#39 - Nick Markosian - Lease Here Pay Here

Hello and welcome to this episode of the Independent Dealer Podcast. Today we have Nick Marcosian with us from Marcosian Auto here in Northern Utah. He is going to enlighten us about lease here pay here. We're going to talk about the deal structures, we talk about the advantages of depreciation, we talk about protecting yourself with the Graves amendment. And Nick is super bullish. Now is the time to be an in house finance dealership. Nick, you're willing to put your money on that?

Well, I put about 800 grand a month out there, so I think I am.

This is a really, really awesome one. If you have any, any, any, any interest in lease here, pay here at all, stay tuned.

Welcome to the Independent Dealer podcast, the.

Podcast for auto dealers to learn and grow together.

Here are your hosts, Luke Godwin and Jeff Watson.

All right, Nick, thank you so much for joining us today. We really appreciate and value your time. I know you're a busy guy. Give us real quick, just kind of an overview. Where are you at? What kind of a dealership are you running? I know we're going to talk about leasing, but maybe first off, just give us a bit of your background. How did you get into it, you know, what kind of an operation do you run, number of locations, things like that, so we can kind of get to know you a little bit better.

Sure. We started in 2000. I started with a business partner. At the time, my dealership was called West Valley Auto Plaza. And after about four years, we started doing buyer pay here. And we just used our excess capital to fund buyer pay here. It was more just a thing we wanted to dabble in nothing, not a huge part of our business. In 2007, we decided to build a second big, huge freaking $4 million deal. So that's when we started leveraging our portfolio. We were borrowing against our portfolio at that point, but up between when we started and that point, I want to say we built it up to around 300 accounts without having to use leverage. And then it kind of fell apart around 2010. Recession, divorce, foreclosure, you name it, it happened to me. I always say I was a dead dog short of a country song at that point. Absolutely desperate to generate any kind of cash flow I could. And that's when we switched to leasing. And I'll get into why it can be so awesome for cash flow versus buy her pay here later on. But so we kind of, you know, I was like, below zero is worth more dead than alive at that point in 2010. And kind of grew our way out of it. I used leverage to grow into what we are now and what we are now. We have about a four acre facility in Taylorsville, Utah, which is just west of Salt Lake City. We average about 150 units a month out of that store. We have a store in Ogden, which is about 45 minutes north. We're averaging about 50 units a month out of that store. And we've been open in Logan, Utah, which is north, even further north, for about a year. And we're averaging somewhere in the 28 unit range at that location. So we're. We're about 220, 230amonth on average. I currently have almost 2,200 lease or pay here accounts. That has grown from 1700 at the beginning of the year. So we've seen some absolutely amazing growth this year. And I'm super passionate about leasing. I'm on the board of directors of the National Vehicle Leasing Association. Been doing that for a few years. Usually you'll see me at one of the NIADA panels talking about leasing. I just think it is the perfect model for the subprime customer. And we'll get into that more of that later on. So that's kind of my story.

I mean, all I think about is, man, I don't know what was more stressful 2010, when things kind of came crashing down, or thinking that you've got 2200 accounts out there. I mean, that's just like. I can't even fathom that. I mean, geez Louise, man. And the only reason why Nick and I are even talking, or somewhat friends, we're both Utah dealers. He's staying north of the Mason Dixon line. I'm south of whatever line we have here in Utah. So I like to hear that he's bending northward. You can go as far to Canada as you want.

I heard you kind of mentioning a market that you were considering expanding in. Jeff and I know what market you were talking about, and I've just kind of been salivating over that market. But I'll stay away.

It'll be a race to the bottom. It's funny because my wife is from Logan, and so she keeps talking about how that was a great place to be in the dealerships. And I'm like, well, Nick and I are gonna have to have some so of a conversation before that happens.

Hey, Nick, what's your acv?

So, you know, if you were to take out the ones that we recycle, which is typically about 30 to 35% of our monthly sales, our ACV is probably around 8,500. And that lease model enables you to feel comfortable with a higher acv because on a typical buy here pay here, you know, the term keeps getting stretched out to about four years and then the customer owns the car. Well, we never go over three years on our leases and we the one where we typically get the car back one way or the other. Whereas in the buyer pay here world you probably have more folks paying off. Although even in the buyer pay here world seems like the lower ACV the higher the chance of a charge off. Right, that's one of the many components of charge offs.

But that's the attractiveness of the car. People just start to see these newer models and body styles and features. And I'm dealing with a 2001 Nissan Sentra right now that shouldn't be there.

But yeah, I should be in the crusher.

So Nick, I mean maybe to dive into that, I mean to me that is the key, right? I mean to have a life cycle of a vehicle, to have two to three life cycles in that car is crucial and I think it's crucial for buy here pay here too. But definitely in lease your pay here because you're bringing in that 8,500 ACV the first time, you're putting it out there on the loan and hopefully by mid loan or whatever, your cash out of that car, you're at cash zero position between payments and then from then on, essentially your return on investment is infinite because you've already paid yourself back your principal. So you finish that lease, you get the car back. Now it's essentially from a cash purpose, it's a zero dollar in car. That second lease is 100% cherry. And then you're hoping to get it back the third time so you can liquidate the thing. Right?

Right. That's one way to do it. Have you ever noticed what drive time runs at the auctions, what kind of cars they're running? Sure, yeah. What are they? I mean what are 90% of them that they're running at the auctions? What would you say the price range is?

