#341 - Breaking Down The LHPH Convention With Tim Lawrence

This is the Independent Dealer Podcast, Education by Dealers for Dealers. Now here are your hosts, Luke Godwin and Jeff Watson.

Hello and welcome to the Independent Dealer Podcast brought to you this week and almost every week for the last few months by Buckeye Dealership Consulting.

A few years, Jeff.

Few years, not years, indeed. And today, Luke, we have the. What is most likely the largest, most reputable Lease Capital provider in the entire world with us today. Most likely.

Most likely. And he's pretty famous, too. He was actually on, like, this really big podcast a couple of months back and. But I would like to say that we were the first ones to put him on a podcast. And so to everyone listening, it's Mr. Tim Lawrence from Lease Here, Pay Here Capital. How you doing, Tim?

Good. Hey, you know, I was really nervous on our first one.

Really?

Yeah.

You're so, so, you know, we're going to talk through a bunch of different things today, but one of them is the. Is Lease Here Capital. Lease Here Pay your Capital summit that's coming up at the 1st of October. And so last year they did this thing where Tim. Couple things to lead into this. Tim gave this talk, and the talk was. It was really great. I mean, Tim's a very good speaker and he's very calm, unlike me, and he enunciates well and people can understand him well. He's very cerebral, just not like a bull in a china shop, like. Like me. Anyway, so later on in the. In the course of the summit, I had to do my impression of Tim and. And I think it went over pretty well. What do you think, Tim?

Yeah, actually, that's a funny story because this was not on the agenda. And on the second day, I don't know how it came to mind, but I just got this idea that it would be really funny to make Luke and two other attendees who were there get up and do this little improv bit that I had just seen through, like kids theater. And it was so funny to me. I thought, oh, this is going to be super fun. And I made Luke pretend to be me and it was hysterical. He did a great job making fun of me. And I still, I still, when I.

Think of it, so funny. Too. Too bad Jeff wasn't there. He's too good.

Yeah, I missed out last year, but I'm not going to miss out this year. I'm going to be there a little bit late, but I will be there October 2nd through the 4th down in San Diego. It's not too late, Tim, to. For people that are interested in leasing or want to learn more or just want to get more educated about the space to sign up, right?

Yep, yep. We got a few more spots left, so we try to keep it relatively small. I think. I mean, you guys have noticed that in General it's about 70 or 80 attendees and we like it that size. It adds an element of intimacy. But we still have a few spots left if you want to attend and if you have curiosity about leasing and maybe something else that's worth saying is if you're a buy here, pay here dealer that has some interest in leasing, it's basically. You won't be too uncomfortable. It's basically the same as a lease here, pay here dealer. Going to like the NIA buy here, pay your forum, whatever. It's just that.

And it's. So of course I do know leasing and I don't really understand leasing, but I tell you, it's, it's getting popular. Tim, I have so many dealers that discuss this with me and they're like, I don't really want to be in the buy here, pay here business, but I'd really like to get into the lease here, pay here space. Why, why is that? Why is it all of a sudden? Or is it always been popular? Maybe I just didn't see it.

No, I don't think it was popular previously. And when, when we first started doing this, it was very much so the redheaded stepchild and like frowned upon. Oh, you, you do, you do lease here, pay here? Well, you know, eventually you'll get to the big boys and do buy here, pay here. But there are just some elements to it that really makes sense once you can commit to learning about it and if you can get the capital and you can put together the, the plan to either do it from the inception of your dealership, your in house financing program, or do the conversion. And some of those probably most relevant ones are that you have a lot more collateral control. So doing the whole repossession process and you don't have the same amount of time that you're holding the vehicle. And in some states there's like zero time that you have to hold the vehicle in trust until the consumer can come and sort some things out, you know, the owner of the vehicle. And so that also adds some collateral protection. And then of course in bankruptcy, it's a bankruptcy remote situation. So it's either you keep it or you don't. But I think in, in, in other ways there's some tax benefits and on the federal income tax side and then sales tax. So you're in, in many states, it's a pay as you go situation. And so you're only, your consumer is only paying sales tax based off of the money that they're giving you, or you're only responsible for paying that sales tax on the money you receive. You're not paying it all upfront, which can be really significant when it comes to cash flow in your business because you don't have to. You can actually absorb that down payment into your business and not have to, you know, pay it off to the state. On the federal income tax side, you are creating depreciation because it's your vehicle. It's an asset on the books. And based off of the tax cuts and Jobs act, there is a bonus depreciation that started out at 100%. So you buy a vehicle for 10,000 in a given year and you can expense that entire 10,000 over the in that particular year and that can create net operating losses. Now that's slowing down to 60% is what this year is. And then next year will be 40% if you. And then back down to regular 20%. However, if Trump gets elected, it's likely to be on the agenda to recoup some of that because there were some big benefits across the board for used car depreciation. So yeah, and then maybe there's a good competitive advantage to, if you're a dealership offer operating, offering this in your geography, there are some elements where you have a competitive advantage to your peers because there's a affordability crisis for consumers and you have a lot more flexibility to get to the payment that's going to make the most sense to your consumer without giving up control of the collateral. So you could do a shorter term 24, 36, 42 months and come into that payment sweet spot while still maintaining the value of that vehicle. If there is an insurance loss or if the consumer wants to pay out, then you're not going to lose any money there. And then you'll likely get the vehicle back and can do it again by reassessing the vehicle's value and then putting a new, you know, a new price on it and payment.

