Article

Diversifying Sales-BHPH Alternative Expanding - New Markets And Cash

August 2006, Auto Dealer Monthly - WebXclusive

by Harlene Doane - Also by this author

Any financial advisor will tell you how important diversification is in your investment portfolio. Your business should receive the same respect. You owe it to yourself to investigate all profit opportunities for your dealership and invest in those that have a risk that is acceptable to you.
 
When you look at your arsenal of finance companies and inventory, what one item is missing? A fit for the credit challenged customer, or the older model higher mileage vehicle? Rent-to-Own might be your missing ammunition.

Rent-to-Own can combine credit challenged customers with your inventory and create a new profit center. “Dealers who utilize this program rarely even advertise it because once they start it, more than enough customers find them through referrals,” claims Mike Garner of Seadra, a business that developed a Rent-to-Own strategy for automobile dealerships.

“These programs are successful because the dealer retains control of the vehicle until the vehicle is paid for in full,” states Garner, “unlike the traditional BHPH operation, where the title is immediately transferred to the customer with a lien on it.”

It is normal for 50 percent of the vehicle cost to be collected up-front in a non-refundable deposit and an average payment to be $300 per month in a Rent-to-Own program. About 200 vehicles can easily generate $70,000 per month in cash flow. It is a true Rent-to-Own program when the customer may return the vehicle, at any time, to the dealer and owe no additional fees to the dealer.

“These programs are successful because the dealer retains control of the vehicle until the vehicle is paid for in full,” states Garner, “unlike the traditional BHPH operation, where the title is immediately transferred to the customer with a lien on it.”

It is normal for 50 percent of the vehicle cost to be collected up-front in a non-refundable deposit and an average payment to be $300 per month in a Rent-to-Own program. About 200 vehicles can easily generate $70,000 per month in cash flow. It is a true Rent-to-Own program when the customer may return the vehicle, at any time, to the dealer and owe no additional fees to the dealer.

How do you protect your vehicle when someone else is constantly driving it? First, have it properly insured. This means that the customer carries insurance, which is always a challenge for this type of customer and the dealer carries a blanket policy. The dealer’s policy protects the dealer and pays out when there is damage to the vehicle through an accident while the customer is in possession of the vehicle. (Note: Due to “vicarious liability” laws in a few states, the cost of a blanket policy may be too prohibitive for some dealers. Seadra would be happy to check this for any dealer.)

There are some significant advantages in addition to the increased cash flow. Sales tax is deferred. The dealer actually gets to keep most of the non-refundable deposit paid. Unlike a standard vehicle sale in which the customer makes a down payment and the dealer gets stuck with paying several hundred dollars of taxes and fees from that cash, the Rent-to-Own program allows the sales tax to be paid as the customer makes the payments on the vehicle. Depreciation of the inventory is also allowed under IRS guidelines creating another tax advantage.

Sales are bankruptcy proof and no changes in the current code changes that. Since the dealership, not the customer, retains ownership, the vehicle cannot be lost in a bankruptcy proceeding.

The vehicle is actually titled in the dealer’s name. If the customer skips town with the vehicle it becomes stolen property since the dealership retains ownership at all times. When repossessions are made, title headaches are minimal because the title was never transferred. When the customer makes their last payment, the title is transferred.

With all of the advantages of Rent-to-Own, you might surmise that this could be your next great sales weapon and your best investment this year. However, as with any investment, due diligence and thorough research will allow you to determine if it is the right investment for you.

Vol 2, Issue 10

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