I would say probably anywhere from 1800 to three grand is what I would, is what it used to be. I hadn't, honestly, I hadn't looked at what they're doing here lately.

Well, I'll tell you, it's higher, it's like five or six thousand dollars. So what's the takeaway on that? For me it's a couple of things. Number one, they're not, they're not recycling any of their inventory. They take it all back, they liquidate all of it. And the second question would be, why? Well, when's a car most reliable, most useful, everything else? Well, it's probably three years, five years or newer, I would say. And then the second thing is that $5,000 car, I mean, what is a $5,000 car? It's like a 2013 Hyundai Elantra with 110,000 miles. It's a 2014 Fusion with 140,000 miles. My point is they are looking at how that first initial income stream, they're getting like $400 a month out of that Fusion. And then rather than spending 1,500 or $2,000 recond, they're getting an incredible amount of money out of a car that they probably generated 15 to $20,000 on that first go around. So it's a really cool way. And that also makes leasing really attractive to me because you, you have so many options at the end of that lease. You know, do you want to liquidate it and get your five grand now reinvest that five grand in an 8,000 ACV car? Do you want to try to get it, squeeze every penny of revenue out of that asset and take it back to the junkyard rather than the auction? You know, you have the flexibility to make those kinds of decisions based on whatever's going on in the market. You know, if there's tons of cheap 8,000, $9,000 Hertz rental cars, might be a good idea to liquidate that $5,000 car and reinvest your inventory. So there's just so many cool ways to manage your fleet. When you're doing lease or pay here.

What is your monthly lease payment and what is your typical first run on that car? How long is.

We base the term of the note on the asset? So if it's a older vehicle, say a 2012 or older, it's going to be around a one year lease, maybe a one and a half year lease. If it's a 2012 to 2015, it's going to be a two to a two and a half year lease. And anything I would say seven grand, 8,000 or higher is going to be a three year lease. Our average term taking all those things into account is 27 months. Payments are about 420 minus sales tax. So our net on that is right around $400. Okay.

And so as Jeff mentioned earlier, I don't know anything about leasing. What are there certain states where leasing is more favorable than another? Because I don't know of anyone in South Carolina who does a lease here, pay here? I think in North Carolina there's several dealers, but I don't know of anyone here in South Carolina does it. What's the legal issues in states that prevent it?

Some states make you pay the sales tax up front rather than when you collect the payments. And that's. See, this is the main reason I switched over to leasing. I hear pay here, you got to cut a check to the state or whatever their sales tax rate is before you ever collect anything from the customer. Oh yeah, that sucks. They're making way more money at the beginning of that lease than or buy her, pay her note than you are. And then, you know, I do know that you get the credit if you, if you repo the car. Most states will give you a credit on that sales tax, but what a pain. Not in South Carolina, really. So you gotta pay it over and over and over again.

It's pretty much 15 grand a month that I can just sell down the river.

I can tell you that there are a handful of states that will make you collect the sales tax up front, but very few. I think Missouri is one of them. I don't know. I don't know about state by state, but most states you only collect sales tax on the downs and the monthly. And it is a huge deferral and a huge cash flow difference. That's $800 a month times whatever you do right off the bat. Oh yeah, it's an awesome model. And that's the main reason I've looked into leasing for years. Loved all, everything about it. When I was totally broke and needed to generate as much cash flow as I could, that was the catalyst, that was the reason I switched to leasing, because of that sales tax advantage. It's been huge for us and it's enabled us to grow much faster than we would have been able to under the buy here, pay here model.

So you're talking about the sales tax benefit. Is there an income tax benefit as well?

Since Trump changed the laws, it's called bonus depreciation. And you're able to depreciate 100% of the cost of that vehicle year one, prior to the Trump changing that, you would depreciate it over a four or five year period or whatever the life of the vehicle was, which is typically four to five years. So in other words, let's say you buy a car for $10,000. Back in the old days, you would depreciate that car 20% year one, 20% year two, and then it would accelerate from there. Now you can write off that total $10,000 year one. This has been unbelievable for me from a tax perspective. I've been able to have net operating losses on my taxes for the last couple of years that I will be able to use for years to come. This is absolutely incredible. If you have any kind of a tax problem, you really want to look at least your pay here.

Help me explain that a little. Help me understand that a little bit more. So because you own the portfolio and they're technically your assets, you get to depreciate the cost of that car, not the note, right? Not the note. Well, there's no note total because you bought it for 10, but you may have sold it for 15, but you get to depreciate the 10, right. The cost of the inventory.

And we put out $3 million worth of cars this year. So my, I will get to write off the entire 3 million against my.

Against any income which would completely dwarf that amount in year 1, 2, 3, 4, 5, 6, 7, 9, 10. Until you get to a point where you're kind of at an equilibrium, right?

Yeah. I mean the catch to that is seven month term. Let's say you went out of business and you were doing nothing but collecting notes. You'd have a huge tax, but it's all deferral. It's not going to happen for a really long time. One lease or pay here. Dealer I spoke to said it's like getting an interest free loan from the government.

I'm sure you would recapture that at the end of the.

When you sell the assets, when you.

Sell the portfolio, when you sell the asset. But it's still depreciated, right?

Yeah, it's zero. I mean it's zero on your books. Now this, the other, the ugly side of leasing is you show losses, right? You show a lot of losses, especially on the tax side. So the lenders that you might be working with will look at this and think you're crazy and think you're running a terrible business. I can't tell you how many stupid bankers have looked at my stuff and said, you know, you shouldn't be in business because, because of some of these numbers. But.

