Finance and Insurance - The Profit Center I would like to make myself clear on a few items of interest before I get too deep into the sales processes at any dealership, including: automobile, recreational vehicles, boats, motorcycle, and even furniture or other big ticket items. A business has to turn a fair profit in order to stay in business. I believe that they should make this profit and use it to pay better quality employees a premium wage in order to serve you better. The financial strengths or weaknesses of any business can definitely have a dramatic effect on your customer service and satisfaction. I do not, in any shape or form, wish to hurt a dealerships profitability, as it is essential for his survival. I merely want to advise people how to negotiate a little better in order to make the profit center more balanced. Let's get right down to this! Every dealership has a finance and insurance department. This department is a huge profit center in any dealership. In some cases, it earns more money than the sale of the automobile itself. Profits are made from many things that most buyers do not understand. You as a consumer should understand the "flow" of the sales process to understand the profit centers that are ahead of you. Most negotiating from the consumer seems to stop after the original price is negotiated and agreed upon. Let's examine just a small portion of what leads up to that point. The first thing that every consumer should understand is that when you go to a dealership several things come into play. One of the most important things that I could point out to you is that you are dealing with a business that has been trained to get the most amount of money from you as they can. They are trained and they practice these tactics everyday, day after day, week after week, month after month, and year after year. Let me point out a couple of important facts that I have said in this paragraph. First, you'll notice that I said a dealership and not a salesman and secondly, I emphasized times of day after day, week after week, etc. etc. This was done to let you know that the salesman is working very closely with the sales managers in order to make as much money as he can. Your interests are really not their objective in most cases. One tactic that is used heavily in the business is that the salesman says he is new to the business. This may be true or not, however; keep in mind that he does not work alone. He is working with store management, who gives him advice on what to say and when to say it. These guys or gals are very well trained on how to overcome every objection that you may have to buying from them. They have been trained in the psychology of the buyer and how to tell what your "hot buttons" are. They listen to things in your conversation that you may say to one another as well as to the salesman. They are trained to tell their desk managers everything that you say and then the desk manager is trained to tell the salesman exactly what and how to answer you. A seasoned salesman does not need as much advice from his desk and may negotiate a little more with you directly without going back and forth. The process of negotiation begins the moment that you walk into the front door or step foot out of your car and begin to look at vehicles. Different stores display inventory in different ways. This is done for crowd control or more commonly known as "up control". Control is the first step in negotiating with a customer. Ever who asks the questions controls the situation. Let me give you an example: A salesman walks up to you and says "Welcome to ABC motors, my name is Joe, and what is yours?" The salesman has just asked the first question- you answer "My name is George." He then asks you what you are looking for today, or; the famous "Can I help You?" As you can see, step after step, question after question, he leads you down a path that he is trained to do. Many times a well trained salesperson will not answer your questions directly. In some cases, they only respond to questions with other questions in order to avert the loss of control. An example of this could be something like you asking the salesman if he has this same car with an automatic rather than a stick shift. Two responses could come back to you. One would be yes or no, the other could very well be something along the lines of: 'don't you know how to drive a stick shift?" In the second response the salesman gained more information from you in order to close you. Closing means to overcome every objection and give your customer no way out other than where do I sign. The art of selling truly is a science of well scripted roll playing and rehearsal. We have established that the negotiating process begins with a series of questions. These questions serve as two main elements of the sales process. First and foremost is to establish rapport and control. The more information that you are willing to share with you salesman in the first few minutes gives him a greater control of the sales process. He has gathered mental notes on our ability to purchase such as whether you have a trade in or not, if you have a down payment, how much can you afford, are you the only decision maker (is there a spouse?), how is your credit, or do you have a payoff on your trade in? These are one of many pieces of information that they collect immediately. Secondly, this information is used to begin a conversation with store management about who the salesman is with, what are they looking for, and what is their ability to purchase. Generally, a sales manager then directs the sales process from his seat in the "tower". A seat that generally overlooks the sales floor or the sales lot. He is kind of like a conductor of an orchestra, seeing all, and hearing all. I cannot describe the entire sales process with you as this varies from dealer to dealer, however; the basic principals of the sale do not vary too much. Most dealerships get started after a demo or test drive. Usually a salesman gets a sheet of paper out that is called a four square. The four square is normally used to find the customer's "hot points". The four corners of the sheet have the following items