Mark Pirtle is a successful multi-line dealer in a small market south of Nashville, TN. In the two months since he established a sub-prime department, the dealership has increased twenty-six units per month with an average $2,100 gross. Don Harris is the manager of the sub-prime department. Read on to find out how Mark and Don have built from scratch a sub-prime department that appears to be doing everything right.
MARK PIRTLE
Q: Mark, what is your background in the automotive industry?
Mark: I am a 22-year veteran of the automobile business. I have been an auto dealer since 1983. I am owner of Mark Pirtle Chevrolet, Mark Pirtle Ford Mercury, Cookeville Honda, and Elite Motor Cars, which is a high line import facility.
Q: How is your sub-prime department set up?
Mark: It is set up just like a regular finance department. If we treat our sub-prime customers right and are able to successfully rehabilitate them, they won't be sub-prime anymore. We have the same type of facility and resources, but most importantly we have a dedicated Sub-Prime Manager who understands the value of this business and understands how it works and knows how to use the resources we have to maximize the profit.
Q: Does your Sub-Prime Manager handle the deal from beginning to close or do your salespeople handle them once he has gotten them approved?
Mark: Actually, all of the above. We wait on customers on our lot and we don't necessarily know if they could be a sub-prime candidate. We work them as we would a regular customer. If they don't qualify for prime financing then we turn them over to our sub-prime person and he will work out the deal. My salespeople love him because he saves deals for them. We also advertise for people who have had credit problems and when they come in, my Sub-Prime Manager will work with them directly. I would say it is probably about a 50-50 split between turnovers and those we have advertised for.
Q: How did you find your Sub-Prime Finance Manager?
Mark: He was actually already in our dealership. He had several different management positions in the automobile business. He had been a Sales Manager, Finance Manager, and he was just a natural. He was a top salesperson and was the next person I wanted to promote. He understood the opportunity was there, and knew how to utilize the tools that were there, and make this a very profitable department. He has done just that.
Q: What kind of background do you think they should have?
Mark: I think if a dealership that is committed to sub-prime does not have a ready candidate, it should go to an independent lot and get a manager who has a background in it. They have experience dealing with financial institutions that are used to buying below A-grade paper.
Q: What types of advertising promotions do you use and how well do you think it works versus advertising for prime customers?
Mark: We are employing a three-prong tack on advertising. We have billboards and a catchy 1-800 number and then we let people apply electronically. Another source we use is direct independent ads in different newspapers that are directed toward the sub-prime customer. And then in all our ads, whether it be new or used, we always include sub-prime information with the phone number. We target sub-prime customers each and every time we hit the public.
Q: What advice would you give a dealership in the start-up process for sub-prime, some of the things to do or not to do if they want to be successful?
Mark: Well, most importantly, the dealer has to make the commitment to getting that business and secondly-and just as important-is that he finds the right person to run that department. Third, make everyone from the sales force to the other managers understand that this department is just as important as any other department. And fourth-and this too is just as important-is to commit the resources: the inventory, the software, and the financial sources to get the program and these cars sold. If you do those four things you will be successful in sub-prime.
Q: You just started this special finance department two months ago. In respect to the rest of your departments, where does this one run as far as gross and profitability?
Mark: In its first month it was the fourth-best department out of seven. The number one department is my regular used, the second producing department is my new car, third is my direct finance, then sub-prime, then service and parts. I really believe that the sub-prime can rival the F & I Department even though it will have half as much opportunity as far as the sales.
Q: And your Sub-Prime Department did what kind of business in its first two months?
Mark: Twenty-five cars and about $57,000 in February, and about twenty units and $40,000 in March. But my Sub-Prime Manager was on vacation one week in March.
Q: For dealerships that are already involved in the sub-prime arena, what have you done to grow your special financing department even though you have only been in it two months?
Mark: I have added all the tools my Sub-Prime Manager has asked me for. And I have chosen the right person to manage this department and he is dedicated to the position. The third thing is the salespeople have seen how he makes them money out of the dust. As long as you make believers out of your salespeople, they will go running to your Sub-Prime Department as opposed to running your customer off the lot. The Bible says, "The poor will always be with you." Since they will always be with us, we might as well sell them a car.