That's a, that's an interesting point. And we were discussing that before we came on. I think a lot of people are discussing affordability in. For cars in general, new car payments are the highest they've ever been. I think they're over a thousand dollars a month. Used car payments are in that. I think average is in the high sixes, maybe low sevens. And just looking at my My portfolio before COVID in 2019, early 2020, our, our average car payment was 44 and some change that that has gone to 535 and it's been there for the last three years. And you know, by my calculations that's a 20% jump, maybe 25% jump. And they're really not getting any more value for, for the car.

They're getting probably less value based off of the, the vehicles that you dealers have to buy now.

And, and I think it's leading to, to repossessions and charge offs and it's, I mean it hurts. It really does hurt. Severity has gone up, you know, across the board and charge offs are going up now.

I think two of the things that's made leasing maybe more mainstream or more talked about is those, those things that Tim touched on. But also our software providers are understanding it more. Right. And it's not like you have to have some special one off random DMS to, to do the contracts for a lease.

Right.

And it's not like you have to have some special accounting firm to do leases. A lot of them all understand it, many of them in integrated leasing contracts into their system. So sometimes a switch is very easy especially if you're on one of those platforms which unfortunately I'm not to just switch over to do leasing all of a sudden one day. And you also have companies like Tim's who can provide capital. And I think that was probably, probably the largest hang up is it's, it's dang hard to get by here pay here, capital like impossible. It is crazy impossible to get capital for leasing.

Right.

Because that banks don't understand buy here, pay here. They definitely don't understanding giving you money for a lease. So that was like now that I, you know, Tim's more mainstream and I think there's some other joints that have come more into the space to provide capital. I think those kind of factors help leasing be more popular.

Yeah. You know, and to that point I think that us being in the space has helped other local regional banks jump into the mix too. Because if, if we have a dealer who's working with us for a while, they're growing, maybe they're growing outside of where we're, you know, the most comfortable with. They, and they have a relationship with their local or regional bank now. They have a history of performance doing this business and working with a senior lender, being compliant and, and that definitely helps to add in another lender into the mix at a, you know, at a, at a local and Regional level. So we, it's not. We've seen more lenders jump into this over time than when we had started. And it was basically, you know, us and primal and used to do it initially. For a while they had a good chunk of their business that was doing leasing and they, I think they just solidified their focus.

Yeah, yeah, that makes sense. I was talking to a dealer the other day, a retail dealer and I ran this by Tim but and thinking to myself, man, if you, because this retail dealer didn't have anybody doing prime leasing for his dealership, I was like, man, if you could, if you could harness that and somehow if you had enough capital to do it and, and start prime leasing in your dealership, if you're selling really nice cars, the, the, the life span of that, that car could just be, you know, three, four, five turns in the amount of money you could make off that. I was like, man, if I'm a prime dealer, this is what I'm trying to get my, my head wrapping on how to make this work.

Yeah, it's like a cradle the grave concept.

Yeah. You know anybody doing that?

Yeah, well actually a lot of dealers will try to get an off lease vehicle and it was so much more readily accessible before COVID to have that model and then you would get more turns throughout that period of time. It's a little bit harder now because those off lease vehicles are so expensive and being able to get the financing for it. So the dealers that we see doing it the most have the most of their own financing doing it to where they, they've built up, you know, self funded portfolio or a big portion of self funded. And it gives them a little bit more freedom to be able to, to be able to offer that.

