Wake up, Buy Here, Pay Here people. It's a beautiful day. Go grab yourself another cup of Joe and say hello to Jim and Michelle Rhodes on the Buy Here, Pay Here Morning Show. Take it away, you two. Hey, good morning. Happy Friday. Welcome back to the morning show. Absolutely. Where we talk all things buy here, pay here, lease here, pay here. We do. Before we get started, too, today is a somber day to remember something that happened. Geez, I remember where I was when it happened, but it is the anniversary of September And, you know, that's always a somber thing to remember. And we just happen to live in a country where just we don't, that doesn't happen often. I think that there's been twice. Sure. That time, which was... not necessarily a country and then when japan when japan bombed pearl harbor i think are the only times that that we've ever experienced something like that on american soil sure yeah yeah it definitely was a somber and a jarring sort of uh incident lots of lives lost that day and so yeah it's somber uh we should remember that day and we we will remember it forever yes yeah shall we move to our subjects or a couple other announcements one thing i want to make sure people know if uh if you're a v-eight dealer or if i'm sorry if you're a dealer with less than one hundred uh buy here pay here accounts and you're interested in getting in a peer group we are uh forming v-eight group six and we would love to have dealers who are Less than one hundred accounts. You want to learn from peers and some mentors and coaches. So reach out if you're interested in joining a VA group and and we'll help. We have a better solution for managing data. for dealers in all situations. We're kind of changing that process, how we retrieved data into V-Eight. And so I think our ability to support those dealers goes up sharply and we look forward to working with dealers in that situation. And of course, today we're talking about information yeah it's the second of a four-part series uh when i when we had this last week i misspoke and said every friday in october i've done that before i lose a whole month yeah yeah yeah it's uh it's september we're uh so we're covering all this in the month of september so this is a four-part series we're into item number two this week around this whole big subject about the analysis is around how many contracts make it past twenty four months with our buyer payer portfolios? And so we've been doing some analysis in our VA community. And so I showed graph last week. I had one more dealer to the pool going into this week's conversation. But I think it's almost really people would want to go look at their own numbers on this and see what this looks like and then be able to tie back the things that that we're going to cover and make their own decision about whether you know it's part of what we're doing also in va is looking at business model right so this is kind of a wide view we back out and look at business model which looks at deal structure profitability portfolio yield and and so this all kind of becomes part of that conversation is how long a contract did we really want Right. So this is part of what we're talking about. Let me cover a couple just for recapping for the sake of our listeners. Let me kind of share the in order. When we're talking about contracts that make it twenty four months, the reason that we we want to be sure that we're. on target with this number you know where we price our cars and and kind of what what because the result of that is term of loan right the kind of what i used to talk about fitting in the box customers down payment is this their payment amount is maxed out because of a income limit and so that means that when we run up the price we typically run up the term okay so now when we talk about term One reason, I'll just go through these quickly. One reason to be cautious about just rounding up the price and putting a lot of gross profit out there is taxation. We talked a little bit about that last week. Yeah, unlike... States like Texas, you pay taxes as you collect. So this is not really something that they have to worry about so much. And the sales tax. Yes. Yeah. But the income tax, everybody's going to have. You do. Yes. And so, as we talked about last week, there are strategies for that. But I think the key takeaway there is the larger the price we set, the more tax we're going to experience, regardless of how we pay for it. And even when we pay for it to a degree. But the real key for me on that one is if we pay tax on profit that we're never going to collect. And a lot of times we're not going to recover that. Now, just way too detailed. We covered this in some depth last week. But just know that that's that's item number one reason to think about that. Just watching your prices and terms, what price results in term, and then go back and look at, so the purpose of this study here is, regardless of how much term we may put out there, a thirty-six month note, forty-two month note, whatever that looks like for a buyer-payer-dealer, the question becomes, how many contracts actually make it to twenty-four months? Alright, so when you ran the numbers, did it surprise you? um no not for me i mean i've seen enough of these portfolios and worked with enough dealers uh that no i did add one to the pool this morning which is a little bit different you'll see it on the slide in a bit but that was a little more percentage-wise than the other dealers very different model and doesn't make it right just makes it different than the rest of the other dealers so it's just one more piece