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

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

Presented to:Presented to:

F&I Showroom Industry SummitF&I Showroom Industry SummitSeptember 26, 2011September 26, 2011Las Vegas, NevadaLas Vegas, Nevada

Presented by:Presented by:

Ken Shilson, CPAKen Shilson, CPAFounder and President,Founder and President,

National Alliance of Buy Here, Pay Here Dealers (NABD)National Alliance of Buy Here, Pay Here Dealers (NABD)President, Subprime AnalyticsPresident, Subprime Analytics

Booth # 231Booth # 231

NAT I ONA L A L L I A N CE

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4 Reasons4 Reasons

1. Good Margins

2. R.O.I.

3. Growing Customer Base

4. Independence


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4 Reasons Why Now4 Reasons Why Now

1. Secondary Finance collapse

2. Subprime mortgage collapse

3. New technology

4. Survival


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4 Questions to Ask4 Questions to Ask

1. Access to Capital?

2. Logistics?

3. Appetite?

4. Personnel?


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3-Step Method3-Step Methodto Successto Success

1. Process

2. Training

3. Execution


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5 Vital Departments of5 Vital Departments ofBuy Here Pay HereBuy Here Pay Here

1. Inventory

2. Recon

3. Marketing / Sales

4. Collections

5. Financial / Accounting


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Benefits and PitfallsBenefits and PitfallsBENEFITS

• 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

Recent Changes in the Recent Changes in the Subprime Financing MarketSubprime Financing Market

Make BHPH aMake BHPH aVery Attractive Profit Center!Very Attractive Profit Center!


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Open Automotive LoansOpen Automotive Loansby Risk Segmentby Risk Segment

Source: / ExperianSource: / Experian

SubprimeSubprimeAnalyticsAnalytics


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Quarterly Used Vehicle Quarterly Used Vehicle Financing by Credit TierFinancing by Credit Tier

Source: / ExperianSource: / Experian



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ImportantImportantBHPHBHPH

Trends!Trends!


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BHPH Financial TrendsBHPH Financial Trends2008 – 2010: Gross Profit Comparison2008 – 2010: Gross Profit Comparison

Source: Shilson, Goldberg, Cheung & Associates, LLPSource: Shilson, Goldberg, Cheung & Associates, LLP

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%

2010 2009 2008

Expressed as a percentage of sales.Expressed as a percentage of sales.


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BHPH Financial TrendsBHPH Financial Trends2008 – 2010: Cost of Sales - Detail2008 – 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 ofVehicle Sales 58.51% 58.56% 59.67%



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BHPH Financial TrendsBHPH Financial Trends2003 – 2010: Costs / Expenses2003 – 2010: Costs / Expenses



59%59%62%62% 64%64% 64%64% 63%63%

60%60% 59%59% 59%59%

20%21%21%19%18%18%22%21%

0%

10%

20%

30%

40%

50%

60%

70%

2003 2004 2005 2006 2007 2008 2009 2010

Cost of Vehicles Operating Expenses


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BHPH Operating PracticesBHPH Operating Practices2005 – 2010:2005 – 2010:

Average “Cash in Deal”Average “Cash in Deal”

Source: NABD / NCMSource: NABD / NCM

$4,480

$4,696

$4,865 $4,850

$4,645

$4,563

$4,200

$4,300

$4,400

$4,500

$4,600

$4,700

$4,800

$4,900

$5,000

2005 2006 2007 2008 2009 2010


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BHPH Operating PracticesBHPH Operating Practices2006 – 2010:2006 – 2010:

Average Total ACV Per Vehicle SoldAverage Total ACV Per Vehicle Sold(Including Recon)(Including Recon)

Source: NABD / NCMSource: NABD / NCM


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$4,949$4,949 $5,111$5,111 $5,284$5,284 $5,534$5,534 $5,458$5,458

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2006 2007 2008 2009 2010


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BHPH Financial TrendsBHPH Financial Trends2004 – 2010: Bad Debts2004 – 2010: Bad Debts


Expressed as a percentage of sales.Expressed as a percentage of sales.N

AT I ONA L A L L I A N CEOF

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0%

5%

10%

15%

20%

25%

2004 2005 2006 2007 2008 2009 2010

17%19% 20% 19%

21% 20%18%


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BHPH Profitability PercentagesBHPH Profitability Percentages

NABD BHPH2010 Averages Benchmarks

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.



