How You & Leasing Can Ensure Your Dealership’s Future — By Not Being a Dealership

experimental-vehicleThe Apparent Situation: Leasing is back in the dealer showroom – With supposedly less risk based on the “right” residuals to keep the trek toward 16M new vehicle sales going, all while being a “catalyst” to transform what “dealer” think they must do.

The Real Situation: Retail auto leasing penetration is approaching 30% going into the last quarter of 2013. The “use” of a lease to fund a car or truck is probably the most impactful factor in the recovery and sales volume to date for the U.S. Auto Market.  Just study sales results from Toyota, Honda, and Hyundai and you’ll see.

Who’s Nervous About Leasing?  Well, all of the participants in this 2013 market trend seem nervous – except for the dealers who are making big money on nearly every lease transaction.  There is much talk of risks and the return of residual deficiencies among major banks and even captives – all of whom bailed from a booming business five years back.  OEM, captives, and banks now claim that the “residualization” process and predictive algorithms have made lease underwriting less risky. Leases are structured based on the lessons and the sins of the past, with portfolio data management heretofore ignored or not considered.

What Happened During the Last Leasing Boom?  Major banks and the captives got into a fight for market share and messed with the residuals to gain dealer business and lessee volume by reducing the depreciation reserve in order to lower the lessee’s payments. Banks and the OEM captives took a bath on lease portfolios and engaged in boiler room telemarketing centers to call every lessee to see if they could convince them to buy the vehicle at lease end.  Dealers could not really buy the returned leased car unless the lessor-bank agreed to take an immediate loss on the inflated book value of the vehicle.

Transfer of the Residual Risk: The solution for the retail auto market and the lending institutions was to get back to “Loaning” where all the real residual risk and responsibility was with the buyer-loanee  and the collateral risk was with some bank, credit union, or securitized captive finance company.  Leasing was to be avoided unless the lessee was gold plated and the car was a luxury vehicle with a history of retaining value over a period of three to five years.

Consumers Buried in Loans – This time it was and still is the car buyer, and not the lease finance company, who is taking all the risk.  For years, consumer “loanees” were buried in car loans, particularly if they accepted a 5-year or longer finance period.  Dealers then got them out of the underwater loans by literally moving the loss of value or residual to another loan for a new vehicle. further burying the loanee in the new car in many cases.

A Car is a Block of Ice:  The challenge for auto users [aka consumers] is to gain the use of a vehicle that has the slowest rate of devaluation (melting) or depreciation of the period of usage or vehicle life cycle.  Further, the basic structure, concept, and element of leasing are ideal for funding the use of an automobile. The big argument for leasing has been that the nature of a depreciating asset made a financial arrangement that could cover the rate of the loss of valuation over time was truly smart and sound.  Further, why must people continue to think that they actually “own” their vehicle when in most cases, they could not sell or even trade the vehicle and realize enough equity or money to pay off the loan?

What, then, should dealers (automotive retailers) do to not be a dealership?

  • Offer lease financing as a sound financial way to fund the use of a vehicle.
  • Use Internet & your showroom to make it mind bogglingly easy get a vehicle.
  • Capitalize on the consumer’s need to gain a payment to go with the car.
  • Do not be a “dealership” any more – Stop calling yourself a “dealer.”
  • Become  a complete  “Personal  Vehicle Transportation Center.”
  • Use the leasing concept as a part of the transformation of the way you sell cars.
  • Seek to be a place where people come to get transportation solutions, not deals.
  • Offer every possible vehicle service needed to move people & their goods.
  • Provide leasing, loaning, rentals, Zipcars, electric bikes, and dealer-to-door service.
  • Transform your former “dealership” into a Constant Car Care Center for Consumers.
  • Promise your clients that they will never have to worry about personal transportation ever again.
  • Seek to take on & manage the risk & hassle of owning and operating a vehicle.
  • Remove the reasons why people have avoided coming to see you all these years.
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One Response to How You & Leasing Can Ensure Your Dealership’s Future — By Not Being a Dealership

