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 friends, welcome back to the morning show. I'm Jim Rose, your host and my normal lovely co-host. Michelle is not with us today. She's in the background running the buttons and knobs and making sure all this stuff happens, but she's not going to join us on screen today. We've got a few guests who are standing by as we kind of wrap up this September series around what I've just generally been calling our month You know, this month, twenty fourth thing has been a thing. It's been something on my radar for some time. And our members of V.A. dealer groups hear us talk about this because we chose from the very first meetings of V.A. to measure this thing about projections and how much cash we can anticipate yielding on our portfolio across twenty four months. So in our V.A. conversations, this is not new. We just bring it to the podcast as a way to really put it out there, something to. everybody compare notes on and go back and do their own math and see kind of where they stand in this number, because we learned in doing some of this recent analysis that a surprisingly low percentage of the portfolio remains active after twenty four months with most of our members. Obviously, it varies a little bit by business model, but that's why the conversation. And with that, I'd like to bring in dealer Matt McGill, who's a member of our V eight group for Matt. Welcome. Thanks for having me. So Matt is in Central Florida, has been with us in V-A for a very long time. And he's also a twenty group member. So, you know, and of course, I'm a former twenty group member. And so I've I've watched these kind of things, Matt. But I wonder, you know, as you you were one of the ones that we charted based on your own portfolio as of August thirty first. your split in terms of the amount of portfolio on your books at August thirty first that had been with you more than twenty four months. You remember your reaction whenever I shared that. You want to tell us what what you saw? I think I was pretty surprised. It's still it's still I think about a quarter percent of the portfolio by number of accounts, but I think it was about ten and a half percent by principal balance, which is I mean, it's not nothing, but it's a fairly negligible number. Yeah, and I've got some things we can share if time permits, but you're right, we charted that, and it was another indication that we just don't have, most of our dealers don't have that large of a percentage of their portfolio that is still active, customers still paying past the twenty-four-month mark. And, of course, we know from past experience that Typically charge-offs, we haven't studied this within our V-eight circle in a while, but typically the time of charge-off, the average time that charge-offs occur is typically like in that nine to thirteen month window. Has that been your experience? Yeah. It's right at, right at all month. Fifteen, sixteen. Yeah. So you're a little longer. Yeah. So, and your term does run a little bit longer, but I want to go and bring in our other guests. I've got Karen Barnett standing by. So Karen, many of you will know Karen from, if you don't recognize her face, you'll know Karen Kane Barnett from Facebook. She's been active on social media and, and I've known Karen a long time. She's been with SDA, which is small dealers assistance, right? Karen out of Atlanta. Yeah, they've had a few different names, but yeah, correct. Okay. Yeah. And so in related news, SDA just announced at the end of last week that they acquired Carr Financial, which has been another longstanding player in the buy here, pay here segment, providing early stage capital solutions to dealers. And so now SDA is in the process of you know, through that acquisition and be kind of changing its offerings, I'm sure. And we hope, obviously, for dealers' sake, that that's going to be expanded offerings. There'll be more and better capital solutions available, and we'll all be watching to see, you know, how that unfolds. But Karen, welcome. Glad you could make time to join the conversation. Thank you, Jim. Yeah, of course, Karen also brings a lot of finance experience prior to her time in the Buy Here, Pay Here subprime segment. She worked in consumer finance. So, Karen, I know that you'll have a lot of perspective as we go through this conversation about this idea that, you know, we know that in the time you and I have been around the Buy Here, Pay Here business, we see high markups, we see high APR, and we see, unfortunately, a very small percentage of contracts that really stay on the books. You know, certainly a very low percentage go all the way to maturity. And we're seeing that a very low percentage of them even make it past twenty four months based on our own recent analysis. So your thoughts on that just generally before we bring our other guests. I don't see that part of it as much because I was always on the funding, the acquisition side, just in the buy here, pay here space. on the front end. And of course, I sell got a charge off or I need to repo or swap it. But there's a couple exceptions out there, but I'm sure your numbers are correct. And I've always been a defender of the APR. You know me and saying there's risk there. You need to have your reward as well. Yeah. So I'll recap. We'll go ahead and bring in Cammie. So Cammie is our new salesperson with V-Eight Dealer Groups, and she's here to listen and learn and participate and ask questions, Cammie, wherever they come up, because I know this particular segment is new to you, but I'm glad you're here to be a part of the conversation. Yeah. Thanks for having me. Of