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Three Key ElementsThree Key Elementsof BHPH Deals:of BHPH Deals:

1. The Customer!2. The Vehicle!3. The Deal Structure!


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Industry Loss StatisticsIndustry Loss StatisticsProvided by Provided by

Subprime AnalyticsSubprime AnalyticsComputerized Portfolio AnalysisComputerized Portfolio Analysis

www.subanalytics.com


http://www.subanalytics.com/


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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.

Notes to These StatisticsNotes to These StatisticsSubprimeSubprimeAnalyticsAnalytics


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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 LoansWritten Off)

Our Findings…Our Findings…Loss RatesLoss Rates

20102010SubprimeSubprimeAnalyticsAnalytics

(Continued)

20092009 20082008

Source: Subprime AnalyticsSource: Subprime Analytics

Average Gross DollarLoss 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 (% ofPrincipal Charged-Off) 35.50% 29.80% 28.00%

(Excl. Repo Expenses)

2009200920102010

Our Findings…Our Findings…Loss RatesLoss RatesSubprimeSubprime

AnalyticsAnalytics(Continued)

20082008


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2010 2009 2008Highest CumulativeDefault MonthAfter Origination 25th Month 21th Month 19th Month

Highest FrequencyOf Default 4th Month 4th Month 4th Month

Highest Loss Month February February February

Our Findings…Our Findings…Loss FrequencyLoss FrequencySubprimeSubprime

AnalyticsAnalytics



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Avoid Paying Taxes On MoneyAvoid Paying Taxes On MoneyYou Never Receive!!!You Never Receive!!!

Tax on “Phantom Income”


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MSSP Independent Used Car MSSP Independent Used Car Dealer Audit Guide OverviewDealer 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.”


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Ten FatalTen FatalBHPH MistakesBHPH MistakesYou Must AvoidYou Must Avoid

To Be Successful!To Be Successful! Based upon analysis of over

$8 billion in BHPH loans by:

Subprime AnalyticsSubprime Analytics


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Mistake 1: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!)



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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 onethey can afford!)



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Not running a credit bureau report prior when granting credit. (Initially saving a few dollars ends up costing you millions!)



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Unscored 45.3%

400 – 545 32.3%

545 – 600 29.5%

600 – 645 23.0%

645 + 16.8%

Losses Based onLosses Based onCredit Bureau Scores…Credit Bureau Scores…

Default RateDefault Rate

Average Loan Default Rate 28.4%!Average Loan Default Rate 28.4%!



*Opportunity,

or mistake??


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Emphasizing sales growth

over good underwriting.

(Growing too fast

can be fatal!)



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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!)



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Customer Age…Customer Age…

YearsYears Default RateDefault Rate

Over-65 Population Expected Over-65 Population Expected To Double By 2030!To Double By 2030!

16 – 25 30.4%25 - 30 29.8%30 - 55 25.2%Over 55 17.3%



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• 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!

Our Conclusions…Our Conclusions…

Take the Take the CASHCASH approach approachto underwriting!to underwriting!



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• Verify Customer…




What Do What Do GoodGood Underwriters Do?Underwriters Do?

Capacity

Ability to Pay

Stability

History



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Not learning from your losses! (Making trial and error mistakes can cost you millions!)



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Learn From Your Learn From Your Losses!Losses!

Analyzing Your PortfolioHelps You AvoidTrial and Error

Mistakes….



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Modifying or extending the term of the loan in order to meet the customer’s payment requirements. (In BHPH, time is your enemy!)



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Letting a large down payment (like a tax refund) make the deal instead of making the deal better! (Confusing down payment with repayment!)



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Not properly managing portfolio risk by adapting to changes in economic conditions. (Dealer education, reading and networking are your best defenses here!)



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Mistake 10: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!



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Finding The Capital You Need!Finding The Capital You Need!

a. Lines of creditb. Sales of contractsc. Point of sale fundingd. Equitye. Need for portfolio

metrics, static pool and loss liquidation!

Financing Sources:Financing Sources:


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Developing an Action Plan!Developing an Action Plan!

a. Develop your business model and project capital requirements

b. Identify key personnel neededc. Location – separation from

franchise operations?d. Systems / processes needede. Identify capital sourcesf. Other

Questions…At this time you are welcome to ask questions on anything covered in this presentation…

Booth # 231Booth # 231Kenneth B. Shilson, CPASubprime Analytics2180 North Loop W., Ste. 270Houston, TX 77018(832) 767-4759


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

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