And you say no, I get to add back in depreciation. Don't you know how accounting works?

They don't and they don't care. You know, most 90% of lenders that you talk to, you, you say the word subprime and they just clam right up and they're just trying to figure out a way to get you out of their building.

So the. And I assume you pay. You pay income tax per monthly. Essentially when you take a payment lease here payment you pay taxes on. There's income generated there, right? In that payment.

Is it the whole payment? Yes. Every penny that you collect is income on a lease, except for sales tax. Right. So why don't we just walk through your typical buyer Pay here deal versus lease or pay here. You buy a car for $6,000, right? And the classic buyer pay her model is cost times two plus a grand, right. So that's $13,000 to sell that car for. And then you got to discount it and sell it to your RFC and you show a profit of like 1500 on the dealer side. And then you got it over to your RFC and it's all this complex paperwork and you got to sell it to the RFC and then if it repos, you go it back and all that yuckiness. That's a total waste of you and your staff's time leasing. You don't show a penny of income until you actually collect something. So the only income that you show is the down payment. Let's say it's $1,000, and the monthly payment, which is $400 a month. And then let's say you repo it. Well, if it's on your books for the initial amount that you purchased it and you didn't depreciate it monthly. So you can either depreciate it monthly or you can do a once a year line item depreciation, which is what we do. The only hit you'll take on that on bringing that car back in is depreciation. Whereas on the buy here, pay your side, you recall a car is a huge financial hit on your. On your p. L. And then it's. You have to do all that complex stuff. And so it's just so much more simple. It's so much easier to deal with it. Plus, you don't have to go to the state to get a sales tax refund if your state allows you to get refunds. Way less complex, way easier. Mm.

So.

So you're only paying that sales tax on the total amount of the payments you collected that month. That's forward that out monthly. Like what we do with our total amount of sales, you're just doing it off your total amount of lease payments.

That's right.

Now tell me this to jump forward a little bit. Now, the car. I got time. I've had a ton of hurdles in my mind over leasing, but one of them is, do you have you don't have an RFC that owns the car. It's titled in your name. Right? I mean, you.

We. We did have an RFC when we were doing buyer pay here. We call our finance company APG Financial, but for all intents and purposes, it's the same company. It's just a way to kind of separate our finance company from our dealership. However, most lease or pay here dealers. If it's. Whatever the name of the dealership is, that's the name on the title. You're the owner of the vehicle. It's your car on the title of the vehicle.

How does that. So in my state, and I get all weird thinking about things like this, but in my state, if ABC Motors own the car and the car was in a car accident, ABC Motors would be the liability of the insurance portion. How does it work in your state, and how do you prevent liability from that standpoint?

That is probably the number one question I get when I do lease or pay here panels. And anybody interested in that very first question, well, if the title's on my name and they hit a bus full of kids and, you know, so there's an amendment called the Graves Amendment, which protects you from their mistakes. And I have not heard of a single lease here pay here dealer getting into any kind of trouble because of something their customer did in the vehicle. Because of that Graves Amendment, and that's a nationwide deal, is the Graves Amendment.

Does it only apply to leased cars or does it apply to rentals and leases?

I wouldn't know about rentals, but I know for sure that it absolutely applies to leases. I mean, think, you know, 50% of new car sales are leases.

Yeah, I think BMW and GM and Honda Financial and all these guys that are massive into leases, if that's. If that door was ever opened, you better believe we got a lot of strong lobbyists that would get that shut real quick.

Yeah. Cause I just heard.

I've heard people bringing up the Graves Amendment, and honestly, I haven't done my due diligence on that. And I've heard people say, oh, it applies to rentals. And then, you know, enterprise the leases. I was just. I've always wondered that.

So your customers still have their own full coverage insurance, correct?

Yeah, I mean, most of them, like.

Any portfolio, prefer them to have their own full coverage.

Yes.

Can you sell? I guess this is gonna lead me to my next one. But you can sell ancillary products. You could still sell them. I mean, can you sell. There is no gap insurance. Right. Because there's never A gap. There is no.

We do sell our customer. There is a receivable. I mean, there's a payoff on a lease, just like there is on a personal. But okay, what we sell our customers is we charge them $50 a month for essentially a bumper to bumper warranty, and then we'll charge them another $50 a month if they only have liability insurance.

We are a lot more or something.

Yeah. And yeah, see, they call it collateral protection, cpi, whatever, and it's not really insurance. It's just that if the car totals out, we'll. We'll pay it off.

Yeah.

Off the note. And there's just so many customers that can't afford full coverage insurance and paying us. And if the assets 5 grand or below, ACV, take the chance, collect your $50, we add that money that we set aside on our balance sheet to our income at the end of every year. We have never not made money on that program.

Yeah, Net net.

Yeah.

So talk to me about that. My biggest hurdle to leasing is helping the customer feel ownership in the car. I just, in my brain, I think that I have a hard enough time getting people to do the oil changes and take care of it because they're just gonna drive it like they stole it if they know that it's a lease. Go back after 12 months. Why would they ever change a tire? Why would they ever inspect it? Why would they ever change the oil? I mean, why ever clean it when you're like, mom, just, I'm gonna give it back in three more months. I just got to make it through this lease.

