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Buy Here, Pay Here – Is It Right For Your Dealership? BHPH: Inside The Numbers

Buy Here, Pay Here – Is It Right For Your Dealership? BHPH: Inside The Numbers. Presented to: F&I Showroom Industry Summit September 26, 2011 Las Vegas, Nevada Presented by: Ken Shilson, CPA Founder and President, National Alliance of Buy Here, Pay Here Dealers (NABD)

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Buy Here, Pay Here – Is It Right For Your Dealership? BHPH: Inside The Numbers

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  1. Buy Here, Pay Here – Is It Right For Your Dealership? BHPH: Inside The Numbers Presented to: F&I Showroom Industry Summit September 26, 2011 Las Vegas, Nevada Presented by: Ken Shilson, CPA Founder and President, National Alliance of Buy Here, Pay Here Dealers (NABD) President, Subprime Analytics Booth # 231

  2. 4 Reasons • Good Margins • R.O.I. • Growing Customer Base • Independence

  3. 4 Reasons Why Now • Secondary Finance collapse • Subprime mortgage collapse • New technology • Survival

  4. 4 Questions to Ask • Access to Capital? • Logistics? • Appetite? • Personnel?

  5. 3-Step Methodto Success • Process • Training • Execution

  6. 5 Vital Departments ofBuy Here Pay Here • Inventory • Recon • Marketing / Sales • Collections • Financial / Accounting

  7. BENEFITS Margins R.O.I. Customer Base Independence New Technology High Price of Entry PITFALLS Capital Fast growth Too Bold Spending Headaches High Price Entry Customers Benefits and Pitfalls

  8. Recent Changes in the Subprime Financing MarketMake BHPH aVery Attractive Profit Center!

  9. Subprime Analytics Open Automotive Loansby Risk Segment Source: / Experian

  10. Subprime Analytics Quarterly Used Vehicle Financing by Credit Tier Source: / Experian

  11. Important BHPH Trends!

  12. BHPH Financial Trends 2008 – 2010: Gross Profit Comparison 2010 2009 2008 Sales 100%100% 100% Cost of Vehicle Sales (59)% (59)% (60)% Subtotal 41% 41% 40% Financing Income 15% 16% 18% Bad Debts (18)% (20)% (21)% Gross Profit 38% 37% 37% Expressed as a percentage of sales. Source: Shilson, Goldberg, Cheung & Associates, LLP

  13. BHPH Financial Trends 2008 – 2010: Cost of Sales - Detail 2010 2009 2008 Cost of Vehicle Sales 48.13% 49.03% 51.03% Reconditioning Costs 7.17% 6.68% 4.12% Other 3.21% 2.85% 4.52% Total Cost of Vehicle Sales58.51%58.56%59.67% Expressed as a percentage of sales. Source: Shilson, Goldberg, Cheung & Associates, LLP

  14. 70% 64% 64% 63% 62% 60% 59% 59% 59% 60% 50% 40% 30% 22% 21% 21% 21% 20% 18% 18% 19% 20% 10% 0% 2003 2004 2005 2006 2007 2008 2009 2010 Cost of Vehicles Operating Expenses BHPH Financial Trends 2003 – 2010: Costs / Expenses Expressed as a percentage of sales. Source: Shilson, Goldberg, Cheung & Associates, LLP

  15. BHPH Operating Practices 2005 – 2010: Average “Cash in Deal” $5,000 $4,865 $4,850 $4,900 $4,800 $4,696 $4,645 $4,700 $4,563 $4,600 $4,480 $4,500 $4,400 $4,300 $4,200 2005 2006 2007 2008 2009 2010 Source: NABD / NCM

  16. BHPH Operating Practices 2006 – 2010: Average Total ACV Per Vehicle Sold (Including Recon) $6,000 $5,534 $5,458 $5,284 $5,111 $4,949 $5,000 $4,000 $3,000 $2,000 $1,000 $0 2006 2007 2008 2009 2010 Source: NABD / NCM

  17. 25% 20% 15% 10% 5% 0% 2004 2005 2006 2007 2008 2009 2010 BHPH Financial Trends 2004 – 2010: Bad Debts 21% 20% 20% 19% 19% 18% 17% Expressed as a percentage of sales. Source: Shilson, Goldberg, Cheung & Associates, LLP

  18. BHPH Profitability Percentages • NABD BHPH • 2010 AveragesBenchmarks • Gross Profit / Vehicle Sales* 38% • Operating Expenses / Vehicle Sales 20% • Operating Income / Vehicle Sales 18% • Interest Expense / Vehicle Sales 3% • Net profit / Vehicle Sales 15% • *Gross profit includes finance income, net of bad debts. Source: Shilson, Goldberg, Cheung & Associates, LLP

  19. Three Key Elementsof BHPH Deals: • The Customer! • The Vehicle! • The Deal Structure!

  20. Subprime Analytics Industry Loss StatisticsProvided by Subprime Analytics Computerized Portfolio Analysis www.subanalytics.com

  21. Subprime Analytics Notes to These Statistics • Loss statistics were determined by Subprime Analytics, who performed electronic portfolio analysis of approximately 900,000 subprime loans aggregating approximately $8.0 billion to identify loss rates and patterns.