  1. Pre-Owned Vehicle Leasing
    The greatest area of untapped potential and unrealized opportunity in the auto business today
    OCTOBER 2013
    The auto industry used to lease pre-owned vehicles. But pre-owned leasing never got the traction it deserved, but it was trending upward. What happened? The Great Recession, for one. When auto loan securitization stopped in its tracks, auto credit dried up for a spell. OEM captive finance arms focused their resources on supporting what they manufactured. Independent lenders pulled in their horns and became extra cautious. Some of those lenders, who were engaged in pre-owned leasing at the time, experienced substantial residual losses on the new vehicle side. On the pre-owned side independent lenders like U.S. Bank, Huntington Bank, and many others, also experienced fraud losses in addition to residual and default losses, largely attributable to a scam called “power booking” by a few unscrupulous dealers and leasing companies. The independent banks “pulled the plug” on pre-owned vehicle leasing. By the end of 2008, pre-owned vehicle leasing was virtually extinct.
    Since then certain OEM captives have maintained limited leasing programs for their own pre-owned vehicles, primarily for Certified Pre-Owned, but these programs don’t seem particularly competitive and the numbers are small. The fact is, they are concerned about being able to dispose of the extra volume of off lease vehicles, as they have their hands full with the new vehicle lease turn ins from their new vehicle subvention programs, which support what they build. These pre-owned leasing programs are primarily offered by the High Line OEM captive finance arms. The domestics currently have no such programs to support their CPO efforts.
    These days most of these pre-owned vehicle leases are done by privately capitalized leasing companies, where they set and are responsible for their own residual values.
    Residual values for pre-owned vehicles are much more predictable than for new vehicles. The bulk of the depreciation is experienced in the first year or two of a vehicles life. Technology exists to identify potential “problem vehicles,” so residual values can be adjusted before they turn into a problem.
    OEMs are showing great discipline and restraint and are not flooding the market with rental units as in the past, which protects ongoing residual values. They seem to have learned a lesson after having previously destroyed their own residual values. They seem to understand how that negatively impacted new vehicle sales and eroded brand equity.
    Pre-owned residual values can be well insured for a nominal fee. When insurance company insuring residuals sets those residuals based on their own projections, rather than on wishful thinking of a lessor or an OEM looking to maintain production, what is the risk?
    Lender/lessors who are engaged in new vehicle leasing are competing with the subventions from the OEMs, who have often had a “death wish” in the past. OEMs have often preferred to take a risk of loss on an enhanced residual down the road rather than to offer a rebate up front, which cheapens the perceived value of their product. This concern does not exist on the pre-owned side which allows for conservative residual values.
    Pre-owned leasing would be a boon to the Certified Pre-Owned business. Often, the 72 month conventional payment of a late model pre-owned vehicle is more than the subvention on a new vehicle. Leasing these late model pre-owned vehicles would maintain a proper distance between the subvented payment on new units versus a like model pre-owned. Leasing pre-owned would also be a compelling value proposition once interest rates rise to normal levels, something which is probably just around the corner.
    Sales tax in many states favors leasing over purchase, as the sales/use tax is calculated on the monthly payment rather than on the full selling price. This is not the case with a purchase or balloon contract. This is especially important in states like California, where the sales tax is high and there is no credit allowed for a trade-in when calculating the state sales or use tax to be charged on a car deal.
    With new “VIN explosion” technology, it is easy for the lessor to know what equipment a vehicle was originally built with. In addition, adding digital pictures and a pre-delivery report to the process completely eliminates this concern, making fraudulent “power booking” a thing of the past.
    Instead of attempting to compete for business based on who can offer money the cheapest, pre-owned vehicle leasing offers lenders the opportunity for substantially higher yields due to a less competitive environment and higher daily balances, while also being able to take advantage of the tax advantages of leasing based depreciation through “like kind exchange.” After all, the title remains in the name of the “lessor,” providing them with these depreciation advantages.
    Interest reserve is handled through the rental/lease fee “money factor,” eliminating the need to argue with a customer over an interest rate.
    Another huge advantage is shorter terms. A vastly improved level of customer loyalty and repeat business with leasing enables the lender/lessor and/or dealer to do business with the consumer more often while providing a never ending stream of pedigreed pre-owned inventory to dealers.
