#247 - Return To Normal, Cashflow, Carvana Collapse

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You are listening to the Independent Dealer podcast with hosts Luke Godwin and Jeff Watson.

Hello and welcome to this episode of the Independent Dealer Podcast. Luke, it's still just you and I today. Hey.

It's brought to us by Buckeye Dealership Consulting.

Brought to us by Buckeye Dealership Consulting. I jumped it. I thought it was just us, but Buckeye is also with us in spirit. I like these episodes, Luke. Sometimes I got stuff on my mind and I know you've got stuff on your mind, man. Things have been really, really interesting lately. I don't know how your October was. Mine was actually really good. So I was up like 15% the month before and I was up like maybe 50% from year ago October. So I don't know what happened to me last year in 2021, but I had a couple horrible months in September and October. So to get back to a good range where I had a good number of sales, I originated a respectable number of loans. Was actually pretty refreshing given all the other factors out there.

Yeah, I mean it's, you know, we just had a discussion, you and I, off air, but I feel like return, returning to normal and, and honestly I like normal. I've been in the normal car business for, you know, 20 years and then there was a two year hiatus there where, where. I just don't know what happened. And I'm glad to see right side up and, and not upside down again because it. That's been tough.

And by that you mean return to normal, meaning that the right side is up, meaning the cars depreciate.

Yeah. You repost happen.

There is a food chain. You know, you get the off lease or the new car store gets the off lease. That car sits there and ages out. Then they send it to a wholesaler or the auction and then you pick up a car that's hopefully frontline ready and has depreciated a little bit. They take some losses on the days in inventory. We buy the car at a reasonable wholesale price. We've got some room, you know, backwards stuff.

Yeah. And you do know you can never buy a car that's frontline ready, right? Even though they tell you that. Yeah.

They'll swear it up and down. It's frontline ready.

It's from ready. It just needs tires and you know, a motor mount.

Yeah. So here's my problem with some of those. When I see those cars that are being timed out or aged out or even sold by other dealers, we still have a parts and recall issue and I always scrutinize those. I'm like, oh, that guy, he's wholesaling that car and it looks awfully clean. There is something, I don't know, there is some little ABS sensor or some little PCU or PCM that is just not available. And I need to do my research first because he sat on that thing for six months waiting for the recall to get handled or waiting for that little teeny sensor to come in and it's not coming in. So do I want to sit on it for another six months?

There's still, there is still definitely a supply chain issue. It's not as great as it once was. I've been sitting on one accord for 90, 100 days that needs a airbag control module. And it seems like all the modules on the Accords are just not able to be found. So do your homework. I mean you got to, when you come to buy as as much inventory as I do and, and others out there that you've got to know what's up because if not, you can, you can get stuck. And you know what happens, you know what happens when you get stuck when the, when the car, when the car economy is correct.

Yeah.

You lose money. Yeah, yeah, yeah. Because last year.

Yeah. You're like, sure, I'll sit on it for another six months. It's going to be worth more.

That's right. Last year, cars are going up. So you sit on it 90 days and you rebook and you're like, holy cow, I just made $3,000. But no, yeah, that, that is not right side up. That was inside out or upside down, however you want to call it. But you're increasing. Yeah.

And I look at my, my, my buy sheets here, the stuff that I bought last week, a 2020 Civic. I'm like, ah, dang it. That's why that guy sell that thing to me for such a good deal. It's going to show up with an ABS problem. Oh. So. So I think we get it on all angles from that standpoint. And, and to that point, prices are, I mean, you look at like, you know, black book or MMR retention and it is back to kind of that normal depreciation. Month over month, quarter over quarter is now the time to buy. That's what, that's a, that's a question I put to the independent Facebook group last week and I got about 30 responses. So not a great, you know, sediment of the market, but 50 of those 30 responses said they are buying inventory aggressively, maybe not aggressively, but they are buying right now. They see opportunity out there. Is that.

