Carvana, America's Car-Mart, & Auto Subprime Financing | In Practise

Carvana, America's Car-Mart, & Auto Subprime Financing

CEO of Holmes Motors

Why is this interview interesting?

  • Comparison of Carvana and deep subprime dealers’ customer type
  • How Carvana accounts for LTV
  • Core drivers for loan losses in auto financing
  • The subprime financing customer journey for BHPH dealers
  • Why Carvana’s net cumulative subprime losses are so low
  • Advantages of America’s Car-Mar vertically integrated business model
  • How Carvana and legacy dealers can compete with online models
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Executive Bio

Ed McDaniel

CEO of Holmes Motors

Ed is the CEO of Holmes Motors, a buy and lease here and pay here subprime auto dealer in the US. He started his career with 12 years in Investment Banking before joining Holmes Motors in 2015 as a Senior Manager before being promoted to CEO in 2017. Holmes sells over 4,000 vehicles across Mississippi, Alabama, and Georgia with the average vehicle and FICO score $14,000 and 540 on average. Holmes is vertically integrated controlling dealer, lender, loan servicing, and vehicle after sales and is a direct competitor to Carvana in regional markets.Read more

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Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Ed, great to have you with us today. Can you share a brief introduction to your background, please?

I was in investment banking for a number of years – about 12 or 13 years – and then got into management, running a sub-prime buy here pay here dealership, over the last six years. The first couple of years was as a senior manager and I was promoted to CEO almost four years ago, here at Holmes Motors.

Could you give us a bit of a background about Holmes Motors? What kind of business you are, locations, cars sold per month etc?

We’re a regional buy here pay here, lease here pay here combination business. We have stores in Mississippi, Alabama and Georgia. We average about 340 vehicles per month, which puts us close to 4,000 a year. We are in the deep sub-prime area, more so than some of the other larger competitors that we are going to talk about a little later, that are more in the higher sub-prime segment.

How would you describe the typical customer or the demographic of your target customer?

For that kind of question I would answer by way of income, the income range of our consumer. That’s anywhere from $25,000 up to $90,000 a year income. It can be people who have not been at their job very long, on the lower end of that scale, in terms of the more deep sub-prime customer, up to the person, in the high five figures – sometimes even the low six figures – who have credit problems. They have various problems with their credit and they need vehicles and we provide a good service for that, in terms of the vehicle and the financing program that we offer.

What would the average FICO score be?

For us, it’s about 540 average, for FICO. We do credit check in one of our markets, in Georgia, but not in Alabama and Mississippi. We have a pretty different model, even in the buy here pay universe, where we are somewhat different from a lot of other dealers, in that respect, and in other aspects as well.

Because you are not required to check credit, specifically, in the traditional way?

More of our lease here pay here platform is geared for no credit check. We check income, residence and we do the traditional prime area underwriting, the scoring that almost everybody does, whether they are a buy here pay here or a sub-prime retailer, like Carvana. For the payment to income ratio – the payment they are signing up for with the vehicle they were looking at – we have a certain ratio that they need to fall under to be approved. It’s an affordability question and that’s one of the key scoring categories for us.

You are focused mainly on your affordability metric where some of the big players, like Carvana, would typically use the usual credit scoring?

There is a distinction but there are also some similarities. Carvana and the larger retail organizations, such as CarMax – although CarMax is going deeper sub-prime now, I understand; they’ve been getting into some of our segment in our markets, around the country – also use a payment income scoring. That’s one of their big categories, as well. That is across the board, whether it is retail or buy here pay here.

What is your average car sale price, roughly?

It would be about $14,000, on average, in terms of the sale price to the consumer, in terms of the all-in cost on it. We’re on the higher end of buy here pay here. In the old, traditional buy here pay here models, the dealerships would run much older and lower ACV cars. We are more in line with the Carvanas of the world, in terms of the inventory that we carry.

America’s Car-Mart ASP, for example, is down at $11,000 or $12,000?

That is an increase for them. Their inventory prices have also gone up, as you know, since the pandemic. Historically, they are a much lower ACV than we, DriveTime or other regionals are, that we compete with.

How would you compare the typical Carvana sub-prime customer to regional dealers like yourself?

It’s close, but it looks to me that at least 30% or more of their customers are higher sub-prime; they are 600 FICO or over. In that segment, they have a sophisticated scoring model. They have software and algorithms that you’ve seen, that I’m familiar with, that look at the customer’s profile and then search the various cars that they qualify for. We are not that sophisticated, obviously. But on average, if you go down to the 580 and below, we have a lot of the same kind of customers that they do, so there is a lot of overlap in the kind of customer, in that segment. Carvana covers a broader segment, I’d say, than we do.

Maybe also, due to the fact that it’s online, Carvana are also capturing the millennial or younger used customers?

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Carvana, America's Car-Mart, & Auto Subprime Financing

March 16, 2021

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