When I was a kid, I really thought debtors could end up in prison. My Dad grew up in Old Europe (pre-WWII) and with memories of German hyperinflation, depression and Nazism came a very firm belief in paying cash . . . no matter what. Conservative isn’t the half of it. He simply can’t stand the very idea of investing in any asset that can only depreciate over time. For the last ten years I embraced the same attitude of “neither a borrower or a lender be.” My customer has always been the ‘cash’ customer. That is until the debtor’s economy hit my fleet of automotive mules with a proverbial 2 × 4.
Now I finance and let me tell you, it ain’t easy. Asking lots of questions and figuring your customer out BEFORE giving them the keys takes an education. A lot of dealerships start with the owner’s credit history. I don’t because it doesn’t tell me anything as to how they will maintain MY car. I start with the car they drive in on. If that vehicle they come in has been neglected, abused or ragged out, mine could be next. Those folks thankfully do not become finance customers, and more times than not they don’t have cash either.
Some places will finance anyone within a 100 mile radius. Tracking equipment and password laden disablers help lower the risk considerably. But they’re also expensive and a nice side living can be had by disabling these systems. Most of what I finance will cost anywhere from $800 to $1500 at a wholesale level and I’ve found that forking out that money on a per car basis is not really necessary. A friend of mine who is a top ten buyer at two different dealer auctions has only financed within a 10 mile radius for over 20 years. Outside of that radius, your level of risk goes up dramatically. I’ve taken this to heart and followed the exact same policy.
Also, I cater to the non-enthusiast buyer and have cars that reflect it. I buy a LOT of minivans. They are the anti-image cars, and along with Buicks, Volvos and other “older person” cars, they attract the type of folks I like (those who are simply looking for point A to point B transportation). The teenage daughter who has their parents under their thumb may not like the family cars. But an awful lot of single parents who work long hours see these cars, and the Carfax reports that denote the car’s history, as a good match for their families.
Along with always offering the Carfax history, I try to minimize the risks and costs for my customers. Within five minutes, most folks realize how much I hate debt AND how much I know about their own car. To encourage a quick payoff, I offer “60 days same as cash” where if they pay for the vehicle in full by that time period, I charge no interest. Period. About a third of my customers can pull that off and I always get repeat business and referrals by offering it.
The rest have payments that are between $40 and $60 a week, and will pay off the vehicle over a 50 to 75 week period. The longer the length, the higher down payment I require because of the greater risk. Contrary to the decades old myth, my down payment is rarely my equity in the vehicle. It usually takes about two to three months to even that out.
I also make ownership cheap and maintenance intensive. Every Friday, I have the fluids and tires of each vehicle looked at to make sure leaks and other mechanical issues get caught early. A hose may be $10. An engine is fifty times more expensive. Oil changes are offered every 3k miles at the same price as Wal-Mart ($25) and can usually be done in less than 30 minutes.
Finally when mechanical issues do creep up, I offer a free loaner (they have to insure it) and the cost of repair is simply attached to the back of the loan. The labor rate is $50 with no parts mark-up, which works out to about half what nearby places will charge them. Thankfully I only had to do this once, and it was for a truck heater control that required a $50 blender motor.
So far it’s worked out. I’ve had only one repo and that one I got back quick. Most of my customers have actually bought a second vehicle from me, and two of them are planning on buying a third after their refund check comes in. The economics of financing are working. But there isn’t a day that goes by where I consider the potential ramifications of essentially becoming the bank of Steve.
[Steve Lang buys and sells used cars for a living.
For more information, please contact steven.lang@duke.edu]
Is it a BHPH (Buy Here Pay Here)?
What interest rate do you charge?
How much gross do you make?
Sounds great. If you tell us what you made in 2007 and 2008, including bonuses, do you qualify for TARP money?
Great. I’d buy a used car from you anytime. The service add-on is a great idea. Oil has nice mark-ups. What’s more, you stay in constant touch with your customers, and probably get repeat business and referrals. In the new car business, money is made with service. I’m glad to hear that this works in the used car business also.
BS: I think Beijing is outside his 10-mile radius.
Came across a site the other day that assumed $50/hr for repair costs. I thought that was way out of date. Apparently at least one person still charges that little.
It sounds like a good business plan, and hopefully it will continue to flourish for you in these economic times. If “push comes to shove” I may end up contacting you to get more details on how to proceed. Not forseeing the loss of my job, but you just never know.
How do you encourage the buyer to keep ~weekly appointments for the spot check?
I hope your buyers, especially the younger crowd, take heed of the “maintenance intensive” approach.
Couple questions.
Are you saying you require your financed customers to come in weekly, and get the oil changed every 3k miles? What if they can do it themselves?
Do you have a full garage at your lot? Do you do the work or do you have a mechanic?
What’s with the duke.edu email address?
Thanks for the fascinating articles. They are like a window into a strange world where nothing is as it seems (e.g. apparently there is such a thing as an ethical used car salesman).
The world needs more of Steve Lang. I want to buy from him.
Wait, what does this guy do? What is the business? I am stumped and don’t want to assume.
cool.
