#421 - The Auto Cave Model: Parts, Process, & Overcoming Margin Compression

all vehicles have common problems, right? Name the year-making model, I'll tell you the common

problem behind it, so we figure if every vehicle has a common problem, why not just buy it with

the problem already existing? So buy it with the problem existing, bank on our ability to fix it

better, quicker, you know, more efficiently, cost savings than anyone else, and then now you got a

car that's on the note, you don't have to worry about the car.

Hello and welcome to this episode of the Independent Dealer Podcast. We are on location

at the Auto Cave with Mr. Mitch. Mitch, this is a boneyard. This is it. Man, this is cool.

This is what the money's made. This is where you got money laying all over the place. We're

going to talk about that today. Your guys' philosophy and process around keeping a boneyard?

It's like a real assembly yard. You disassemble, then you reassemble. That's right. Is that the

concept? Yeah, for us, it's trying to keep it simple. At the Auto Cave, we try to hone in on

just a few year-making models. For us, it's the Hyundai Kia, the 2.0 and 2.4. When you do that

as a dealer, not only do your technicians get used to working on the same cars over and over

and over, so it helps efficiency there, but then more importantly, when you need a door,

when you need a clock spring, when you need a steering wheel assembly, when you need a module,

when you need a motor, when you need a transmission, when you need a door, you have it.

Yeah. How many cars do you have in the parts inventory?

Parts inventory. We've got about 100 junk cars.

100 junk cars. Now, it takes space to do this, so like your place, we wouldn't be able to do it.

I couldn't do it. This is beautiful. I mean, if you guys look at the view of this place,

it is, we got seven acres here. Yeah, you're saying beautiful. I see a junk yard, but that

could be beauty in some eyes, and image eyes, and Katelyn's eyes is beauty, right?

Yeah, that's right. I want to rewind and talk about the philosophy behind this.

Okay, so you have to have, you mentioned your buy box, like you got your target of cars,

that you as a dealership have decided are the best for your buy here, pay it, right?

That's correct. And you're focusing on the Hyundai's and the Kia's. They sell great.

Bang for buck is there. It's pretty dependable except for the engine.

That's correct. Yeah, that's correct. I mean, right? They're pretty good.

But you guys have, you found that niche where you figured out the engines.

Well, yeah, our philosophy or our model is like, all vehicles have common problems, right?

Yeah, 100. Name the year-making model. I'll tell you the common problem behind it.

So we figure if every vehicle has a common problem, why not just buy it with the problem

already existing? Love that. And Trumpets said, I'll open you got one without the problem, like I do.

That's it. So buy it with the problem existing, bank on our ability to fix it better, quicker,

you know, more efficiently, cost savings than anyone else. And then now you got a car that's on

the note, you don't have to worry about the car. Yeah, I mean, because you can buy a really nice

200,000 mile car, let's just say or 80,000 mile car with a bad engine and put a new engine in it.

And it should, in theory, run for another 150,000 miles and run the note.

That's correct. In theory. In theory.

Depend on the vehicle. Okay. All right. How, if I was a dealer out there and I wanted to start

doing this, how do I go about buying a car that already has that known issue? Because I've done

this with a few models like Silverados or Tahoe's. I'm not buying them unless they have bad

transmissions, right? Because I know that I'm going to have to put one in it. That's right.

And these are maximums. If I can find one with a bad transmission, I'm going to buy it because

I know I can put a transmission in it. That's right. How do you focus on that?

Yeah, I'd say reverse engineer it. So there's a market price on every single part, right?

So find out how to be below market on that specific part. Like you said, the Chevy transmission,

most people are spending between 32, 50 and 3650 to rebuild that transmission, right? If you can

find that transmission for 1500 bucks, 1800 bucks, and then, you know, have your shop do it yourself,

calls for probably nine hours at a tech, you're paying 25 hours an hour. Now you're in that same

vehicle. Everyone else is paying 3650 to rebuild the transmission. You're in at about two grand.