course. So let me just kind of recap first our past three topics. This again, we're on session number four of four in the month of September. In our first session, we covered this thing about taxation. We looked at sales tax and income tax. And you can find that episode from early September where we really broke down the cost to dealers by having, you know, Matt, as a dealer yourself, if you price a car a thousand dollars higher, maybe, or ran your average selling price up a thousand dollars next month, That would hit you on both sales tax and income tax. Granted, there are strategies for income tax. People do related finance companies and this sort of thing. But irrespective of that, we are being assessed more income tax in a buy here, pay here situation when we run our gross profit up. And of course, we have that phantom profit where it's a paper profit to you, right? The day of delivery, you haven't collected a nickel of it. In fact, you're negative on cash. So we've got this profit sitting out there because we ran our price up, and now we've got sales tax that's higher, and we've got income taxes that was higher. So that, again, was part of our first episode. So thoughts on that, Matt, before we move on to the second one? I'm just going to kind of recap the first three here. Yeah, it's definitely a balance. I mean, you know, I don't know what everybody's percentage of what they put on the book is what they collect, but there's no need in paying unnecessary taxes. And it's just it's tough because, you know, I work a lot with dealers who are brand new to the business. And when you run the cash flow modeling, you realize, gosh, early in the business is we don't want to put cash out there. We're already shelling out a lot of cash for cost of car and, you know, our cash and deal per contract. So to have additional cash outlay at the beginning around taxes, because we know that money's not coming back. Granted, on the income tax side, we may have some allowances as we get into charge offs at a later date, but we don't want to prepay taxes on money that we're never going to collect. And so that's kind of where we landed on this. This math was looking at this whole twenty four month thing. And And so the other thing that happens and was our second podcast of the month was on this idea of a customer's waning interest in the vehicle. We know that's a real thing. I'm sure, Karen, you're bound to have seen that in your time in this business. And Matt, I would have you speak to that just kind of at a high level about, you know, what do you see about how often your customers want to trade or just what's been your observation there? Yeah, usually it's around that two to two and a half year mark. really depends uh you know whether they bought a nicer or excuse me a newer lower mileage car to get you know to start or whether they bought one of our more value-oriented cars uh and it depends on how many miles they put on it i mean right you know it's not uncommon to see twenty twenty five thousand dollars or twenty to twenty five thousand miles a year put on a car and you know they're ready to get something newer Yeah, for sure. And, and the thing starts to make a little funny noise in the back end or, you know, whatever the case may be. So they can, and, and, you know, one of the things that came up just kind of flippantly, but it's, it's a real thing is like, if, if I, my coworker gets a new car that has Apple CarPlay and I don't have it, you know, it's just a natural thing that I'm going to want to, you know, have the latest and newest things. And if, and, uh, So, you know, as a car starts to get a little wear and tear, it stands to reason that folks would start to lose interest. And, heck, all of us, you know, get tired of the car we're driving and would love to have something shinier and newer. So it's part of the thing, and it's a hard thing to measure. I don't know that anybody's got any real data on it. But I just wanted to kind of put it in the thought process is that because we know our customers' interest can be declining, you know, in the car and their commitment to the car can be declining, Then I thought it was another thing to kind of throw in the mix. And then the third episode, we covered this idea of diminishing returns. And I'll put it on the screen just briefly and show you. We brought a tool to the podcast the day that we introduced this. And it's an actual interactive tool that will measure returns. Or show kind of real time. Let me get over here and I can operate the tool just a little bit to give folks a feel for what happens. But, you know, it's got the amount financed up here, which we can change and it'll show the impact of that. And I didn't bother to look up the number, Matt, but you think fourteen thousand is pretty common for thirteen five. About about right. Okay. And then, you know, obviously interest rates will vary a little bit, but we see most dealers charging twenty to twenty five percent. It's currently loaded at twenty five percent. I got the term at thirty six months on the day we recorded this podcast on this conversation last week. I had it set at forty eight, but I do know that thirty six is more reflective. We have some dealers that are out to like forty and forty two months, but most of our members are in that thirty six month range or a few shorter. And then the last thing it looks at is servicing cost. So what this does is the green line shows the interest earnings, you know, according to the amortization across that period. And then the red line would be the cost of servicing each account. So obviously by the time we get out here to month twenty