#78 - How To Fine Tune Your BHPH with Jim Rhoads

Alright, guys, welcome to this episode of the Independent Dealer Podcast. This week we have a real treat for you. We have Mr. Jim Rhoads of Octane Group, located just about four and a half hours that way of me, a little bit to the north. And we're also gonna do a fun little Facebook live during this recording. So if you were on the Facebook group, you saw us.

Well, y' all need to settle in and listen to Jim. Jim has a wealth of knowledge from his history in the buy here, pay here business. Probably about 22 years or so, I think Jim said. But a lot of interesting ideas that we don't always touch on that really will get you thinking to figure out how to make your portfolio better. And really and truly that's what matters. And Jeff, Jeff dropped a powerbomb during this episode. You dropped a powerbomb, buddy. So listen up for it.

All right, Jim, you ready?

You bet.

All right, here we go.

You are listening to the Independent Dealer podcast with hosts Luke Godwin and Jeff Watson. Thank you so much for tuning in. Let's do this.

All right, guys, welcome to this episode of the Independent Dealer podcast. We are with Jim Rhodes here. Jim, thank you so much for joining us. We appreciate your time. Tell us just real quickly, I mean, how did you get into this crazy world of buy here, pay here and not to mention consulting and dealing with, you know, dealers, and especially us buy here, pay here dealers. We were kind of crazy to begin with. And you're the one kind of like the Pied Piper of the crazies, right?

Pied Piper crazies. I like it. That'll be my new moniker. I'll put that on business cards. Yeah, I fell into the business. It just kind of found me. I was. I was originally in the retail business in Oklahoma, and then I started working a franchise operation. That operation had four Dodge and Chrysler stores around the state. And then I helped them open their sixth buy here, pay here store. They just kind of pulled me out of new car sales and sent me over to open their buy here, pay here operation. And so I just kind of fell into it and just fell in love with it. It was wonderful. And so I enjoyed working with people in that way. Whole different dynamic in the buy here, pay your operation versus, you know, retail or certainly a franchise environment. And so I liked it. It suited me well. And after a couple years, I was offered a consulting opportunity. Company that provided our training consulting back then kind of pulled me aside at a conference and offered me a consulting opportunity. And so I picked up a move to Florida in 2000. And since that time I've been in 26 states professionally. So that's 20 years of traveling across 26 states and for many of states, you know, been multiple locations. But yeah, I don't know that anybody else in the country could say that they've been in buy here pay here dealerships and finance companies in 26 states. So there's definitely a depth of experience there that's interesting.

Jim, you. So you're out in your group's called the Octane Group and you're in Salt Lake now. It's funny, I don't think I knew any other Utah dealers until I met Jeff. What is the, what is the landscape like around the country? I mean, you've been in 26 states. You know, it seems like the buy here pay here is buy here pay here. But with state laws and all this working, what's the biggest difference from state to state that you see? And what should people gather from other states that maybe sticks out?

I'd say the biggest thing that varies. There are a couple states that have different repo rules. So those kind of, you know, those are kind of the exceptions, but really it's licensing. There are some states that have pretty stringent licensing requirements. To be a finance company, you really got to go through a banking license, almost like a Chase bank would, you know. So there's, there's some pretty heavy restrictions in that way. I would say that also is generally the exception. Most are pretty favorable. There are lots of states where it's a simple one page application, application fee to become a finance dealer. And so that's generally the. And then just interest rates. You know, there are state caps. Some of those states in the southeast have really high caps. And so you see a lot of dealers in the buy here pay your business in those three or four states right there in the corner of the Southeast. And, but otherwise most of the states are pretty similar. About a 21% interest cap and licensing is pretty accessible.

What do you see as far as. Sorry. So Jim, you've been all over the country and you see these buy your pay heres. Where do you see that? I mean, overall, overall, kind of give us the temperature of buy here pay here. Do you see? Is it, is it growing in popularity? Is the need for it still there? I mean, obviously us who are buy here pay here dealers, we see that our competition with subprime is stronger and stronger as these banks buy deeper and deeper. Do you think that our future and our outlook is still strong? This is still A product and a service people need.

