How to Sell Auto Notes
Breakdown of the selling process
- Account Review. Prior to having any potential buyer place a bid on the accounts for sale, the seller will have to get them the information they require to do so. The buyer will want to review the particular accounts for sale and the data associated with these given accounts. Most of this information can be gathered from the customer contract and payment history. Here is the information that most lenders require: account number, borrower name, contract open date, original amount financed, apr, original contract term, number of payments made/ payments remaining, payment amount, current principal balance, payment frequency, down payment, vehicle year, make, model , vin # & mileage, next payment due date, last payment made date, days past due & gross balance. Some lenders may require additional information but this would generally be enough information to place a bid.This information can be gathered in a number of ways. The easiest and most preferred method would be to request a data download of this information from your DMS (Dealer Management Software) provider. Examples: Wayne Reeves, Frazer, Finance Express, etc. Requesting an excel data file allows the lender to quickly and efficiently place a bid on a great number of accounts. Another option that many dealers use that may not be setup with a DMS that offers this option, is to individually copy each account and the information required. This would generally require them to make copies (in some cases faxing) of the contract, credit application and an updated payment history. They would then overnight these files to the buyer so they could analyze the accounts for bid. A third option would be for the dealer to manually load the information into a portfolio template and email this to the lender, but a download is preferred, as it eliminates the human error factor.
- Proposal or LOI. Once the lender/ buyer receives the information required to place a bid, they will review the data along with some dealer specific information to place a bid for purchase. Some other information that could also be a factor would be: dealer location, time in business, size of portfolio, number of vehicles sold per month, dealer expectations, etc. It generally takes 24 to 72 hours for a lender to review the accounts and place a LOI (Letter of Intent). The LOI will clearly stipulate the full bid and the specifics of the process. The information generally offered would be: price on loans, accounts of interest, recourse provisions and usually an expected time frame to complete due diligence.
- Due Diligence. Once the LOI has been signed the due diligence process will vary from lender to lender. Depending on the size of the transaction and whether it is a first purchase or repeat business this could also differ. In most cases, the lender will want to either conduct full verifications (customer interview and employment verification) prior to closing, but we work with lenders who don’t. In the case that verifications is required, the seller will need to either overnight copies of the accounts for interest to the buyer so they can complete this step or have them ready for lender visit. It is highly recommended to make sure customer contact information is updated as possible. Most lenders will not buy an account if they cannot get the customer on the phone. Some lenders will conduct this process at their home office and some will come to the dealership to conduct the verifications. Lenders who do not verify the accounts will visit the dealer and thoroughly review the accounts. Original documents, callback notes, payment histories, etc. In the case of verifications this process generally takes 3 to 5 days depending on the portfolio size and accuracy of the phone numbers. In the case of no verifications, this process is generally 1 to 2 days.
- Closing. The final step would be the closing of the transaction. Once the due diligence process is complete the lender will request updated payment histories and original documents on all accounts for purchase (In many cases the lender will request the original documents post funding). The accounts will be uploaded into their system for accuracy and then they will issue a purchase agreement between the two parties. The purchase agreement generally lists a Schedule A (accounts for purchase) and a Power Of Attorney (covers lien transfers on all accounts listed in Schedule A). Once the purchase docs have been signed and notarized, the seller will be funded. They can be paid by check or electronic wire transfer.Overall, a bulk purchase can range from 5 days up to 2 weeks start to finish, depending on the lender and their specific requirements.
What type of bid can you expect from today’s lender?
Pricing: Lenders are paying anywhere from as little as possible upwards to 90% on the principal dollar for in house accounts (buy here pay here notes). It’s all about risk management. If the dealer keeps his loan to values in relative order and has an acceptable mode of customer qualifications, most dealers should expect between 70 and 80% of principal on average for their accounts at closing.
Recourse: Most lenders will require recourse when buying loans but some will not. The recourse will range from 0 up to 6 payments. Most lenders will ask for 30 or 60 day recourse. In the case of the 30 day recourse, the seller will be on the hook for the account until the customer makes the next months’ worth of contractual payments without being over 30 days late. This would be one payment for a monthly account, two payments for a bi-weekly, etc.
Reserves: Some lenders offer a back end reserve on their bids which gives the dealer an opportunity to earn additional monies based on performance. These reserves are generally structured to get the seller more involved in the relationship and assisting with any lender issues to help keep the portfolio performance at optimal levels. Some lenders will require a buyback reserve, which is totally different. In this case, they will hold a % of the total advance during the recourse period. This assures them of any buybacks being taken care of. Example: Lender offers 80% of principal with 60 day recourse and holding 10% in buyback reserve. In this case, the seller would receive 70% of the advance at closing and the additional 10% after 60 days, minus buybacks.
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