#136 - BHPH 101 with Luke & Jeff

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.

First off, just want to thank everyone who's leaving us reviews online, people who have given us some shout outs on itunes and Spotify and things like that. It really, really does help guys. It helps us get the podcast out to more people, boost us in the rankings when dealers out there are looking for education. So we really appreciate that. Also, we've been noticing in the forums a lot of people are getting curious about Buy Here Pay Here. Right, Luke? It seems like as there's a more unserved segment of the credit market, there's opportunities for dealers to start carrying their own paper.

Yeah. And you know, yeah, you know, it always happens is whenever maybe banks pull back a little bit and people start having extra inventory on their lot, which I think will be coming here very soon. You know, these dealers who've never touched Buy Here payers. Oh, let's get into buy here Payer business. It can't be hard, right? I can get as much down as I got in the car. That's, that's what I hear a lot. Well.

Yeah, yeah, yeah.

It makes me angry.

Yes. So if banks start tightening up and pulling back, they get scared. There's going to be a lot of opportunity to service that industry. So what we wanted to do is put together our top tips for Buy Here Pay here, whether you think about getting into it or whether you're already in it and just kind of need some advice, some tips, some education. This is obviously not meant to be all inclusive. There's a lot of great 20 groups and mentors and three day seminars you can go to to really, really get educated in the nuts and bolts of this. But Luke and I are just kind of going to kind of do a brief, brief overview and hopefully be able to reference some of our previous episodes that you can go to.

And you know, what's important, Jeff, is this is not a business you go willy nilly into. There's a lot of regulations surrounded by here payers. You know, back when, when my dad started Buy Here Pay here, there was probably three in the state of South Carolina, probably more than that. But it, you know, it was very limited. People didn't really understand what we were doing originally and there were no regulations. You could just fly by the seat of your pants, make up rules as you go. But today, today that's not the case. You know, every big publicly traded car company has a related finance company arm carmax does. Carvana does. Drive time does. I would probably say room does. You know, there's a lot of places that are in the business we're into, and it's highly regulated. You need to know the laws before you start. So if you're thinking about it, you really need to stop, listen, and you need to do the research on the laws, and you need to do the training that Jeff was talking about. You really need to get involved before you just throw your hat in the ring, because this can cost you a lot of money, lot of time if you don't do it properly.

Yeah. So that would take us to our very, very first tip, Luke. Tip number one. What I wanted to make sure people know is that buy here, pay here is not car sales.

Right?

Right. Just because you can sell a car and you want to tote the note, it is collections. Right. It's 100%. A different business model.

It is. And I see a lot of people that make the biggest mistake is they get into the buyer, pay her business, and they sell all these cars. Right, Jeff? And I mean, it's just sell, sell, sell, sell. And they didn't do their due diligence on underwriting and things like this. And next thing you know, they have four or five hundred accounts out there within the first several months, and then they start, have all these repos come back. Right. Because for one, they didn't have a collections arm set up to start with. And when that happens, it creates a nightmare. It could create a tax liability nightmare. It could create our repo nightmare, cash flow nightmare. There's all kind of things can go into this. If you don't understand that this business has nothing to do with selling cars. Nothing. It has to do with collecting the cars that you sell and collecting the paper that you put out there.

Yep. And just from a straight mentality standpoint, you need to understand that. That you are now a collector. You are now that person calling every single day, two to three times a day, trying to get the money from them. So be prepared for that. Mentally, it leads us into tip number two. Obviously, based on your state, you're gonna want to evaluate your buy here pay here versus lease here, pay here. And we got into lease here, pay here quite a bit in episode 39 when we talked to Nick Marcosian. He explains a lot of the benefits of lease here, pay here in his state. And, you know, obviously get with a professional, a consultant, find out if lease here, pay here is right for you in your state or your business model the way you want to handle things as opposed to a buy here, pay here model. There's, there's pros and cons to both and yeah.