I do. And I've been at this long enough now to kind of see cycles. You know, you'll see as you have ebb and flows on Wall street and ebb and flows in the economy, you'll see kind of these big players step in and buy pretty deep in subprime and then it's the first sign of any kind of economic downturn, they start withdrawing. So we've seen that happen a few times. My answer on that is always the same. My outlook for buy here pay here is generally that you can expect it to remain the same. And what I mean by that is even when Wall street withdraws, as an example, when they pull back and that capital is no longer available, if we kind of divide credit up into that A, B, C and D tier, you know, talk about a D paper customer, being an unbankable customer doesn't qualify for conventional credit, then you know, there's always that customer is always in our marketplace that deep subprime tends to buy in that C paper range, that what I would call a marginal credit customer. And when they withdraw, you could argue that there's a lot more customers maybe that are that C customer who are now, you know, going to fall into a buy here payer class. But the reason I say it remains the same is because with most of my, most of my dealers, they're already funding all the customers they can afford to fund. It's really capital limitation. So they're funding all the business they can afford to fund. So even if they had three times customers tomorrow, they can't afford to finance all those clients. There's not enough capital available typically to most of my clients. You know, obviously there are exceptions, but because of that I just say it's kind of the same. We've just always got some folks down there who are struggling credit wise and there's just always going to be that demand. And most of my clients are or funding about all the business they can afford.

That's interesting. So how long have you, when did you first get into the buy here pay your business?

22 years ago.

Okay, so you and I've been in pretty much the same amount of time. What's different right now? I know money's cheap for these big groups. What's different right now compared to right before the downturn? Before, you know, I worked through the downturn and buy here pay your business was really good. We were financing people with high interest rate, with high credit scores. They were willing to pay a lot for interest wise for car, you see any differences or similarities between right before the recession hit and right now?

I would say the only thing I'm really hearing from my clients is the same thing we're talking about with deep subprime competitors, with those retail lenders having deep subprime buyers who will buy that paper. Pretty deep. A lot of my clients were feeling the pinch. I would say more so two years ago and even in the last year. But I feel like that's loosening up. Like I'm seeing that more and more of these lenders are pulling back from. From buy here pay here. Some of those dealers are not being able to get that paper bought anymore. And so we're seeing that that buy here pay here is kind of improving in that way that there's seems to be a shift in the competition out of the subprime market. But to be honest, most of my clients are the smaller independents, and so they're really pretty unaffected by, you know, these are dealers doing a volume of 30amonth. You know, I'm not saying I don't have. I have clients doing 100amonth, but for the most part, my dealers are that, you know, smaller dealers doing 30 and 40 buy here payer deals a month. And they're pretty much unaffected by this. They've got enough business. They're just always kind of adjusting their underwriting, and sometimes that just means adjusting down payments in order to, you know, regulate how much business they take on.

For sure, I know how that works. Who is the biggest competitor for our paper right now? Not in. Not buy here pay you.

You know, I don't. I don't even see that on the retail side. We've got some dealers that are both retail and buy here pay here. But the truth is, I don't see that side of the business as much. I don't know from any given month to month, you know, who are the strong buyers. Obviously at one time we were hearing a lot about Santander. There are, you know, Westlake is buying a lot. You know, credit acceptance is kind of an anomaly out there. Credit acceptance is somebody that some of my buy here payer dealers also are enrolled in credit acceptance program. So when you see credit acceptance, they hearing from my clients that even credit acceptance is pulling back a little bit, that they're requiring more down payment on their deals. And so they're apparently even making some adjustments. But I would say the one I hear most often is credit acceptance is the one that's penetrating into that deep paper space.

Yeah, I would think that would Be the answer there. Back to the interest rate. What is the median or the average interest rate that you see charged on buy here, pay here around the country?

About 20%. It, you know, obviously those states in the Southeast, as I mentioned, are going to charge more like 28 and 29%, but I see some in the teens. So it probably averages about 20, 21% and 21% being the cap in a lot of states.

What do you. Is there a number where you say, okay, a buy here, pay here dealer can't be successful if they don't charge a minimum of X percent. What is that number?