of information for dealers to to think about. As I said last week, and I still feel the same, it's like, of course, I'm a coach and we make suggestions and people will come to me as a coach, especially when they're new. Hey, where should I set pricing? Where should I set APR? And all these kind of factors. As these conversations in the month of September will provide evidence for, there's a lot of things to consider. Now, we are getting closer all the time with the way that we're analyzing report cards and analyzing business models. We are going to be able to tell dealers better and better with each passing week and month. What the data shows is the better outcome. So now dealers have to, you know, outcomes can vary to what a dealer is looking for. you know, in terms of their portfolio yield. I always talk about in buy here, pay here, there's two different general approaches. One is based on cash flow. One's based on equity and grow, grow, grow, right? So those kinds of strategies can vary too. So that's why it's hard to give one answer. And I'm not really focused on answers here in this series as much as I'm providing information and allowing people to think think through how to answer it for themselves. Yeah, because they're going to have to measure these things based on their own business model and their portfolio. Right. So I think the reason we took, excuse me, there are multiple reasons that we chose twenty four months that I chose twenty four months when we set up our data from the beginning. And most of what we're going to talk about in these four weeks kind of point back to why that would be the case. All right. So let's talk about reason number two. So reason number two would be The very real waning interest in the vehicle, which is going to be a really difficult thing to measure. Yeah. And it is going to be a difficult thing to measure. We know it's real. Most any dealer we've talked to would know that the customer has an itch to trade. They start asking. You'll see it out on Facebook and social media. Dealers are saying, hey, what's your policy about trade? How often will you trade? Right. And so I, uh, let me find these real quick. And actually let me go through the list. I'll come back and share those. And we, we're not going to go into a whole lot of depth there on waning interest, um, because of the, um, there, there are some podcasts that we did in the past where we dug pretty deeply into this. I created a tool that would calculate what does it look like to trade our customer at twenty four months, thirty months. What's a math, right? Go ahead. Well, and I, I ran a, uh, I love my chat GPT all of that. And I said, okay, what is just your average like car buyer? Um, and pulled some studies from Cox and other ones about, about how long people are keeping cars. And what I found interesting, which was surprising for me, um, is that, is that. Especially when you're buying new or next to new that people are keeping their cars much longer than five years um and that it's becoming it's becoming more common that it's about a ten year thing that people are holding onto cars and and i think that part of that is is because it is just it's the the economics around purchasing a car especially a new one i mean the the prices are just astronomical all of the things and so people are for financial reasons are when they're buying a new car are holding on to them substantially longer. And one of the things that it said is that, I mean, it's just in the last year that there's been a very noticeable shift in how many people are keeping their vehicles longer. And then when I started to drill into subprime, it's like, oh, well, that's a completely different factor. And what it was talking about for our industry is... maintenance issues. That was like, it's the yes, there's an itch. And most people they say it's like they say it's a three to five for new cars, which was typical, right? It's not that anymore. It's now like five to seven and ten is is becoming more and more common for yeah but when you're looking at buying your pay here and you're buying a car that's got a hundred thousand miles on it that's it and i'm all purchased that's yeah that's it um that there becomes a shift and so you know are we are we doing this because people want something new and shiny which is everyone loves that you know they talk about the three to five years for new cars um and most of your leases are around that length anyway so that you know the has watched that. But for buy here, pay here, it's like when do things start breaking down? And when do they, when they get hit with a twenty five hundred dollar replacement of something that they're like, I can't afford this car anymore. Yeah. Which look, you know, dealers have different remedies for that. Some will do a service contract. Some do a warranty. Some will finance repairs as a scenario. There's all different ways to solve that before you ever get there to a mechanical failure. Let's say the car is still performing OK. Right. Still run drives. AC blows cold. I'm really talking about the customer just simply loses interest in the car. They see a new body style. They wish they had Apple CarPlay, whatever they wish. They just have an itch to trade into something new. Now I'm going to throw one more wrinkle in that because, again, I don't have the data to prove that. I don't know that anybody can prove. about a customer's fickle interest in a new car, right? Like how much, but dealers who have been around this a long time know that that's a very real thing that the customer has a desire to change. The wrinkle