Eyo Toe & Kevin Londerholm | September 14, 2020
Watch below as Terry Bowdler, Founder & CEO of LHPH Capital, explains the Sales Tax Advantage that LHPH has over the BHPH model. With traditional Buy Here Pay Here lending on retail installment sales contracts (RISC), state sales tax is paid at the time of the transaction on the sales price of the vehicle. This means the dealer uses the entire down payment for sales tax and is immediately cash-negative at the inception of the deal.
For LHPH deals in “pay-as-you-go” states, the sales tax is calculated only on the actual monies collected by the dealer (i.e. down payment, first payment). Sales tax is then remitted to the state on each lessee payment received for the remainder of the lease. With this structure, the dealer can pay sales tax over time, rather than all up front. This helps dealers start loans on a cash positive basis, requiring less capital to growth the business as well as better unit economics throughout the life of the lease.
Trevor Watson | June 23, 2020
Every dealer is feeling the impact of the very unique market conditions brought on by the pandemic. The statewide closures, injection of stimulus funds, moratoriums on repossessions and lease return extensions, combined with pent-up demand have thrown the used car market into whiplash.
Here is an excellent article that dives into the details of the current used (and new) car supply squeeze:
How LHPH Helps Dealers During Supply Challenges
This unforeseen situation has shined a light on an additional benefit of having your own Lease-Here, Pay-Here program: Recycling of Inventory. We often promote recycling of maturing leases from your portfolio as a significant advantage of LHPH from a profitability perspective, and it is. However, the additional benefit of having a mature portfolio of leases with numerous lease returns coming back to each month is: free inventory.
For dealers who have developed their LHPH program over the last few years, they have 10, 20, 30 cars coming back onto their lots each month, without having to buy those vehicles in the market. These cars are debt-free, no flooring or lines of credit debt and fees weighing their operations down. These dealers are not paying $2,000 over book to win the vehicle from their competitors on the block. Many are still buying additional vehicles for the inventory right now, but they can be selective, thanks to their guaranteed flow of lease returns each month.
Of course, growing and maintaining a lease portfolio to the maturity point takes time, discipline and dedication. Dealers who may read this and think, “that doesn’t do me any good at this moment,” should remember, we have now seen two significant supply crunches in the last 12 years alone. With little doubt, there will be more of these events at some point in the future. Preparing now and building your lease portfolio will allow you to ride out the natural fluctuations of the future used car market, whether those are large or small.
Kevin Londerholm | May 11, 2020
Making the switch from selling retail vehicles to creating an in-house leasing program is a big decision for an independent auto dealer. After careful planning with their teams and discussions with their lender, each of our LHPH dealers adjusted their business models to offer their own lease-here pay-here program. As Nick at Markosian Auto explains, the switch from selling retail to creating his own LHPH portfolio was the difference between achieving short-term profit vs. creating long-term wealth.
If you are a dealer interested in creating your own in-house used car leasing program, reach out to us ( TWatson@LHPH.com (619) 222-9990 ext. 1010 ). LHPH Capital can help offer suggestions on vendors, accounting firms, deal structure, and more!
Trevor Watson | April 27, 2020
Sales Tax and Cash Flow Advantage
With traditional Buy Here Pay Here lending on retail installment sales contracts (RISC), state sales tax is paid at the time of the transaction on the sales price of the vehicle. Typically, this means the dealer uses the entire down payment, and often some of their own capital, to pay sales tax. The result is the dealer is immediately cash-negative at the inception of the deal.
For LHPH deals in one of the 31 “pay-as-you-go” states across the nation, the sales tax is calculated only on the actual monies collected by the dealer (i.e. down payment, first payment). Sales tax is then remitted to the state on each lessee payment received for the remainder of the lease. With this structure, the dealer can pay sales tax over time and with the money paid by the lessee, rather than all up front. This helps dealers start leases on a cash positive basis, requiring less capital to grow the business as well as better unit economics throughout the life of the lease.
A simple example would be a car you sell for $12,000 and get a $500 down payment on from the customer. With a BHPH deal in a state with a 7% sales tax, you will owe the state $840 in sales tax when you roll that car. The entire $500 of the customer’s down payment, plus $340 of your own money just went out for tax, and it will take months of successful customer payments before your cash flow recuperates.
If you had leased this vehicle in the same state with “pay-as-you-go” sales tax, you would have paid 7% of the customer’s down payment, or $35 ($500 x 7%), in sales tax to the state when you put the vehicle over the curb. The other $465 of that down payment is yours. You are already in a positive cash flow position from the outset. Now the customer will make a $410 per month payment to you, of which you will remit $28.70 ($410 x 7%) to the state in sales tax each month. Multiply this impact over the 10, 20, 50 deals you roll per month and leasing quickly makes an incredible impact to your cash flow.
If you would like to see a list of the 31 “pay-as-you-go” states or learn more about the other 9 financial and operational advantages of LHPH, download our LHPH E-Book here.
Kevin Londerholm | April 21, 2020
Mike North, CPA & Partner at the accounting firm Katz, Sapper & Milller, serves in the firm’s Transaction, Buy Here – Pay Here and Dealership Services Groups and also has considerable experience in the equipment leasing industry. Mike has extensive experience advising clients in accounting, financial reporting, auditing, compliance, and internal control matters.
Listen as Mike presents one of the main reasons why an independent auto dealer chooses to transition from Buy-Here Pay-Here to Lease-Here Pay-Here: Sales Tax Advantage.
- BHPH: On a retail installment sales contract, the sales tax is paid at the time of the transaction on the sales price of the vehicle. This means the dealer will use the entire down payment for sales tax and is immediately cash-negative at the inception of the deal.