So now just off of what it is, you got a $1,650 spread plus you bought it inoperable. So you

probably have another $1,500 to $2,000 spread there. So now everyone else is in their car,

$14,000 when it hits the front lot. And you're in it probably $11,000, but you have all the major

issues already fixed. That's interesting that you can increase margin. I didn't even think about

that. It's a fix and flip. They're building equity in the car, sweat equity. So it takes a

large shop operation too. I mean, talk to us about that. When you have, how many mechanics do

you have working on this? Because this is a dedication. It's not like I could just do that

with my current shop setup, because I don't have builders. I don't have heavy line guys

that can just crank. What additional commitment was that for you to be able to do this? You got

guys that are only doing a specific engine five times a day? That's a good question. I think

number one, you know, especially when you're home growing and buy here, pay here,

a lot of times the shop comes last. So in that being said, how you get to where you got is

typically outsource vendors. So really honing in on those relationships. And as you grow and scale,

it's like, oh man, you got 35 lifts here. You got six and a half acres. We still have outsource vendors.

Wow. And we have vendors that even have, we have the space that we've brought in on site to be able

to help us. So I have a guy who specializes in engine rebuilds. So his name's Angel. Do we do

a bunch of them? No. But when we pull an engine, if it just has low compression and it only needs

the heads, we're going to do the heads. If it needs a complete rebuild, we'll scrap it and we'll move

on to the next. But I would say honing in on your vendors, making sure you're curating that

relationship constantly. And then the next step from that is having the same tech work on the

same car. And that leads us into the economies of scale. When you talk about, okay, I've got guys

that are specializing in this, now they're beating the book consistently. So I'm becoming more

efficient there. But also from a part standpoint, when I can buy, you know, 20 engine blocks at a

time, I can get a deal. Or when I can buy 20, you know, transmissions or some of these guys,

they'll cut your deal when you're doing bulk, right? Yeah. Yeah. I think a common thing that buy

here, pay here dealers forget is that they, they're not just in the finance business. They're in the

car business, right? And part of the car business is a whole another world called the wholesale

world, right? So a lot of times buy here, pay here dealers, they skip the wholesale part,

they go straight into buying a depreciating asset at retail value. And then they expect it to have

a high recovery rate down at the end, where if you are actually in the car business, you buy

it at wholesale price, you fix it, you make that wholesale margin, then you make your retail margin,

then you make your APR. And that's how you make money. Yeah, I like that. You're right, because

we were been talking about margin compression here lately. And this is a way to get it back.

It's interesting that philosophy. So there's a whole another ball of wax here that we hadn't

talked about. And that's inventorying all this. There, I mean, is there a software that you use,

or is it just old fashioned writing it down every time one comes in? This is what I have.

Yeah, that's a good question. So I mean, really, I'm not in the parts business. Okay. Meaning I

have six and a half acres, I have all these parts cars. So it depends on how deep you want to go.

For us, we have engines inventory in a spreadsheet. And it all comes into a CPI total loss chat. So

when a car gets total loss or cosmetic manager memo, you go ahead and takes pictures, puts it

in the total loss chat. And then from there, I go ahead and I inventory that engine into my

spreadsheet. And then Nick, he's here somewhere, but Nicholas Wheeler, he sits here on the back end

and he will take these parts and you'll post them online for sale. So not only are we, you know,

scavenging our own parts for us, we're sitting here driving additional revenue. I think last

month we did, you know, just shy of $20,000 in part sales. Wow. I thought you would have just

thrown away your sense of the scrap yard. That's it. And that's a, I mean, it was about

plat or recovery rate or helping out your, your reassurance coming, recovering that money,

because you and I know if we send most of these cars to auction, I mean, they're going to bring

between $500,000. Yeah. But there's so many good parts. That's correct. So like you, you're

itching CPI here. So most of the cars we see here are probably CPI losses. Is that the case? Yeah,

about 95% of them are CPI losses. And how many CPI claims are you getting a month, do you think?

Man, less than 20, but more than five for sure. Yeah. So most of your CPI is total loss or

50% of them. I mean, half we fix half are total loss. And so then you, you have parts where you

can fix your CPI cars too. That is correct. Yeah. You do a lot of body work on those then.

Are you looking mostly mechanical to build a value or will you buy something that's completely

wrecked or buy back that CPI that's lost the front end and rebuild it? Yeah, that's a good question.