I think, yeah. I mean, I bought, I've probably bow. In the last 30 days, I probably bought 60 cars or something to that effect. And I'm just putting, you know, kind of what I'm doing is I'm just pricing stuff down, following the book now and then coming in under that. And what we noticed today, this morning actually in Florida, that in Florida is a weird market because they had the hurricane and so prices spiked there. Now they're, now they're coming back down and they'll probably do the same thing up north because there'll probably be a bunch of big winter storms. But you got to know where you're buying and you got to follow the train down. So when prices, when there's a hurricane somewhere for one, watch out for flood cars, which that's overblown by the media. Don't. Yeah, that's, that's nonsense. Don't worry about things like that. Do your due diligence, but don't worry about it. But you got to know if it spikes somewhere. You got to move your buy in somewhere else and, and be cognizant of what's going on in the economy in, in the country to know when to go. You know, we're coming up on elections, Jeff, and it always shakes people and so if you're going to buy, typically before the election is the best time to buy or during that cycle. And you buy because we're heading up to what should be our best time of the year. And so we gotta get those cars ready.

And when you say that best time of the year is tax time. Right. And you guys know, if you listen to the episode last week or the week before, we talked about tax max, and of course, Bill believes there's going to be another tax season, that there's going to be large tax returns. And I would say yes. You know, everything that I know about what's going on with our customers is these tax returns are going to mean a lot, and they're going to be needing them in order to get into a new car because they don't have a lot of down payments saved up in order to get out of their flipped cars. So if you're a retail dealer and you're trying to get someone that's upside down on their vehicle, that tax return is going to be incredibly helpful.

Yeah. And, you know, and there is. There is going to be tax money. Let's. There's always tax money. It's whether you get it or not, Jeff. And tax great partner of ours and should be a great partner at your dealership to help you get that tax money. It is going to be there.

Yeah.

You've got to make sure you have a plan to get it. So give them a call. Right.

And the biggest thing about all that is cash flow, Luke. And that's what's super interesting to me from many, many aspects. And you say, hey, now is the time to buy. But at the same time, I'm saying now's the time to be, you know, in a good cash position to weather the storm and. Or take advantage of things. So I have the hardest time reconciling. Like, wait a minute. Am I supposed to spend my available cash on inventory right now and stock up for tax time, or am I supposed to keep my powder dry just in case it hits the fan and then I've got to make it through some tough times?

Yeah, I think it's a fine. A fine line to walk there. It's a balance, Jeff. The balance is this. Can you buy the right inventory today and can you get it ready fast enough to sell it? And if the answer is yes, you should buy. Okay.

Okay.

If you. If you don't have a lot of cash and you're just buying inventory, that may take you a long time to get ready because you just want to go Buy something. That's not the right time to buy. We got to have a plan for everything we do. And if you. If you don't have a process, you don't have a plan. Just buying inventory is not the right thing to do right now. Right. They do it be to hold the cash and wait. You have those. Those people in place as policies in place, those procedures in place, and then you can. Then you can go do what you need to do.

Yeah. So my rule of thumb for the most part is I try to keep somewhere between, you know, four to six months worth of, like, cash for overhead. Right. So I say, okay, what is my typical payroll? What is like my rent expenses? What are my hard things? Okay. Can I keep somewhere close to that in cash in case things slowed down? Now, I'm not talking about a total shutdown. It's not like I'm gonna have to contribute a hundred percent of my overhead for six months, but that's kind of a safe area to say. Okay. And that's super conservative. Right.

I would wait. Yeah, I would argue against that. I think that's insane.

Yeah. But it's all based on your expenses. Right. So for me, it's. It's kind of a smaller amount based on my total, you know, inventory.

When we did. I think we did this with Joe Lascoda years ago in our. Our whatever it is, car dealer management class, whatever it was, cmd And I think he said two months of overheads of overhead or a month and a half of overhead is where you should be. And especially in the buy here. Pay your business, you. You don't need nearly that because the payments are coming in so much. And a retail store, I could see why you would definitely need that buffer because you could just go and not selling cars.

Yeah. You might want to be a little bit more on the conservative side. I'm a conservative fella. Here's what makes me panic. So I. We hear the stories every day. I mean, just last week there was an AFC rep that came by with the black book fella, backlot fella, and, you know, trying to get me to sign up for a flooring line and this, that, and the other. And I'm like, flooring lines? No, thank you. Like, debt is what's going to take out dealers. And he's like, oh, yeah, I had seven of my dealers closed down. Seven dealers in my region shut down, you know, last week alone. Wow. And it's like, oh, yeah, you're right. There are a lot of dealers. And he had one. They had to go pick up all the cars. They went and rounded up all the cars off his lot. You know, it happens.