DON HARRIS
Q: Don, what is the relationship between your Special Finance Department and your respective salespeople?
Don: This dealership, probably better than any one I've worked at, works like a team. We have found that every salesperson and manager wants each and every person who comes on the lot to leave with a car.
Q: There is no friction or static between any of the departments or salespeople when a customer is delivered a car either prime or sub-prime?
Don: Actually, what sub-prime does here is it takes customers the salespeople wouldn't have been able to make any money from, because they simply wouldn't have been able to sell them a car, and turns them into a commissionable sale. Of course, the Service Department is happy because they get that many more delivered cars to do warranty work on. The F & I Department is happy because our warranty sales have increased. The managers are all happy because they turned the inventory quicker. It works well for everybody.
Q: What kinds of advertisements and promotions do you run strictly for sub-prime and is any of your sub-prime mixed in with your prime ads?
Don: We have done a combination. We ran several local newspaper ads within a fifty-mile radius targeting sub-prime customers. We have also intermingled the 1-800 number we use for sub-prime into our regular advertising. From that we get about 12 to 15 applications per week at a low cost to us. We simply have added one line to our ad and it has been very beneficial to us. The thing that seems to work the best is targeting small ads in the classifieds; that doesn't cost a lot of money. Or some of the targeting that we are just starting to get into is radio and television. But targeting is the important thing. One thing that I brought into the dealership, and that we are doing now, is complete follow-up surveys for all our sales.
Q: You mean CSI for sub-prime?
Don: It is more than just CSI. We target demographical information. We want to know where our customers are coming from, where they heard about us, and even how many people live in their household. We want to know how many of those people are drivers and may eventually be buyers. We even ask them up front if they know of others who have had credit problems. Can you refer us to them? We actually get more referrals from our sub-prime customers than any other buyers we have.
Q: How many lenders do you use?
Don: Have and use are two different things. We have several lenders but we use primarily three of them. They are Ameri-Credit, Household Finance, and TranSouth.
Q: Why do you use these three as your primary lenders?
Don: One of the main concerns that dealers and Special Finance Managers have of sub-prime dealing is funding. Of course one of the major things is approval percentages. That is two areas where all three of these are very strong. If we get a deal together and approved we can expect funding from any of these three usually within a 48-hour turn.
Q: I assume you send them in a funding package that has all the information they need.
Don: That is true. But these three companies make very clear all the stipulations they need. Once they give them to you they do not change them.
Q: You mean if you send them everything they ask for, they will not ask for anything else?
Don: That's right.
Q: You mentioned computer programs earlier...
Don: What they allow us to do is enter criteria for our lenders. The type of customer you have, such as time on the job, credit bureau score, income, that sort of thing. We can enter our inventory. What the program does, is instead of us having to do a physical inventory sheet, the old NADA book, and having to look at every single car until we find one that the customer will take, the computer will do it all for us.
Q: So the computer will hook you up to NADA or Kelley with your inventory?
Don: Yes. My program uses both. The customer will come in and I can look at their credit application, credit bureau, ask them a couple questions, and within a couple of minutes I can find out what car I need to single them in on to make the most money.
Q: What is the biggest single reason for your quick success in sub-prime?
Don: The relationship we have between the salespeople, the managers, and this department. The dealer principle is included in that. Everyone has to be committed to sub-primary in order for it to work. The Sub-Prime Department is basically free money. It makes everyone around it money. It makes the customer happy and they send more customers. It makes the dealer happy because you get more customers and you have a high per-copy average on the ones you get. But it only works if you have a commitment to advertising and the computers. You also need a commitment by your used car manager to go out and buy the right kinds of cars. And also the new car department needs a commitment to send customers with a credit problem to you instead of running them off the lot. You would then have all the necessary ingredients together to run a good sub-prime department and make it work for everybody.