Well, we really don't even talk about the word lease until we're step eight, which is presenting the numbers. The lease doesn't really come up until that point. And at the end of the day, our customers could care less whether it's a lease or a purchase or whatever. There's only two things they care about. You guys know what that is, what the down is and what the monthly is. Those are the only two concerns we have had in all the years we've done leasing. We've had maybe a handful of customers say, well, you never own the car. And we can overcome that 99% of the time. The 1% that we can't have a difficult time overcoming that with is the Hispanic community. They just feel like it's some kind of an exotic, strange thing. And on those handful of deals, we've gone ahead and just done a regular buy here, pay here deal. But in terms of them taking ownership, yes, we've had Those folks come in and say, well, I don't own it anyways. And it's like, well, no, but we made an agreement, and, you know, in exchange for coming and getting your free oil change, you're going to have a warranty that will cover it in the event of a. Of a breakdown. I mean, I think that's a pretty fair trade off, but at the same time, I totally agree with you. Extremely hard to get the customers to do something like just come in here, free oil change. I don't think that changes whether it's buyer, pay your lease or pay your.

Yeah, I'm scared that I guess in my brain, I just think that, yeah, A, they're gonna drive the tires off it. B, I'm gonna call the guy and say, hey, your lease just expired. You need to bring the car back. And he's gonna say, what lease? I just barely put $1,000 in new tires into this thing. Belts, brakes, radiators. What are you talking about? You need to pay me back. You know what I'm saying?

Sure. Fair enough.

Those types of. All right, let's. Let's sign you up for a second lease on it, or let's flip that into a regular installment loan. I mean, I guess you got options, huh?

We do have a lot of options. We start having that conversation with our customer about 90 days before the lease expires. Kind of what their plans are, how it works, what your options are. And a lot of our customers that have gotten to that point will just end up buying the vehicle at the end of the lease, and we'll finance the residual for them. We actually switch it from a lease to a buyer pay here. Note, we currently have about 100 customers paying on the residual. And that works really well. That works extremely well. But our goal, of course, is to get them to turn the car back in and get another car from us. Yeah. And we set the residuals. Yeah, at first, our residuals were way too low. You know, $1,500 pretty much flat across the board. That's very compelling for the customer to just purchase it. So we really increased our residuals up to about 35% order to encourage them to give us the car back and get them into another vehicle.

I mean, that's a fine line between having the quote, unquote, $1 buyout, which is not a lease, you know, and you get in trouble if you're doing that if your buyouts are too low. And so you want your buyouts to be high enough that it's an incentive to Trade in.

That's right. And we learned that the hard way. We had tons of customers. The cars were worth 3, $4,000, and they, they only had to pay $1500. Well, of course they're gonna, they're gonna buy the vehicle.

They had a lot of positive equity in it. Right, right.

Go ahead. Sorry.

Yeah. Residual things I've got to wrap my head around. I know. I mean, I know what residual is, but if I'm. If I'm. You and I sell the car, if I buy the car for $8,000.

Mm.

My lease sales price is gonna be what, 12?

I don't know. What is it? Well, this is a really interesting thing that you bring up because we do a lot of retail bills. We're averaging around 50 retail units a month. Just regular outside finance, credit unions, cap one type deals. And really hard to put the kind of markup that you need for buy here, pay here on your website while you're doing retail. Right. I mean, nobody would. So. So this is how we overcome that. And this is another huge competitive advantage to leasing over buyer pay here. If you're interested in having both models under one roof, almost impossible to do, buy here, pay here, and retail in the same roof. Because. Because of the markup, you can't. You can't put a $5,000 car for 10, 9. 95 and expect retail buyers to just increase ink up on that. Right. So anyhow, what we do is we have. This is some beautiful things about leasing. You have a lot of fees that you can add. So we had a $350 security deposit. We had a $995 acquisition fee. We had the 499 DOC fee, stuff like that. And that helps cover the margin that we need to cover in order to make the leasing work. And then we also have an extremely high money factor to make up for our low. The low markup money factor is an interest rate. And if you were to calculate it, we charge like 29% interest, which is, which is a. Which is a great return. And the cool thing for the customer is if you were to model out 24.99 over five years versus the money factor over three years. They save money, we make money. It's just, it's an awesome model because of that residual. That residual is really what.

The price you're advertising for your car or the price you're selling for your car.

That.

Does not include the residual. So if I'm coming into you and I'm buying this $12,000 car plus all the fees and I pay the entire lease program. Is it that amount of money plus interest that I'm paying or is it a lower amount of that $12,000? Is it, is it minus residual? How's that?

So on that $8,000 example you have all the fees and stuff. Let's just say you add $2,000 in fees. So the customer's finance, the customer's initial cap cost, that's what it's called in a lease. Your price is the initial cap cost, 99.99. And then you have what's called cap cost reduction, which is their down. We take 350 of that cap of that down payment and apply it towards a security deposit. So let's just say they're putting 1350 down. So $1000 would be their initial cap cost. So then they would be at 89.95. They make payments over 20 months, 24 months, whatever. And then at the end of that payment they have the residual, which 35% of 89.95 would be about 3, $3,000 would be the residual. So to answer your question, they are only making payments on that difference between the residual and then. And so we're taking that payment, adding the money factor, the rent charge and that's the payment.