I'm gonna throw in there is I would be looking at that desire to change cars relative to tax refund season. Oh, yeah. For sure. Right. Oh, yeah. It's like when. So here we are having this conversation. You know, we're live in the month of September. Tax refund season will be coming up, you know, February, whatever. So if we ignore that customer's itch and we don't address it. It stands to reason that we could lose some of those customers. We could lose them any time because they're going to get frustrated and give up on a car. And if they can finance elsewhere, they get a couple thousand dollars down, then they can go finance another car and give up on the one that they have with us potentially. Right. That can happen. So it's really about being proactive, about understanding our customers. needs and one of our dealers when this came up in our v-eight meetings last month one of our dealers talked very specifically about a program that they've created where they they're they're aggressive about um trading customers right so i think again i people will see when we go through this these four weeks that i'm certainly an advocate for proactivity in this area that's why we had these podcasts before i shared looks like they may have only gone to a couple of destinations here but i shared in the notes here so it probably goes out to accompany the broadcast in certain locations but we've done podcasts in the past i looked them up michelle those dates were in february let me do this other one first in june of We did, when can I, should I trade my customers and buy your paper, right? So people can look that up and you can go to our YouTube channel. You can find a playlist anywhere on our YouTube channel. You should be able to search, when can I trade? Okay. And find that one. That again was June of twenty twenty three. And then in February of twenty twenty four, we did one around handling negative equity. Okay. So that would also be relevant here for why dealers choose not to trade. We had one of our dealers in last month's meeting says, I can't really trade at twenty four months. The math doesn't work for me. OK, so I think we need to ask ourselves and if we'd had time and it may become a recurring conversation with that particular group is like, why do we say we can't like what's what's the math? What's our internal math that's working against us there? Because if we simply can't then we run the risk of losing that customer certainly come refund season. You know, if we just simply can't, because if we've got a customer upside down and that's really goes back to what you were talking about early, high mile cars and buy your pair back to life way it has to be. So the price, we run up the price a little bit and in the interest of, you know, making sure we've got enough margin to justify the risk that we're taking. And now, at at twenty four months in we have to really ask ourselves and this is what i would ask you to be looking at go look at how much of your portfolio remains um active after twenty four months twenty four months from origination okay and in our case let's show the slide and then i'll go ahead and finish up items three and four so uh the slide that we created and again last week when we showed it had four dealers i added a fifth one Let me just describe it for any of our folks who are listening only on audio. There are five dealers on this slide, and what it shows is... the percentages of their portfolio that remains active. So this is a look at, this is not a static pool to study all the way through all contracts, all the way to the end. This is a look at as of August, what percentage of the active portfolio is more than months since origination. Okay, so we looked at it in both number of accounts and in dollars. So you can see there, I'm gonna expand this so I can read it for, But for our listeners, rather, the bars across the way go in terms of dollars. The lowest dealer is at six percent of their portfolio in principal dollars was originated more than two years ago. i can tell you from i looked it up that dealer's average term is around forty months okay so they but only about six percent of their portfolio in dollars is still with them past twenty four months the the highest uh dealer in that segment is at fourteen point two that's the one i added this week okay and that is a dealer that has a higher acv they do some pickup trucks and and higher ac a little different model that dealer has about fourteen percent okay so let's just think about that a minute so if a hundred percent of our cars have high markup and only the in the best scenario in terms of dollars only eighty six percent of those or eighty six percent of those accounts don't make it in terms of dollars eighty six percent don't make it to two years but that was a question i was you know when you said the um that we were talking to a dealer about this the twenty four months and they're like the math doesn't match it doesn't work for me right um so you know obviously they must have a lower charge off rate at twenty four months and more than a lot of other dealers i just have to ask them because i think their motivation they have their own motivation for why they would say i can't So there's some math they're looking at in there that makes them feel like that that's a losing proposition for them. So I would just say that I think, and this is tricky for any business, but I don't see a lot of dealers in our business measuring things like lifetime value of customer, right? So I think what I would be looking at is you're not losing the customer. So you're trading the