my opinion, and I know we've talked about this episodes before, the consumer side of it, you know, when from a bank repo standpoint, I don't know that we're going to see the influx of repos that we think thought we were going to because of the stimulus money. At least the repo guys I've talked to, they're busy. They're not crazy busy. There was a bit of a moratorium on some repos from the big guys that might be lifted here soon. So maybe you'll have a two month, you know, kind of pent up repo list that all of a sudden gets dropped in, you know, June or July. But I don't think you're losing a lot. I think some of the gig guys are going to lose it. You know, I think there's probably a lot of Uber cars that are going to go back because these guys have not been doing anything. Maybe some Turo, you know, people that had two or three cars in their rental pool or their Uber pool or their Lyft, whatever, you know, I think you'll probably see some of those. Do you see a lot coming in the repo area?

I don't. I mean, our collections probably have never been better. Honestly, I think that there's going to be a lot. I was listening to a podcast, Wall Street Journal podcast. I listen to it daily and it's something I would encourage everybody to. But they were talking about credit card debt and how so many of these big credit card companies were having to, you know, defer, defer, defer. And they're going into the third month of a defer. And what most of them were doing was so, okay, you didn't have to pay the minimum first month, you didn't have to pay the minimum the third month, he didn't have to pay it the fourth month, but on the fifth month, all of a sudden you've got to pay all the back minimums. And so they were talking about how that's going to affect People's credit in a very near future. And so I think not only is that going to affect credit, it's also going to affect people who. They're getting deferments on their car loans. Well, you defer for so long, next thing you know, that car's gonna probably go back. And they're even talking. They're even talking, Jeff. And this. This kind of blew my mind just to think about it. But when I thought more about it, I said, okay, well, it makes sense. We're not gonna get all these jobs back until 2022. Think about that.

Really?

That's a long time. So people. Because people like me are gonna say, hey, you know what? I didn't necessarily need all the people I had on staff, so we're gonna learn to do more jobs. So the people who are kind of the low end of the totem pole, you're gonna get rid of them. They're gonna have trouble finding jobs. They're talking around here, Jeff, at 30% of restaurants not reopening. I don't know if you see that, but that's kind of what we've seen. That's a lot of people that were employed.

Yeah. Yeah, I definitely see the struggling businesses are gonna. This will be the straw that broke the camel's back or the excuse to get out. I don't see the hiring standpoint. I can't find anyone to save my life. I've been looking for a salesman for two months, need two mechanics, and I am gonna need a receptionist here in the next month, and I have zero luck.

I think that that's gonna change as soon as the $600 extra a week goes away.

July, whatever. That.

Yeah, I think the people who are out of the job market right now don't care about getting back in because, hey, you know, I can stay at home and make. Make good money while I go back to work. Not. I don't.

That.

That definitely won't stay, but, you know, that's what. That's what we're dealing with right now, which is sad.

And I want to transition and talk about one more thing before we wrap it up today with all the supply side. I'm also looking at a lender side. You know, I mean, I do. I'm 50. 50. Buy here, pay here, subprime, you know, credit acceptance, credit union, Westlake labelle, all the. All the subprime guys. I'm seeing a stronger pushback from their underwriting guidelines, which makes it harder for me, you know, especially on my CAC deals. I don't know if anyone else has seen that, but I think they have definitely tightened up and gotten more stringent and more scared. My discounts are ridiculous. You know, I'm breaking even on some of these cars because of the size of the discount. Is that going to continue to hurt, you know, our ability to sell cars? And when that perfect storm comes of all of a sudden now I'm buying cars more expensive. Plus my lenders are being more strict now. There's no meat left on the bone for me as a dealer.

Yeah. And I mean, and you continue to see some of these subprime companies, their ratings are getting cut and because there's people that really, truly believe there's going to be a huge repossession outlook coming up. And CAC has been through this before. They're good company. They know what they're doing and they're pushing back because their outlook is for repossessions and their outlook is for a tough job, a tough job market for their customers right now. So I believe it's coming. I think, I think we'll lose some subprime lenders. But, you know, I don't mind it because that helps my buy here, pay here business. So selfish said. That's being selfish. But it's truly get. There may be good times right now, but what's the forecast look like for June and July? I don't know yet. I truly don't know. I'm. I'm in a good position for June and July and so we'll see. We'll see what the market brings. I thought May was gonna slow down. May haven't slowed down. Maybe June doesn't slow down either. So even if they talked about second round of stimulus, maybe it's coming. But I do think that you need to be prepared for the slowdown because it will come. I don't think there's any doubt in my mind.

Awesome, Luke, Great words. Awesome talking to you. Hopefully everyone listening got some sort of education, knowledge they can take into their dealership. Take some serious action and make sure. I mean, just like Luke said, you just keep inspecting your business, staying on top of it. Awesome.

That's right. Just prepare, man. Just be prepared.

Thanks Luke.

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