Hey Jeff, we're talking about lease here pay here capital summit this week and Buckeye is actually going to be there. And it's one of the things that Tim was discussing because of the depreciate because the, that depreciating asset thing is going away from the tax advantage. Buckeye's going to be there and I think we're going to sit on the panel, talk a bit little, a lot about reinsurance at this summit. And as we tell you, reinsurance is just a way to build so much wealth in the car business. If you don't have your reinsurance company set up, call Buck out right now. You need to have it done before the end of the end of the year. And we started talking about the end of year, Jeff. Yeah, we only got around the corner Five months.

Yeah, it seems pretty crucial with a leasing model. You know, my whole argument was if these customers really believe this is a lease, they're not going to do, they're not even going to change the oil, they're not going to change a set of tires, they're not even going to wash the thing. Right. They're just going to push it to 24 months and give it back. And that's always kind of been like my internal rub or, or stumbling block with getting into leasing fully. Having a strong service contract that you can reinsure for can solve a lot of that problem. Right? Because you can bundle together oil changes, you can bundle tire and tint and, and window and you can put everything together in a, in a, in a reinsurable product that you can require as part of your lease or include in part of your lease. Because that's a lease term thing.

It's just included. And, and if you do that, I mean, holy cow, the amount of money you could squirrel away. I like it. I like it.

All right, back to the podcast. It's so interesting. That's how I actually got started in this business was my dad had heard of a local company that was doing leasing and they were doing higher end stuff, twenty thirty thousand dollar SUVs and they were leasing. And I was like, man, that sounds just crazy. Like that's insane. Like the risk on that is so nuts. And so then I completely like pared it down clear down to the three thousand dollar cars, right? I'm like, no, no, I want to spread my risk out everywhere. Which, you know, good or bad idea, I don't know. But that company actually ended up going under during the 2008 financial stuff. I don't know the details of why. I don't know if they weren't keeping track of their books, if they had bad lenders, if they couldn't handle the interest rate changes, if all of a sudden they had a bunch of $30,000 cars heading south of the border or blowing up. What are you seeing, Tim, as times change and these economic times get a little more shaky, like from the back end, like behind the curtain, what are you seeing from dealer health?

I think that's a good question. I think that's probably one of the hardest times that independent dealers with their own in house financing have been in. And, and maybe not as hard if you have a big portion of your portfolio as being self funded or self financed, but if you're working with a lender that no matter who this lender is, they're Typically working from a variable interest rate. So their rates are going up as the cost of their funds that they're borrowing. And then they have to issue the same cost of funds with a spread to you as the dealer, meaning those are going up every time the Fed rate increases. And so that's put a huge cash burden on any dealership that has debt because there's a, only a cap of how much you can charge your consumer. And Luke, you just pointed out a 25% increase in the payment that you are now have to pass on to your consumer. And that's about probably the limit of what they could tolerate more or less in your respective geography. And but if you think about how much more, if you're borrowing money that has increased over two years, it probably has gone up 40% because the, the, those rates compared to what you were paying before has been exponential. And what that does to your margin is it shrinks it so much and then you add on top of that the supply chain costs, the delays in supply chain. And you know, there's this huge bottleneck in moving vehicles that you've either acquired from auction or, or have come back and you're recycling them to put them through your business all the way back to get them lot ready. It's taking a lot more time than it used to for so many various reasons and creating all these operational inefficiencies which is costing you more money and then also reducing your margins. And so all of those different things impact your, the dealer's cash flow and makes it harder to then service your debt. So we, we've seen across the board most dealers are, are managing that margin really finely. They're trying to find where can I gain profitability, where can I maximize profitability, where can I reduce expenses just to get through this period of time that is a, I'm going to survive now as best that I can so that I can get to the other side. And I think what we're all feeling as a potential golden era for the subprime, deep subprime market.

What, oh boy.

Yeah.

What's the best, what is the best way for a dealer that, that you've seen to manage the higher cost that we can't pass on to the consumer, is it a, I mean of course you got to handle your, your assets better and more quickly, but what is the, what are some other cost cutting ideas that you've seen that that's really helped dealers?

I think the, the biggest things that have been the most successful are. So we'll talk about three things, maybe the operational efficiencies. And that's going to be one of the themes at our summit is the way that you're working on that, that throughput your inventory from however you get it back or you get it the first time to when it gets a lot ready. That is an expensive process. And every day matters and every penny matters and the amount of labor on that matters. And so the more that you streamline that, the least amount that it's going to cost you. And what do you need to be able to do that? You need to have accurate KPIs and you need to be tracking those vehicles, which a lot of dealers just don't really know how to do because it takes a lot of effort to learn how to do that when maybe before in pre Covid times you didn't have to track it as as much. And so kind of gets stuck in these. This is the way we used to always do it. So why is it not working?