customer into something else at twenty four months, for example. So you're just changing collateral. And there's some really good math behind why you would do that. So I think when you think about I can't make it work like it might not look good on paper, the actual transaction and when you do the trade. But there are other factors that have to go into this calculation that. that we really need to get comfortable with. And I think dealers are going to certainly through our VA community, we're going to be working with dealers to help them see this math in a little more depth. But I would say then, let me go back to the slide just for a moment. Oh, I was already up at the same time. Okay. So the blue bar is on the screen shows the number of accounts. So this would be the number of active accounts compared to the total number of active accounts. That are beyond twenty four months and that came out. I said that backwards, but I think folks follow that in terms of accounts. The dealer with the lowest number was ten point six percent of their active accounts are more than twenty four months since origination and the highest was twenty five point five. We had another one last week at twenty four point three. But that's just saying the number of accounts. But the account balance could be small at that point in time. And so which takes me to my other points. You know, when we think about our our items, you know, kind of four different things to talk about here. We're on reason number two, which is the customer's waning interest. But number three is. Diminishing returns. So I did some math with some of our dealers last week, and we don't need to get that deep today except to recognize that even if the account is still with us past twenty four months, the balance is obviously declining. And virtually all of our dealers who are buy here, pay here, if they're not lease here, pay here, they're buy here, pay here doing simple interest, which means most of the interest happens early. we shouldn't be surprised that the customer is upside down with us at twenty four months or at least not in a great equity position because what they've been paying mostly interest. Right. So now we're going to have that situation. But but irrespective of how much is principal or you could say, We're now collecting less interest per customer in that bucket that's over twenty four months. We're not collecting as much interest. Right. Those. Yeah. Going towards principal. Right. Those accounts are maturing. And so you have to ask yourself, OK, what is it costing me to support and service this account at this stage of its life? And if I had that customer, that same customer, put them in a car that's now got twenty five thousand fewer miles. be forty whatever it's like lower miles newer model year better paint job whatever it's like now we put them into a newer collateral and our interest resets contract goes up to the customer they're just in a nicer car got the same payment yeah so we hope that's so again this is why I think refund season is the time to have a pretty pretty tight strategy around this kind of thing because we can see that our costs are going down. I'm sorry, our costs are probably the same to support that customer, but our interest earnings are going down. So it's one more reason. And then number four is loan to value, which really comes into question when we've got a lender in the picture, we've had dealers getting a lot of trouble with their lender over loan to value, that their margins were too high. They had too much markup relative to the book value of the car they were financing. So customer might not mind, dealer might not mind, but the lender behind the paper has a problem if the LTV is not in line. Okay. So again, that's just a lot of markup, a high note relative to the actual wholesale market value or the liquid value of the collateral, the car. So when we get our loan to value out of whack, then that can become a problem with our lender. So I think this is one more reason for us to ask ourselves, are we putting too much markup on there? And if we know that a low percentage of our accounts are going to be around past twenty four months, maybe that will help us to recalibrate recalibrate our strategy. Yeah. And that was like the focus last week was around, you know, what are we pricing? How are we pricing? Because if we know that we're paying taxes up front and that most of our accounts are going to have dropped off and we're going to have a charge off situation, then why are we creating more loss? right by having a higher uh higher markup on the vehicle and listen you know we talk about this all and and obviously you could hear this and and say well jim and michelle are saying i should reduce my prices and cut my markup well we're saying go study it because that may actually be the result of what you the that may be the right course of action for you everybody's situation is going to be different we know there are lots of business models and and they can all work it's just that when we get With this math, we've got five dealers who are representative of this across multiple states. This is representative of a typical buyer-payer. We'll have more and more of this kind of data going forward, but I think we just need to be prepared to go do that math for ourselves and see... What does it look like? Where can I make adjustments so that I'm not paying too much tax? I have a favorable LTV. My customers are happy at their payment and I can keep them in a car and keep them for a lifetime, have customers for decades, that thing we talk about. Because I think