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Is Buy Here-Pay Here The Right Fit for You?
Appeared March 2008 - volume 5 - issue 3 - page 12
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I conduct classes to educate prospective entrants into the buy here-pay here market segment every month. The vast majority of these prospects are retail new and used car dealers. It seems to be a natural extension of the retail business and an additional profit center. Or is it?
Buy here-pay here is among the most profitable segments of the automobile industry when executed well. It can also be a money pit when poorly executed. It is a business model where the rewards are high. It is also a business model where the risks are great.
Let’s touch on the rewards, the risks and the day-to-day realities of starting a buy here-pay here operation. If you are excited about the opportunities (rewards) and are not frightened by the challenges (risks) as well as the daily realities of operating a buy here-pay here dealership, then this may just be the right fit for you.
The rewards of operating a buy here-pay here dealership are great and relatively transparent. These rewards include tremendous ROI (return on investment) opportunities. Many dealers return 60 percent or more annually on their initial capital investment. There are few business opportunities with returns this high and this consistent.
Also, buy here-pay here dealers do not depend upon manufacturers to produce desirable models at competitive prices and deliver these vehicles on a timely basis. Buy here-pay here dealers do not depend upon banks and finance companies to finance automobiles or purchase notes. They do not have to consider the myriad of auto finance programs that seem to change each month. The inventory that worked last month will work this month in buy here-pay here. These dealers don’t wake up one morning to find out that their best funding source is “not buying this month” or no longer buys from independent dealers or has added a new round of fees.
It is easy to see that a dealer can control their business much more than a retail dealer trapped by banks and manufacturers. They do not typically face competitors willing to make a dollar less than you just to move one more unit.
Buy here-pay here dealers also have the luxury of setting retail prices at remarkable gross profit margins. The buy here-pay here benchmark for gross profit margin on retail sales is over 54 percent. The typical margin exceeds $3,800. Buy here-pay here customers do not price shop then buy, therefore, do not negotiate price at all. These prospects are not adverse to the interest rates charged in the industry. Those rates typically run from 18-29 percent and even more in states that allow higher rates. These customers are payment buyers and, based on poor credit history, completely captive to the buy here-pay here dealer’s finance program parameters.
It becomes easy to see the potential for profits when you can charge those rates and achieve those gross profit margins. Beyond the profit potential, the buy here-pay here dealer is the bank and makes all credit decisions (hey, it’s your money…) so you can be as “loose or tight” as you desire when it comes to loan underwriting.
Given all the upside of the business, the control, the margins, the returns; why wouldn’t everyone get into the business?
Two reasons to avoid the buy here-pay here business are the risks involved with the business and the investment required to enter the business. The risks seem obvious. The typical buy here-pay here customer has a 450 Beacon score with low- to-moderate income and a history of bad car credit. The typical buy here-pay here customer does not value possessions or have many, for that matter. They are buying transportation, not purchasing an asset. They will typically not maintain the vehicle or make necessary repairs. They will move often and change jobs on a regular basis. They are slow payers on most, if not all their bills, and will add you to that list.
Someone once said, “The average buy here-pay here customer was born LATE.” You have to feel comfortable speaking to, dealing with and seeing these people at your dealership every day. If you are comfortable with that aspect of the buy here-pay here market, we can move on to the costs to enter the business.
The capital required to start up a buy here-pay here can be daunting. The typical buy here-pay here dealer finances a $3,400 (ACV) unit with a net down payment of almost nothing (net down = cash down at delivery less taxes, fees and commissions). They repeat this process 30 times each month or more. This requires an investment of more than $100,000 (30 X $3,400) every month before overhead is paid. It is conceivable that a 30-car per month operation will require more than a million dollars in investment capital to get a buy here-pay here operation up and running in the first 12-18 months.
The reality of starting and operating a buy here-pay here operation is that your retail automobile operation experience gives you an advantage over others entering the market. You are a licensed dealer, you know how and where to acquire inventory, you have the facilities or relationships to recondition the vehicles properly. You know the compliance and regulatory issues involved in the retail sale of an automobile. But that is where the similarity ends.
The buy here-pay here business is a finance and collection business and is more closely associated with the rent-to-own industry than the retail auto industry. This business requires that think and act like a bank. You MUST have the discipline to say no to a shaky deal. The goal of buy here-pay here dealers is to produce collectible loans, not just “move metal.” And most importantly, you must learn to collect from the “uncollectible.” Dealers who get in this business, but do not like collections rarely do well. Collections is an acquired taste and not for all dealers.
In short, buy here-pay here can be the most profitable and rewarding business imaginable. It does, however, require substantial capital investment, a stomach for collections including uninsured wrecks, bankruptcies, skips, head cases, repossessions, a litany of excuses for nonpayment, and the discipline to make the right loans to the right people only as many times as you can afford to do so. If this opportunity interests you, let me show you the way at one of my upcoming buy here-pay here training schools.