- LHPH: In “pay-as-you-go” states, the sales tax is calculated on the actual monies collected by the dealer (i.e. down payment, first payment). The dealer can pay sales tax over time, rather than all up-front. The dealer can start each loan on a cash-positive basis.
Trevor Watson | March 10, 2020
One element of leasing that we receive a lot of questions about is, “how do I set an accurate residual value?” Most dealers are familiar with new car leasing and the science behind the setting of residuals on new cars. A lender in new car leasing will live or die by how accurately they can predict a three-year residual on the vehicles they lease today. Many people in the auto industry have heard the horror stories from the previous residual value crises that knocked many big-name players out of the industry, once upon a time. This leads to a degree of anxiety about attempting to set their own residuals on their LHPH program.
Great news! Setting residuals on Lease-Here, Pay-Here is not nearly as challenging or frightening as it is with new car leasing. Residual risk is not a significant risk for LHPH dealers if they follow some basic guidelines and focus on the purpose of LHPH; offering reliable vehicles that can run multiple full-term leases. Here are the three primary ways to set your residuals.
- Most LHPH dealers use a 20% residual of the Agreed Upon Value of the car (the sales price). So if they bought a car for $7,000 and lease it to the customer at $10,000, they will set the residual at $2,000 (20% of the $10,000). A key reason for the 20% level is maintaining compliance with Regulation M for consumer leasing. While Reg M technically allows for residuals to be set down to 10%, keeping your residual up at 20% or greater will ensure you do not run into issues with disguised retail installment sales contracts. This level has also proved to be fairly accurate for most vehicles in the $5,000-$10,000 range.
- Other LHPH dealers will set their residual based on the term and the ACV of the vehicle. If they are rolling higher value vehicles, maybe around a $12,000 ACV unit, and leasing it for $15,000 on a 36-month lease, they will probably be up toward a 30-35% residual. If the term is shorter, they will raise the residual and if the term is longer, they will drop the residual. However, we do not recommend extending your term over 36 months, it really isn’t necessary to keep the payment in the sweet spot of $400-$500/month thanks to the residual on the lease.
- The third method our dealers will employ is utilizing MMR to set their residuals. We have dealers who will check MMR on a deal by deal basis. They will look up what a similar vehicle, 3 model years older with roughly 60k more miles on it, is going for at auction today and set their residual at that number.
While residual setting is important in LHPH (for customer affordability and term), it is key to remember the primary goal of your platform. The goal with LHPH is to spin the same car for 2-3 full term leases before you liquidate the vehicle. Therefore, the residual on the first one or two leases is not overly important, if you can put the vehicle back out a second or third time.
By the time you reach the last lease cycle, if you miss the residual by $500, or even $1,000, you have made a solid ROI on that vehicle over the course of its useful life. As a dealer, you step up on an occasional trade in your retail business today and pay $500-$1,000 over ACV to get a customer into another car. The same applies here, however, that single vehicle sale is not nearly as profitable as the long-term profitability of your lease fleet units.
Kevin Londerholm | March 2, 2020
At our LHPH Summit in 2019, our VP of Business Development, Trevor Watson, asked our experienced LHPH Dealers what their average lease deal looks like. The deal structure (term and agreed upon value) is generally based off of the purchase price of the inventory. As our dealer panel explains, inventory for a Lease-Here Pay-Here Dealer can differ from a BHPH dealer’s inventory due to getting multiple turns on a single vehicle. This results in vehicles with a higher Actual Cash Value (ACV) purchased from an auction mixed in the lot inventory with vehicles that have been returned to the dealership after a successful lease transaction with a slightly lower value:
- Higher ACV: New inventory that has been purchased from the auction may have a term of up to 36 months and may cost the dealer up to $9,000 initially.
- Lower ACV: A vehicle that has successfully run the term with an original lessee is returned back to the dealership, reconditioned, and re-leased to another customer. The second or third lease on the same vehicle would most likely have a shorter term with a lower agreed upon value.
Whether the vehicle is new to the lot or it is recycled inventory, the goal for our LHPH dealers is to lease vehicles to their customers that will successfully run the length of the lease term. Check out the video of our dealers explaining their deal structure below:
Kevin Londerholm | January 2, 2020
LHPH Capital hosted its annual LHPH Summit in San Diego at the Hard Rock Hotel on November 8 – 9th, 2019. Watch as Tim Lawrence, Chief Operating Officer, introduced the purpose of the Summit: to create a platform for LHPH dealers to share best practices and become better operators. LHPH industry experts were given the opportunity to share their knowledge & lessons learned as they navigated their journey to becoming some of the most successful LHPH Dealers in the nation. Stay tuned in 2020 as we release highlights from the LHPH Summit which covered topics from importance of accounting, access to capital, sourcing inventory, cash flow, the subscription model, underwriting software, and much more!
Trevor Watson | December 2, 2019
Gene Daughtry has over 20 years of Buy-Here, Pay-Here experience. Hear his thoughts on Lease-Here, Pay-Here and the opportunities LHPH can offer for both independent and franchise dealers.
Trevor Watson | November 25, 2019
Interested in how Lease-Here, Pay-Here dealers stack up to their Buy-Here, Pay-Here peers? Here is a comparison of recent benchmarks between the two models. In 2018, LHPH dealers were rolling larger dollar vehicles, on leases that were eight months shorter in term, with the same monthly payment as the average BHPH dealer.
In subprime lending, you need to keep your terms as low as possible to reduce your risk, while still keeping the customer’s payments affordable. LHPH provides the financial instrument to do just that.