Stocking the Proper Inventory

Dealers all face the same obstacle – where to find the right used vehicles to retail. Special finance inventory is an additional challenge because it has to not only meet the needs of the customers but also meet the criteria of finance companies, all while allowing for an acceptable level of gross profit.

Many dealers have found that working a “system” or set of guidelines works much better than gut instinct and blind luck when it comes to purchasing for their special finance departments. What types of cars should dealers focusing on special finance stock? Where are they found? How much will they cost? How much reconditioning is necessary?

Deciding What to Stock
Every dealer successful in special finance must constantly be on the lookout for decent cars that can be purchased well back of book. However, it is safe to say that quite a few dealers have found it necessary to come up with some guidelines for determining which cars will work for their special finance departments.

It has been suggested that dealers structure their special finance inventory to match credit demographics, usually broken down into several tiers of credit customers, ranging from the near-prime buyers down to the toughest-to-finance customers. Some dealers do follow this suggestion for the most part and tailor their inventory to fit every program offered by their lenders. “We try and make sure that we have cars that fit every bank possibility,” said Reid Rubenstein, president of Car City Superstore in Aurora, Colo.
 “If the customer’s here and you get a call from the bank, the worst thing is to not have a car to match up with that.”

Scott Falcone, owner and dealer principal of Bob Watson Chevrolet, Harvey, Ill., agreed but added that he also likes to have a small amount of his inventory that’s based on market demand and consumer desire. “We still want desirable cars for our customers, obviously. We don’t put stuff on the lot that’s exclusively bank-driven.” Falcone emphasized, however, that profit and the ability to obtain financing still take precedence over desirability.

Other dealers would rather simplify things a bit and find cars matching a particular profile to comprise the bulk of their inventory. While not all dealers subscribe to the idea, there are some dealers who like to follow a 3-8-10 guideline: finding cars that will fit a $300-per-month payment, can be purchased for $8,000 and have a book value of $10,000. “They’re hard to find, but they are out there,” said John Clutts, dealer principal of Clutts Auto Sales in Hazard, Ky.

That statement was echoed by Bob Cockerham, owner and president of Car World in Albuquerque, N.M.: “That’s a pretty tough car to find,” he agreed, “but the closer we get to that, the faster the car sells.” While staying as close to the 3-8-10 guideline as possible, Cockerham stated that he has had the most success by finding one particular make and model that performs well in special finance and acquiring that vehicle in large numbers. What kind of car that is, he cautioned, is always changing. “There was a time it was Cobalts, there was a time it was Malibus, then Forenzas. All those things cycle,” he said. “The markets change and you constantly have to be on the lookout for the next car that fits within your program.”

A number of dealers try to stick to mostly late-model/low mileage vehicles, program cars and off-lease and off-rental vehicles. “We specialize in newer cars with lower miles, most that are still under factory warranty, and work our relationship with our lenders to put [the customer] in a nicer car with lower miles,” said Jeff Carrier, managing partner of Metro Auto Wholesale of Portland, Ore. Having customers in newer vehicles, he explained, can reduce the chances of future expenses that may affect the integrity of the loan.

When it comes to vehicles needing paint or body work, there doesn’t appear to be any hard rule dealers stick to. There are dealers who completely avoid paint or body work because of cost and inconvenience. “We used to do that; it’s just so much trouble,” said Clutts.

Other dealers will consider it under the right circumstances. Rubenstein, for example, said he only purchases cars needing minor work if the work can be done on-site at the auction. “If it has to go to a body shop, I won’t buy it,” he stated.

Falcone, who said he generally preferred to avoid vehicles needing paint or body work, indicated that he will purchase one if the work needed can be done while keeping costs at a minimum. “If we think we can buy the car right and spend a little money to get it up to speed, and provide a good vehicle for our customer, we’ll do that.”

The one area where dealers seem to agree is the issue of blemished titles. Dealers are least likely to purchase a car with title problems. According to Rubenstein, they are nearly impossible to obtain financing for. “I won’t buy anything with title blemishes because the lenders won’t buy them” he explained.

Where to Find Special Finance Inventory
Acquiring inventory is no longer just about traveling to auction and relying on trade-ins. While auctions are still the most popular way for dealers to acquire inventory, some dealers now attend only in cyberspace. The advent of the Internet has changed the way many dealers purchase special finance inventory. Virtual auctions offer dealers the convenience of bidding on cars from behind their desks, saving them time that would otherwise be spent traveling. Falcone said he’s always liked buying online and estimated that he purchases 60 to 65 percent of his special finance inventory that way. “Certain sales we buy exclusively online; there’s just no point in going there.”

However, despite the number of advantages, some dealers still shy away from online purchasing and prefer to be able to inspect the vehicles in person. Rubenstein is one such dealer. While he reported having purchased vehicles online in the past, he said he had several instances where he missed things about the cars, “things I didn’t like.” He said being there in person gives him confidence about the transaction.

