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.
Jangan Masuk Kedai Makan Yang Ada Gambar Ini!
Park Owned Mobile Homes - Cash Cow or Financing Pitfall?
First and foremost, the mobile home collateral is considered personal property when it is located in a park. It has, historically, been a quickly depreciating asset. The costs associated with lending on this type of asset push many banks out of the market altogether. This leaves park-owners and private investors as the driving forces behind the mobile home rental arena as far as mobile home park financing is concerned.
A conventional financing program will not typically consider income from park-owned mobile rents for the debt service ability of a real estate loan. There are some higher rate alternative programs out there, which consider all park income - both mobile home rent and pad rent. The most common problem buyers have with these types of parks is the numbers sellers or Realtors provide them. They will often times consider all income when determining cap rates, value, etc. The incomes from mobiles are never used in determining an appraised real estate value. This is due to the fact that mobiles in parks are not real estate improvements. One cannot simply throw several different types of incomes together in the blender and determine a value based on a single cap rate. All parts are not equal. The income stream generated from park-owned mobile homes run different risks of interruption or loss than the income stream generated by a mobile pad. A safer income stream deserves a different valuation and also a different loan interest rate - a reflection of risk.
The easiest way to picture these types of parks is in two components. You have the real estate component, which consists of dirt and any verifiable land improvements. Typical mobile home park improvements may include mobile pads, RV pads, clubhouses, laundry room, pool, office, etc. The real estate value is largely determined by the normal operational income generated from real improvements. You also have the personal property component or chattel. Personal property may include mobiles, equipment, appliances, etc. There are finance products available for these chattel portions at higher rates, shorter amortizations, and shorter fixed periods than one might expect with a normal real estate loan.
These different streams of income deserve their own separate determinations for investment value. An income derived from rental real estate such as a mobile home park pad is viewed as more reliable and valuable than an income derived from personal property such as with a mobile home rental. The cap rate for a passive investment such as a mobile home park (considering pad rents only) may be in the 8% range in some markets whereas the cap rate for a more business intensive project such as mobile home or RV pad rentals may be in the 12% range for that same market. Obviously the actual cap rate will vary greatly across different markets, but a more risky income will still warrant a higher cap rate than a less risky income. This type of thinking suggests that $1 of income from a mobile pad is more valuable than $1 of income from a mobile home rental.
Just because two income streams are generated through real estate improvements does not mean they are equal still. Although RV pads can be valued as real estate, they are still more work intensive and their income streams less reliable than a mobile home pad and therefore warrant a higher cap rate in valuation. This is apparent in the market vacancies any underwriter will utilize in determining the stabilized cash flow of an RV rental property.
From an investor standpoint, reliable or easier-to-produce income is more valuable than income that takes more time to create or is less reliable. From a lending standpoint, reliable or easier-to-produce income contains less risk of interruption and therefore less risk of default.
Lenders will only accept real estate as collateral to secure a CMBS (commercial mortgage backed security). A CMBS is a loan that is secured against commercial real estate and offers the flexibility to lenders of being sold much like any other bond security traded on the market today. This type of money has become much more prevalent in recent years. Many national lenders today, with products typically more aggressive than a local bank may offer, employ this type of lending structure. Very similar in investor consequence, a CDO or CDS structure may also be employed today.
The issue of different asset-types (real estate and personal) being sold simultaneously often leaves inexperienced buyers in the middle of a purchase contract with a need for additional cash to cover mobile value since most lenders can only offer loan dollars against the real estate value. Real estate loans are not the answer without considering some type of cross-collateralization, which is atypical of most conventional finance options. One of the most common solutions is to have the seller carry a note for the value of some or all of the mobiles. If seller financing doesn't pan out, there are a number of private investors who may be able to offer a variety of options depending on the situation. The key phrase to remember in securing financing on property such as a mobile not considered real estate is, "Chattel Mortgage." In commercial real estate, this term is typically reserved for a situation where a mobile home is in a park and not occupying its own tax lot.
There is an occupancy issue to consider. There is usually less incentive keeping a mobile renter in the park. A tenant owning their mobile is much less likely to move out than a mobile renter. The costs and efforts to move a mobile are often a factor helping to safeguard long-term occupancy for tenants owning their mobiles.
There is also an added expense to consider. Any person in a rented mobile is less likely to take care of it. Mobile owners are responsible for the maintenance and repair of the home. When a mobile can no longer be rented due to use, the owner must pay to dispose of it.
There are many different benefits and detriments to owning mobiles in a park. Parks can be very profitable when they collect mobile rent on top of pad rent. The determining factor of whether or not to employ this type of rental style park is usually, "How much do you want to put into the project?" If you are looking to get into a property and put the time and work into it, park owned mobiles could be a great way to maximize cash flow - be sure to approach the financing appropriately. For the passive investor who likes to collect checks every month, a pad rent only park is the route of choice - expect to receive the most competitive rates and terms.
Colby Callahan Commercial Loan Officer Business Loan Store