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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3 Keys To Commercial Real Estate Financing For Small Businesses There are a ton of items that go into getting a commercial real estate loan approved for a small business. Complicated items from valuations to debt ratios. But, most of those items take care of themselves if you focus on and manage just three key important criteria in ensuring that your business gets the commercial property it needs to grow and prosper. So, if we ignore some of the obvious underwriting issues in commercial lending like your credit history, property use or even if the property will be used by your business (owner-occupied) or for your business (rental property) - the three following things are what really matters in getting your loan approved: 3 Keys To A Commercial Property Loan 1) Price - Price matters. It matters a lot. It matters in terms of what you can afford, what you can buy, where you can buy and the loan that you can get approve. Most borrowers looking to buy property for their small business tend to start looking at what they need and then try to find property that meets all those needs. Which is OK if your resources are limitless. However, most small businesses do not have unlimited wealth and tend to find themselves with more needs from their potential real estate then the wherewithal to satisfy those needs - meaning that most cannot afford to buy property that meets 100% of their company's needs. Thus, they will have to settle at some point. On the other side, we say that even before you think about your specific needs and what you have to settle on, you should first think about price. And, your price is determined not by what you think you can afford but what a lender thinks you can afford and what they will loan against. And further, you can determine what loan amount you can qualify for and eventually what price of property you can purchase by simply looking at your past revenues. All lenders will take your anticipated loan payment and compare it against your past revenue numbers. If your business could have covered the loan payments over say the last three, four, five or more years (in the past), then it is reasonable (in their eyes) that your business will be able to do so going forward. Thus, let's say that your business earned in past revenue $5,000 per month (money that your business has left over to cover loan payments) for the last three years. So, would $5,000 per month cover a $1 million loan? No, in fact, a $1 million loan at 6% for 15 years on commercial property would result in a monthly payment of around $8,500. For $5,000 a month, your small business could afford a commercial loan of around $600,000. Now, with this amount in mind - knowing what you can afford - you can then start looking for property that begins to meet your business's needs and work your way up based on your price. This is much better than looking for property that might meet all your needs then have to come down off that high to meet your price. In order to find what your particular business can afford - its price - look at your past cash flow to determine what your monthly payment could be then use an online payment calculator to either back into your maximum purchase price based on relevant rates and terms or use what if scenarios to get to your price point. 2) Down Payment - Now that you have your purchase price, you also need to understand the major expenses a commercial loan will cost you. Not only will you have to pay your closing costs - costs for appraisals, reports, taxes and insurance - but, you will be required to put at least (at the minimum) 20% of the value of the property down as a an equity payment. The good news here is that you can use this 20% that you have to put down to increase your purchase price as the lender will only fund 80% of that property value. Thus, if you can afford a $600,000 loan and your lender will fund that amount - and that amount is only 80% of the value of the property - then you can increase your price by the 20% you have to put down anyways. Thus, while you can afford a $600,000 loan, your total purchase price could increase to $750,000. The bad news is that not only will you have to pay anywhere from 1% to 5% of your loan amount in closing costs - in our example some $6,000 up to $30,000 - but you will also have to come up with a down payment of $150,000 (in our example) - and this amount can not be financed, not with this deal or from any other source. Even if you kept your purchase price at $600,000, you still would have to come up with $120,000 as a down payment leaving your loan amount at $480,000. Many small businesses miss out on buying real estate for their companies (especially in great value markets like we have now) because they do not have and cannot get the required money down. But, 20% down is the minimum these days and very few lenders (if any) will make an exception to it. 3) Loan Term - The loan term you get - or that you fight for - can be the difference in both getting your loan approved as well as in the amount of interest your loan will cost you. The longer the loan term, the more affordable the loan payments as the loan's principal is spread out over a longer period. And, a more affordable (smaller) payment means that you have a better chance of getting your loan request approved. Example: A $600,000 loan at 6% would have a payment of around $5,000 per month. Increase that term to say 20 years, and the payment drops to around $4,300 per month. Thus, your business could either have a much lower monthly payment or would be able to increase the price of the property it intends to purchase. Thus, the power of the loan's term. However, on the other hand, there is always a cost. In this case it is the cost of interest. The longer the loan's term, the more interest you will pay on the loan overall. Example: A $600,000 loan at 6% for the shorter term of 15 years would result in $311,000 interest for the life of the loan. That same loan at 20 years (5 more years of payments), its overall interest would rise to $432,000 - a difference of $121,000 just in interest. Quite the difference! Thus, you have to set your term - fight for the term you want - to find a balance between what you can afford and the amount of interest that loan will cost your business because no matter how much your business pays in interest, the business still has to make up for that amount in either revenue or cost savings. If it doesn't make up for that amount, it will lose money and that is not what you are in business to do. Conclusion This is a great market for small businesses to buy commercial property. Not only are interest rates low - some of the lowest in our history - but property values on commercial property have not yet begun to rise back to their pre-recession levels. And, there is, no matter how many properties foreigners are buying these days, an adequate supply of both land and buildings available - even in your own backyard. The only real problem in this market is getting a commercial real estate loan for that purchase - tougher than it was just five years ago. However, if you can keep these three keys to commercial property in mind, you should be able to easily take advantage of this beneficial market and get the property your business needs to grow and prosper. And, with these key items taken care of before you walk into your lenders office, all those other issues will just fall into place - as these key items are what really matters to all commercial lenders. Think about it this way. Would it be better to continue to pay your landlord thousands of dollars a month that only goes to build his wealth or to put those funds (your money) to work buying a building that could be worth hundreds of thousands of dollars to you once paid off - not to mention the benefits you get for your business by owning and operating your own building.




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