four, we're barely above water on that. And I've got it set at sixty eight dollars of average servicing cost per account. And that number obviously going to vary with some folks. But that's something that I just think is we just kind of wanted to model that out as a way to say, Something we don't think about a lot, but obviously most dealers out there are in a buy here, pay here, instead of lease here, pay here, and buy here, pay here, simple interest. We're earning most of our interest on the front end, but that starts to shrink over time. And so now we've got a customer who's paying us the same amount, but we're earning less interest per payment. Our cost of service to that account is the same. So this was why we brought it in. as a third thing to think about so karen with your finance experience i'd be interested to hear kind of your thoughts on that do you see the relevance of tracking that sort of a number i do it just makes me think about all the other things combined with that right like like you've mentioned the care of the car the um how well it's running there i just I don't know. It seems like with technology now, the service, I mean, I guess you've calculated that service cost to incorporate technology that they're paying for, like a dealer that can accept payments and the cost of that. I've always been from the world of buy here, pay here, where the dealer services their own account. Right. I'm my thought is the cost of losing that customer would be greater. So you just want to keep them happy and find another fit. Yeah. Yeah. I think that's part of what we see too. So on doing that math, like I, we don't necessarily have a lot of math. We don't track the expense side in V eight. So it's not a number that we see as often. We don't certainly don't have the detail on what, how much of the expense that a dealer would have would be associated with actually servicing accounts. But to your point, yes, it would include GPS expense, merchant fees associated with payments, cost of collectors, all the things that we would have to do to run a finance department. Instead of just selling the contract, if Matt were to sell all of his contracts on day one over to some bulk buyer, then he wouldn't have any servicing expense associated with that at all. He's not supporting and servicing those accounts. And so there's a diminishing return factor that I think is worth considering. So those service costs are real. And when we ran that episode, I credited Steve Burke at Agora, you know, who's made his career buying paper in bulk. And when he first mentioned that to us in a kind of a workshop series we did a few years ago, It was the first time I'd really heard the case made, and to me, it's brilliant to really think about that we do have costs associated with those contracts. Of course, in his career, he's more interested in bulk buying, and so his theory was, might as well sell the contract at that point in time. A lot of our dealers would not want to sell the paper. They'd rather retain it. So then it begs the question if our costs are getting or the costs are the same and earnings are less. And if we traded that customer into a new car, even if their payments stay the same, then Matt knows his interest earnings per payment goes up pretty sharply. He's reset the note. same customer, newer car, newer note. And so now his earnings are going back up. So that was kind of the idea, Matt, for me was to start to bring forward this idea that if we traded our customers on a regular interval, and we've done podcasts on this subject back in twenty three and twenty four, where we use some tools and broke this down a little more depth. But What's been your experience with that part, Matt? I mean, as you see, as you've traded customers, you said you kind of reached past twenty four months. You've got a little more portfolio there. But what's your thought in terms of trading customers? Why trade them? I'm never opposed to it. Like you say, it's good. Let's go back up. It's certainly good to reset the, you know, the revolving interest. You know, you can much rather be collecting interest on a fourteen thousand dollar loan than a four thousand dollar loan, which is our average balance after twenty thousand or after twenty four months is about four thousand dollars. There's not a whole lot of interest made on the bone once you start getting down to that to that principal balance level. So, yeah, if we can restart the clock for the customer and start another Thirty six to forty two month term collecting five dollars a month. We will take that. Yeah. So I got one more question for Matt, but I'll check in with you, Kim. Any any questions for these two based on what we talked about so far? So far, no. Just absorbing, listening and making sure that I'm following. Yeah, it's all good. So I think that that idea for me, Matt, is like, you know, we're recording this in late September. You've got customers past twenty four months, which means and you said your average account balance on those accounts that are more than two years with you is down to about four thousand dollars. So come January and February, those folks are going to be getting a tax refund, right? And so it begs the question, and I just kind of inserted this as one more interval to consider. As we approach tax refund season, I'm sure you've seen it, that you'll lose customers at tax refund season because they've got maybe some equity in that trade from you, maybe some cash down from that refund. And so we'll end up losing them to somebody else. They'll end up in somebody else's portfolio if we don't have the means. And then you also have to think about the