And if you don't understand the difference, you really, you should go back and listen to Nick and also you should listen to us on when it comes to buy here pay here, do your research on the Internet. Because it's really different and the fundamental philosophy is not hugely different, but the ownership of the car is different and the tax liability is different. There's so many different, different things that go caveats that are, that are involved in it. And the state is huge. In South Carolina wouldn't work. Utah apparently work credits. Right.

If you, if you ever think you're going to take money against your receivables, it's way different when it's a lease portfolio.

Yeah. And so you really need to understand the difference and you need to know what works best in your state because if you don't, you could spend a lot of money going down a path and it not work for you.

Luke, if you do buy here, pay here. Is an RFC absolutely essential or just a good idea?

It's not absolutely essential. We were in business for 30 years, I think before we had an RFC. And let me break this down for you real quick. Tax wise, if the RFC really only gives you the huge tax benefit for about three to four years, depending on how long your contracts are. Right.

Depends on your contracts. Right.

So we're averaging, let's say at the time when we did it, we were probably at 36 month contract. Well, we kind of ran a little cash short one year. And the best way to recoup that cash and to keep going was to do a big play when it came to RFC. So we decided 30 years in the business, let's start RFC. And it did. It helped us a lot when it came to the tax liability of it because we've been fighting it for years. So it's not essential to do to start with. And honestly I probably wouldn't do it until I had probably 2, 300 accounts because it just really.

Yeah. And as a startup you need that extra cash flow. You need the ability to discount that note and save your income tax.

No, because I think, because I think you need to, you need to understand, you need to have the cash to operate for three years without the cash.

With paying that income tax every year.

Yes. Because for one, number one, if you just started, you probably don't understand the tax implications. Number two, you probably don't understand the tax maneuvers. Number three is you need to, you need to understand that the backside, the financial situation before you have two companies that you got to try to figure out the financial situation on because if you handle the RFC improperly, then you're going to create all kind of taxable problems. And so, you know, this is my opinion, you might get with CLA or with our boys at HHM and figure out what they think is best. But I know this, when we went to cla, they were fine with us not having it and they knew that it was going to be a good option down the road for us to get a huge.

I would say if you are committed to it. And moving on to tip number three, if you have done the financial projection and the market analysis and you have the cash flow that knows you're going to commit to this. Start with an rfc. Also start with the right dms. Get with a DMS that is going to take you, it's going to take you for the long run because one of the most painful things is switching DMS providers. It's horrible, it's miserable. Make sure you've got a DMS that's going to be able to handle the type of business model you're running that can handle an RFC and selling your notes. Also auto pay, it's got to have an integrated auto pay and I say the word integration. Find something that has the most integration possible. Because if you're doing double and triple entry, adding inventory, converting inventory over to your sales side, converting it to your CRM and then booking it into whatever system you're going to use to take payments, and then having to upload it to your website, like absolutely frustrating. So integration is horrible.

Nothing's worse than taking a payment virtually then having to key it into your, to your VMs every night. That's just, that's double work. It's useless. And you know, Jeff, you and I are, we're dealer socket people. You despise them. But I love them and, but you know, it works good and for those type things, it's really, really. IDMS is I think, really one of the top products out there. If you're going to grow, you know, if you're going to be small for a long time, there's some really good products. Wayne Reeves, Fraser, all those products are really good. I don't know how much integration they have. But don't just go off and your buddy down the street have a certain DMS company he just started and jump on board because if you're gonna grow, it's not, not gonna make sense. And there's a lot, there's a lot of liability that goes into the forms and all that. You need to be with somebody you trust.

Yep. So step number three, tip three, I would say is you need to be you. This is the most crucial thing and it should probably be step number one, do a market analysis and a financial projection. You need to know what does your region, your demographic, what can they support. Are you talking about being a, you know, Luke's business model as a buy here pay here is different than mine. We're pretty close. But Luke has a ACV of six grand, $9,500. Oh, 90. That's ridiculous. So he's, he's selling a 95. He's buying a car at nine grand, selling it at 14 and getting two to three grand down. Right. Much nicer cars.

Pretty much, yeah.

And his region supports a higher down payment. Whereas you're in some areas where you're going to be the 199 down guy because there's so much competition and you're going to sell, you know, a $4,000 ACV for nine grand.