addressed, not necessarily in this order. Number one is sales price, number two is trade value, number three is down payment, and number four is monthly payments. The idea here is to reduce three out of the four items and focus on YOUR hot button. Every person settles in on something different. The idea for the salesman is to get you to focus and commit to one or two of the hot buttons without even addressing the other two or three items. When you do settle in on one of the items on the four square, the process of closing you becomes much easier. One thing to keep in mind is that all four items are usually negotiable and are usually submitted to you the first time in a manner as to maximize the profit that the dealer earns on the deal. Usually the MSRP is listed unless there is a sales price that is advertised (in may cases the vehicle is advertised, but; you are not aware). The trade value is usually first submitted to you as wholesale value. Most dealers request 25-33% down payment. Most monthly payments are inflated using maximum rate. What this all boils down to is that the price is usually always negotiable, the trade in is definitely negotiable, the down payment may be what you choose, and the monthly payment and interest rates are most certainly negotiable. If you do your homework prior to a dealership visit you can go into the negotiation process better armed. You still need to keep two things in mind through this process. The first item is that you are dealing with a sales TEAM that is usually highly skilled and money motivated. The more you pay the more they earn. The second item to remember is that you may have done your homework and think that you are getting a great deal and the dealer is still making a lot of money. The latter part of this statement goes back to the fact that it is essential for a dealer to make a "fair" profit in order to serve you better. Once your negotiations are somewhat settled, you are then taken to the business or finance department to finalize your paperwork. Keep in mind that this too is another negotiating process. In fact, the finance manager is usually one of the top trained sales associates that definitely knows all the ins and outs of maximizing the dealerships profit. It is in the finance department that many dealers actually earn more than they earned by selling the car, boat, RV, or other large ticket item to you. We will break these profit centers down for you and enlighten you as to how the process usually works. Remember that finance people are more often than not a superior skilled negotiator that is still representing the dealership. It may seem that he or she has your best interests at heart, but; they are still profit centered. The real problem with finance departments are that the average consumer has just put his or her guard down. They have just negotiated hard for what is assumed to be a good deal. They have taken this deal at full faced value and assume that all negotiations are done. The average consumer doesn't even have an understanding of finances or how the finance department functions. The average consumer nearly "lays down" for anything that the finance manager says. The interest rate is one of the largest profit centers in the finance department. For example, the dealership buys the interest rate from the bank the same way that he buys the car from the manufacturer. He may only have to pay 6% to the bank for a $25,000 loan. He can then charge you 8% for that same $25,000. The dealer is paid on the difference. If this is a five year loan that amount could very well be $2,000. So the dealer makes an additional $2,000 profit on the sale when the bank funds the loan. This is called a rate spread or "reserves". In mortgages, this is disclosed at time of closing on the HUD-1 statement as Yield Spread Premium. This may also be disclosed on the Good Faith Estimate or GFE. You can see why it becomes important to understand bank rates and financing. Many finance managers use a menu to sell aftermarket products to you. This process is very similar to the four square process that I discussed in the beginning. There are usually items like gap insurance, extended service contracts, paint and fabric guard, as well as many other after market products available from this dealer. The menu again is usually stacked up to be presented to the consumer in a way that the dealer maximizes his profitability if you take the best plan available. The presentation is usually given in a manner in which the dealer wins no matter what options are chosen. With the additional items being pitched to you at closing, your mind becomes less entrenched on the rates and terms and your focus then turns to the after market products. Each aftermarket item can very well make the dealer up to 300-400% over what he pays for these items. Gap coverage for example may cost the dealer $195.00 and is sold to the consumer for $895.00. The $700.00 is pure profit to the dealer and is very rarely negotiated down during this process. The service contract may only cost a dealer $650.00 and is being sold for $2000.00. The difference in these items are pure profit to the dealer. You see, if you only paid $995.00 for the same contract, the dealer still earns $345.00 profit from you and you still have the same coverage that you would have had if you had paid the $2000.00. The same is true for the gap coverage. You are covered the same if you paid $395.00 or $895.00 if the dealers costs are only $195.00. The only difference is the amount of profit that you paid to the dealer. Another huge profit center is paint and fabric protector. In most cases the costs to apply the product are minimal (around $125.00 on average). In many cases the dealer charges you $1200-$1800 for this paint and fabric guard. As you can see, these products sold in the finance department are huge profit centers and are negotiable. I also have to recommend the value of most all products sold in a finance department. It is in your best interest to get the best coverage possible at the best price possible. Always remember this: The dealer has to make a fair profit to stay in business. It just doesn't have to be all out of your pocket.
