Login

BHPH – License To Print Money

Written on July 30, 2004 by Scott Carlson

Having spent the last 35 years in the BHPH industry, I have learned that BHPH is a license to print money–if properly managed. My family and I started our first BHPH lot in 1969 with $500 borrowed money and minimal industry knowledge. Since then, our combined efforts have yielded in excess of $1 billion dollars in total BHPH receivables.

BHPH is coming of age. Those who learn to manage the risks of BHPH through the use of tried and true methods and evolving technologies will create fortunes. When growing a BHPH business, it is vital that you start with or change to the best dealership management software available today. Information is the key to properly managing your BHPH business.

Additionally, standardized underwriting and BHPH credit scoring is proving to be a beneficial component for competing in the current market. BHPH customers are becoming more spoiled every day. Prospective buyers are expecting a lot more car for a much lower down payment. Considering the cost of a good BHPH vehicle these days, your company’s ability to more consistently and accurately decision deals will determine your degree of success in the future.

In order to maximize your BHPH business, consider the following:

Product range

Most dealers get their start in BHPH offering vehicles with ACVs of $2,500 and less. While the yields associated with these vehicles can be impressive, the challenges related to the vehicle’s condition can be cumbersome. The sweet spot in the industry is an ACV range of $3,000 to $6,500. Realize that the greater the spread between the cost of the low-end and the high-end vehicle, the greater volume and range of customers you will attract and close. The goal in BHPH should be to match product range with your ability to fund your business.

Risk dollars

Markets vary across the nation. Where there is less competition, customers are willing to pay larger down payments. Therefore, dealers are able to recover more of the cost of the vehicle at the time of sale. Contrary to popular belief, the size of down payment has very little to do with the performance of the note, unless you are dealing with extreme low-end customers. Utilizing BHPH scoring enables dealers to more accurately match customers with dollars at risk or cash-in-deal. Industry leaders are learning to sell more cars for a lot less down.

Repo rate

In BHPH, just as in banking, there will be repossessions. Dealers do not create repos. Most repos are a result of the following: good people with poor means and good intentions, ultimately not being able to pay in a timely manner, mechanical failure, and/or physical damage. While the repo rate (number of vehicles that ultimately come back as compared to the number sold) is an important factor to measure in your business. A 30% to 40% rate is not alarming.

Repo frequency

Frequency is much more important than repo rate. The months in which the repos occur can make or break a BHPH dealer. 80% of all repos traditionally occur within the 12 months of the life of BHPH originations. Repos usually peak during the third 90-day period of the installment contract. BHPH scoring enables dealers to build portfolios that have repos peaking in later periods. To maximize sales, dealers should target a 30% to 40% repo rate, coupled with a repo frequency peaking in the fourth or fifth 90-day period following retail installment contract originations. A protracted frequency will minimize losses traditionally associated with a higher repo rate.

Collectability

Measuring dollars paid prior to repossession plus the ACVs of the vehicles repossessed. Next, include all of the dollars paid on the good accounts to help determine a portfolio’s overall collectability. Comparing that result to the total dollars to be paid by customers on all contracts originated (including both the amount financed and interest) will result in a ratio. On average, BHPH dealers realize 70% to 75% collectability. Through the use of today’s technologies, dealers are pushing all the limits in BHPH without compromising collectability. Dealers should target collectability in the 80% to 85% range, while at the same time pushing the limits on repo rate and properly managing repo frequency in order to maximize sales.

The master plan of BHPH should be to keep your customers paying your dealership for a minimum of ten to fifteen years by providing the broadest range of products for the lowest down payment. Draw on the experience of industry experts and utilize evolving technologies to grow your BHPH business. Those who do so may far exceed their wildest expectations of growth in their businesses, as did my family and I.

