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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How To Talk To Sellers In Real Estate Investing With Seller Financing First off, there are some subliminal things you have to learn how to do. When I say subliminal, there are some basic sales tactics that work in any type of sales environment, especially in real estate. One of them is association. You have to let your sellers know that people do this. This is a regular thing. It's not this big unheard of thing for someone to sell with seller financing. If you have done this in the past, talk about this. Mention about doing this in the past. People also want to do what other people do. If they know other people are doing it, they will feel good about doing it. Let the seller know that people do this all of the time, lots of people do it, then they will be more likely to do it. Unfortunately, we have a herd mentality. A lot of times we have to see that someone else did something first, then we have permission to do it. Also, you want to have some fear of loss, indirectly, in the tone of your voice. You want to make it sound like this is the only way you can do this deal. In a lot of cases, this is the truth, so you're not lying to anybody. Let them know that. Be indifferent about it. You have to have an attitude about you that there are other houses you can buy, especially in this market. Make them feel that they are going to lose something if they don't go ahead with the sale with you. Now, let's get into the topic itself. There are some things you can do to sway the seller into going your way. One of them is to offer them a good interest rate. In most of these cases, we are buying these houses, not for a long-term deal, maybe to have it for a couple of years with a lease-option tenant in it to pay it off, or just looking to buy it for a short period of time to fix it up and maybe sell it. Or perhaps, we are just looking to get it under contract to sell it to someone else. So, offer a nice interest rate. Offer an interest rate that makes it attractive to the seller to give you seller financing, to trust you. You are not going to have it that long. That extra 2, 3, or 4, percent is nothing. I'll pay 15 or 20 percent interest if I have to if the deal is right, just to get the deal under my belt and make some money on it. If you are only going to make 3 or 4 payments on it, what's the difference if you are paying 20 or 25 percent on it? It's only going to be an extra couple of hundred dollars. If the deal is good enough to take, it's good enough to take with a higher interest rate. Don't make the mistake of financing at the same rates the banks give. Another tip for you if someone is uncomfortable is to offer them a balloon. A balloon on a mortgage means that the mortgage is going to be paid in full by a certain amount of time. So, a mortgage with a 3 year balloon guarantees the seller that in 3 years or sooner, we are going to pay that mortgage off and they will have all of their money. It also allows them to defer their taxes. If they sell their house today for cash, and they get their HUD, and they go to closing and they get that full amount, they are liable to pay taxes on the full amount of their profit. (Make sure your accountant double checks this for you on an individual basis). When they sell you the house with owner financing, they don't have to pay taxes on the whole amount, because they don't get the full amount. It allows them to defer their taxes for a year or two, or until you pay the loan off in full. Also, they are acting as a bank. I have told sellers that the people that are making money in selling houses are usually the banks. I tell them that they will be in a position like a bank, and they will earn a lot of interest on their property. I add it up and tell them how much profit they will be making on the deal. For example, it's a $200,000 house and I'm giving them 8% interest. That's a $1,467 dollar a month payment. Let's say I make that payment for 2 years. At the end of 2 years, on that $200,000 house, I'm going to owe about $197,000 or so. So, I will show him in a year, it equals $17,000 that I have paid him. If it takes me 2 years to pay you off, I will have given you $35,000 on your house, and I'm still going to owe you $197,000. Let him know that he will end up selling that house for $237,000 because of my monthly payments and the amount due at payoff. Not the original $200,000 on the contract. Explain that that is how the banks make their money. Point out to him the real dollars that he will be getting over a period of time. On an interest-only loan, you will be giving them interest every month after month. At the end of the loan, you will still owe them the full amount. If it's a $250,000 house and they are giving me an interest-only loan on the house, I still owe them $250,000 whenever I pay it off. So, everything I give them up- front is money in their pocket. Make sure you tell them that the whole payment every month goes right into their pocket no matter when I pay this off, I will STILL owe you the full amount of the loan. It's a good deal for a seller. And it's the truth. That's how the mortgage companies and banks make A LOT OF MONEY! That's why some investors quit investing after a period of time when they put a million dollars in their accounts and become hard money lenders. They become private lenders and make a lot of money for NOTHING! In a lot of cases, you will have a seller that will go with owner financing, but needs some money NOW. Point out to them that if you give them $20,000 now, and pay off the difference, they are going to have to pay taxes on that $20,000 (again, double-check with your accountant about this). Suggest this to them if the home is paid in full: So they can save money, they can instead go get a loan/mortgage on the house for $20,000. You can put that $20,000 in your pocket right now. I will then make the payments on that loan until we sell the house and I pay you off in full. And right now, you don't have to pay taxes on that $20,000. This is a great way if they want some money now. Here's a tactic that works and will continue to work. Once you get a deal on seller financing for a house that is selling for $300,000 and it has a 5 year balloon, tell the seller that within 5 years or sooner I will pay you off. If in the near future, I have someone ready to buy that house, I'll call the seller and tell them that you have some extra cash, offer to pay about $250,000 for that home RIGHT NOW. Guess what. That $250,000 today is better than $300,000 in 4 or 5 years, and you have just make $50,000! If they make a counter-offer for a little more, tell them you will think about it, wait a day or two, call back and accept their offer. There are lots of ways to make money in this business. The bottom line is: MAKE AN OFFER. You have to believe that people are going to accept your offers. Don't think for a minute that just because maybe you don't own your house outright, that a lot of other people don't. I own a house outright. I can borrow money against it, I can rent it. In any case, make an offer. There are many people out there that own houses that are paid for, and they are just sitting there. Make the offer, look them in the eye, pitch them high, and watch them buy. Believe in yourself!




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