I've seen that. I've seen that happen. And just a, and just a quick side note to that and a warning to all dealers out there, if for some reason AFC or maps or not even mass, whatever, Neski or whatever comes out and repossesses everything on another dealer's lot, if your car is parked there, guess what's going to be repossessed? Your car as well. And you know, talk about a mess to get that back. So if you're swapping inventory with folks, which I do not recommend, and for some reason that guy goes belly up, you're going to probably end up losing that car. So be very, very careful because it does happen. I've seen it a lot.

Yeah. And that's a cash flow argument, right? Like your flooring line hit you for a curtailment, said, hey, all your inventory is impaired by 10 or 20%. You need to, you need to get us back in line. They can, they can do that. From what I understand, 100, if you don't make it within that time, they say, great, we're going to take our losses, snag your cars. I saw some stuff going through Manheim the other day that was being sold by the flooring line. I was like, wait, I've never seen that seller on there before. And sure, I've seen it.

I've seen it a ton.

Yeah, I was like, that's interesting. So also to plug another one of our sponsors, guys throwing a commercial here for Buckeye. That is one of the places where a, it's a, it's a double edged sword for some dealers. Right. You know, for me, when I first started out and cash was super thin, it was hard to put money away into a reinsurance company. Right. You start looking at that, that builds up 5, 6, 7, 8, 10 grand a month that you're pushing off into your reinsurance company for those premiums. But once you build it to the point now, that also becomes an emergency fund. And it does. Hey guys, I want to set this up as a line so now I can draw on it when I get a curtailment for my flooring line or I can draw on it if times get tough.

Yeah, it's kind of, it's super interesting how that money sitting there can be a lifeline. And that's something great that, that a reinsurance company and Buckeye is the way to go here. If you have that money that you've been Putting back and back and back every month. When times do get hard, you can loan that money back to yourself, Jeff. Charge you very little interest. It can, it can be essentially your flooring line if you need it at some point. So call our friends over at Buckeye, get it done before the end of the year, y'. All. There's so many tax savings to this. It's a savings accounts. It's tax savings. It helps you sell your product, not someone else's. So make sure to look them up.

Yeah, yeah, definitely the way to go. And continual training, guys. I mean, that's something we talk about all the time with these is, you know, hopefully you guys made it out to the buy here, pay here, super forum. We've got a lot of other conventions and conferences coming up. You know, the first part of next year, 2023. A lot of this is just being educated. None of us can really tell the future. And I think a lot of that, you know, a lot of it is we are at. We are beholden by outside forces. Right? I mean, we talk about like Carvana Q3 earnings coming out tomorrow on the 3rd of November.

And just an aside there, it's going to be a bloodbath. So if you, you know, it's going to be a bloodbath. And what you will probably see, talking about floor plan companies, they will start getting scared. And so make sure your floor plan is not maxed out because they, the floor plan companies will look at CarMax results, Carvana's results, rooms results, and they will start making you pare down your inventory because they think the slowdown is coming. Because the big companies, in essence should feel it first.

Yeah. And so what happens when a company like that, that's selling, you know, what, 40,000 cars a month, you know, decides that they're too heavy in inventory, you know, or is forced to liquidate inventory to meet. Meet cash. I think they got a lot of cash on the sheet, so it doesn't matter right now. But I mean, that can, that does. That's got to have a huge effect on car prices too.

This is something we. Yeah, this, Jeff, this is something we've never seen before. We've never experienced this in the car business. I'm talking about getting back to normal. Normal is not one independent car dealership having a hundred thousand units. Right. So carmax, but I think that's a bit of a different model there. But you're right, what could happen is that Carvana Room could have all this inventory and all of a sudden need some cash. Be cash called or whatever and, and have to start liquidating. You want to talk about a market mover? I think that could really be a market mover. I don't think that's going to happen anytime soon at all. But it's just something to keep in the back of your mind. I buy cars from Carvana, Broom, all those, you know, all those big players and I don't see anything coming down the pipe that. But they can all of a sudden stop buying as well. They stop buying, prices go down too. All these things to. All these things to remember. Cause it's, it is slowing down.

