I'm talking to a great number of dealers that say that they are doing Buy Here Pay Here, but through our conversation I find out that they are either; selling off their porfolio in bulk or selling the loan to a finance company from day one with a 100% recourse. If you are doing this, what is your rational? Is it strickly to increase imeadiate cash flow?
This information is a trade secret for many lol. I can assure you we are not losing money selling bulk. Most deals are structured as 60-70% of principal with 30-60 day recourse. I've found that moving the portfolio around 6 months holding seems to be the best profit level. But there are some accounts the buyers will not buy, they may pay good but for some reason there system kicks them out. So we always have 40-100 accounts to collect on ourself which helps with cash flow for bills and payroll etc.
Day 1 deals never had made sense to me, not enough money left for the dealer.
Eric, first of all you should always disclose that you are with a finance company such as Credit Acceptance so we can reply based on what you are looking for.
Most BHPH dealers do not sell off their portfolio. The main reason is the money is in the receivable ( payments ).
Many dealers have borrowed against this money so they are selling the loan back to the bank as security for more loans.
As far as Credit Acceptance goes , I do agree that if as a dealer your are not ready to get a $500,000 line of credit to do BHPH loans you should use CAC, Westlake or another lender in that spectrum.
BHPH is not for the weak.
Currently, I do not have a loan for my receivables, nor floorplan for my inventory(Thank GOD!). I have a large line just not currently using it. I have found it best after 6 months to sell my accounts and constantly concentrate heavily on sales. Most vehicles we sell have accounts with terms of 3 years. Anyone in Buy Here\pay here knows it is tough to keep a customer in a 7 year old car for 3 years. We found after a year or so they want to trade or move up etc. This usually causes a problem because if you don't trade with them for just the amount of a down payment to the car they want(the best piece you have on your lot btw) they will stop paying for yours and go to the competition and start the cycle again.
To corner this risk and other risks we sell accounts, the discount that is given 30-40% is very fair in our opinion. After a 60 day recourse period which 95% of our customers make it through then we can relieve our collections staff from collecting on those accounts.
There are many different business plans for Buy Here/Pay Here, this one works best for us. The customers still come back to us and buy other cars so we don't lose them due to account selling. Collecting on 1500 accounts does not interest me as quality staff is extremely hard to find. Also, due to todays pricing and competition we are selling a 4500 acv vehicle for average down payment of $700 down with around $300 month payment. The first years payment go towards paying for the vehicle and sales commission. So selling 500 cars for a year with no profit would make me have to borrow money. Selling after 6 months usually nets me close to the same profit as before when we held accounts for 2 years plus, except we get the profit in 6 months instead of year 2.
BTW, Yes it feels good to get huge monthly payments on 400-700 accounts but if you do the math it is just an illusion. The awesome cashflow is not profit, that illusion has made some dealers go broke.
Before this website I wondered how the Credit Acceptance guys made money, I had heard many rumors. Now I see but still if you have the money straight buy here pay here will net you much more profit and freedom. I don't need to look at a black book to buy any vehicle that fits into my criteria. For some reason an 03 Grand am GT with 100k has been worth around $4000 for the last 6 years lol.
If I had 100 million to invest I would not open a lot, I would start a portfolio purchasing company and offer 50% and no more. I'm sure at that price you could pick up plenty of accounts and at that price the risk would be extremely low. The ACV of vehicles in this market do not depreciate.
If you have 250k in principal balance most will put bids in. Mid atlantic, United acceptance, Sterling Credit, Southside, Westlake all will give you a bid. Be aware, they will not pick all of your accounts. On the 250k plan on them picking 125k worth. We generally alternate companies each month so that certain accounts that were left behind get picked by other buyers.