that's what we don't want to do is be churning customers. If we can keep them in a car and keep them happy and keep them in a payment, maybe keep them under warranty or service contract for that period. That's one more reason to be thinking about this is, you know, if you've done a twenty four month service contract or whatever, when we can keep the customers. It's a really good sell strategy because it's like, hey, Your warranty is now expired. Remember that repair we did for you that was covered? Well, starting this time, it will no longer be covered. We've got extra miles on the car, so it might be time to trade you in and we can restart a clock on that warranty. Sure. Yeah. Yeah. And I honestly don't know the answer about how it works in reinsurance or external service contracts. If a customer can buy a service contract, I think the answer would be yes. In other words, can I buy another service contract? You might be able to, but you probably can't add it to the current note. Yeah. Right. You can pay cash for one, probably whatever. But but I don't hear that happen. So I think you basically would be looking at how do I make it make sense? Keep my customer protected, keep a customer happy in the car that they want and keep them in my portfolio for a very long time. So, again, when you can get that recurring, the annual recurring revenue and keep it in your portfolio, book of business, so to speak, then I think that's really what you would want to target in our business. We know it's about customer retention. And as you touched on last week, rightfully, it's like, This stuff becomes even more true in small markets. Like, you know, when you're in a small market. You don't have the churn ability. Yeah. The churn ability. Yeah. New word. But, yeah, I think you want to be even more focused on this to make sure that you're keeping the customers that you do win because you really can't afford to lose a lot of customers, especially in a small market. And you can't afford to have too many customers go away in repo. Right. And have that not have you not suffered for that over time? Yeah. Right. So I think that's the thing that we we want to be watchful about. But again, we'll cover all those. We've got more to really examine as we go. And we're going to continue to dig into it with our own data. and see what we can come back and share. But I would say, you know, our purpose this month is to really just bring this information to let folks decide for themselves, you know, what is a prudent structure given that we know mathematically we can see that only a certain percentage of our customers are getting past twenty four months. Yeah. You know, and and In the industry, I have not been a dealer, but it's just what I have watched through the work that you've done and through conversations that we've had is that we know that a lot of things changed around COVID. And it hasn't changed back to what it was before COVID. And so the old models, the old way of doing things that were pre- just that they they don't apply as well as um or they don't apply as well today as they did back then because you know you're looking at cost of car and just all of the things and so it's always a good idea any business owner any in any industry is gonna is is going to um you figure your your business model is a living breathing thing which means based on current economic circumstances and all of that is you shift and you and you grow sure and that you know most of your most successful entrepreneurs are always in a learning state and they're always willing to shift Because when you're married to one way of doing things, you will end up shuttering your doors. You can see that I've got a very good friend of mine who does affiliate marketing and in the health industry. And they went through, I mean, it's like this is an industry that they have been done very, very well. You know, they're multi-multi-millionaires and that there was a shift in how people are buying. and in a matter of six months they dropped their income dropped almost three quarters of their income just like boom and they had to go like what and make some adjustments and now it's it's that's happening so in every industry this happens it just depends on what's happening in the economy all those things so you know the when when we're as a business owner when we are just like nose grind head down, do the thing without looking up to see what's changing. And looking up to see what other people are doing and looking up and it's like, you know what I, and, and, and making tweaks and adjustments and sometimes a full fricking overhaul. I can't tell you. We there's a bunch of people that we've worked with that it's like, you need an overhaul. How do you feel about like not selling any cars for a month while you overhaul this thing? And so we, that we can't be so rigid. In the way we've always done it, because... you know, what's the next thing that's going to come along and throw a stick in the wheel of your bicycle tire and it's going to flip you over because you never know what's going to happen. So my point to this is just stay flexible. Yeah. You know, bend with whatever it is that's happening. Listen and watch what's happening with trends. You know, there's a lot of good articles and things like that out there. But be willing to not be so rigidly married to the way you do it. um because uh you know making a small shift how many times do you hear i i pay attention to a lot of different podcasts and and different business structures different types of businesses that you know sometimes we don't change because we're