You know, I don't know that it's about success as much as it is. The number for me is about 18%. There's not much justification for charging less than about, you know, 18% to this consumer. It is a, it is a high risk transaction. And we all understand that there's margin in the car, there's profit, you know, in the car in addition to the APR. But my argument for suggesting a dealer charged that 18%, it's not that they can't be profitable at a number less than that. It's that if I always tell my clients when you set up, even though there's no expectation maybe at the outset that you're going to sell your business or sell your portfolio of contracts, the reality is if you take that paper to the open market, most of those buyers are going to be looking for 18% and above. So that just makes the paper more marketable. So I always have to help my dealers think ahead to an exit strategy. And that just means keeping that paper up there. And the other thing I argue for my dealers is we don't. And I'm a guy who trains dealers to not be. Certainly don't want to be abusive. We want to make sure that we take care of those customers. And so worst case, you charge the customers 18%. If your portfolio does really well, you find ways to give back to the customers. So that's kind of the approach that I would recommend.

Yeah, it helps you be a lot more generous, which in turn just brings you more business. So, you know, sometimes we do see that, Luke, we argue. Some people think that a super, super low interest rate is fine or a zero interest rate is fine and buy here, pay here. But the legality side is one thing, but also like Jim said, you know, exit strategy paper is not worth as much. So Jim, what are some other like, do you see any other real faux pas or bad things that buy here, pay here? Dealers are Doing that, we need to be aware of anything that you'd give us, like, hey guys, just this is something that we see as chronic issue or has popped up. Just really, really beware of this or any kind of recommendations you could give those buy here, pay here.

Dealers that are just getting going, I would say yeah. The one thing I see is just, you know, what we might define as just kind of human greed. I mean, they tend to overcharge the customer in terms of their price on the car. And for me, let's talk about that.

I know Luke's strong opinion on that. What is overcharged? Because we've all got friends and I have guys in my 20 group that they could gross 5, $6,000 per car, a full 150 or 200% markup, but they'd never collect it.

That's right. So there's no crystal ball. If I'm working with a brand new dealer and I'm teaching them, I'm going to say, look, there's no crystal ball here. But when you set the price on the car, what I recommend for them is let's set a price that is sensible based on life expectancy of the car. So this is what I mean by no crystal ball. How can we know which car is going to last a year, which one's going to last three years? But when we price a car based on the age of the car, miles on the car, et cetera, we need to set a price that, you know, at the typical down payment and the typical payment, what does that term look like? And if that term is unreasonably long, I see two problems with that. Most of my clients have related finance companies, so we don't get too far off in the weeds in terms of taxation and that sort of thing. But I can just tell you, assuming there's no finance company in place, why would I want to put more gross profit on my books that I'm not going to collect? I'm going to pay tax on that profit. Why would I want to put profit out there that is not going to be bankable? That's just kind of hurting me two ways. The customer's not going to perform in the end and I'm going to end up paying tax on money that I never collected? So I think it's a smarter approach. To charge a reasonable markup, you're going to have that 18% to 20% interest on top of that, charge a reasonable markup and take enough care of your customers that at the end of two years they're trading for something else and buying another one. So I never needed them to make it to the end of the day, 36 or 42 month contract or you know, that sort of thing. So that's kind of generally the approach that I recommend to my clients is keep it reasonable based on life expectancy of the car, take good care of the customer and then trade them before they leave your book of business and trade them into something else. If you take good care of them, they'll be happy to buy with you. Get it?

Again, I totally agree with you, Jim. It sounds like you and I come from the same school of thought there. Dealers don't think about the amount of cash flow that charging that much extra cost them in taxes. And I think that's a big deal that dealers don't think about. Also you talked earlier about being able to sell your paper. If you got this huge overvalued paper, that's just paper and you need to sell out, you're going to take such a haircut, it's not going to matter.

Sure, that's true. Yeah, you've got kind of some false profit in there. And I think in that way I'm always also telling my dealers, you know, I would like to be able to look at my balance sheet on any given day or any given month and know that my market value of my business is real. If I've got a bunch of, you know, fake profit in there, then I'm just kidding myself, you know, for sure. So I think I'd like to know that my profit is bankable. And while I recognize I may have to wait that 30 months or something to collect it over time, I want to know that my portfolio has got some real value and that I don't have something artificial in there that I'm looking at on my balance sheet.

So along with not overcharging for our cars and not undercharging for our interest. Any other potholes you see dealers step in?