A lot of times, so when we evaluate CPIs, it's based on what we have. So for example, if I have a

11 Sonata that smashed from the front end and I have an 11 Sonata that was smashed from the

back end, I'm probably against a super glue out. I'm going to build the car. Yeah, I'm going to

build the car. And also we look at a certified body shop on site too. Yeah, we do. We're car

star certified. So, you know, we're collision insurance repair facility. It's been very helpful

as well. But even then it's like 75% of our cars don't go through car star. They go through our

in-house, you know, which is just a call to mom and pot is two guys, a painter and a body guy

that are just hammering in there doing fenders, bumpers, knocking it out and moving on.

We do want to make money on the reinsurance side as well. So having this to help when those CPI

claims come in can drastically drastically reduce the cost of your CPI claim ratio. Yeah.

Yeah, it's a large investment though. And that's when my brain starts turning that's like,

when you look at all these moving parts that these guys have invested in making it work,

you know, parts guys and tracking and having the space and keeping the inventory just even from

a cash, even a scrap standpoint, you're keeping a lot of cash on hand here. But if you're producing

20,000 a month selling parts, yeah, and that adds up quick. Yeah, that's great. But you have one

guy doing it. So you guys have made the commitment and that's really commendable. How do you keep

from hoarding? What is that line? What do you mean? Yeah, when you crush.

Hey, sorry to break into real quick, but make sure you guys know about Buck Guy,

longtime, awesome sponsor of the podcast and who I use for all my reinsurance products.

I can't thank them enough for teaching me so much about reinsurance over the years and coming

up with new products and new ways to get my portfolio secured. My customers have options

of warranties and service contracts, gap. I think it's just been great, Jeff. It's absolutely been

a great way for me to build wealth, put away some money. So if you are a buy here, pay here,

lease here, pay here or retail dealer, it works for all dealers. You can set up a reinsurance

company. You can ensure your own stop giving money to those third party providers that aren't

going to cover your stuff anyways. Keep it in house, call the guys and girls over at Buck

Guy risk services and get set up ASAP. So we are targeting buying a lot of 19 and 20s right now.

So our parts inventory on them are not there yet. Exactly. Exactly. So when we get a 19 model that

needs a front end, I'm going to spend two grand on parts just sourcing that front end. So I know,

for example, this car we bought a week and a half ago. This was out of Mannheim, Mannheim Dallas,

and it was a complete car. It's not now. It was a complete car in up 190,000 miles,

and we bought it for 1700 bucks with fees. So we buy this car, we slap it onto the ticket

of the car we're reconditioning. That's interesting. Like, because I would have never

thought of that. Like, instead of just piecing part here to part there, because that's probably

what I would have done. I said, okay, we've got this, we're going to charge 500 for the fender,

500 for the door. But you just say, you know what, we're just going to put the entire car

on the recon ticket. I like that. It's simple. And then you're in house money. So now this is a free

car. Anything we saw off it, just free money. And if you, if y'all could see this, if you're

watching on YouTube, they stole the front fender and the doors on this side and then put the other

ones back on, which I kind of like that. Ah, yeah. If you have any other cars here and you can see

what you've already used. That's right. And honestly, those doors aren't that bad. If you,

had to use those at some point, you could, but you don't need them. So when you bought it with

a bad motor, how did you decide not to just get a motor for it? That's a good question. That'd be

my problem. It's like, I bought it with a bad motor and I wanted all the body panels, but now when

it shows up, I'm like, well, maybe I should just put a motor in this. So it was really clean. Actually,

it had the entire front end. This was a complete car. And when it came in, we don't always just

assume it's a bad motor. We get a technician out and we verify what is wrong with the motor,

right? Cause if it's just timing on these Hyundai's and Kia's, it's a $400 job. So for this car,

being 190,000 miles, the book on it has really came down massively. So you've taken that big

book hit. So for me, yes, I could put $3,000 with the motor, the labor behind it and getting

it retail ready. So I could put three grand in a 190,000 mile unit, or I can sit here and I can

just basically start fresh with a 60, 70, 80,000 mile, 19 model. That's correct. That's correct.

The high mileage. I see that. Yeah. Yeah. It was not worth throwing. We have kind of a limit where

you say, Hey, if I get a CPI or a repo or a claim that's close to 200, that's just not sellable.