Q: Give me an example of a good vehicle to have on your lot. Price range, year, make, model, toys, whatever.
Don: If I had to name one it would be a Buick Skylark. We were able to buy some 1998 Buick Skylarks with V-6 engines, automatic transmission, power windows and locks, tilt steering wheel, cruise, and custom mirrors for around $9,000. Now the key there is that the car will carry over $10,000 in NADA trade-in. Therefore, you start out your deal at anywhere from $800-$1,200. Now most of your lenders will give you a percentage over NADA trade so what that does is open up a golden opportunity for profit. For example, if I had a car that was going to book out at $10,250 and I have got $9,000 in it, if the customer gives me $1,500 down and I can sell it for 110% of book value, that puts me at $11,400. After tax, title, and license I can sell that car for around $12,900, including the down payment. I have got $9,000 in it. That is a $4,000 deal. Even if a customer comes in with $800-$1,000 down you can still make $2,500-$3,000 .
Q: Is that 60-to-72-month terms?
Don: Some lenders like Summit and Household will give you 72 months if the miles are 25,000 or less. If it is 30,000 or so you can still get 60 months financed. That puts you in a low $300 payment, which the vast majority of our customers are ready to pay. Low miles, and most of the time, still under factory warranty.
Q: What advice would you give to a dealership that doesn't have a special financing department and wants to set one up?
Don: First of all, you can't do anything until you have a world of commitment. The first commitment a dealer principle would have to make is to find the right personnel. Not everyone is cut out for dealing with secondary lenders and/or secondary customers all day long. You have got to search for people with experience. In my opinion, the best people are those who "grew up" on independent lots, who have worked in finance with independent dealers, not franchise dealers. My reason is that when you are with an independent dealer you have to have to have sources set up for secondary lending. Because you are a smaller dealer, you come to know them and build a rapport with them.
Q: So the manager that comes from an independent lot is not only more versatile but has a broader spectrum of the industry as a whole and maybe they work a little harder?
Don: I think that it comes as a natural compulsion with the independent dealership that everyone who comes on that lot is looked at as a paycheck. Everyone that comes gets latched onto and you don't let go until the deal is done. Those who understand this are the kinds of people it takes to run a sub-prime department.
Q: What are two or three things a dealer can do to grow an established sub-prime department after they have the right person and inventory?
Don: First of all, be willing to pay your salespeople in a sub-prime dealership. Get paid on a real commission and get paid real money. If you find the customer and get them in the car, and the dealership makes a $2,000 or $3,000 profit, you should get paid for it. That's one thing dealerships have to get away from-paying small flats for sub-prime deals. Even though they may not have to do as much work after the customer gets there, they may have to do more work to get the customer in the door. The second thing to do is manage your lenders. You can have way too many lenders. Over ten or so is way too many. What the manager needs to do is let the lenders know that he is not going to have more than four or five top gun lenders. Third, let three lenders know that they are going to get the bulk of your business. The others are going to have to fight to get into that top three. If you manage your lenders, and are honest and up front with your lenders and let them know this is the way you do business, then you are always going to have those three be appreciative of your business. They will work with you and have more of a one-on-one relationship with you. You will also have those seven or so who are wanting to break in with you and will be readily available.
Q: As you know, there is a lot of fraud in sub-prime departments. What flags should a dealer watch for that may indicate his Sub-Prime Finance Manager is not playing by the rules?
Don: I think the most-committed crime is a Finance Manager lying to a lender. No deal is worth losing a lender over. You may not only lose that lender from that dealership for years to come, you may lose your job. What I have suggested goes back to your tools-a computer system that scans the VIN number, and a hard copy back-up inventory list of what is actually on the vehicle. Then you have accountability. The one thing that has hurt the reputation of sub-prime dealers and departments, and for that matter managers, is the lack of accountability.$
Mark A. Hafner Is The Director of Special Projects for Adtel International, Inc. If you have specific questions or require more information about this subject, please check the appropriate box on the reader response form on page 3. mhafner@dealeronline.com