The Buy Here Pay Here business model meets the needs of auto-financing consumers who have sub-prime credit scores and are restricted from using traditional bank loans. As a BHPH dealer, you will offer customers the ability to finance directly with your dealership and create an ongoing monthly income stream from them. On the other hand, sometimes these auto notes can be too much and liquidity becomes an issue. Selling the auto notes in this case, will free up cash, which allows you to reinvest it back into your business.
What is an Auto Note and Why To Sell It
Auto notes are nothing but the payments customers owe on vehicles they have bought through a finance plan. The dealer finances the sale and collects the payments in a Buy Here, Pay Here situation. Rather than receiving those payments over a number of years, selling the auto notes provides an immediate lump sum of cash.
By selling auto notes you are outsourcing the task of collecting principal and interest to an investor or note buyer. You get cash, which in turn you can apply to your dealership for re-investment, more inventory, or operational improvement.
Let’s now discuss how you can start selling auto notes.
Step 1: Determine How Much Your Auto Notes Are Worth
The value of your auto notes depends on several things. First, the customer’s payment history is key. If a customer has been paying on time, the note is worth more. Buyers like notes with a strong payment record because they see less risk.
Next, the remaining balance on the note matters. Buyers are interested in how much money is still owed on the note. The more money left to be paid, the more valuable the note is to the buyer.
The value of the vehicle also plays a part. If the car is still worth a lot, the note is worth more because the vehicle backs it up. And while BHPH dealers often work with customers who have lower credit scores, the creditworthiness of the customer still counts. Buyers want to know that the customer will keep making payments.
Read also: Why E-Bikes are the Smart Choice for Tech-Savvy Commuters
Step 2: Get Your Auto Notes Ready to Sell
After you have identified what your notes are worth it is time to get them ready for sale. The better thought-out the notes are, the easier your sale. Please have everything at hand such as the loan agreement and all previous payments. Everything should be transparent to the buyers.
Also, verify there are no hang-ups on the accounts such as missed payments or disputes. Addressing these issues upfront, before you sell, can help ease the process and possibly, get you more money.
Step 3: Find the Right Buyer
The main challenge faced while selling your notes is you need to search for a potential buyer. You have several options:
- Individual investors: Those searching for steady income They might be more loose with what they are willing to give you and your terms.
- Institutional buyers: Large companies or investment firms buy auto notes in large quantities — this can bring quicker sales, but usually for less profit.
- Online Auctions: You can also use online platforms like Debexpert to list your auto notes for auction.
Step 4: Negotiate the Sale
The next stage of the process is to negotiate the terms of the sale after finding a buyer. And you can probably say goodbye to a chunk of that — if not the entirety — of the rest of those payments. Depending on your perceived risk, you might be able to sell the remaining value for 50–90% or so given to what buyers will pay.
There is also a decision about recourse vs non-recourse sale. This was a recourse sale in the sense that you might be on the hook to pay back that loan if he stopped paying. In a sale with a non-recourse contract, the buyer is wholly responsible.
Step 5: Complete the Sale
When you have agreed upon the terms, then set up the closing of the sale. You will enter into an agreement in which the seller will assign you the unpaid promissory note. It is a good idea to have an attorney review the agreement before signing just to cover all your bases. So you get your money and the buyer now starts collecting payments from the customer.
Wrapping Up
Selling auto notes is a strategic move for BHPH dealerships seeking to enhance their financial position. By financing deals, dealerships can increase their capacity to take on new business and explore lucrative real estate opportunities. To maximize the value of their auto notes, dealerships should ensure proper documentation, identify suitable buyers, and negotiate fair deals. This approach can help dealerships boost their cash flow, reduce risk, and drive long-term growth.