Which is one of the sexiest things about leasing. If you were to full blown advertise, it is, it is kind of, I mean it is rental. Look buddy, you're only using, you're only paying for the amount of car you're using. And when you're done using that car, at the end of my one, two or three month lease, you give the car back, you know, you're done with it. You don't, you don't have to keep paying on this thing when it gets old and decrepit and starts falling apart. You're only using, paying for what you're.

Using, especially on low ACV stuff. Nobody is banging anybody's door down to get into a 2012 Impala. That's a need car, not a want car. Our response to that, Mr. Customer, you're dating it, you're not marrying it. The idea here is just to get you back on track, get some good on time payments on your credit, get you in a better situation and then we'll find you a really nice car at the end of this super short term, 18 month, 24 month, whatever the term lease is, then we're going to get you into the dream car.

So stop me if I'm wrong here, but with what you've been saying in Order to run a successful lease program, you do need to have a pretty robust service center. Right. Like if you're going to be putting your own warranty on these things and you're going to be doing oil changes so you can keep your hand on them, you guys are probably doing a lot of customer repairs.

I think that's absolutely essential to having it, to having a successful outcome. Absolutely. The only way I would caveat that is higher ACV so I could see a world where you're doing 2016 Altimas 11,000, $12,000, you're getting 1500. You can always command a better down payment out of a like that. Let's say you average down on that's $2,000 you're collecting for. You can get a better payment out of it. Right. 450amonth. You do a 36 month lease on that with a 40% residual, you get that car back. I mean, that's a scenario under which you would not need a robust shop. But then if you have capital constraints, it won't be too long to 12,000 times 100 units a month. I mean, that's a tremendous amount of capital going out. So yes, absolutely. You need to have that shock. That shock is essential.

Yeah, your bus, you're going to put tires on that thing and you're going to have done oil changes, you know, a dozen times. You know, so you've got to have the ability to get your hands back on the car. If they don't come in for their oil change, is that a requirement? Like, hey, you void your lease, you're done. We got to pick this thing up. If you're not getting your oil, your free oil changes done.

Because we would never pick up car because they're not getting their oil changed. And let's say they didn't change their oil, they put 30,000 miles on it and the engine blows, would we repo them over that or not? Help them get another motor? No, we'd still do it because what are we going to do if they don't play ball? We're going to repo the car, we're going to put a motor in it.

Yeah, standard.

Why not try to generate as much revenue from that customer as you can? Even if they screw up, you know, which a ton of them do. The other thing while we're speaking on that full synthetic across the board, that product is so much better than, you know, than the conventional oil. It's a game changer for us. That customer can go 9,000, 12,000 miles without changing the Oil and it'll still survive.

Yeah, I agree with you there. How many cars? So if you've got a 2200 portfolio right now, how many cars are coming back in every month and reconing, how does that, what does that look like?

Really good question. So our repo rate is hovering around 3% of our portfolio every month. So 3% of 2200 is about 50 units a month. And then we are seeing an average termination of about our total. Total repo termination is about five and a half percent of our portfolio. So we're averaging about 120 units a month that come back in. So we have to sell a ton of cars to grow, right? I mean we really do. And that is one of the more difficult sides of leasing. I really don't know what your typical buyer pay here looks like in terms of vehicles coming back, but it's a double edged sword. So on the one hand you keep getting these cars back, it's tough to grow. But on the other hand you have a steady supply of that lower ACV inventory that's super difficult to purchase at the auctions. Right.

I mean, you know, 100% of the history.

Yeah. And our techs, you know, they'll be like, oh, you're back. Oh, it's nice to see love with these stupid cars.

You know, that's a good point you made though. The flip side of that is because your loans are shorter, you know, your leases are shorter, you are turning, you are selling, you're having to sell more cars because of, you know, you know, you add the repo rate onto the lease, the turn in rate or your upgrade, whatever you're calling it, you got to move. Yeah, you have a lot higher volume you're having to do, you know, it's true.

But you look at your typical buy here pay here world, is it really that different? I mean I don't know the definitively know the answer that I do have a lot of buy here pay her dealer friends that see similar kind of numbers. I mean I don't know how much.

The leasing model 27 month is probably the average term that I bet any of our buy here pay here notes actually make it.

So yeah, we're probably, I agree and I think that the terms that we put out is more in line with reality. You know, our customer on a low ACV car, you're going to see them pay for about 16 months higher ACV. It'll be closer to the term of the note. But all in all out, I think you're right. No Matter whether it's lease or pay here, buyer Pay here. That 27 month, that sounds like about the right number, doesn't it? Yeah.

Can you logistically and or legally do both lease here, pay here and a buy here, pay here off the same lot? If you just said, hey, anything under a 10 grand sales price is going to be a buy here, pay here and everything over is going to be a lease here, pay here or whatever your factors were. Is that something that, I mean, you said you do a little bit of the buy here, pay here's on some payouts and things like that. If a customer is absolutely staunch, like no, I do not want this to be a lease. I want you to amortize the full amount of the purchase so that I can own it at the end of the term. Do you say okay, cool. And then it does, it's not, it's not confusing or legally challenging.

I think that it can be done. And yes, we do it under certain circumstances. But Jeff, the most successful operators I know keep it simple. They keep it simple for their staff, they keep it simple for their customers. And keeping it simple, doing both day in, day out for your staff and your customer just becomes really laborious, really difficult to keep on top of. So I would suggest that you just do one or the other or let's say you're a big buyer pay here, you see all the benefits of leasing but you don't want to completely switch over. And of course you have a ton of buyer pay here, notes left to collect. I can see a scenario under which you would still do a few buyer pay here. But, but the idea of doing low ACV buyer pay here, high CV lease year pay here, there's benefits and disadvantages to doing both low and high ACV in either model. So I personally, if you're going to do lease or pay here, just do it. Just, just do it. Dip in with, don't, don't dip with your toe. Go in full feet and go for it.

