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 SubPrime Auto Finance News 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 SubPrime Auto Finance News.

"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.

Joe Overby can be reached at joverby@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.


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