And I think, I think a way to do that, people would be like, well, how, how do I figure that out? Well, you need to see within and you got to think about regionality of buy here, pay here, you're probably not going to sell. If you're a small buy here, pay here store, you're probably not going to sell with outside of 15 to 20 miles radius of your dealership. Right. So let's say that's your county. Well, see what the gross income of your county is, see what the GDP is. Because what's going to happen is if you live in a, you say a rural town somewhere that has a population of 5,000 to 15,000 people and the average income is, let's say the average household income is $50,000 where you got to have a low price car. My model would not work. Okay. But because Columbia, South Carolina is a capital city. We have, you know, we have school jobs, we have government jobs, we have all this, we have manufacturing. Well, our medium income is pretty high for the cost of living here. Our cost of living is cheap compared to other, other regions.

You do that financial analysis, you decide what your market can handle and it's based on your, your location too. Are you willing to move to the suburbs where the growth is, where the income is? If you're in downtown Dallas, you might have a buy here pay here on every other corner and that's going to be your model Maybe a lower down payment, lower monthly payment, and you may have a higher repossession rate, but that's okay because you're gonna take them and you're gonna kind of turn them a little more often. And that model does work for people. High repo, high gross profit. High repo, or like Luke runs a low gross profit and a lower repo. So once you've done the financial analysis of your area, you need to do some cash flow projections. Right, Luke, you're gonna say great, based on my area, I, I want to be a nicer car. I'm going to be Luke. I'm going to have a $9,000 ACV. I'm going to sell 20 cars a month and I'm going to be X amount cash on the road every single month. After my down payments, after my recon, I plan on putting out, you got a 9,000 ACV with 2,000 down tax, title, license. You're probably eight grand cash into every deal. 2,000 times that by 20 deals a month. I mean, you're talking about a lot of money, right?

A lot of money. And it really hurts. That money goes out really quickly at the beginning because you don't have a portfolio big enough to produce that money. Now when your portfolio gets large, right, Then that money comes in. Just so much money starts rolling in that it's. Well, your expenses all go up too, but the money starts rolling in and so cash doesn't get as hard. And you've got repos coming back in as you can sell every once in a while. So you may not have to go and buy a lot of inventory every month. My repos aren't real high, so I still had to continue buying inventory. These are all these things you gotta, you gotta take into account because this is a cash eaten machine. If you're growing, I mean, it just eats it up, swallows it up, and you gotta run these numbers. So if you're like me and you're your $7500 cash out of pocket every month for 30 or 35 cars. Well, you see real quickly where that money goes.

Yeah.

So, so you got to do those numbers. You got to know what it's gonna take.

Yeah. And so the quick math is if you wanted to be an $8,000 cash in deal and you do 20 cars a month, you're gonna burn through $2 million in 12 months.

And that's, that's the number. So everybody always asks, what does it take to start a buy here, pay here if you don't? Well, if you don't have $2 million. Don't do it. You need 2 million in cash, and you may borrow it from friends or whatever you want to do, but that is the number that you really need to have in today's buy here, pay here environment. And that's a lot of money. That's a lot of money in it, Jeff.

Yep, it is. I don't. You can't borrow it from me.

I don't got it. When I set up just. Just a quick. Back in the early 2000s, we set up another buy here, pay here store for a friend, a friend of my dad's. And the guy got out of a business and he had a good bit of money set aside, and he had never been in the buy here, pay here business, never been in the car business before. And he brought us in 50% ownership to kind of get it running. And I remember at the time, I ran a. I ran a performer, right? And this was in the early 2000s. And I think my number was $800,000 is what it was going to take. Initial cash investment. No problem. No problem. We went rolling well at about 1.5 million. It was hurting. Right. And that was in the. That was in the early 2000s. We burned through 1.5 million in two years.

Yeah. So.

So you gotta. You gotta really have a lot of cash to do this. Yep.