So are you having to buy a lot of units per month also?

Yes.

And where do you source those? Like a typical, a typical store or are you buying mostly off rental, off lease products right now?

It's cyclical. You know, in the pre tax time period we like to buy a lot of rentals because they get cheap, they get under around 10 grand. You know, I mean I saw 16 Altimas with 40,000 miles car MMR on that thing right now is $12,000 and we were buying them for 9 grand, 9500 bucks back in December, January. So you don't touch a rental car right now. So I like to buy the fleet vehicles. Element lease plan Donlin Wheels Fusion has been the car I've bought the most. The new body style Fusions this year. Love the fleet cars because it's typically one person that drove them. They're regularly maintained, high mileage but really clean, you know, likely highway high mileage. I love that car. We do really well with that car. But yes, we buy 180 to 200 units a month. And I do it all myself. I do 90 to 95% of it online. Have a little guy that'll go buy trade ins at some of the local stores. But that's just a handful of our sourcing.

And yeah, you find the most lucky in the base models though. You're not buying anything that's hard, loaded or fancy or flashy. You're talking like basic solid transportation.

Yes, I would say 80% of our sales are the four door car, compact to midsize car. But that being said, here's another really cool thing about leasing. Just wrap your head around this. You got a Crew Cab F150, 2015. You bought it from Wheels has high mileage, 120,000 miles, super clean. So you bought it for 16,000 bucks and you got on your lot for $18,900. You get this construction guy that maybe had a little few problems in the past but, but working, got a steady job. He's got 5,000 bucks down and he wants a truck. You're charging him $350 every couple of weeks. Just do the math on that deal. You make an incredible profit under that scenario. I mean that is a super profitable deal. You can feel a lot more comfortable doing that under a lease scenario than a purchase scenario because of the residual. The customer's not paying on the entire purchase, he's only paying on that. And trucks in particular are worth something at the end of the lease versus your typical four door car. That's probably about 5% of our sales. That scenario that I just described and I love the way that looks and I love the profitability of it. First glance you'd think, gosh, that's crazy to expose yourself to that kind of risk. But you get the right customer with the right amount of down, oh my gosh, you just knock it out of the park.

You know, the dollar amount and the use does that doesn't make you nervous that they're using it for construction or beating it up or it's going to be covered in drywall and paint.

Yes. But if you're getting five grand down and you're collecting $700 a month, I think you can make, make that work, you know. Yeah.

And you have mileage restrictions, I'm sure. Or guidelines.

We do have guidelines. We do not enforce it and we don't watch it. My personal philosophy is there's just only so many things that you can control. The Uber Lyft thing, that's like catnip to the in house finance customer. There's no question that at some point almost all of our customers will be Uber Lyft drivers. The question is how many are actually going to stick with it. And I really think that when they see how little they get and what a pain in the butt it is that they'll abandon it after a few months. But if it's a scenario like either I get a repo or they become an Uber Lyft driver and make a couple payments to me, I think I'm going to go for the Uber Lyft scenario.

Interesting. Yeah, you definitely provide them with the car that would actually qualify. I'm not sure that many of mine out here would Luke's do, that's for sure.

Yeah, we see it every once in a while. But I'm with you that it doesn't last long. Typically if someone's Uber or Lyft driver, it's a month or two type of situation, not a consistent, consistent situation.

And you look at the, I can't remember the name of the finance company that financed Uber customers. Do you remember that?

Santander? Yeah, I just didn't.

They took huge, huge losses. And the reason why is because our customers don't want to. They don't stick to that job. There's no way. So. Yeah, but Uber Lyft's definitely put interesting things into, into our customer and how we deal with that. I love how some dealers just can't stand the idea of Uber and think it's the worst thing that's ever happened. And I'm like, dude, if it's an extra 300, that's our car payment that prevents a repo. That's awesome in my opinion.

Yeah, let them put an extra thousand or miles on in a month, huh? Just get the payment in.

It's not a thousand mile. It's not the thousand miles I'm worried about. It's the 3,000 miles, an extra month that I've seen that, that worries me from that perspective. But I mean, you see it any, I mean, sometimes you see it anyway and they're not making any money.

So. Right.

I mean if that like we had a customer come in with a 16 RAV4 finance with Toyota, Toyota motor credit. 170,000 miles. Now that's not our customer. It's just not our customer.

Can't help you out there.

So you, I heard you say you don't enforce mileage restrictions. That's hard for me to wrap my head around. If you've got, you know, a customer that's devalued your collateral so much. And I understand it's about collecting the monthly, but you know, if I put a car out there that, let's say I'm allowing them 15,000 miles a year and they're doing 30,000 miles a year and I get it back, I mean, and the car's done. I mean, what do you do in that situation?

We go after him. We, you know, we sue them. We have our attorney collect the bad debt. But at the end of the day, if we had a strict policy about mileage, would we still get. Would that customer have still done that and would we still have that problem? I think the answer is yes. I just don't think it's something that's realistically enforceable. And looking at my fleet, looking what I put out on the road, you know, most of our stuff with including the recycled inventory is going to be 6 or $7,000. So yes, that's exposure if every single customer is putting that kind of mileage out there. But we just don't see it enough for us to worry about that.

