Trying to open a small Dealership

[daellis]

Hello everyone...I am glad I have found this forum. I have soo many questions so please be bear with me.

So recently I have been looking at opening a small dealership. That has alway been a dream job of mine ( i love cars and the car business). I have never worked at a dealership but I have flipped a few cars in the past ( I know its not the same).

I live near a military base and I found a great location on the main road outside of the gate. A good friend of mine owns the bldg/lot and will let me use it for dirt cheap until I start to make a nice little profit. My plan is to get my license and buy cars at Auction ( initially about 3 or 4 ). I will get a small business loan to buy my first 3 or 4 cars. I know a few mechanics and there is also a body shop close by ( I know the owner for that business)In my head it sound really simple but I know I am missing something. Here is what I do not have though or am unsure about

I dont know a lot about financing ( so initially I was going to sell all cars AS-IS) and I have never bought at an Auction before so that will be new.

So my question is can you guys give me some advice or tell me what I need to be aware of? Thanks in advance

[adastra]

First things to check:

Is the zoning correct for the space.... General Commercial, Limited Commercial. Some consider dealerships an eyesore and will not allow you to operate in certain areas. Check with the local city zoning offical.

Next, price out insurance/bond. You'll have a hard time finding an insurance company that will go less than $5000 a year. Usually that's their minimum policy. They will finance it monthly or quarterly with a higher interest loan.

Most states mandate you maintain certain open business hours, signage and display rules.

Now that you have some idea of your operating expenses, startup costs, and obligations, and zoning, you can have an idea of how much sales you need to generate.

Auctions are generally the worst place to get cars. Very high prices for the good ones, and the rest are dealers playing hot potato with the junk. So if you expect to go to an auction finding $3000 cars that will yield $5000 retail with minimal reconditioning. Think again. Those days are LONG gone thanks to diminishing supply and the rise of the buy here pay here lots that don't care what they pay for cars.

If you are not very mechanically inclined it will be tough to buy good cars unless you bring a mechanic along.

My lot is all $15000 and under. Survived almost 5 years through a very volatile market. My average profit is $800 a car. I break even or lose money on one car out of five. Most would consider this VERY GOOD in this market.

I find, in this price point, location is growing less important. Most of my sales are generated by craigslist. One out of two people who come from craigsilst actually buy the car. One out of Ten people who stop by off the road buy a car. Lot's of time wasted with drive by traffic... "what's the downpayment... how much a month" people who's mama wouldn't finance them a dollar.

Don't expect to get desirable cars for "trade in" book values regularly, and being a small lot, you'll rarely get "retail" book values.

Hope that gives you some idea.

[adastra]

As for financing.

There are many companies that will act as your own little finance guy via the computer. Most won't finance more than 10 years or 150,000 miles, and they are brokers, so there interest rate is high. They also can make you more money selling warranties and other things.

To get older cars financed and lower rates for customers, get in with a local credit union. Usually they are willing to take a credit application via email or fax. So all you have to do is input the credit information and make sure the buyer signs all the lines.

Since you have zero experience I'd be reluctant to dive right into that. If they ask about financing, encourage them to go to a nearby friendly credit union, right up a buyers order, and push for a deposit pending financing. Perhaps you could get a loan officers personal number and call ahead for them.

[daellis]

Thanks for the input. So where would be the best place to find cars? Also since I am just starting out,would it be better to get lower priced cars ? Say under 5k?

[twkrantz]

Maybe look for them owned privately, in the classified ads or ebay in your area and deal on them froom there.

[adastra]

Originally Posted by daellis

Thanks for the input. So where would be the best place to find cars? Also since I am just starting out,would it be better to get lower priced cars ? Say under 5k?

Individuals on craigslist.

Repos

Estates

You will not have the advertising power to bring people in and command top dollar, so your car has to be the nicest and the best priced... the car will bring the customer.

It's hard for me to get more than a grand over NADA clean trade in for things, unless it's a very desirable car like a Camry or Accord.