So you've done your projections. You're ready to rock and roll. You've got your 2 million in the bank. You. You are our tip number four is make sure you have written underwriting and collection policies. Right. Get everything out onto paper and create a policy and procedure manual with written guidelines on how you're gonna operate your.

Buy here pay here. Well, Jeff, how do I do that if I don't know anything about buy here pay here? Yeah, I'm not gonna. How am I gonna write that down? Right.

Well, you're hopefully gonna get some education and you're just gonna. I mean, a, I think where you're driving, Luke, is you're gonna get some education, you're gonna talk to some people. But B, I think it's something you're continually fine tuning, you know? You know, I've been at it 15 years, and I change mine every three to four months.

We are 35 years in. Okay? Something will happen this week that we don't expect, that we have to write a new collection policy for. But I think. I think I wanted to do it the right way. I would hire someone. I would reach out to me or to Niada or to Whatever. And say, hey, I need help. I need somebody to write this for me. And I don't even know if that's available out there. I'm sure Chuck probably does that through niada, but it's something you should do because you, you want to have it written down and done right.

And I'm sure Jim Rhodes, if you know him, episode 78, he's a great buy here, pay here consultant. I'm sure he has. Actually, I know he has a buy here pay your startup service, I think. I'm pretty sure he mentioned that in the episode.

And Jim is a good guy and he knows his stuff for sure.

Yep. Number five, I think as soon as possible, you've got to be quote all in. And you have to have a dedicated collector that probably needs to be a day one thing. And then by dedicated collector, you don't want to just have the salesman collecting the notes. You don't want to be doing it if you can avoid it. You really need someone that can give it the attention and the time it needs because it can't be an afterthought on a Friday afternoon.

Well, what's funny is, you know, I remember, I remember doing this back when we didn't have a dms. It was ledgers. Okay. A ledger book. And you would flip through the ledger book and you would pull out each ledger that was behind. And you may have. You may only did this once a month. Right. It was, it was a one or two man operation and you pulled out everybody that was 30 days. Well, this is how you collect it back then, Jeff. You repossess the car. Yeah. And that's a horrible business model to do. You're so right. You gotta be all in. You gotta have a collector. If you're getting in the buy here, pay here business, you gotta have a collector, period. And they may be part time. They may be part time, but you need them in probably twice a week in the beginnings and then move it up as you go along.

Yeah, yeah. Someone that understands. You're retraining people who have a proven record of not paying on time or paying slowly. You're trying to train them that you are not the one that they can put to the back burner, you know?

Yeah. So you know what? People forget a lot of times when they. These are really good people that have bad credit. And, you know, 99.9% of them are. And people forget that, Jeff. And it is retraining. You know, they've never paid anything on time. You can't expect them to pay A buy here, pay here, loan on time. Because they're not going to. Mm. Number one is because they can't, they can't afford to most of the time.

Hiccup. Something popped up.

Yeah, that's right. They don't have money sitting the bank like we do. Right. So when something happens, it's got to be shifted around and they play it. They juggle like crazy. So your collectors got to understand that you have to understand that you have to be patient with people because they do want to pay you. Most of the time you probably got probably point zero five percent of your portfolio does not want to pay you. Everybody else wants to. Everybody else wants to pay you on time, but they can't do it. So you just got to keep that in the back of your mind.

Yeah. And also obviously, once you are up and running and you get to that point where you can start funding your Luke reinsurance company, that is going to be the, the second best way outside of your straight up portfolio. You know, building your portfolio, getting debt free, churning the cash back into the business, funneling some of that off to fund your reinsurance company is going to be the second best way to build that long term wealth tax deferred income. You guys know, listen to last week's.

Episode because guess what, Jeff, you're going to be warranting these cars whether you want to or not.

Yeah.

Because if you don't warranty them, they don't pay. So if you can give them a warranty up front or sell them a vehicle service contract or sell them gap, whatever you can do, or have cpi, whatever you can do with your reinsurance company is going to help your portfolio perform better. And the boys at dealer re understand that. They understand our business. Another great resource, if you're about to open a dealership and nobody's too small for reinsurance company, it works for any size. Because people who think that far ahead want to grow, right?