cost of acquiring a customer. That customer that's been with you two years, you know what it costs you to go create ten, twenty more sales. And you don't have a relationship. There's a bit of an unknown in the underwriting. So the value of that customer that's been with you twenty four months is is higher. Right. I mean, you would you would be willing to invest more to retain that customer, not have to spend the money to go find a new customer. And you've got a proven, you know, situation, obviously, with that customer has been with you. So thoughts on that, Matt? Yeah. Anytime you can keep a known commodity. I think is something you want to try and do. You got a customer that's paid you well for twenty four to thirty months and they want to get back on your book with a new car versus a person who sends in a random application. They may be just as good, but you don't know. Right. So, you know. There's some uncertainty there. Yeah, for sure. We'll do what we can to keep them on the books. Right, absolutely. You're not a perfect payer, but when you're late, you're calling us on this, what's going on, something comes up, we work with you, but you've handled things the right way, then we want to keep you in our portfolio. Yeah, for sure. Karen, I saw you nodding your head there affirmatively, so something to add there? Just the overwhelming agreement that no matter what in the cost line, that keeping the customer is a greater... then, okay, my returns are diminished at this level. So, customer retention, your collateral, there's, you know, so many factors there that you want to keep cycling the customer in a true buy here pay here scenario right and i know matt your dealership has been in business for sixty years you're you're third generation in that business right and so you're bound to have customers on your portfolio right now that have been with you for many years do you know what those numbers are do you know like longest standing customer Um, well, I mean, we have customers on the books that bought from my grandpa and he, he got out in one, I believe on the year, but yeah, it's kind of neat. And then, and then we're selling to their grandkids now, you know, we're selling to the grandparent, the parent and the kid. It's kind of neat. Yeah, it's fantastic. And not to mention just the value of that customer and all those customers they brought, it's hard to measure that. The value of that customer compared to a customer that you're going to meet for the first time tomorrow. Right. It's just the unknown factor, right? You just don't know what the outcome is going to be. And so I think that idea that you keep that customer and customer safe buys from you again you know or they refer friends and family the idea of keeping them in your portfolio is something that a buy here pay your dealer in a smaller community or any community just as they're because they're if they're in um in the neighborhood then you're going to have a chance to have that customer keep more customers and keep them coming back and so the The value of that is a really difficult thing to measure. So Karen's right. It's not just the resetting of the contract. It's the value of retaining that customer and being able to keep them in your portfolio for a long time is worth a whole lot. I want to go ahead and switch over to this fourth episode is meant to really address loan to value. And I'll explain quickly the the loan to value formula for us and buy your payers really just looking at the customer's loan balance. It's whatever. So if Matt finances a customer tomorrow and the loan amount ends up being fourteen thousand dollars, then if I'm his lender or Karen is his lender, they're going to be looking at. What is the value of the collateral itself, the wholesale market value of the car that is being financed relative to the note? So that's our ratio that we're looking at here. What's that percentage look like? And I can tell you, Matt, we've talked about it in V-Eight meetings, I'm sure, with your group. When I asked the question, there are really very few of our members that do pay attention to LTV, right? And that's okay. They're running their own business model and it doesn't come into play. They're doing their own financing. Maybe they're using their own money and it doesn't come into play. Or Karen, we have some members who've said, I have a loan to value covenant with my line of credit provider, but I stay well within that bracket. So I don't even, our pricing model, I don't even really pay attention to it because I'm never out of covenant on that ratio, which that's good. Then my concern is that dealer who is not in a favorable LTV, meaning there's a wide spread between the contract value and the actual value of the car that's being financed. And while if they're doing their own financing and nobody's in the picture, then it doesn't matter. But we know that life circumstances can change. And if a dealer found themselves in a situation where they needed to liquidate their business or liquidate their portfolio, LTV is going to matter. If they're in a situation where you're going to need a line of credit, want to go get capital and grow their business, and they want to pledge those assets, the collateral, the contracts, the portfolio as collateral. LTV is going to matter. So, and a lot of times they're looking at LTV at the time of delivery. You know, they may, obviously if it's a new business relationship, they may be looking at the current LTV based on what the contract value is now. So I think LTV, When we look at that combined to what we already talked about in terms of the taxation standpoint, like we're putting a