You know, it's just this is the kind of a big one that I realize I got dealers on the line, you know, gonna listen to us. But I think what I see is dealers tend to be kind of this type A individual, right? And I love them, they're my clients. But what I see is that sometimes they're too slow to recognize that they've got a problem or admit that they've got a problem. And so when the, the wheels are wobbling on their buy here, pay your portfolio, they either, you know, obviously when we Talk about Dealer 20 groups that's one of the values, as you can see, kind of your performance against other dealers and know that you're underperforming. But I find that dealers are just too slow to accept some help or go find some help when their portfolio is underperforming. They don't even really know what the performance metrics need to look like. And so that's, you know, I live in that space every day. We do weekly reporting for clients and we track collection efficiency and we just know what's possible in buy here payers. So I see all these dealers underperforming and high repo rates and, you know, really high delinquency and management problems. And they just don't, you know, go find the help that they need to get that problem solved. And I tell them, look, even if it's not me, you know, you find somebody who can help, you know, cut down. Because if you find somebody and help you save 10, 20 repos a year, that's a pretty big number. So, you know, and obviously most of us can help do more than that. But it's like, you know, I would say it's a simple ego. It's like, you know, and we all have it. I've written articles on this. Ego is not a dirty word. It's just that we have to be prepared to admit when something's not working right and go find somebody to help us fix it.

Let's talk real quick about a wobbly wheel in a portfolio. What is the biggest, what's the biggest thing that jumps out to you if you're looking at, if you're coming in fresh, your portfolio and you see this specific KPI, what is it? What would say, oh my goodness, yeah.

That for me is collection efficiency, which when I, when I arrive in a new portfolio, sometimes hard to find, it may take some weeks to get to that number because most of my clients, a new client rather, is not used to tracking that number in the way that we do that. So I don't want to get too deep into numbers, but I would just tell you that basically is a measurement of how well did we collect cash or how well did we produce money out of the portfolio compared to what we were contractually expected to collect. So that's different from any kind of static pooling. That's different from delinquency. It's even different from these, what I call conversion rates. And you know, you can look at conversion rates where you look at how much cash did your portfolio generate as a percentage of where it started and those Kind of things are important over a longer range of time. But when we look at collection efficiency, we look at that number weekly. And so it's as simple as, you know, if I'm looking at your portfolio, Luke, you've got X number of contracts. Your Average payment is 350. You're expected to collect X amount of money next week. So we would measure that over a range of time and then come back and see, okay, how well did we do? How much of the money that we expected do we actually put in the bank? And that's what I call collection efficiency. And my argument is, if we're doing well in that number, we're probably doing well in all the other. Recency, delinquency, all those numbers we want to talk about. If we're doing well in collection efficiency, we're probably doing okay in those other.

So. So interesting you say that. I. I put on a seminar. This has been years ago, when I. When I just started doing some teaching, and I said. And I didn't probably know this, this name of collection efficiency. And I said, you should be collecting around 120% of your. Of your monthly payments of what you expect to collect each month. And everybody's like, well, how in the world can you do that? You should only be able to do 100. Well, I've tracked that over the years, and we essentially do 100 to 125% of what we should be doing each month. And I believe that's a really big indicator. And it's cool that you mentioned that. What is the number? Is it 100%? Is 120%? Is it 150%?

Well, I think what I'm hearing is you're tracking it on a gross basis, and I'm used to tracking it on a net basis. So when I'm working with a dealer, I'm telling them to expect to collect 93% net or above. We've got clients that have been with us for years, and we track that number for them weekly, and they're collecting 95 to 96% net. So just a simple explanation is we would filter out any. What I call unexpected money. In other words, if a customer has a contractual payment of $100 this week, but they get an insurance settlement, and they come in and pay $4,500, pay off the account, we filter out that extra $4,500 that we didn't expect. And so that leads us to a net number. And that's the number I'm really talking about, Luke, is something that we, we measure the net number because we really want to see, because we're looking at performance of the collectors. How well did they collect what we expected them to collect. And so that's why we look at net instead that other money, I call it unexpected money. And so we filter it.

So you don't have a gross number, which I was talking about gross.

Of course, you know, I have that number in our portfolio or our spreadsheets, but I don't, I don't look at it just because it's sort of a, you know, it's a, almost an arbitrary number to me in that that's just unexpected money. And I would agree with you that that number I would expect would track pretty close to 110, 120% if we didn't filter those things out. You know, to give you an example, we've got clients that we work with regularly. We've got pretty good sized portfolios, you know, 1800 contracts, $12 million kind of portfolio. And they'll have on any given week 30 to 40 grand of payments that we filter out. You know, so they're just, they're going to have payoffs and they're going to have unexpected things. And so, you know, we filter that out. So that obviously moves the needle quite a bit. Just that number alone for sure.