Yeah. And so much of it is the perceived of what's going to happen. Right. I mean that's all these stock prices are. And these price earnings come out and they revalue Carvana stock and then all of a sudden their liquidity tightens up which means their lending platforms tighten up, which means they don't have the ability to raise more capital. So now what happens with their financing arms, you know, and those guys can't go out and raise more money or a. Their, their credit bundles become less valuable because of the defaults inside of them. And they can't sell these, you know, portfolio of auto loan debt between each other to keep that ball rolling. That's when everything kind of slows down and comes to an halt. That, that could be a big issue.

Yeah. And repos are going up, you know, so you're going to have defaults that their loans are probably going to drop a letter grade or their, the tranches or whatever you want to call them and probably drop a letter grade. And when that happens, and I'm telling you, we're seeing it. If you watch the captives and what's going on at the auctions, you'll see their inventory just keeps going up.

Oh man. And look at the rate calls too. I had a guy in here the other day, looked like a new balance, you know, frickin 820 credit score. He didn't have an 820. It was a little weaker, but he still got quoted a 12% interest rate.

I had a deal done yesterday. I mean done. The guy is sitting in the credit Union's office on a 17 Silverado way back a book. The guy walked from the credit union because they offered him an 8% rate. And I said, hey buddy, it is what it is. You're not going to get much better than normal. He's like, I'm not paying 8%. I go, well you're probably not going to buy a Car. So this is happening every day.

The great thing is I'm not raising my rates. I was going to advertise that, you know, hey, come talk to me. My rates are the same. They've been the same for 15 years. 24.9 straight across the board for everybody.

We raised, we raised our rates 3% on the, on the lowest end. We have a sliding scale. We raised that three and we may end up raising it again because of. Yeah, when they're, you should move your rates when they, when they do.

After you have contributing to inflation. Look at you contributing to inflation.

Money costs more. You have to go up.

Mine always cost a lot. So the last plug for our sponsor, Lucas Pastime, the guys over there. Great. It is the best way to make sure you're being covered. Right. So we talk about these cars. The, the costs going up. You really need to protect yourself because you've got to be able to recover these things when it's time to recover.

Yes, you do. And that's past time. Has been our part partner for years now and they're going to continue to be our partner. Especially this wireless device. Jeff, I know you've been with that for a while. I see more and more that really and truly I may have to go just wireless. God, I still like being able to cut a customer off when they won't respond to us.

Interrupt. Yeah.

But you know, for, I think for ease of speed. Yeah.

Think about how many, how many interrupts you've installed times that by the amount of, or divide that by the amount of times you'd actually had to cut someone's off. Right. That's your true cost of repo right there. Because you're like, wait, I put in, you know, for every 30 interrupts I install, I'm only cutting off one person, you know, so that's an hour times 30. That's 30 hours for one ignition interrupt, you know.

Yeah, yeah, that's the way I looked at it.

That's why I stopped making keys. I don't make a spare key.

I don't make those anymore. I think. Yeah, that's a no brainer.

1 out of 50 cars I'd have a. I, I'd need a key for, you know, the rest of the time I'd either get the key or the repo guy would get it and get the spare. So I was just spending so much money on keys. Same with installs. You might be spending a lot of money on ignition interrupt installs when you could switch to the wireless. And I looked the other Day I actually did a complete analysis on my wireless with Pastime and I think I'm at like a 1% failure rate on active accounts. My failure rate jumps up a little bit more when I look at inactives and paid offs because we don't ever recover the GPS after payoff. It's just, I look at it as a sunk cost. It's way too much work. So I'm only like 1% and that could be installer error, it could be hardware failure, it could be tampering. Well, it's definitely not tampering because there's.

No way they find them.

Yeah, they ain't finding them. I can't find them. They're not finding them.

We put one in a car, was over cash we could not find. So funny.

Yeah, I turned the, turn the sucker upside down and shake it and try to see if it fall out.

So hilarious.

Is, is, is, is being harder on repos. Is that a good source of inventory for those of us that are buy here, pay here and can do that?