Even Falcone conceded that attending in person is sometimes necessary. “If we’re looking for cars that might be a couple of years old and have some miles on them in that 40 range, we want to be there to see the car.”

The quality of condition reports available online can be an issue. Obviously, when purchasing online, the vehicle’s description and condition report are practically all dealers have to rely on, and those can be hard to come by for some vehicles. “It’s really hard to get a detailed description,” said Clutts, referring to cars in the 35,000- to 50,000-mile range, such as new dealer trades and program vehicles that are not in great condition.

Cockerham, who occasionally purchases from online auctions, agreed that descriptions and condition reports are very important to him. “If we’re going to buy online, we’re going to look at condition reports,” he said. “The auction that can provide the best condition report is really what we’re after; the more detailed the condition report, the better off.”

Many of the dealers who still prefer to be present at auctions often stay local. Rubenstein estimated that he purchases roughly 70 percent of his special finance inventory at local auctions. In the case of larger metropolitan areas, there are usually several major auctions that allow dealers to keep travel time and expenses at a minimum while still getting a good selection of vehicles. Increased demand for special finance vehicles has forced some dealers to travel a greater distance to get the cars they need. Even those dealers who prefer to personally inspect their potential purchases may decide that buying online is worth the perceived risk if certain vehicles they need can only be found some distance away.

A few dealers have reported that they often use smaller independent auctions if they are looking for a specific vehicle or for older vehicles with higher mileage. “I use small independent auctions for the lower-end cars, $6,000 and less,” said Rubenstein. “I use the two Manheim auctions in the city for the more expensive stuff, usually the program vehicles.”

Factory auctions are great for low-mileage, late model vehicles, but that does not seem to be the only place to find them. Many dealers now look at rental companies and businesses with fleet vehicles as excellent sources of inventory. Purchasing directly from a rental company or from a business fleet is a great way for a dealer to easily acquire a large number of cars for special finance in one transaction. Many dealers have developed relationships with rental car companies in their area and frequently purchase 15 to 20 vehicles from them at one time.

Cockerham said he acquires the majority of his special finance inventory from rental companies or business fleets and has done so for the past three or four years. For a particular model that works well for special finance, he said his strategy is to “try to find someone who has a large fleet of them and then just commit to that large fleet.”

According to Cockerham, this method saves money for both him and the rental company. “Typically I’ve found that I can pay anywhere between $600 to $900 less for that car than running it through auction,” he said, “because [the rental company] is saving auction fees, they’re saving transport to the auction.”

He reported that his average car right now is a 2007 model with 15,000 miles and still under warranty. The drawback, he admitted, is that buying one kind of car in volume doesn’t allow much variety, so he said he tries to buy individual cars as often as he can.

How Much to Spend
When asked how far back of book they try to buy, any dealer will answer, “As far back as I can.” For lower-mileage cars that book between $13,000 and $17,000, most dealers aim for at least $3,000 back of book. However, Falcone believes dealers can’t expect to do any better than $1,500 or $2,000 behind book value on vehicles in the $8,000 to $10,000 range.

When it comes to reconditioning, there is a great deal of difference in how much dealers are willing to spend. Obviously, this is going to depend on the types of cars they’re purchasing. Since most late-model, low-mileage vehicles are still under their original factory warranty, they likely need almost nothing done to them aside from a good detailing. Cars with a few more miles may need a little more TLC. Older, higher-mileage cars will probably get little, if any, cosmetic work; ensuring that they operate safely is a much higher priority.

Rubenstein said that his average cost for reconditioning is $275 to $350 per car. “If the car has an ACV of less than $6,000, we don’t do a lot of cosmetic stuff,” he said. “We make sure that the car’s mechanically sound and that it’s completely safe.”

Falcone agreed. “We make our cars right. We’re very concerned about safety and we want our customers to leave here with a nice car and a good experience,” he said. “Our average reconditioning … is probably somewhere in the low- to mid-$600 range and that’s escalated over the last couple of years.” He considered this average to be a bit high for the age of his inventory, which is typically three years old or newer.
 
Cockerham was much the same. “My average reconditioning on an ‘07 with 15,000 miles is a little over $500,” he reported. “We’ve got a pretty exhaustive list that we go through.” Special finance customers may not end up in the car they set out to buy, he explained, so when they are presented with the cars they actually are able to buy, the condition of the cars should not give them an excuse to look elsewhere. “I want there to be no objection,” he said. “Maybe [the customer] didn’t come in to buy a Cobalt, but I want it to be the best Cobalt he’s probably ever seen.”

Cockerham might have said it all when he said “My job…is to make sure my guys have the best possible car for the lowest possible cost.” Isn’t that commitment to inventory what drives success in special finance?