high markup on the car. And granted, look, I'm the first guy who's going to say dealers who do buy, hear, pay, or finance are taking a risk that a local bank and local credit union won't take. The dealer deserves to be paid for that risk that they're taking, right? And that has a combination of interest and markup on the car, right? However, when that markup gets to be so high that this ratio falls out of line, then even though day-to-day for a dealer like Matt, who's not necessarily using the line of credit, it may not be a problem for somebody like Matt. until the day that it became a problem right so that's being a little dramatic but i said but but it really can be true matt we've seen it happen and we've seen dealers who had trouble getting their line of credit renewed because most of those lines of credit have an annual renewal process and and so there will be some sort of due diligence at the time of renewal and we've seen dealers who have just darn near didn't get their line of credit renewed because their LTV was so out of favor. There was such has such a widespread there. So this is why I would kind of wanted to bring it as one more reason to really, and I'm not saying look, business models vary. I've done this a long time and I've seen business models vary and they can all work in different ways and they can serve different purposes. Some models are really focused on cashflow. Some models are focused more on the, um, the equity that we build and kind of grow, grow, grow and create equity and receivables. But I think what happens here is we get to a place where we stop and say, okay, well, if if we can turn our cash over more quickly and we can have an asset that has a good market value all along the way, and we can retain our customers, keep them in a car, to your point, Matt, if you could trade your customers and keep the payment the same and provide them new wheels and keep them in your books and keep them referring friends and family and all the things that go along with that, And this is why I thought it's important for dealers to, regardless of business model, I would say go back and analyze this. We look at the number. The number's in the report every month for us and has been since we started V-A. But I think if you're not a V-A member, I would say go study that on your own portfolio and look at how many of your customers are actually still on the books at the active then unfortunately we're we're typically putting markup and in a real simple world simple example you know we said that our our dealers probably average around thirty six month term but what this says is only about let's say fifteen percent of those customers make it past twenty four months which tells us we just got a whole lot of customers that are they're not going to make it past twenty four months then we end up just um we also ended up creating a scenario where we took on more income tax more sales tax and we're probably not going to recover that and so that that just begs the question can we make it work matt you've been a twenty group member for a long time i'm sure you've seen dealers who run a lower markup model, right? You've seen that like, so if, if you've got examples of people that you've dealt with who run a low markup, have you seen them be successful with a lower percentage markup than other dealers? So funny you bring that up. Um, in my twenty year old I'm known as low gross Matt. So I would probably be the one that runs a little lower gross markup than most. Um, it is, I am increasing it, but it's still, I think I'm still one of the lower, if not the lowest in my VA and in my twenty groups. Okay. And for that very reason, when we take a charge off, you know, it's a, it's a less severe charge off or, you know, the tax burdens aren't as bad at the end of every year, but I probably do need to make it a little higher than what it is now for sure. Yeah, I got you. Well, that's it's interesting, though. Your company's been in business sixty years running a lower markup. Right. And so I think it's and I understand that there certainly may be rationale behind increasing that margin. It just I certainly have seen through V.A. and other consulting engagements where dealers who run a lower markup have have done quite well in terms of their portfolio yield and look there's i'm not going to get too deep on the weeds into the weeds on numbers there's a lot of numbers that we look at in v-aid and the reason we do is because there's really no one number that tells the whole story our business is complex it has a long tail to it there's a lot of things to analyze one of the things we do karen is we look at the portfolio yield and more recently we started to look at report cards so we created a grading system where everybody gets a report card each month and then the report card really just grades the business model itself it's like basically saying okay you have this certain amount of deal structure certain amount of markup you have a certain amount of average down payment but how does that translate into money in the bank is really what we're we're measuring with that report card and so we favor in our grading portfolio yield how much cash do we actually squeeze out of the portfolio and then we look at profitability so those are the two main drivers so it's like regardless of how much markup you may have uh regardless how much average down payment you may see and how much you spend on your underwriting software the real measuring stick or the report card that comes out when the you know we've we've gotten past the midterm now we get our final report card and it says you know the portfolio didn't didn't