I've always thought about filtering those numbers out to get that true number. And that does make sense. And it would really, it would show your collection efficient, your collectors efficiency more than that gross number. Because they, unless they're out there making people total, I guess it doesn't make sense.

Right. So how well they collected what we really expected and that then becomes pretty predictable, we can say. And your gross number is also something you can lean on to say. You know, we've consistently been at this kind of gross number. So for me it becomes about predictability. You know, when you think about on the surface we're dealing with a customer who's got poor credit, where you've got this, everybody perceives it as really volatile high risk portfolio. But I find this more predictable than people might expect. And so one of the things I'm always working to do is because in this business we have certain things that are unpredictable. I want us to work real hard to make sure that we project and predict those things that should be predictable. And that just kind of helps us know when we're cash flow forecasting and sitting down and budgeting and planning how many, whether it's growth or advertising or whatever we're looking to do. It just is helpful to be able to forecast six months out and have a pretty good idea what your cash flow, your total bank deposit should run during that stretch of time. So that's what it's all about for me, is getting more predictive.

I agree. It's hard to. Hard to plan on how much money you're gonna put out there if you don't. If you don't have a good handle on that, sure. And speaking about putting money out there, this is a crazy big cash eater. What do you recommend for the dealer who is, let's say, somewhat new to this? Maybe started with, you know, $500,000, thought that was gonna work and realized quick that wasn't, and they have to run to the market to get the money. Two questions here. What is the most a dealer can pay? Relative, like, all in with the fees, with this, that percentage rate, what can they pay for their money and still make this work? Because I see dealers paying a lot of money. I guess that's the first question. What can they pay? And number two, how's that market out there right now? Is it strong? Is it weak?

I'd say it's weak. I mean, there's not a lot of players in this space. And there are lenders, there are exceptions to this. But generally speaking, if dealer's been in business two years or more, there are places you can go to get financing, but that money is going to be priced in the 10 to 16% range. So I've seen dealers operate at 16% and make it work. So if you think about it, if you're getting a 45% advance rate on your portfolio, you're paying 16% on the 45, and you're collecting 21% on the 100% of the portfolio. There's still some margin there to make it work. But I see that at 16%, that lender is doing really well, and the dealer is not doing so well. There's not much margin left for them. So they can still make it work at about that. That's the most I'd ever want to see a dealer pay, is about that 16% number. 10% is livable. I've got clients that just picked up money at 6%, but that's typically more like private relationships and private money. So that's really what it takes, I think, to get below that 10% is you got to have, you know, either some assets, some real estate that you can pledge with your local bank, community bank, or whatever, or you've got, you know, investor partners who are Willing to participate in that way. Over the years, I've gotten pretty creative helping and often that's part of what I help a dealer do is structure a deal that makes sense for an investor. And so we can sometimes help them make a deal make sense for an investor to participate. And what seems like a risky business, we can help mitigate a lot of that risk.

What do you see private investors willing to take on that risk? What's the number that you see and you have private investors available to do that?

We really don't. We're going to help a dealer develop their own relationships. Like more than one time I've been out there to work with a dealer to host an event and bring in some investors to look at their. And help them draw up the investment proposal and the business plan. So we've done that to work with their investors. I don't currently. And capital is part of my future. You'll see us move into the capital side of this business eventually because it's just inevitable that, you know, I always say when I do these webinars and whatever that, you know, there's a lot of people out there that would love to be in the buy here, pay your business that they had both the know how and the capital. And my company's already in the know how business. So we can teach you how to do it. But you still got to have access to the funds to do that. You know, half a million to 3/4 million you're talking about. So you can expect to see us do that. In the meantime, we don't really have investors who are willing to place funds privately, you know, in somebody else's business. But we can certainly help dealers to write a business plan and go to their own investors. And we can help make that story. We can help, you know, bring our data to show what the portfolio should perform like. And it gives investors a little more comfort in how the whole thing should work.

Do you see, and you've seen these private investors, do you see them taking maybe a percentage of the business as well as an interest rate or how does it. Is it like.

Not with my clients. What I recommend is that, you know, we work out something with an investor where they get an interest rate plus a little percentage of the portfolio? You know, I don't, I don't like to see. And this is just, my client is the dealer. So I'm recommending the dealer how to make it work and let them hold equity and run the business. And so I typically discourage a scenario where the investor gets a piece of the business and we just have them participate in the portfolio that they invest in. So in this day and age with software being better, where we can run multiple portfolios and easily segregate that, then it just makes it easier for us to structure those kind of deals.