    A new trend in auto retailing involves selling service customers a newer vehicle based on a monthly payment about the same as what they are currently paying. Imagine the opportunity to put a service customer into a late model CPO unit using a lease payment to achieve the desired monthly payment. This puts this new retailing trend on steroids.
    In a telephone interview, Tim Deese, Founder and Chairman of Progressive Basics, a high profile and highly respected auto industry consulting company focused on the pro-owned industry said, “The vehicles these days have a much longer useful life than before, further reducing residual risk and the risk of breakdown for the lessee. Used vehicles can be safely leased out to 8 years from new. There is no good reason used vehicle leasing shouldn’t be a mainstay of the pre-owned business. Past issues, both real and imagined, don’t exist anymore. The principles of higher gross profit, higher consumer loyalty and lower monthly payments do.”
    According to David Blassingame, CVLE and Partner and General Manager of Autoflex Leasing in Dallas TX, a past President of the National Vehicle Leasing Association, “A previous issue for lenders engaged in pre-owned leasing was that many dealership F&I managers only used it as a “court of last resort” for consumers who were “payment challenged.” This resulted in a “look to book” percentage and a measure of adverse selection that didn’t work well for lender/lessors. This is easily resolved by only allowing operations into the program who agree to monthly volume minimums. A leasing operation like ours leads with leasing. That’s what we do. Its our specialty. We advertise leasing and the concept of convenience and shorter term. We stock the best inventory for it. We do NOT use it as a “court of last resort.” Many dealers tend to employ counterproductive F&I pay plans which promote longer term financing over shorter term options. They don’t “get it.”
    Jeff Cook, Founder and CEO of CyberCalc, a leading lease comparison software provider and developer of technology tool to identify problem vehicles for lease lenders before they become an issue said, “Dealers who didn’t “get it” were a problem in the past. Dealers and leasing companies who truly understand pre-owned leasing can do substantial volume on their own. They can include Pre-Paid Maintenance and Service Contracts tailored to the lease. There are enough dealers and leasing companies who DO “get it” to do substantial monthly volume without having to deal with the ones who do one or two a month and provide more clutter than results. There is no secret that I’ve always been bullish on leasing. What confounds me, however, is lenders’ fear of pre-owned leasing. After all, if you offer a 48 month lease on a new car today, why would you NOT offer a 36 month lease on the same car next year? Both cars are coming off lease at the same time and both have the same remarketing dynamics. However, the used car lease has less depreciation risk and typically is leased out at a lower residual value.”
    At a recent American Financial Services Association conference Melinda Zabritski, Senior Director of Product and Marketing, Automotive Finance at Experian observed, “While pre-owned Leasing is currently statistically irrelevant, it is a mystery to me why it hasn’t been embraced. The risk factors seem to be significantly lower than for new vehicle leasing.”
    Rob Mudd, President – Research & Development at Mudd, Inc., a leading marketing and advertising company, weighed in: “As it has always been and always will be, payment is the number one purchasing factor for the majority of consumers. Consumers today have two very specific needs/wants: First, they are looking for the lowest monthly payment they can swing. To provide a low monthly payment on late model pre-owned vehicles the terms of conventional financing contracts are being extended beyond what makes sense. The second need or want comes long before the extended financing term is completed, when that same customer wants to trade out of his/her vehicle. Leasing late model pre-owned vehicle resolves both issues in favor of both dealer and consumer, a classic win/win situation.
    In order for dealers/OEMs to experience a faster turn cycle on Certified Pre-Owned and other late model inventory, as well as enhanced retention of the customer, a more efficient financial model must be employed. If done right, the enhanced customer retention can also include more service department visits and repair orders written.”
    Adam Berger, National Vice President of Sales at Doering Fleet Management says, “Used vehicle residuals are much simpler to predict and far less volatile. As such, used vehicle leases are a great way to offset other portfolio risks as a lessor.

    The sweet spot today exists in leasing two to five year old vehicles. They have had a substantial portion of depreciation lopped off and future values are anticipated to remain strong, even though a drop from today’s historically high used vehicle prices to a normalized level can be expected.”

    Is pre-owned vehicle leasing a good idea whose time has come again? I expect we’ll know soon enough.

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