generate as much cash as we thought it would have or should have and so this starts to beg the question of Where does it matter? Like how much markup is the right markup? And look, I've been doing this a long time. I can't tell you. One of the things our report cards are starting to tell us and some of this other information, it helps us to better advise dealers on what is the sweet spot? What does work well? And one of the things I'm seeing, Matt, is that Matt just told us he's the low gross dealer in his portfolio. I can also tell you in his V-A data, he's one of the highest portfolio yields. He squeezes more money out of his portfolio than many of our other members. Is there a correlation? Well, we're working to figure that out. This is what our letter grading does. By the way, AI is a big part of this, Matt. We're being able to use AI on our side to sweep a lot of data that would have taken us, it's a fraction of the time that it takes to analyze big data and spit out results that are really meaningful. And so I think this is the part that we're now starting to be able to better answer the significance of these three things that we've, or the now four that we've covered across four weeks is the real significance of how does that show up in terms of, you know, Karen, because you guys, you've been doing this a long time. Cash is king, right? I mean, it's not how much paper profit we have out there. It's not how large the portfolio is. It's how much money we can create in terms of ongoing cash and how well we ultimately are able to create that cash flow and how much we're able to, and I call it portfolio yield, just how much money are we able to pull out of our portfolio and put it in the bank. right so this is the part that i think we're getting closer all the time matt and so uh cami i'm glad you were able to be here and be part of the conversation listening because this is the stuff that's real and i think one of the stuff that one of the things that you're going to see us doing even more and more in our v-eight groups is we're going to be getting down to the real conversation you know it sounds facetious karen but in a v-eight meeting we can only talk about average gross profit for so long we can only talk about average down payment for so long and keep people interested So we have to get down to the stuff that is real, that really matters, that really translates into, you know, improvement in Matt's bank deposits, improvement in Matt's profitability. Right. All these kind of things are we got to get to the stuff that really translates into real benefit. And we're getting there. And I think today's conversation is another step in that direction. So I don't have anything else. Matt, do you have anything to add to what we what we covered? I think we gave a pretty good high level run through on why this stuff matters and why we urge people to track it. Yeah, no, it's been a good series. Good. I appreciate that. So, Karen, anything from you before we wind down? No. Ten years with SDA. So if you have any questions there, people can reach out. Yeah, and especially people, I would say there are a lot of folks that Karen can help at any stage of their business life. I would say they, in my experience, have been some of the best suited providers when it comes to providing early stage capital solutions. You know, dealers that are smaller, newer, just getting some traction and trying to build up to a place to get over the hump. And I know SDA can be a really great solution. And of course, now with the acquisition of Carr Financial, probably expands their ability to serve those folks. So I would say at any stage of business, by all means, reach out to Karen, certainly, especially if you're new. And don't over leverage. Don't borrow too much. No matter what. Even if somebody says, I've got more money, I've got your money. Slow it down. Yeah. Amen. Yeah, we see that. I know Matt's nodding his head like we've seen that. And so I can tell you. That can get you into trouble. Yeah. Well, yeah, we've seen that. And obviously here we are recording this in late twenty twenty six in the last couple of years. We've all seen some really large operations tank. Right. We've seen we've seen big operations falter. And if there's a theme, it's going to be the leverage with a lot of them that they're their leverage. But also you can be, if your leverage is still the same and your portfolio yield starts to tank, right? That gets us in trouble, right? So it's like, as long as those things hold in check, fine. But when the portfolio yield is not there, the charge offs are up, the cash flow is down, then suddenly that's where it starts to really become a huge leverage problem, like business threatening leverage problem. So I think Karen's wise to bring that forward because that is something we definitely see too, Karen. We don't want to see dealers, you know, pledge too much and soak up their own cash flow. And so there's a balance. And when you talk to Karen, you're talking to somebody who knows that and knows how to help you not just find the money, but find the right money. So it's important to do that. So, Kami, thanks again for joining us. You're getting a better understanding for what it's like to sit in a V-A meeting. Thank you so much for having me. Yeah, of course. So we'll wrap up there. Michelle, thanks for being here behind the scenes, kind of running the board. And that wraps up our series for September on this twenty four month thing. We'll continue to talk about that, of course, in different ways going forward. But but this will wrap up our four part series. And we thank you folks for tuning in.