afraid of what might go wrong if we make a change because it's like you know it's the it's the it's the devil you know And, um, and so things like having the ability or paying close attention to publications and things that are happening, but having the ability to be able to talk to other dealers on a regular basis, what's happening in your market. What is it that you did? I see that your numbers have changed. I see that something has shifted. What are you doing differently? And that those kinds of things, and I'm in a long winded way, plugging dealer peer groups. I don't care what one it is, but I do have, I do. Yeah, we kind of do, but it's just having that and being open and not so married to your, to this is the way I've always done it. This is the way it works. Yeah. And yeah, just being open. And I think that's just a really important thing. And I know in your consulting career that that's been, the dealers that are flexible are the ones that you can help the most. yeah and i think you know it's good that you brought that up because um obviously me facetious we people these things scratch different inches if a twenty group um you know niad is twenty groups that's an in-depth thing that's a much deeper examination can be a great solution for a lot of people we do a virtual alternative and uh so that's a good affordable way to be virtual and we have people quite a good number of people that are doing both. Sure. I would just add to what you said that you're right. Being in that peer group or wherever you find that information, if you need to adjust the business model, to me, that starts with data. And we talk a lot about like in our groups and we're asking now we're going back and surveying our people like is the peer group conversation more important to you or just the data or do you not care about the data? And the reason I would say The dealers will benefit from having data stacked up is because to your point, if they need to adjust the business model, they need to know which levers to pull. Exactly. And it's interesting because we've talked to dealers. It's like, yeah, I've got great data. I've been tracking my data for thirty years, but you're doing it in an echo chamber. Yeah. Unless you're able to compare, like really compare apples to apples with other dealers, you might be tracking your data and everything works according to your data. But until you look at someone else's and compare, it's like you're in your fishbowl and your echo chamber or whatever, it's working great. But, you know, when you're that flexible, it's like it could be better. It could, you know, or that there's something coming down the pipe that we weren't aware. Because now we're we're kind of watching that there are trends that are happening because we all know things like the housing market and all of that, that it they. it kind of starts somewhere and then it grows or it doesn't hit everybody all at the same time. So being aware too is really important. Yeah, so I think your point about, you touched on the COVID thing, and I think somebody tracking their own numbers for many years is great. You can see your own numbers pre-COVID, post-COVID perhaps, but can you see how other dealers have been, more successful post COVID and more successful based on what measurement. So in other words, you have to know. Less successful and it's like, well, that's something I'm not going to do. Yeah, you have to see the comparison. But again, it's kind of what's the outcome that we're looking for in order to measure success, love and respect. Brent Carmichael at NIEDA because he teased me one time probably on the podcast about, yeah, but what's successful or what's, you know, when you say successful, because there are different measuring sticks on this thing in terms of what that can look like. So I think it just starts with data. You have your own data. You decide what matters for you. But I think the way that we're approaching it with our report cards and being able to say, here's a report card on your business model. You rank high in this area, low in this area. Your cumulative GPA is this. and the dealer sitting next to you has GPA of this, and so let's talk. Ask them how this works, why this looks like this, and they'll see it for themselves, because they can see the numbers and know why this dealer lands higher in profitability, this dealer lands higher in portfolio yield, and they'll be able to go away from the meeting and say, I want more portfolio yield. Looks like I need to adjust this number. Exactly. Yeah, exactly. Yeah, for sure. Exactly. What else you got? I think that's it for today. Like just a reminder about a group six. If you're a dealer with, um, size already. So we were just going to be making a push. There's time to get them in a meeting. in the month of September. We just need to get some folks who want to be part of those groups get in there right away and let's get that figured out. Absolutely. All right. Well, and those of you, we have a new salesperson too. Yeah. Who's amazing. She's just doing a great job. Just really, really enjoy her. So those of you who are getting, might be getting a phone call or an email or something from her. Current members, former members. She's great. Potential members. She really, really is. All right, everybody. Thanks for joining. We really appreciate you taking your time. Happy Friday. And our hearts and our thoughts go out to all those families that were greatly affected by what happened a few years ago with the nine eleven. So have a great day, though, everybody. And we will chat with you all on the other side.
