When stocking vehicles for subprime buyers, a good target and rule of thumb is to look for vehicles you can buy $1,000 to $1,500 back of wholesale book.
Finding these vehicles allows you to cover the fee structure of your lenders and still make a good gross profit.
Some of the better profit opportunities are with current year vehicles, not yet in a retail book, where lenders advance a percent of like-invoice. Finding the greatest spread from wholesale purchase to advance on retail book or percent of like-invoice will create your best opportunity for profit.
Margin or “spread” is not static. Book values change. Target a 60-day turn on inventory. Going beyond that erodes your book values and opportunity for profit.
As a rule, your wholesale values should fall between $8,000 and $12,000 to meet typical payment calls. Keep a history of what you sell to track average gross by make and model.
Keep in mind the seasonality of some inventory. A little business intelligence will go a long way in helping your vehicle buyer target the right inventory.
Typical vehicles are program or auction vehicles, not retail trade-ins. Some new vehicles with factory rebates also structure well. If you are attempting only to sell from retail trade-ins, you are fighting a losing battle.
Program vehicles, rental fleet sales and auction vehicles will provide the bulk of inventory. Some lower-priced new vehicles structure with available cash back rebates allowed by some lenders.
Don't forget the “virtual inventory” available from your manufacturer's online auction. Here you can find complete descriptions on lease returns, early terminations or repossessions. With your customer, you may be able to select a vehicle, take a deposit and in so doing take your customer out of the market.
Your inventory-to-sales ratio should be approximately two to one. If you plan to sell 50 subprime units, you should have at least 100 on the ground. Remember “approvals” will mean nothing unless you have vehicles your prospects will buy.
Domestic vehicles usually structure better than foreign ones. It will be difficult to buy a Honda Accord at a price that will book out. Look for vehicles that are “option” rich. They carry higher book values and greater advance. You will find better success with automatic transmissions and 4-doors for cars.
Conditioning and re-conditioning are important. A successful dealer I know puts new tires and brakes on every used vehicle to build consumer confidence and curb appeal.
Managing subprime inventory is a dynamic process. What is appropriate today will change tomorrow. Some units to consider currently include:
- Cars: Buick Century, Chevy Malibu (LS) and Cavalier, Dodge Stratus, Ford Focus, Contour and Taurus, Pontiac Grand AM, Mazda 626, Saturn L200, Mitsubishi Galant, and Olds Alero.
- Trucks: Mazda B2000, Ford Ranger, Chevy S-10, Dodge Dakota.
- Vans and SUVs: Chevy Trailblazer, Ford Windstar and Explorer, Isuzu Rodeo.
Once you've purchased your vehicles, price them properly. Initial pricing should accommodate your worse-case scenario with bank fees and higher down payments.
If not required by state law, consider not posting a price. If required by law, utilize addendum pricing to accommodate the bank fees and down payments.
An appropriate inventory is essential to any special finance program. While vehicle selection is dynamic, principles by which you manage inventory are not.
Pay attention and discipline yourself to follow fundamentals and you will enjoy increasing subprime sales success.
Tim Shea is president of Great Direct Concepts, a subprime consulting firm to auto dealers. He is at [email protected] and 800-430 5484.