Yeah, to try to track it on a monthly basis somehow.

Yeah, it would be super erroneous, you know, really difficult.

But you, I assume in these leases they're all still have a GPS unit.

Mm, yeah. On every unit.

So I mean you repo and just, just like about here, pay your store. I mean it's, it's essentially the same.

Well, we didn't talk about that too. The legal side of it. That eliminates a lot of the legal side of a repossession. Because it's a lease, you don't have to give certain notices and certain things. Correct.

You sure don't. You don't. And you're, you're. None of that is none of the stuff you have to do with your buyer pay her dealer. Do you have to do under.

There's no 10 day cure.

Period. There's no, no 10 day cure, no nothing.

I mean, doesn't matter where you sell it. You don't have to send it to the auction and give them A, you know, a 1099 C at the end of the year or whatever, all that stuff. Correct.

None of that applies. It makes life a whole bunch easier under the lease scenario. Now, does that mean you do stupid stuff and upset customer? Of course not. But it just means you're not under that. Those set of rules.

Yeah. And sued for not giving notice or something like that.

We can, if we know a customer's not going to redeem, we just, we don't even put it in the repo yard. We just put it straight into our service line, get it reconditioned, and it's back for sale within five days to seven days.

And it's got plates on it. Right. I mean, you don't have to replate these things every time.

Right, we do replate them every time, Utah that's the case. But I know different states have different rules regarding that and I think that's. That could be another potential cost savings.

You do have to re register them. Even though it's still titled in your name and registered in your name, you.

Still have to re register new lessor. Yeah. And I don't know because the lessor.

Is named on the title.

Yes.

Okay. Okay. That's where I'm.

How's that, how they name on title? Is it such and such leasing and that customer? Is that how it goes?

You know, I've never actually looked at a title to see how. But I can tell you on the registration, we're the owner. But there is, I think on the registration it'll say that they're the, they're the lessor. But I really don't know the answer to that.

Yeah, you'd be the lien holder technically. Plus you'd be the owner with a lessor on there because they have to be listed on the title in order to get their insurance. They got to be on the registration to get their insurance. Right. Because insurance kind of, you know, ensure something you're not on the registration for.

Yep.

I guess we're also responsible for like, I mean, you get notices for parking tickets and fines, pole booths and things like that. Like that's your gig, right?

Yeah, we do see a handful of parking tickets. We just, I mean, we essentially have to pay notices.

I mean, if the car gets impounded, like for me, I get a car impounded in Las Vegas, the fees are so ridiculous astronomical. Between towing and storage, if I'm not on it within five days, it's not worth picking up.

That's true.

So I say forget it. I'm not going to touch it, they have to go after the owner of the car. But if I'm the owner now, as the leasee, am I on the hook? And they can sue me for all of their towing and storage and position.

All they're suing you for is to get the car. So you just hand them the title?

Essentially, yeah. Or they apply for a duplicate or abandoned title at their state.

Yeah, we run after you for their. For the. For fees that are accrued.

No, no, we've never.

Mechanics, liens. They can't. They could come after you for those, but for the most part, these guys just want the title, right?

Yep. Just like any other impound scenario. And yeah, we definitely get our share of impound notices, just like all in house finance dealers every.

Every day.

I mean.

I mean, you know, it's funny that we. We think about, if we're in subprime financing, buy here, pay here, lease here, whatever it is, and we think about the. The things we have to go through in these, you know, these mechanics, liens and these storage bills. But, you know, every finance company does this. They have the same thing going on every day. And if it's Wells Fargo, if it's Santander, if it's whoever, they all go through that.

It's just.

They do, you know, so it's like, it's just part of the. Just part of the job.

Well, but the big difference. This is an interesting. You know, I think that a lot of, like Cox Automotive Group, I really think they thought the buy here, pay here model was going down the tubes. I don't know if you've got that feeling from next year or V. Otto or whatever, people, but they really looked at us like we were gonna go extinct. I really believe that. So why. Why didn't we go in state? And why are we seeing more showroom visits and more customers that we've seen in years? I think that we are so much better equipped to deal with that subprime customer than any indirect finance company. Think about the bureaucracy of a Wells Fargo, okay? The customer has to get 90 days delinquent before they repo that car. Then they got to fill out all their paperwork. Then it goes and sits at some yard for 60 or 90 days, then it gets processed at the auction. Blah, blah, blah, blah, blah. I mean, you're talking six to eight months. I get put in that car, back on the lot after that customer's 30 days late, and I'm reselling the vehicle. It's so much more efficient. It's so much better than Anything any indirect finance company could do. You asked me, there was a while where I thought doing indirect would be so cool. No salespeople, no cars, no overhead. Da da da da da. Looking at that scenario now, there's no question in my mind that this in house financing scenario is by far the best thing that our customers could ever. We provide an incredible service for so many reasons, but the lenders don't have any way to deal with mechanical failure or other life problems. I lost my job. We do. And this is a huge competitive advantage. So you're a little discouraged. As an in house finance dealer, I say get out of that mode. This is an exciting period. These regional lenders, I'm understanding their margins are getting worse. Repos are going up. This is our time, baby. I'm really excited about it.