So interesting to me, Jim. And just real quick, for those of you that are watching this on Facebook Live, really appreciate it. Catch the full episode. It'll be out next Thursday. We're going to drop off the Facebook Live now. Just a little teaser for you guys to download us next Thursday and get this whole episode with Jim. But Jim also. So being smart and following those things, what other tools do us buy here, pay here dealers need to have? And specifically I'm thinking about underwriting tools. Do we need to be subscribing to the alternative data sources, the credit polling, the auto zooms, or do we just need to go with our own gut instinct and five liner application? What do you see that works best with the industry these days?

Well, I definitely recommend to my clients more than a five liner and I would say that, you know, we provide our clients with some underwriting tools. I'm familiar with Autozoom, great product and can be a solution for some. I would say that I feel like there's always going to be a degree of subjectivity. I talk to my clients about, you know, in buyer payer we have, you know, you think about there's the franchise dealer and those of us who are franchise dealers would have some responsibility to the, to the manufacturer, right? And then you've got retail and we've got to play by the rules of our lenders and buy here payer we get to make the rules, we have flexibility. So that just means to me we need to retain that and that lets us do business. If we've got a deal that we can do for a customer that makes sense for us and makes sense for the customer, then that's only limited by our flexibility and our creativity and our software. So that means the reason I bring that up is when it comes to underwriting, we can use tools. I've never been a big proponent of any kind of a scoring system. You can use some pointers, I guess, but I think there's always going to be a degree of subjectivity to do a deal that makes sense and have that flexibility. You know, the reality is we're going to make some mistakes. We have to track those in a way that we can learn from those mistakes. But I'm a believer in a thorough application and using some indicators Certainly job time, residence time and you know, down payment, those kind of things. But really at the end of the day we're going to need some subjectivity in that deal to do a deal that, you know, whether it's a self employed roofer or you know, there's just, we can spend all afternoon talking about, you know, the scenarios that a buy here pay or dealer is going to face.

And I think that's my biggest argument is I try to find a way to automate the approval process to a degree. You know, I don't want it to be completely out of my hands. But I also don't want my salesmen and managers to be have their hands tied because they're trying to get me on the phone to run down an application with me. So, you know, finding where is that, you know, balance? Is it the scoring models or just credit scores or things like that?

Yeah, I like, I like a tool that will give us some guides, some guideline. We've got a parameter. Obviously as a dealer principal, you're going to set some rules that a deal that makes sense and fits in your portfolio. But I'm saying if we often if you look at your own, and I don't even have to look at whatever your own guidelines would be, if you looked at that and you only did the deals that fit exactly in that box, it would probably stunt your sales some. And so my point is really, and.

That'S another good point, Jim. How do we know if we're being too conservative?

Right. And I think the answer is we have to measure our collection efficiency and monitor that and see how well that portfolio is performing. And we try to learn anytime we, you know, do a batch of charge offs, we need to really analyze those and see where we went wrong and decisioning. But it's been my experience that, you know, a lot of our decisioning was fine. We, you know, we couldn't have foreseen, you know, what happened in those scenarios. And so we tend to over analyze those things. And listen, I can be as analytical as anyone but I just know that we got to strike a balance when it comes to underwriting. We've got to be able to, you know, create that box, those guidelines. But we need that flexibility. We need somebody designated to be able to make a judgment and that if it's not the dealer principal, it needs to be somebody who's, who has the larger company interest in mind. And you know, this is not new to buy here, pay here. There's a sales side of this and there's A collection side of this, and got to keep those things married together. But that's part of where, you know, the underwriting is so pivotal. And we need somebody who really wants the business to grow, and we want to do business. We gotta be creative and figure out how to make deals.

And I'd love to ask you the question, too, Jim. In your experience, does a larger down payment equal a higher degree of success for that loan?

The answer is no. We have seen that. No, we. And one of the things we see in this business over the years, I've seen that, you know, February traditionally is a big.

That's why I asked.