  • FAQ

    What exactly is AutoZoom's product or service?
    AutoZoom is a web-based predictive underwriting system designed to assist you with the underwriting and analysis challenges of the buy-here pay-here industry. AutoZoom has created a number of Scoring Models specifically for the sub-standard credit (buy-here pay-here) industry. AutoZoom includes management tools which utilize dashboards, charting, and exporting features to present data related to underwriting, sales, repossessions and associated cash-on-cash gains and/or losses in a very user friendly interface. Additionally, AutoZoom clients are able to issue Adverse Action Letters systematically when credit is declined.
    I already have underwriting guidelines. How is AutoZoom different?
    AutoZoom is only different in the way it applies number values to standard buy-here pay-here underwriting criteria, allowing those values to be used to make more precise and consistent underwriting decisions. AutoZoom is based on more than forty years of buy-here pay-here underwriting experience. Since buy-here pay-here underwriters typically do not use, or capture, numeric values with their credit decisions, they can know their underwriting produces good or bad results, but not why or how to improve their underwriting.
    Does AutoZoom's Predictive Underwriting make decisions for me?
    No. You are in control. AutoZoom simply provides you with numeric indicators that allow you to see more clearly the strengths and weaknesses of each prospective customer and deal structure. Someone will still need to make the final decision on each deal. Typically, upper management in your company will establish minimum AutoZoom numeric benchmarks. Underwriters then use those for approval, eliminating the need for upper management to be involved in every decision.
    Can AutoZoom help me if I am just getting started in the BHPH business?
    Yes. Any company that chooses to use AutoZoom at start-up will avoid the losses traditionally associated with the learning curve of the BHPH underwriting and deal approval process.
    How can AutoZoom help me in my business if I already consider myself a BHPH expert?
    AutoZoom has found that, regardless of level of expertise, all companies can benefit from using AutoZoom. Our larger clients have more than dozens of BHPH lots.
    More

  • Testimonials

    • AutoZoom has been helping Auto City make the right underwriting decisions since 2006 and we’ve found it amazingly accurate. We just started using the newest version, AutoZoom FLX, and we are completely blown away by the amount of data at our fingertips. It is absolutely the best scoring program we’ve ever seen. If you’re not using AutoZoom now, you should be. It’s underwriting made simple.
      • Blake Ingram, Owner
      • 4 Locations
      • 35 Years
      • Texas
    • AutoZoom allows you to dig deep into your portfolio to retrieve priceless information in an easy to operate and understand format. This is the tool that will take you from the guessing game to learning the science of building a successful portfolio. The knowledge and support given by the AutoZoom team is tremendous.
      • Brad Kalivoda, Accounts Manager
      • 2 Locations
      • 10 Years
      • Texas
    • AutoZoom is by far the leader in scoring systems for BHPH. We have seen countless dealers utilize this program to help in the underwriting process. It is really the only one that provides consistent results that you can use to assist in making good underwriting decisions. We recommend AutoZoom for BHPH dealers.
    • Consistency is the key to stabilizing portfolio performance and ultimately increasing net profit. We have found that each underwriter brings to the table their own unique experiences and these variations in experiences can simply lead to higher default rates or missed business. AutoZoom lends itself to being an equalizer or sorts. AutoZoom’s effectiveness is not dependent upon the level of experience each underwriter possesses. AutoZoom provides a platform where the customer’s ability, stability and willingness to repay are evaluated in the same manner on each deal, providing a quantifiable mechanism for systematically assessing risk. AutoZoom takes the guess work out of the equation. We have used the model since 2006 and we continue to see improvements with our static pools and the overall performance of the portfolio. So, even if your company already has sound underwriting policies and procedures, adding an AutoZoom model should still bring about more improvements in your business.
      • Mark Bursey, Acquisitions Director
      • 9 Locations
      • 19 Years
      • Maine

  • Newsworthy

    • BHPH – License To Print Money

      Having spent the last 35 years in the BHPH industry, I have learned that BHPH is a license to print money–if properly managed. My family and I started our first BHPH lot in 1969 with $500 borrowed money and minimal … Continue reading

    • BHPH: What Big Money?

      According to IndependentDealer.com, the typical buy here, pay here dealer produced a $1,213,236 annual pre-tax profit in the year 2005. Many of my successful buy here, pay here dealer clients make this kind of profit and more. That being said, … Continue reading

    • BHPH Underwriting, Scoring, And Static Pool Analysis

      Establishing underwriting criteria that maximize sales without compromising the collectability of retail installment contracts has been one of the biggest challenges for buy here, pay here dealers for many years. To make matters worse, the BHPH industry is changing complexion … Continue reading

    • BHPH: Feeding The BHPH Monster

      Long before I ever learned about internal rate of return, effective yield, relational databases, static pool analysis, the differences in repo rate and repo frequency, credit score modeling, audited financial statements, agreed-upon procedures audits, and a plethora of other things … Continue reading

    • BHPH: Profits Predicted

      It has been said for many years that investors make their profit on real estate at the time of acquisition. The same can be said for BHPH dealers regarding retail installment contract originations. Just as real estate investors thrive by … Continue reading

  • Auttr