The.

The second way is people efficiency. And I think a lot of that has to do with culture and getting the most out of your people. A lot of us don't think that way of how am I going to get my people aligned with purpose and mastery and autonomy in order to get them really engaged at an intrinsic level and not just an extrinsic. Extrinsic meaning like, hey, I'm just showing up for a paycheck and maybe I'll get a bonus or maybe I'll get extra hours or overtime. But what's happening on the inside intrinsically, that's motivating me to be excited about where I am, what I'm, what I'm doing, who I'm working with. And really who you're working with makes a difference. Like Gallup does this poll every, every year across thousands of businesses and they're trying to figure out how many people feel like they have a good close friend at work and that that matters on how long the employee retention is going to be there and how engaged they are at work. And engagement has a lot to do with productivity. So all those things which kind of feel like they're not measurable, they add up over time. So if you have, if you have people issues, if you have high employee attrition, it's going to cost you a lot more. So all, all these things, I think they, they add up to the just managing your business. And I think that's maybe the third part is that overall management team of your business and being able to actually track what you want to have happen. So if you put together a budget for the year, even if it's simple and you keep checking in every month, what's the budget? And the budget can be broken down into different, different areas. It doesn't have to be just like this financial budget. You can have a quote unquote plan on. This is how many vehicles we expect to go through reconditioning, you know, every week, every month. And then you review back to it and it sounds kind of like micromanaging or too simple. But it's really important to do. You have to actually stop and check in with your people and look at the numbers and ask the questions. Not in a way that's like punitive, but just adding accountability and visibility. How many vehicles did we get through? Oh, we only got seven when we were expecting 10. What was the reason for that? Not necessarily blaming people, but let's, let's talk about this and how are we going to get from 7 to 10? So all those things are really important and they hit your bottom line in the end.

Yeah, I, you know, this is something I, I've done a couple sessions on and it's, it's scoreboarding and it's, you know, what it did for me and Jeff saw my numbers at the end of last year. We were bloated, right? We had kind of like I was about a month and a half ago before I started losing weight, you know, I was fat and gregarious and. And all of a sudden you start to see it on your bottom line. And, and we're not one that borrows a bunch of money. So we were getting hurt because of. Of higher employee costs and lack of production from higher cost. And so we had to, to really figure out how are we going to make this better. And, and one thing is, is me as an own and re engaging to make sure that, that I'm inspecting what I'm expecting out of my employees. And we do that with scoreboards every week. We do that with spreadsheets that I, that I personally put numbers in so I can see what's going on. And it's so right, you can, you can dial your business in to be very effective and efficient if you engage yourself and cut back and, and motivate people.

Hey everybody, real quick, one more time. Of course, if you're doing leasing and, or buy here, pay here. It's crucial. Whatever that payment is, you're getting it as quick as possible. Because it is higher, it's harder to get. Customers are stressed from all situations. So if you're not the first one in line when that paycheck hits their bank account, you might not get paid at all because there's a lot of other creditors that are all vying for our money every single month. Right. So having a company like blitzpay in place that's sending out automated texts, running auto pays, giving your customer every opportunity to get that payment in as soon as they have it is crucial.

Yeah. One of the great things, I think we were talking last week about you, about. About you hating your phone company and us switching phone companies. Well, what's great is We've been using BlitzPay as our collections text messaging strategy. And when we decided to switch phone companies, we didn't really have to worry about losing all that. That information because we have been using BlitzPay for a year and a half now. And their texting is wonderful, their ease of collection is wonderful. So anybody out there looking for a credit card processing company and a partner in collecting, you need to give BlitzPay a call.

I find it interesting that the balance between motivating through tracking every metric or nut and bolt, as I would say Luke is doing, you know, just to kind of dig at Luke a little bit on the, on the managing, every time they get up and go to the bathroom, they got to write it into a spreadsheet somewhere. And what's the, what's the balance of tracking every single number under the sun and having a culture where they just do it because it's built into them? I don't know if that's what you were hinting at, Tim, but, like, it's the intrinsic side of them where, like, I'm doing a good job because I don't want to let Jeff down. Like, I don't want to let him down. I'm just going to do it and hustle. Not because Jeff's going to send me a strongly worded email on Monday morning because my numbers aren't there.

But you'll.