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Options, Lease-Options, and Seller Financing Agreements, Part 1 I talk to people all the time who either have bad credit or no money, or both, who want to invest in real estate. The easy answer is to tell them to save their money and pay off their debts. But we all know that's easier said than done. In order to save money they have to earn more than they spend, and since most of them are barely getting by on what they make, they're spending everything they have just surviving and don't have enough left over to save. The ideal answer would be to find a way for them to invest in real estate without money or good credit, so they can save the profits in order to pay off their bad debts. Does this sound too good to be true? It isn't. Back in 1996 when I started investing in real estate, I had good credit, but very little money. I borrowed money on a boat that I owned and used it as the down payment on my first investment property, which I bought with owner financing. When I sold that property I made a decent profit. I bought my second investment property with bank financing and had to put 10% down. That, along with the closing costs, tapped me out. I put a buyer in that property on a 12 month lease-purchase agreement. I stood to make about 15k over and above what I had invested in the property when the sale closed, but that wouldn't be for another year. Since I wanted to continue doing deals, I had to figure out something creative. The first deal that I'd done proved to be the answer, with a twist: If I could get people to hold paper on properties - and this is key - without requiring me to put money down, I could continue doing deals. I knew it could be done. I just had to figure out how to do it. So I bought a couple of books on real estate investing and did some reading. I settled on 3 basic no-money-down techniques: Options, Lease-Options and Seller Financing Agreements. Over the next year, using them exclusively, I made over $80,000 and didn't put more than $10 down on a single property. Keep in mind that this was 11 years ago. Taking inflation into account that would be well over $100,000 of income in today's dollars. There are multiple variations of the 3 techniques. But if you understand the basics of all of them, you can modify them to suit your needs. I'm going to give you examples of how I've used each technique. Since it would be too lengthy to explain all 3 techniques in 1 article, I'm going to break this up into a 3 article series. Today let's talk about Lease-options: The definition of a lease-option is simply leasing a house with the option - the choice - of whether to or not to buy it at a predetermined price. You might get a credit from each monthly payment toward a down payment. Or you might not. It all depends on the situation, and how you structure the deal. In most cases, if the seller is willing to work with you at all, they will do what you want them to do so long as it makes sense for them. The great thing about lease-options is you can take control of a property and at the same time put very little money down. You're not taking deed, so you won't trigger the acceleration clause in the seller's mortgage. In a buyer's market like the one we're currently experiencing, properties you can buy with lease-options are far more readily available because there is just so much inventory on the market. The key to doing lease-options is buying properties needing little, if any repairs. You don't want to be dumping thousands of dollars into a property you don't own. You want to do business in decent neighborhoods. Stay out of the slums and war zones. The types of buyers you'll attract in those areas are nothing but trouble. Believe me - I'm speaking from experience. The type of seller you'll run across will most often have very little equity. That's why he will consider a lease-option, because he can't afford to hire a realtor to sell his house and oftentimes he's already tried selling it himself without any luck. Perhaps a job transfer took him out of town, or he's bought another house and is making two payments. Whatever the situation, you're his savior because you're taking that unwanted mortgage payment off of his hands. You'll be dealing with nice properties in good areas, so you're not going to buy them on lease-options for drastically under value. Most times you'll pay the seller what the property is worth, but that's okay if the terms are right. By that I mean, very little money down (I've done many lease options with $1 dollar down), monthly payments that are no more than the seller's debt service, a contract that is a minimum of 12 months - with at least one 6 month renewal clause, the ability to sublet the property (so of course the property must be vacant), and the ability to assign the contract. If