  22. Subprime Analytics Our Findings…Loss Rates 2010 2009 2008 • Average Gross Loss $ 7,072 7,049 6,887 • (Before recoveries) • Average Net Loss $ 4,526 5,090 5,157 • (After recoveries) • Average Default Rate 30.39%30.11% 28.43% • (Percentage of Loans • Written Off) (Continued) Source: Subprime Analytics

  23. Subprime Analytics Our Findings…Loss Rates (Continued) 2010 2009 2008 • Average Gross Dollar • Loss Rate (% of Principal) 39.18% 37.51% 35.54% • Worst - 00.0% • Average Net Loss Rate • (% of Principal) 26.52% 26.06% 24.76% • Worst - 00.0% • Average Recovery (% of • Principal Charged-Off) 35.50% 29.80% 28.00% • (Excl. Repo Expenses) Source: Subprime Analytics

  24. Subprime Analytics Our Findings…Loss Frequency 2010 2009 2008 Highest Cumulative Default Month After Origination 25th Month 21th Month 19th Month Highest Frequency Of Default 4th Month 4th Month 4th Month Highest Loss Month February February February Source: Subprime Analytics

  25. Avoid Paying Taxes On MoneyYou Never Receive!!! Tax on “Phantom Income”

  26. MSSP Independent Used Car Dealer Audit Guide Overview • “The use of Related Finance Companies (RFC’s) is a common practice in the Used Car Industry. Such companies serve many valid business purposes and were utilized before any tax advantages were developed.”

  27. Subprime Analytics Ten FatalBHPH MistakesYou Must AvoidTo Be Successful! Based upon analysis of over $8 billion in BHPH loans by:

  28. Subprime Analytics Mistake 1: • Not determining that your installment contracts and documents are compliant with all the applicable laws and regulations. (Making legal and regulatory mistakes can bring you down!)

  29. Subprime Analytics Mistake 2: • Improper deal structure: not properly matching the customer, the vehicle, and the deal structure when granting credit. • (Selling a customer the vehicle they want instead of the one • they can afford!)

  30. Subprime Analytics Mistake 3: • Not running a credit bureau report prior when granting credit. (Initially saving a few dollars ends up costing you millions!)

  31. Subprime Analytics Losses Based onCredit Bureau Scores… • Unscored 45.3% • 400 – 545 32.3% • 545 – 600 29.5% • 600 – 645 23.0% • 645 + 16.8% Default Rate *Opportunity, or mistake?? Average Loan Default Rate 28.4%! Source: Subprime Analytics

  32. Subprime Analytics Mistake 4: • Emphasizing sales growth • over good underwriting. (Growing too fast • can be fatal!)

  33. Subprime Analytics Mistake 5: • Not independently (separate from the sales function) verifying stipulations or customer applicant information. (There is an inherent conflict of interests between sales and good underwriting practices!)

  34. Subprime Analytics Customer Age… Years Default Rate • 16 – 25 30.4% • 25 - 30 29.8% • 30 - 55 25.2% • Over 55 17.3% Over-65 Population Expected To Double By 2030!

  35. Subprime Analytics Our Conclusions… • Analysis of customer info is needed to effectively manage portfolio risk! • Verification of income, debt and expenses is critical to good underwriting. • Using technology is the only efficient way to gather and analyze customer information. • The more you learn about your customers, the more you will earn! Take the CASH approach to underwriting!

  36. Subprime Analytics What Do Good Underwriters Do? • Verify Customer… • Verify Customer… • Verify Customer… • Verify Customer… • Capacity • Ability to Pay • Stability • History

  37. Subprime Analytics Mistake 6: • Not learning from your losses! (Making trial and error mistakes can cost you millions!)

  38. Subprime Analytics Learn From Your Losses! • Analyzing Your Portfolio • Helps You Avoid • Trial and Error • Mistakes….

  39. Subprime Analytics Mistake 7: • Modifying or extending the term of the loan in order to meet the customer’s payment requirements. (In BHPH, time is your enemy!)

  40. Subprime Analytics Mistake 8: • Letting a large down payment (like a tax refund) make the deal instead of making the deal better! (Confusing down payment with repayment!)

  41. Subprime Analytics Mistake 9: • Not properly managing portfolio risk by adapting to changes in economic conditions. (Dealer education, reading and networking are your best defenses here!)

  42. Subprime Analytics Mistake 10: • Not monitoring or using credit scoring or deal stipulations to make underwriting decisions more consistently. • (Frequent changes in underwriting policies and practices can be very costly!

  43. Finding The Capital You Need! Financing Sources: • Lines of credit • Sales of contracts • Point of sale funding • Equity • Need for portfolio metrics, static pool and loss liquidation!

  44. Developing an Action Plan! • Develop your business model and project capital requirements • Identify key personnel needed • Location – separation from franchise operations? • Systems / processes needed • Identify capital sources • Other

  45. Questions… • At this time you are welcome to ask questions on anything covered in this presentation… Booth # 231 Kenneth B. Shilson, CPA Subprime Analytics 2180 North Loop W., Ste. 270 Houston, TX 77018 (832) 767-4759

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