But you'll see once you put that expectation out there that the employees start doing it themselves and it's. They get better at it and they, they are motivated then, they're motivated to, to feel good about themselves, about the job they're doing for you. You know, you're probably right. There's probably a fine line. But I think it starts with us for sure.

And I think it, it takes both. So you wouldn't say that it's only intrinsic or it's only extrinsic. I think everybody operates a little bit differently but the intrinsic motivator is always the most powerful. So you want to add the extrinsic as part of it, but you want to focus the most on the intrinsic, to try to enhance that. And that. That just helps with having purpose in your organization. And then everybody's more excited. And then you have this cool thing called conformity, attraction, where then new people come in and it elevate. They. They elevate to the standard of everybody else who's there. And. And. And they. It's almost like, well, I have to do this just to fit in.

I. I have to just, you know, look at Tim. You look at F1 and look at the reason Red Bull's been so successful for years and years and years, because if someone gets hired there, they understand the level of expertise they. They have to meet. Same with professional football teams. When Tom Brady was on your team, you had to live up to his expectations. Michael Jordan, the same. And yeah, man, that's. It's so neat to watch that happen. And what's even better, as we've had to hire people. When someone comes into your dealership as a new hire, and after they've been there a month or two or maybe even less, and the employees come to you and go, yeah, they're not going to work here. And you're like, okay, why not? They. They can't keep up with us, and they don't have the same motivation that we have. And that's enough for me to go, well, okay, I guess we're going to get rid of them because they understand what we're looking for and what, as a culture, we demand.

Yeah. And if you didn't act on it, then it would bring the whole organization down.

Yes. Yes, for sure.

I prefer to you just use guilt and shame. Is that as motivating?

Yeah, I mean, it sounds like maybe there was some childhood trauma that.

Well, I've just been married too long. I don't know.

Oh, gosh.

I've been. I've been trained at home, and I tried to carry it into the dealership. And I mean, so far, so good. It's a real, like, you know, volatile situation here.

But seriously, though, I'm just gonna. I'm just gonna riff for a second because, you know, my background is psychology, and I'm reading this great, great book about men and women, and it's super validating for what you're saying, because no matter what is going on in. This is all just as a disclaimer. This is from a book. This is not Tim speaking Based off of decades of research by John Gottman.

Oh, good one.

That no matter what's. How expressive a woman is with her thoughts, emotions, critiques, whatever it is, it is so important for men not to take it personally because it. It in most cases does not specifically have to do with you. And it more has to do with a reason to connect. Like, I want to connect with this guy. Can you believe that?

I. I don't take. I don't take anything personally ever. It's just not even worth it.

And, you know, no matter how much Alexa screams at him, he will not take it personal.

I just look back at her, say, honey, I love you so much and. And I just appreciate you let me be in your life. And I, you know, that just works for me anyway. And then I go, hey, do you want to come to San Diego for this awesome summit? At least here pay. Here she goes. I would love to go to San Diego with you.

See, we're all good. You should come. I love seeing Alexa.

Yeah, she's coming. Actually.

It's.

And Tim, it's at a new place this year. What? But this place looks really neat.

Yeah. We usually do it downtown and pick a cool spot downtown. And this time we're going a little beach vibe and doing it in Mission beach at the Bahia Resort. And it's. It's literally like the beaches across the street and a strip and there's tons of cool places to go. And then we're doing. I think our. Our reception dinner or something is on a boat.

Yeah.

Which is going to be fun. Yeah. And then we do a really good dinner at the Portside Pier, which is waterfront too. So. Yeah, it's going to be a blast.

Yeah.

I'd say anybody that has any interest in learning. And this is for retail dealers because there's a lot of retail dealers out there that could really learn a lot from. From lease here, from Lisa or pay here. Capital the summit here. Come on. It's going to be fun. We're going to be talking. Jeff. Jeff and I are going to interview. And that's one of the cool things about it. We always interview somebody for Fireside Chat. And it's a dealer who usually has been through the ringers and has so much knowledge that they like to share. And we all know that we love. We love the How I Built this. And you will hear a good one for sure this time.

Yes. And then we also have Melinda Zabritsky coming. Some good dealer panels. Got some good breakout times, focus on culture and operations. So it should be fun. We always have a great time.

Yes, we are.

Cool.

Well, Tim, we look forward to it. Guys, if you haven't got onto LHPHPH.com, go find the Summit tab hit, book your room, sign up, and we'll see you in San Diego first week of October.

All right, thanks, guys.

Thank you for listening. Please leave us a review. We'll catch you in the next episode.