I think there is a business model in that. It's not my business model. I know a lot of, I know a lot, a lot, a lot of buy here, pay here stores that, that is their business model. And I think, you know, you're going to have to do that some. I think we only recycle maybe 10% of our repos and because we nurse our, we, we nurse our accounts way out to the end if we have to repo it is what is you repossess early enough? Yes. There's a business model in that if you sell a low end enough car and you repossess early. There's a, there's a business model. I don't like it. Yeah, it's a funny story. We recycled a repo one time, Jeff, and we ended up not and this before the use of Pastimer or any other gps. We couldn't find it. Could not find the car. And then one day, just out of the blue, I said, you know what, we should go back and look at the last person we sold that car to. We should go just see and guess where the car was with the same person that we sold it to the first time and repossessed it. She had gotten someone else to come in, buy the car and give it to her because we wouldn't give it back to her.

That's funny.

But I tell you what, we have seen a lot of. We had to revisit a couple people in the last few weeks and redemption rates are going up. And, and that tells me that people understand that credit markets are harder and that they need to stay in the car that they have. So. So we're going to see more and more of that. And I like that. I really do like that.

That's very true. On day one and day two, they're cursing you out and they hate you. And then day eight of the cure, period, we're 10 days here, they're calling.

You to see if they can redeem.

Because they've shopped around and they found out that nobody else will give them a car at all. And definitely not as nice as the one you gave them. I look at my repo recycling and what I want, I, what I don't want to do is kind of get like a double dip on inventory. I don't want to be out there buying at these, you know, prices and stocking up and then have my repos jump up. And now I'm over inventoried, you know, because I've got all my repos, I'm recycling. I've got all these cars I bought. Dave Keller trying to.

Dave Keller has always told me this. He told me this for years. So you can always stop buying.

I can't. I can't. I literally can't. I tried and I cannot.

I, I had to turn my computer off, but I can do it.

I did. I shut the browser yesterday. I literally had to shut the browser. I was like, if I just keep refreshing these, I'm going to keep seeing these new deals and these. I can't pass this up. Like, this is a Kia Soul. I cannot not buy this Kia Soul. It just, it draws me in and then I end up clicking on it. And a lot of times what I'm doing is most of the stuff I'm buying is just on offer. I'm not even paying. I mean, I only buy through obe and you know, Concierge360. I'm not sitting in lanes. Forget that nonsense. I don't got time.

That was funny. Did you, did you make a comment of like, who goes to the lanes anymore?

But who, who, who waits for an auction to run? Just please get rid of time to auctions. Get rid of the Thursday sale. Just list everything on OBE with a buy it now or make an offer. It's just I don't want to sit here on Friday and have to be logged in at exactly 1105 to catch that one car. And then, heaven forbid, it's ran out of sequence and now I gotta wait another hour and then I have to like, Help a customer or, like, you know, hit the restroom and then I missed it.

That is the one thing I'll say about ACV that I do not like, and that is the randomness of when things run. Yeah, I. That is a problem. And hopefully I've said that to them so many times. Hopefully at some point they will. Will fix that issue. But you know, it. Stop buying cars. If you need to. To get cash, you just stop buying. It used to be easy. You could not go to the lanes, but today it's a little harder.

It is a little bit harder when it's right here in front of your computer and the good deals are just popping up all day long. And they're so shiny, man. Those. Those cute little boxy Kia Souls and the Scion XDS xbs, man. Oh, I love a Scion xb, man.

Actually, I bought a Scion XB that was delivered this morning, Jeff. So I will not. I will not touch a soul, but.

I will buy a Ford Flex.

I bought a Ford Flex just a minute ago. So.

Dude, those. They're like. They're like catnip. There's a handful of cars that are just straight up catnip to buy here, pay here customers, and they have cycles they go through.

That's a nice unit, though. That Ford Flex is a nice car.

Just without the EcoBoost.

Yeah. Three, five normal car.

Yeah, man. And it is super interesting where you're like, if I could create an entire car lot full of just these five, you know, makes and models. I tint them, I throw some wheels on them. You'd be like, I don't know. What's. What's a. What's a drug dealer? What are they doing these days? Fentanyl or something? I don't know.

I don't know, Jeff. I think that kills people, so probably not.

All right, we've gone down an unprofitable road at this point, Luke. Time to wrap it up.

Hey, Jeff.

Yeah?

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It's hard for him to do, but they force.

I get it done.

Yeah. Great. Luke. Hey. Talk to you next week.

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