CARY, N.C. -

For buy-here, pay-here dealers trying to secure used-car supply in the wholesale market, it certainly has been a challenging few years.

But based on analyses coming from several different vantage points, it appears times are getting better.

That was one central theme Auto Remarketing came across in recent months during our look at the slice of the BHPH pie dealing specifically with wholesale acquisition of vehicles for these dealers.

To get a sense of the environment BHPH dealers are facing when it comes to finding cars for their lots, we reached out this spring to economists, leading BHPH franchises and auctions, and dove into the “Buy Here, Pay Here Industry Benchmarks/Trends 2012” report from the National Alliance of Buy Here, Pay Here Dealers, NCM Associates and other contributors.

Doug Turner, director asset management at J.D. Byrider, is on the forefront of these supply challenges BHPH dealers have facing. He heads up the “acquisition and liquidation of all vehicles for J. D. Byrider and CNAC within company store operations,” the company said.

“The overall supply for our company and industry continues to be very tight. From a supply-and-demand perspective, it has been a seller's market for the past three to four years due to two primary factors,” Turner said. “First, the reduction in new-car sales and leasing drives the volume of new-car dealer trades down at wholesale auctions.

“Second, we are noticing more automotive dealers entering the buy-here-pay-here and subprime business, which is relative to the focus they used to have on new-car sales prior to 2008,” he added. “This is supported by the fact that used retail vehicle sales were the highest in March of this year since 2006.”

But, the situation on the supply side is turning around and should remain on the incline, Turner added. This is something ADESA’s Tom Kontos referred to in his discussion with Auto Remarketing.

“We’re starting to get back a few more of the older cars,” Kontos said. “A higher percentage of the vehicles we’re getting at auction these days are coming from dealer consignment. The dealers are bringing cars that consumers are trading in on either new- or used-car purchases, and as we know from a lot of sources, there has been a lot of pent-up demand for vehicle purchases as consumer held off as long as they could on replacing their vehicles.

“So, we know that the types of cars that are being traded in these days are a bit older than what we might have seen in times past, when people were cycling out of their cars at a little bit quicker intervals than they have been since the recession, ” Kontos added.

But at some point, he noted, people do have to replace their cars. And it appears they’re doing so now; hence, these older units are finally coming back into the used-car market.

“To the extent those end up at auction, that’s a good source of supply for the BHPH dealer,” Kontos said, referring to these older cars. “What we’re seeing so far this year, I think represents a bit of a recovery in the availability of these older cars” compared to what the past two or three years had shown.

Citing discussions his company has had with auto industry economists, Turner said J.D. Byrider believes new-car sales will remain on par with a 15.3 million seasonally adjusted annual rate.

The company is also anticipates lease and fleet returns to foster “slightly increased volumes” at the auction.

“As these returns continue to increase, we should see less pressure on the demand of units in this segment of the business which will hopefully loosen up the supply of vehicles and lighten the prices,” Turner indicated.

From his vantage point, Manheim chief economist has noticed this year has shown stronger BHPH vehicle availability in the lanes through April; however, this comes with a caveat.

“The availability of used vehicles in the wholesale marketplace suitable for possible BHPH inventory increased in the first four months of 2013.  Unfortunately, from the perspective of the BHPH operator, so too did the demand for these units,” Webb said.

“And that increased demand was not coming solely from BHPH dealers.  As subprime and deep subprime lenders bought further down the credit scale, dealers who use these financing sources increasingly competed against BHPH dealers for the same units.”

The findings from these industry insiders seem to align with the BHPH benchmarks in the aforementioned report from NABD, NCM Associates and others. The report indicates that there were gains in auction consignment of BHPH units last year, “but inventory availability remained limited and very competitive.”

The report’s “2012 Buy Here, Pay Here Year-End Review and Look Ahead” section, prepared by NABD founder and Subprime Analytics president Ken Shilson, went on to note: “Dealers have expanded their efforts to locate good inventory by using the Internet, traveling further, and increased repo sales. These trends are likely to continue in the future.”

Pricier Than Most?

The BHPH benchmarks report notes that the first quarter of the year saw acquisition costs settle down amid softer sales and more consignment at the auction.

“It is now hoped that the increases in vehicle acquisition costs since 2010 are behind us. Many dealers are now carrying a broader range of inventory and integrating BHPH with retail sales,” the report indicated.

“Locating the best inventory at competitive costs will be challenging. Operators should identify new sources of inventory by using the Internet and control their reconditioning costs,” it added.

That point of advice may prove crucial to BHPH dealers this year, based on the observations from Turner — the J.D. Byrider executive — and Bill McIver, chief executive officer of the American Auto Auction Group.

When asked if he got the sense that dealers looking for BHPH inventory at auction are having to pay more for cars with higher mileage than they did previously, Turner answered: “Yes. Compared to other automotive business segments, the buy-here-pay-here industry has seen the most significant increase on demand in the past three to five years, which drives up prices and limits options for units to purchase.

“In most cases, buy-here-pay-here dealers are buying vehicles that are two to three years older than before, and we have also seen an increase in the average mileage on these units by roughly 10,000-12,000 miles,” he added. “Even though we have seen a change in the average model year and mileage, the average price of these units continues to increase by $300 to $500.”

Answering the same question, Webb said: “Due to strong wholesale used-vehicle values, many BHPH operators have had to raise their targeted price points for inventory acquisition. Their ability to shift to higher-priced units is, however, strictly limited by their customers’ weekly payment thresholds and the limited funds available for down payment.

“As a result, virtually all BHPH dealers are now stocking vehicles with higher mileage.  Consider, for example, that if a dealer spent $5,000 on a vehicle at auction in the first part of 2013, they got, on average, a vehicle with 118,000 miles.  In 2011, that same $5,000 would buy, on average, a vehicle with 112,000 miles,” he said. “And, in 2009 when prices were weak, that $5,000 would get, on average, a vehicle with only 85,000 miles.”

In his comments, Turner also noted that one of the two biggest challenges in the BHPH business for dealers is the dynamic between inventory demand and prices.

Similar to Webb’s earlier comments, AAAG’s McIver stressed that even though supply has increased, so has demand.

“Even though the supply has been greater, the demand has been even greater than that. And I’d say the activity amongst the buy here, pay here dealers, it was a little spotty at the first of the year, because of the fiscal cliff and the delay of the income tax refunds, but since those have started coming in, we’re seeing a steady increase; never as much as anybody wants but you can tell that it’s happening and it’s more gradual.”

Going back to his comments on challenges in BHPH, Turner offered a silver lining. Similar to what was mentioned in the benchmarks report, dealers are taking steps to beat these hurdles.

“Dealers are overcoming some of these issues by purchasing more miles, older model years and higher prices while trying to maintain consistent quality and quantity,” he noted.

Editor's Note: This article appears in the May 15-31 print and digital editions of Auto Remarketing, which is our Special NABD Convention Report. Turn to those editions for BHPH insight as the NABD 2013 Dealer Academy and NABD 2013 National Conference get under way this week.