Kinda like the anti-slime ball used car dealer…
drove around with a friend looking for ‘reliable’ used cars, under 6k.
went to a couple of lots, one did the ‘financing’ thing, only their catch is that they didn’t sell cars. they only ‘financed’ them, with significant profits, hoping that they’d get the car back in 6-12 months via repo, etc…
asked if I could buy a car off their lot for cash, was told flat out NO.
I also know of a guy in indiana that does auction cars, though mostly newer, 1-4 years old.
charges 500$ over cost (auction sale price + auction fee).
he’ll even let you tag along to the auction and choose the specific car if you sweet talk him enough…
Mr. Lang, you are a wealth of information. I know in Virginia, where I live, in order to get into the auctions one must have a dealer’s license…and to get a dealer’s license you have to have a proven brick & mortar business establishment. However, I assume that a lot of people get around this loophole one way or another. Do you have any insight as to whether or not all the people attending these auctions have real dealerships? I tend to believe that is not the case, and that many people are simply doing this over the internet, for the most part, one car at a time. Do you have a dealership?
Suggestion to RF for a new segment: Ask Mr. Lang. The B&B submit questions for SL.
I work as an auctioneer during the week. But I also buy and sell cars on the side as well. My lot is only three miles away from my home. Before I had the lot, I simply used an office and storage area for my vehicles which didn’t cost me anything.
It is a BHPH. I charge anywhere from 10% to 20% interest. In Georgia, you can charge up to 28% interest plus a multitude of bogus fees. I do neither. Just the actual cost of the title and 30 day tag ($20) is all I charge.
One other thing I do to make things easier for everyone is I have an employee who can go over a person’s house if there are any issues with a vehicle and work right there. There was a radiator leak on one vehicle and instead of having to schlep it back to the lot, I ordered a $66 radiator and had it installed on site. It’s not very difficult and most folks appreciate the quick response.
I also have an off-site mechanic who can handle some of the more complex issues. Check engine lights on older vehicles, oil leaks, engine idling issues, and anything else can be handled by him. So far I haven’t needed to offer a loaner vehicle to anyone and I’m going on five months now.
“How do you encourage the buyer to keep ~weekly appointments for the spot check?”
We have friendly employees (well one besides me) and they make either weekly or bi-monthly payments at the lot. As for maintenance, it’s easier to identify issues early on if you keep track of oil and coolant levels specifically. Also little ticks or skips are more noticeable by someone like me than someone who is simply interested in things other than cars.
Duke is where I got my MBA.
Steve, we need someone like you here in Toronto, Canada. Can you open a shop here?
I applaud your business model. It makes perfect sense. Have you considered giving it a brand name to make it stand out? I wish you more success sir.
+1 on detroit-iron’s proposal.
I am looking for a used car. You aren’t anywhere near Chicago are you ? :)
You should explain how a BHPH works, most commenters perhaps have no clue of how it works. How lucrative it can be, and having the stomach to deal with a variety of characters.
You “eyeball” and individual, make your judgement call, decide on an interest rate, get money down to pay for a reasonable portion of the vehicle, and finance the difference on a weekly or bi weekly cash payment basis.
In many cases the down payment portion permits you to go out and buy another vehicle.
Checking the vehicle every time they come to make a payment is a good insurance policy to avert “collection issues”.
“Do you have any insight as to whether or not all the people attending these auctions have real dealerships?”
Some of these people are not even who they say they are.
Here’s a quick story. I know of a fellow by the name of Miguel who has been buying and selling vehicles for over ten years now. Only Miguel is not his real name. He took on the name of a fellow who lives in the Midwest and proceeded to use that as a means of procuring vehicles.
One thing that many dealers do (that I will never do) is allow people to buy under their own dealership. It’s a lucrative and VERY dangerous proposition. If someone sells a vehicle that is structurally unsafe, decides not to tell you of their activities, or simply gets in cahoots with someone at the auction and whores out your license to other people for a fee, you can be royally screwed.
I know a long-time wholesaler who seemingly had over a half million on cash transactions at one auction in a single year. Turns out this ‘Miguel; fellow was the one farming out his dealer number to anyone with a pulse. He had to spend months squaring things away with the state and federal tax authorities. To my knowledge, he now ‘buys’ for someone else who now holds a dealer’s license.
I keep it simple. Nobody buys under me, ever. If someone wants a vehicle I’ll take pictures, get a condition report, a complete history, and offer the current market values wholesale and retail. I also require a 20% deposit before I get the vehicle in question. It’s a limited business this way. But at least it effectively separates the serious buyers from the proverbial grazers.
rob-star:
– check out Jon Hubner (google him)
operates out of west lafayette, IN
doesn’t do bhph, but is an honest guy who sees a lot of cars at auction.
Steven, Nice story and great strategy. Save yourself some money though and extend your oil change intervals. The rote, 3k oil change is so wasteful. (Unless you´re using this interval to keep the customer close in touch, though.) Driving high mileage vehicles for most of my life, I have found that the difference between an engine lasting or not is based on so many other factors then oil change frequency. Or put another way, for 150k miles, 6k oil changes (at $25 each) save you $625 for the purchase toward your next vehicle, not to mention saving you your time.