Tax refund season. We get big down payments, but what we see historically is that's the worst batch of business that we do all year long. And what does that tell us? That dealers get sort of intoxicated by the down payment and that that deal looks good on paper. I teach dealers to look beyond the down payment. And that's true whether it's a small down payment or a large one, you know, just to look at the deal, because the down payment is what we're faced with today. But if you figure that customer's gonna be on your books with you for three years, you really need to look at that customer's qualifications. Is that really a good customer for your portfolio, regardless of their down payment today? So, yeah, I just wanted to get find you.

And you grew up together.

Yeah. Some of these dealers get so caught up in the fact that, like, they need to have 1,000 or $1,500 down, and they won't do a customer with 500 down or sometimes less. And when you look at it, I mean, you're talking about two extra payments.

Sure.

You know, on your loan or three extra payments. And if that's the whole reason why you won't carry this loan is because they don't have $1,000 down.

Right.

Yeah. It took me years to finally chuck beat me over the head and finally decided that I could. That I would do that. And I tell you, it's made a difference in our sales and our portfolio. And it's so important to qualify someone accordingly. And once you do that, a down payment is not make or break. It's not a make or break. And you got to understand that, Jim, one thing that. That you talked about was tracking your underwriting mistakes. What's a good way to do that? I've often tried to figure that out, and I just can't get a good process in place to do it.

Yeah, we don't have anybody doing that really well that we see. I mean, what we recommend is that you would have a team meeting, you'd be your underwriting or top managers and you look, because I always say that if a deal makes it four to six months, and you could argue maybe even less than that, but we need the customer and the car to perform for at least four months. If we get past that mark, we probably are going to do okay. In other words, we probably didn't make an underwriting mistake. Right. If we get past four months, the car failed, which we couldn't have foreseen in the underwriting and the customer failed for some other, something unforeseen, you know, job change or whatever. So the reality is I would just look at that and see is there anything that occurred here that we should have been able to foresee in the underwriting and just start to look at that more carefully. But you know, I say I would look at the timing of the repo and charge off. You know, what, you know, what do we do there? And this, this varies a lot from dealer to dealer because their approach to collections and how much pressure they put on customers varies from dealer to dealer so much. And so we, you know, we encourage flexibility and we don't have time to get into all that kind of collection talk today. But, but we certainly encourage dealers to be flexible with customers and think long term and work through hiccups with the customer. And not everybody adopts that approach. Some of them kind of use that iron fist and kind of really hit them hard. And we don't recommend that approach. It's not typically effective. So again, all these kind of things affect the outcome. But I think when we look at just, is there anything that we should have foreseen in our underwriting that might have been predictive in this case?

I think that's a really good insight though. If, if it, if the loan has made it 12 months, let's say, or more, you almost, it's almost pointless to go back and look at underwriting a little bit because things change drastically in 12 months. The job, the divorce, the something that you would have never known on the application or at the time of underwriting. So don't beat yourself up on those ones. But within that certain window of 6 months or 8 months or 12 months or less, and you definitely say, hey, alright, within that six to eight to 12 month window, I should have seen something on the application that maybe I overlooked or turned a blind eye or got lied to. Those are the ones that I think a good Autopsy would probably show you some flaws in your underwriting.

Yeah. What, you know, what I see is we would, you know, every once in a while go, okay, I'm gonna look at. We'll have a big monthly repo. I want to look at every single one of them.

Yeah.

And I go. And I flip to them and I go, well, let's score these again. I've got my own model. Let's score these again, and let's see if we would finance them again. And it's almost always, yeah, we would have financed them again. I don't know what happened. And it's frustrating, and I would like to be able to pin that down on how to do it. But like you said, it's kind of hard.

I think that's just part of our reality. We've got to adjust that as we can. But there's always going to be a degree of, you know, unpredictability in this. And so we do the best we can to forecast that in our underwriting at the time. And, yeah, I always say to dealers, you know, the longer the note is, the greater the chance of some sort of failure, whether or the customer. And so we like to see notes be, you know, short. You already heard me make the argument for keeping them reasonably short based on some anticipated life expectancy. But the longer the note is, the longer, the greater the chance of failure.

And what's funny is, Luke, you could autopsy all those loans that went bad and think that you pinpointed the reason. Oh, you know what? We've been really upping our payment to income, or we've been taking people outside of our area or this common thread. But I bet you could go and look at your payoffs for the next six to 12 months and find just as many that would counter that argument.

So with that, what's the perfect length of a buy here, pay here note?