you can get the seller to wait 30 to 60 days before the first payment is due, all the better. Now that you've taken control of the property, you can do two things: 1. Sell the property on a second lease-option to a tenant-buyer. You charge them a hefty Option Fee - 5% to 10% of the purchase price - and if possible mark up the sales price as much as you think the property will appraise for at the end of the lease term. If you're dealing in good areas you can more readily attract good buyers. The reasons people would lease-option a property rather than buying it outright are manifold. One reason would be that they're just coming out of a bankruptcy and need 6 to 12 months to rebuild their credit. You need to judge the story on its own merits and confirm your buyer's ability to obtain a mortgage at the end of the contract by having a mortgage professional pre-qualify them. You're charging an "Option Fee", not a down payment. The Option Fee is what the tenant-buyer is paying you for the right to purchase the property for a predetermined price at the end of the lease. So theoretically, you can charge the tenant-buyer a 10% Option Fee on a house that you're buying on a lease-option for $100,000 that is only worth $100,000. You don't think the property will appreciate that much, so you do a second lease-option with the tenant-buyer for $100,000. On the sale you're not making anything on the back end, but up front you made $10,000 because you charged a 10% Option Fee. Another good thing I've found about Option Fees is that when I've had to evict a delinquent tenant-buyer, the Option Fee was not considered a down payment. That's a BIG deal. If I had collected a down payment rather than an Option Fee, the tenant-buyer would have had an equitable interest in the property. The lease-option agreement could be construed as a Sales Agreement and I would have been forced to foreclose - a much more lengthy and expensive process than eviction. I can't say if that would be the case in your state. You should check with an attorney before entering into an agreement to make sure. Throughout the term of the lease-option with the tenant-buyer, they are making payments to you that are equal to or greater than the payments you're making to your seller. They're maintaining the property and paying the utilities. This all works great so long as they hold up their end of the deal. And that's the downside. In the event that the tenant buyer defaults, you still have to make payments to your seller and deal with any repairs needing to be made on the property. Then, depending upon how much time is left on your lease-option agreement with the seller, you might or might not be able to put a second tenant-buyer in the property for a sufficient period of time for them to obtain financing. By the time it's all said and done, if your seller is unwilling to extend the term of your contract, you could end up giving the property back to him at the end of the lease term and losing money. (Remember, this is a lease-option, meaning you have the Option to buy or not buy the property at the end of the contract.) That's where course of action number two comes into play... 2. Assign the contract to another buyer in return for a hefty assignment fee. They're in effect buying the contract from you. If you compose the assignment clause in your lease-option contract correctly, as well as the assignment agreement with your assignee, the assignee is responsible for living up to the terms and conditions of the contract from that point onward, not you. So you've made money on the deal up front, and don't have to deal with tenant-buyers and property maintenance. It's pretty sweet. Just make sure to explain the contract thoroughly to your seller - including the assignment clause. And don't just pawn the property off on the first person who waves some cash. Do some due diligence. Make sure they're a viable buyer with a reasonably good shot at obtaining financing at the end of the lease term. If you do lease-options unethically by putting just anyone who can pay into the properties without regard for the consequences, you will gain a bad reputation and eventually your misdeeds will come back to haunt you. Technique # 2, Option agreements. To be continued... Frank Lawson is the author of [http://www.profitsafely.com] the Online Resource for Real Estate Investors and Hard Money Lenders. With today's record numbers of real estate foreclosures, this is the greatest market for investment real estate in the past 15 years. Real Estate Investors need capital in order to take advantage of these incredible opportunities. Hard Money Lenders need borrowers. Both, however, must proceed cautiously. Frank's mission is to empower them all with knowledge in order that they might Profit Safely...




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