So Nick, that's interesting that you bring that up because I agree with what you're talking about. How we're better equipped as we have boots on the ground, let's say. Okay, why then is it. And why does Drive Time successful? I've often wondered that. I don't understand how there's becoming more and more of these, let's say chain or not franchise, but chained, big money backed buy here, pay your stores when they can't provide the level of service we do and they don't understand our customer. What is, is it just capital that made that grow? You know what, what is it you think?

And I've studied that Drive Time thing a lot just because it's, it's such an interesting story. You know, these Garcia guys, then his son, you know, I'm sure you know, as Carvana, just fascinating guys. And, and I think Ernie, Ernie Garcia just found an opportunity with the ugly duckling. You guys can just read Google about this thing because it's, it's absolutely amazing. I mean this guy was in big legal trouble at one point, heavily leveraged and turned it into Drive Time. Which is it, the number one or the number two used car?

I think it's two behind CarMax.

Yeah, I think you're right. So why does a customer go to CarMax or DriveTime versus some little dealership that they never heard of? It's the same question as why is Best Buy still around? And a bunch of the little electronic stores. Why is Walmart here and all the little, you know, variety stores are gone. It's just brand and name recognition. I think more than anything is it Drive Time? I don't really know how they handle collections and late, you know, customers losing their job, mechanical Failures. But I imagine they have a pretty robust program to help folks under those scenarios.

I would think they would have to.

Honestly, I think to that degree though, they still have the same issue of bureaucracy because you, you're Talking to someone 20 levels deep that's stuck to a policy and procedure manual that they can't verify from, that's in some call center that's just making his whatever wage plus bonus. Whereas when I talk about independent dealers and like you talk about us in house guys, I'm talking like he comes down and he's sitting on the couch across from me and we're talking about how we're going to keep the car going and keep their loan working. You know what I'm saying? It's the personal touch where I can go completely outside of the parameters of what makes sense to make them happy, keep the loan active. Right?

Yeah. But like it or not, we're the dealer of last resort. I think we are the drive time customers. Dealer after drive time repos them because they're like, drive time sucks. They can't help us, they don't want to do anything and they just repoed me. I'm going to go see Jeff and he'll take care of me and give me that personal touch. And then hopefully you got a customer for a long, long time. You know, well done at that point.

And my thought on that is because I'm gonna do a reasonable successful loan in my brain. And again, I'm not in a drive time market or JD By Rider or Carmax or any of those guys. But the people that are gonna go there and they're gonna get a 2016 or a 2017 Nissan Altima at $600 a month for 36 months or whatever it is, are gonna come here and I'm gonna say, no, no, no, no, no, no, no. We are gonna look at this 2011 Ford Fusion and I'm gonna have you at 300 or 350amonth. That's why they go there first because they're gonna have too much car at too much point, whereas they're gonna come to me. I'm gonna be realistic.

Had a customer this morning reach out to us on Facebook and of course I got them off of one of our paid ads into a direct messaging type situation. And she, she was complaining on our website about our application process and didn't have a. I'm like, no, we take Social Security as income. You know, I pulled her off and this lady wanted a four wheel drive truck, no problem. I say, yeah, we have four wheel drive trucks, but my Social Security is $1,294 a month. And I'm like, well, I can only approve you up to, you know, about 250, 275amonth. You know, you're not gonna buy a four wheel drive truck for that. But how many places are maybe putting her in that Ford? Because she, her response to me is, oh, I can afford $400 a month. Really? You can afford $400 driving a truck that's gonna get 12 miles of the gallon? You, you're gonna be able to afford that on twelve hundred ninety four dollars a month? No, ma', am, you can't. But how many drive times are putting up, putting those customers in those situations like you speak of that, Jeff, Knowing it, they're, they're not, they can't afford it. You know, I don't know. I think that that distinguishes us a lot of times from the, from the other companies.

Well, I think the other couple other takeaways, the reason why you're seeing more of these conglomerate buy her pay here dealers, especially back east American Car Center, CarMax. I don't know if you've looked at a auto count report, but they 80% of the cars, they're freaking buy her Pay here store 80% of the cars they sell, they finance themselves. So why it's because it's unbelievably profitable. Yeah, it's super, incredibly profitable. I think you're gonna see this more and I think you look at. Okay, if I'm gonna, if I'm trying to get a return on my vc, venture capital, private equity money. Where is that? This auto finance business is super attractive to that, to that kind of investor. And so where does that put us, the smaller dealers? Well, for me, I just, I advertise like crazy and make sure everybody out there knows who we are so we get that brand name recognition. And I'm hopeful that, you know, I'm usually the dealer of last resort. Even though we have nice cars and stuff, I think just people with lousy credit would rather they have this idea in their head that they want to go to a CarMax or a Larry, you know, some of the bigger, bigger places. But that's fine. There's still great customers. We're still killing it. We still got 800 customer showroom visits this month. There's just a huge market out there for what we have to offer, and it's super exciting. I think one thing that's concerned me is just more people out there have better credit. There's less folks with 600 and less credit scores because of the economy and everything else, but that's still a huge chunk of the population that has that lower credit score. And if we're super dialed in and zeroed in on our marketing message, we're going to capture a huge chunk of that customer base. Anyhow, those are my little Jeff. I think.

I think that's kind of a wrap there, buddy. That's a. I could go on forever, Nick.

It's been just super enlightening. Just so. Just so much knowledge. Geez Louise.

Yeah, it's been a lot of fun, guys. Thank you for having me, Sam.