Yep. Yeah. Yeah. And I think what you said is so crucial and that's what plays into that. If the car ain't running, they ain't paying. You know, I mean, that is the golden rule of buy here, pay here, lease here, pay here. You've got to keep the car running. We always say, what's the scenario? Well, I'm just going to go pick it up because they're not paying. Well, the car's not running. So. So what you're gonna do is go pick the car up, bring it back, then you're gonna fix it anyways and then you're Gonna sell it to the next guy who's the exact same person. So now you gotta sell two cars to make up for the fact that you repoed that one. Cause you were so pissed that you weren't gonna fix it for them. So just fix it for them. You know, do a 50, 50. Put it in your reinsurance company. Do what you gotta do to keep the car on the road and keep it running. I think my only caveat to that, Luke, is obviously, I have a real issue with the entitlement attitude. And sometimes based on principle, if the customer just has such an attitude of entitlement, sometimes I will spite myself and I'll be dumb. But the people that come in here and are just so grateful and thankful for anything, I will go to the end of the world for them and keep their car running, no matter what it cost me.

You're exactly right. I've met so many wonderful people doing this business and just made a lot of friends over the years. And it really. It humbles you a lot of times to see, you know, what they'll do for you. You know, we had a customer bring in cookies last Friday, you know, and this happens, and you just go, I mean, I sold you a car, and you think I did something all this great for you. And I'm just. I'm so thankful for what, you know, for you. This. And there's just. There's a lot of good people, and you got to be. I think our biggest thing was you gotta. You gotta have tolerance, and you gotta. You gotta like what you do in this business. Because if you don't, you won't make it.

Yep. And that's our number six tip, Luke, is a tolerance for nonsense. Right. You're gonna have, you know, it is a demographic of people that have proven they aren't really great at juggling all the aspects of their life. So we're gonna be in there helping them. Certain areas, we say there's a level of babysitting, and there's also a level of. You've got to understand, like Luke was saying earlier, you've got. If you've got 600, the accounts on the books, and 1% of those people are disgruntled with you on any given week or month. 1%. That's what, six people. Six people that'll come in pissed. And if all those people decide to come in on Friday, you think the world is burning down, and you think you are in the worst industry in the world. So you got to keep it in perspective.

That's right. And you, you know, we get mad when, when our DMS doesn't perform well or, or Jeff can't just push a button and get his composite 23 composite report.

I mean, don't put the button there.

If I can't push it, he gets mad. So, you know, it's just we all get mad and when we felt, if we feel like we're not being treated fairly, it makes us mad. And so you got to step into other people's shoes one time and understand their frustration. And if you can do that, you will be a great Buy here, Pay Here operator.

Absolutely. And I think you guys probably have that. I hope that you all drive your cars home and not your nicest cars, drive your cheapest thing that you are trying to put someone in home and have that thing break down on you and, or your wife on the way to school. And you will see the level of emergency that happens when their car doesn't start two days after they bought it or you know what I'm saying? We do have to have some sympathy. And one thing I remind my employees is our customers, guess what? They did not go on vacation this month, this year, this quarter because they had to make their car payment. So because they are not going to Disney World this fall, we can, you know what I'm saying? Like, that's a really, really humbling experience to think that this customer, they decided between going out to eat on Friday night with their family and friends and making their car payment, they decided whether or not they could take their family on vacation or make their car payment and they chose to make their car payment. And that's super, super humbling.

Oh, it is, it is.

Yeah.

I can't add anything to that.

Yeah, awesome. Those are our top tips for Buy Here, Pay here guys. If you're getting into it, obviously be smart, eyes wide open. And if anyone has any other ones, you know, let us know. Comment. We're going to do a follow up episode for sure. Try to get in more depth on some of these ideas and topics that can help those that are in this industry run it a little bit better because, you know, we all don't know what's coming around the corner. You know, we kind of have some guesses and who knows, you know, elections and everything else, but it could be another golden era for Buy Here, Pay here.

I'm ready.

I'm ready. Stocked up. All right, everybody, have a great week. We'll talk to you next week.

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