I don't know that I can give that answer. Because if you look at the mainstream of Buy here, pay here, I'm going to give you an answer of 30 to 36 months. And the reason I would even arrive at that is what I'm calling mainstream is the dealer that we see that's typical for Buy here, pay here. If you and I went to Atlanta, Georgia, or went to Nashville, Tennessee, and we drove up and down note row in that community. If we look at the average ACV of what the typical dealer is carrying, that's typically going to settle in at around the $4,500 to $5,000 range is kind of what I see as typical. So when you just kind of do back into the math, if you did that deal with $700 down and had it priced in the $9,500 range, whatever, then that should land somewhere in there. And part of that for me is I'm trying to make sure one of the things I urge dealers to do in underwriting is set that payment in a way that's reasonable. Because I'm going to ask my collectors to hold that customer accountable, that payment. So I want the payment to be reasonable. You know, what is that number? Well, it varies depending on the customer and their income and stability and lots of factors. But I try to set the payment reasonable, which should put me in that 30 month range. On the note that we just talked about, depending on interest rate, it's going to put me in that 30 to 36 month range. I think that's pretty typical, you know, so. And those notes perform well. You know, we just see that, that's, that's pretty dependable portfolio and it's what I see a lot.

You back? Yeah, we lost it every second. You back?

I'm back.

Okay, that, that's, that's interesting. You know, for years we, every note was, and this was when our, our ACV was a lot lower, but it was 30 months. I could quote the payment on the car every time. And those, those loans did really well. You know, I have noticed, I mean our ACV is almost $9,000 at this point, but the note just gets longer and longer and at some point you.

Have to pull it back in a little bit.

But the longer it's out there, the more chance it has a failure.

Of course.

Car and the customer. Have you noticed a month where these typical loans go bad? Is there a month that sticks out? Is it the 8th month? Is it the 12th month? Do you see that anywhere?

The average, I think was around 10 months. Last time we did a study with our own clients. So I can't say that there's anything real predictable there. But I would say that again, it has to do, has a lot to do with the cars. I mean, I think every dealer, I would urge them to go back and look at their mechanical failure rate. I mean, did the customer perform and if we lost the car, did that mean that we lost the customer? You know, sometimes we can trade that customer or maybe we're doing reinsurance and can do a warranty program, whatever. But it's always my hope that just because we lost the car, I hope we don't lose the customer. So I'M always trying to help that customer's performing well. We have a solution to keep that customer. So the whole thing, we look at.

The cars as the asset, and I really think the paying customers the asset. Right. The cars, the commodity. And sometimes even I can get upset with myself or my employees when I swap them into another car. And it's like, well, it's not, you know, it's not their fault necessarily on this situation, but let's keep them paying. Let's keep them on the books. No sense in trying to stick it to them and make them feel like they got to go do this, that or the other.

That's. That's so Jeff. That's. That's a lot right there. That's. That's it, man. Customer is our asset. You got anything else there? I'm all out of questions. You know me, I can go for days.

Yeah, I could. Jim, really appreciate your time. Tell us. So people that want to get to know you more, what you do, or even reach out to you for some consulting, how do they get ahold of you? And what is. What does that look like?

Sure. Just look up the Octane Group. We have one of those funky new domains instead of dot com, we're Octane Group. So they can find us that way. And to make sure they've got the right one, you'll see that we're in Salt Lake City, but they can also, of course, reach me by phone. I'll give you the phone number here. It's 903-816-0216. Any dealer can always just call me directly. And we're happy to help them in that way. But yeah, Octane Group in Salt Lake.

City and the level of services, it's everything you do a startup for, buy here, pay here. You do a kind of a boost, a continual. And then you do kind of analysis on an ongoing basis. Right? Of course. Portfolios and health.

Yep. We like to do data services for clients. That's usually a good place to start. Start measuring the portfolio. That gives a better idea where we might be able to help them. But that's a pretty valuable service to be able to track their numbers, collection efficiency, and there's any number of indicators that we track for dealers on an ongoing basis, both weekly and monthly.

Awesome. Awesome. Jim, thank you so much for your time.

You bet. Thank you. Pleasure, guys. Thank you for joining us today. Hope this episode inspired you to take part positive action. Remember to subscribe so you get each episode the day it comes out, and we would love your help. Spreading the word. Leave us a review and share this podcast with your dealer friends. Dealers helping Dealers learn and grow together.