It's to have a mix of price points. You'll find that the more expensive you go, the easier it is to buy with a decent margin, but it gets extremely competitive, and less buyers. There's always plenty of people looking for cheap transportation.

[daellis]

Thanks guys. Your input is really helping. I pit out a few ads yesterday saying I would pay cash for vehicles and I had a ton of ppl reply back. Some were super unrealistic but a few were right in the range of what I wanted to pay to make a profit. I am going to flip a few until I get my license as to build my capital.

The good thing about where I am , I am at a very desirable location for ppl to buy cars and there is not a lot of comp. There are two dealerships around and the one of them is owned by the guy who is helping me get started. He said he will also put a few of his cars on my lot to help get me started and we split the profits.

I will look into that financing info as well. Initially I was going to have cars in the lower price point so I would not have to offer financing....but I see your point

[adastra]

Be careful.

Many states have upped penalties for individuals flipping cars by leaving the titles open. If you driving an letting people test drive uninsured cars you are opening yourself up to alot of liability.

Also, individuals seem to dislike "curb stoners" more than car dealers. Didn't think that was possible.

Any title issues can present a huge problem as well.

[daellis]

I wasn't planning on doing that. I understand in Tx an individual can flip a few cars before having to get a dealers license. I was just going to do as many as I can legally to build up a little capital. The last thing I want going into this is a bad rep

[adastra]

By the time you pay sales tax, tag, insure and title them... and have to wait for the title in many states, things can get tough

Perhaps in Texas they print the titles off immediately. Up here in Kansas it can take up to a month to get a new title unless you use a service.

Where in Texas are you?

[adastra]

Do you have assets, or know someone with a strong personal financial statement that would be willing to be your partner in exchange for a personal guaruntee on a loan?

Lot's of floor-plan companies out there to get an inventory fast, but you have to watch out for their fees, curtailments, high interest, etc.

[XDCX]

Great thread and thanks to our newest member, adastra, for providing so much helpful information.

For what it's worth, my advice would be to go to work for a used car dealer to get experience and see if it's really what you want to do. To the extent you already have a friend who has a car lot that might be a great place to gain experience and then open the new lot once you know what sells and what doesn't.

Additionally, in my opinion there's nothing wrong with starting your business with a business partner who has capital and experience. You can structure a deal that allows you to eventually buy-out the business and guarantees your partner a good return on investment. I'd rather own 50% of a business that eventually prospers than 100% of a business that ultimately fails.

[XDCX]

Originally Posted by adastra

I find, in this price point, location is growing less important. Most of my sales are generated by craigslist. One out of two people who come from craigsilst actually buy the car. One out of Ten people who stop by off the road buy a car. Lot's of time wasted with drive by traffic... "what's the downpayment... how much a month" people who's mama wouldn't finance them a dollar.

Very interesting comment.

In the old days location and the amount of drive-by traffic a lot had was one of the key metrics to determining how successful a dealership would be. In today's world, by contrast, with so many buyers using the Internet to find their next car a location with a lower rent factor would likely give the dealer an edge over his/her competition.

[daellis]

wow...you guys are really good. You are telling me things I never thought of.

[DealerEx]

Originally Posted by daellis

I wasn't planning on doing that. I understand in Tx an individual can flip a few cars before having to get a dealers license. I was just going to do as many as I can legally to build up a little capital. The last thing I want going into this is a bad rep

As an individual in Texas you can sell no more than 5 vehicles in a 12 month period without a dealer license. If someone reports you to the DMV, that you are operating a business without a license, they will investigate. If they find that you've bought and resold vehicles without having transferred them into your name and paid sales tax on them, you will be in serious trouble... large fines, tax penalities and they will probably not grant you a dealers license afterwards. As other's stated, if you let someone drive a car you're trying to sell, off your lot, without commercial liability policy, you are leaving yourself wide open for a lawsuit...even if you don't currently have assets you are worried about losing, a judgement filed will ruin you for years. You need to be very careful.