#3 - The current state of the used car market

Hey, everybody. Welcome to episode number three of the Independent Dealer podcast here with Luke Godwin and Jeff Watson. Today, Luke and I are just going to chat a little bit about the current field of the used car industry. Right, Luke, what do we talk about today?

Oh, this is going to be a great podcast. Today we're looking at the difference in the independent model to the buy here, pay here model. And is there a possibility for a hybrid there? And also about a little inventory acquisition. It's been hard to buy cars for the last few years. Maybe we can crack the egg on this and figure it out.

Yep. And if you're listening and not watching, you'll not get to see Luke's amazing beard that he's got going on right now. Nice. Definitely on point. I look at my Casper because I can't get the lighting right in this office, but other than that, stay tuned. Here it comes. Hey, all, here we are. We got Jeff and Luke today. Luke, I wanted to talk to you just a little bit about maybe get your thoughts and feelings and you could give us some information on how you feel, the state of used cars, the independent space, whether you're a traditional finance and you're using outside sources, or whether you're using inside buy here, pay here type money. Where do you see that going, Luke? I mean, I hear a lot of talk and I see a lot of people saying, hey, you know what? Right now, money is so cheap and so available from an outside lender standpoint, why would I want to put my money and my risk out on the street when I can hook up with credit acceptance or Westlake or even these credit unions? They're doing crazy loans for people. Why should I give the loan? Why don't I just cash out now, let them carry the note, and then I'm going to wait and kind of stockpile my money. What would you say to those people that are maybe getting out of the game?

I think it really depends on your tolerance for risk. If you're set up to do buy here, pay here, and you've been doing it for a long time, is it tougher than it used to be? Of course it is. I think that's just the nature of the car business right now. That's what my business is set up to do is buy here, pay here. It's a little more labor intensive, but the profit's a lot better. Why would you want to give Westlake or Santander a $1800 fee to do the same customer you could do? I don't think there's Any, you know, the profits get so slim when you do that. I just don't know if you're set up to do buy here, pay here. And it's so labor intensive. How could you switch mid game? I think it's a hard thing to do.

So talk to me more specifically. What do you feel you're losing in those situations? So you're losing maybe a strong fee to someone like credit acceptance. But talk about the relationship. I mean, is that a crazy case where they're not making their payment to you every month, they don't know you, you were the guy that sold them a car and then you lose contact? Right.

That's number one. I think we are a relationship business. Most dealers are going to sell. I think we talked about this last week. But 50 to 70% of your new business is referral and repeat. Not new business, but just the cars you sell. Repeat and referral business. 50 to 70% of your business. If you lose contact with that customer, especially in the subprime and in the buy here, pay here space, I think.

That.

It'S going to create a real drag on your future sales if you continue to use Santander or these type of subprime companies and not just picking on Santander. I don't know. I don't know the exact business model of CAC or Westlake, but to me it seems like they carry the loans too far on these customers. The price is outrageous because the dealer has to up their price to cover the fee and not up the price at the time of the sale. Of course that's legal. But price their cars maybe more than what a customer should be paying for the car so they can make just a little bit of profit. The customer is paying for the car for too long. The car doesn't last. They can't build a relationship with you in your dealership for taking care of the business. It's just a. I think in the long run it might be a great idea for two years. But if you want to be in this business for 15 years, 20, 30 years, I don't see how it works.

Do you see that there's an opportunity to do both? I know, myself included and some of the other dealers I talked to, they're doing kind of a hybrid model where they're like, well, I'm going to pick and choose. I'm going to keep some in house. But some of these people that might be outside of my typical buy here, pay here underwriting criteria, I'm going to send those out to Westlake. Credit acceptance Someone else. Do you feel that a dealership in the same roof can do a hybrid model retail by your payer?

Well, I'll say this. I tried it for years, and maybe. Maybe it's just because I don't understand the subprime business well enough and didn't ever hire a manager who understood it well enough to make it work. I couldn't do it. What I can do, though, is I can. I can sell prime customers and buy here, pay your customers under the same roof. I know that sounds. I know that sounds ridiculous, but the.

Extremes you're saying you can.

I believe so.

Okay.

Because, number one, I don't mind financing a $40,000 Escalade if it's the right customer. So don't get me wrong. My model might be a little weird, but I don't think you can really. I don't think you can really make it work. If you look at. I think it's maybe selfish. If you look at the fee that CAC charging you and you look at the opportunity to make money on your end, which way you're gonna go. I know which way I'm gonna go. And I think that's the biggest. The biggest advantage of keeping that customer in house and treating them like you're supposed to. Maybe the subprime hybrid will work. I cannot make it work.

So what about those dealers out there who are traditional car lots? They've always used outside financing banks, credit unions, subprime stuff. When does the opportunity come for them to say, hey, you know what? I'm going to actually start carrying these guys in house, and maybe I want to start doing some buy here, pay here, because I am sending some good people away. My guess is we're going to start seeing that over the next year or two. Banks, credit unions, tighten up a little bit. Us independent dealers, we're going to have an opportunity to step into carrying the notes on these if we choose to. Where do you see that going? How are those guys going to be able to get their foot in the door?

Sometimes I think people fall into the buy here, pay here business. They don't set out to do it. They're like, yeah, I can sell cars. I just buy a car at the lot, the auction. I put it on my lot and sells, right? And then it sits for 90 days. And then a customer walks up and says, hey, my credit's no good. I can give you $1,500 down on that car. Then I'll finance it. So I think it's always a possibility that these people who are independent dealers who don't do buy here, pay here can do this. What I would see after somebody's doing that for a little bit, number one, they're not going to have the structure set up to collect the accounts. That's going to create an issue. They're not going to have the money to loan the accounts. So I think it's a bit of a disaster waiting to happen if a traditional independent store just decides to get in that business. I think it's a recipe for a lot of money to be lost.

Absolutely. And the old adage is you are a collections agency. You need to remember that, you know, you are in the business of collecting the payment. And so many people come in, think that they're a dealer. Oh sure, I can carry them on a couple payments and they start getting into it. What they don't realize is it's a whole different business model. So yeah, thinks they want to carry some notes. Just remember it's collections.

I've always said that when people say, hey, I'm going to keep a couple accounts in house, it's one of those fine lines. It's if you don't have enough, it's not worth doing.

Yeah. And if you don't plan or don't, you know, because you're gonna ignore those half dozen notes you got sitting there when it comes to Friday afternoon at 5 o', clock, it's just not worth the distraction or the headache and you're gonna let them slide and. Oh yeah.

So I think it's just a recipe for disaster to do it.

I want to convert a little bit over to along the same lines of us independent dealers. You know, I've been thinking a lot about inventory, you know, and getting the right car at the right price. And it's been really hard. You know, I think traditionally there's no longer. There's not a $3,000 car worth a lick. Right. I mean, you're not finding them. I don't know what area of the country you're in. I'm in the Southwest. They just don't exist. So a traditional buy here, pay here model or even to give people affordable transportation, there's just not a lot out there right now. And from what I see, and my thoughts are this, I think that's going to be changing. I think that you're going to have a combination of high new car production that hit its peak in like 20, what was it, 2013 or 2014, I think is when they got back up into the, you know, the new car. Stores got back up on their game. So as those are becoming old, five, six years old, seven years old, it's if that hits the same timing as a lending slowdown or a repossession increase, now all of a sudden you've got kind of the three little factors there of more aged units, new cars that are now aged, and hitting the used car market strong. You've got increased repossessions from subprime lenders. And then you also would couple that with a slowdown in sales, traditional sales, because the banks have tightened up. Does that seem like a fair analysis for my end?

I think you hit it on the head, Jeff. It's a, you know, that's the perfect storm. But what we've seen is industry analysts from Mannheim, Odessa, Nada, Niada have been talking about what you're talking about for the last four years. It seems like they're producing 17 million cars. A bunch of. Are coming off lease. It's. It's supposed to already happen, okay?

But I don't know.

I don't know.

Look at the numbers that I see at my local Manheim, and they're double what they were running two years ago. You know, so I feel like the volumes up. Have the prices reflected that yet? What else does that take? Maybe it's a little slowdown in used car sales. I think that's the banks. And then all of a sudden, well.

We'Re seeing, you know, we're seeing interest rates rising almost every quarter. So we're talking about at most of 100 basis points over the next year. You know, the Libor rate creeps up. That starts, that starts putting pressure on the new car dealers because most of their floor plans are based on Libor. You know, most of our floor plans, if you have one, are based on typical prime rate. But the more that ticks up, the more it cost everybody a month. If you get to a point where your carrying costs are really putting pressure on your net profit, then you got an issue. As we see interest rates move up, I think that will push inventory back in the market as well.

Right. I mean, definitely from my standpoint, I'm, I'm excited for a strong downturn. Like I said before, when we have. The ride down is not fun for any of us. But once you settle at the bottom, it's pretty good for us Buy here, pay here dealers, you know.

Yeah, that's for sure. You know, and it's, it's a little. It's probably not nice for us Buy here, pay here stores to wish for the Downturn, but that's what we do.

Anyone who sees what's going on and sees the writing on the wall and whether you're in, buy here, pay here, and cars, or whether you're in real estate or anything, I think a lot of people are hoping for a slowdown or a correction. And when the blood's on the street, that's when the deals are had. You got to be prepared. Right. And that probably speaks to the larger thing of make sure you're not over leveraged, make sure you've got the right inventory and you're turning appropriately. A swift drop in used car prices and you could quickly be out of whack on everything you got going on out on your lot.

Yeah, I mean, I, you know, I remember back during the downturn, you know, in 9, 9, 10, 11, I could go to the auction, Odessa up in Charlotte, and I would have to quit buying cars because I was running out of money. You know, I have not had that problem since probably 15, you know, and it's not because my money is any shorter. It's because I can't buy enough cars when I go to auction. So it's a, you know, I can remember buying 18, 20 cars at one auction. Good luck on buying four cars at auction at this moment, you know.

Yeah, yeah. You see that? Because of the price or because of the quality combination, both. All that is good, good information. I think that leaves everybody for a lot to think about. They can kind of assess their situation, see where they sit, you know, are they happy with, you know, doing some outside financing, lending? Are we going to sit on the sidelines with our money and wait for a downturn and then jump back in or, you know, just, you know, put that in the back of your mind. Be prepared for a downturn, but you get business as usual, right, Luke?

Pretty much. Jeff, the biggest thing is always prepare for the future. And we should never be surprised about anything that happens. And that's the reason it's so important to listen to podcasts, to read, to read all your publications, to try to get education, to come to conventions. All these things matter because there's always forecasting. You should be forecasting right now, forecasting for next year. All these things are important. And you gotta be prepared for the downturn. You can't spend what you make. You gotta spend a lot less than what you make.

Absolutely, Absolutely. Alrighty, we're gonna wrap it up today for the independent dealer podcast. Luke, you want to sign us off?

Yes, sir. Jeff. It's Jeff and Luke and we enjoyed having you all.

Sam.