Nobody wants it. I mean, if we can fix it for under a thousand bucks, I don't care if it has

220. If we put a new engine in it already and I can fix it for under a thousand dollars, I'm

going to get a thousand dollars down on the car. So again, I'm playing with house money. Listen,

let's talk about that. How do you know that other than looking back at your tickets,

that you put an engine in that car? Yes. All the engines are stamped. So we do rebuild some. The

ones that are rebuilt, they're stamped with the name Larry on it. And most of them we buy new,

and the new ones have just a manufacturer day on the side. And you know that and you look at it.

Oh, well, we put this one in 2023, 2021, 2024 says the date on it. And it's good to go. That's it.

And then you can look at your original purchase, see how many miles it had,

see how many miles it has now, because it was a new engine. Some of our customers drive 100,000

miles in two years. And don't do an oil change. Yeah, exactly. Have you had the new blocks come

back with the same failure rate or close to? No, no, no, no. I've heard those rumors that...

Do we have issues? Yeah, of course we have issues. In terms of a new block, they come back because

customer neglect is why they come back. You know, if we put a hundred engines in,

are we going to have issues with a hundred? Maybe one. Maybe one. One to two from the jump.

On those, just send them back to manufacturer, get new ones. Yeah. So now you have plenty of

extra parts, see? Yeah. Like you mentioned, the interior of this is still spotless. So you could,

instead of a heavy detail, or if you like someone, you know, like how to murder or how to baby in

the backseat, you don't got to clean that up. You just come over here, grab the backseat,

toss it in. And then upholstery too, because you could get one in that's got to rip in,

you just rip this seat out, but then you went in. I mean, that's a suit.

Well, I want to talk to, you know, you're unique because of your location, right? This works really

well because you have, I don't know, a hundred thousand cars for sale at any one time within a,

you know, a hundred mile radius for you. Yeah. Is that so key to this puzzle that you can just

like, oh, I need a 2019 with a good front end. I can jump on and within a week or two, I can find

one. Yeah, I think what's more important than that is your lot size, right? I think the first thing

you got to evaluate is how much space do I have myself? Because if you don't have all the space,

then you're having to break them down as soon as they come in. And then you're having to shelve them,

inventory them, takes a lot more effort, a lot more organization. They get that done. So, and then,

yeah, the second thing in terms of having Mannheim Dallas, Mary's Auto auction, Metro Alliance,

you know, Mannheim, Fort Worth, you have all these options. Like you said, a hundred thousand,

you know, cars within a reach. Houston right here too. That's right. San Antonio, Austin,

you got all these options. So, yeah, it does make it helpful, absolutely. But I still don't think it

should deter a buy here, pay here dealer from zooming in on two or three making models, you know,

because your inventory is going to stack up. But even if you can't do the junk, you're still gonna,

you know, your efficiencies that no one wants working on. That's correct. That's correct. Having

the tax work on the same cars over and over and over and over. And you know, in the South, where I

am, there's plenty of land. Like you can go, yeah, we always talk about how cheap land is in

Columbia, Ohio, Carolina compared to Georgia and St. George's, each all. It's, you can always go buy

a little acre or two of land and stick cars on it if you wanted to do it. And even a step further

than that, if you have a good relationship with an auction in your area that you're buying a lot from

and you're liquidating all your inventory from, like America's, at one point, we have 40 cars

sitting at lot five in America's and not selling them, just sitting, keeping them there. And you

know, I have the inventory list. Yeah, of course, you know, we're selling, we're doing so much

business with that. That's right. He's correct. And so we forget about that with our vendors sometimes.

Sometimes we can, we can reach out and they'll ask them for something that they don't typically do,

but they'll do it because we're doing sweatshirt. Yeah, volume definitely helps. That's yeah, sure.

For sure. Hey guys, real quick to jump in and make sure you know about a new exciting sponsor here,

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Yep. Give them a call. Go to our website for more information. Mitch, so let's talk about someone

like me. I'm a small dealer. I don't have a ton of space. What are you doing to like inventory

high dollar things? Like if I identified my makes and models and I say, Hey, yeah, I really,

really, I'm going to stick with these cars, but do you do stuff to like rip out the high dollar

you stuff quick and like not have a sitting rod or like, what are you doing with those?

Yeah, identify common problems, right? So as we talked earlier, honey and Kia, the transmissions

are good. So why sit here and take up valuable space? If I don't have it yet, a transmission

where on a Hyundai and Kia, you got dual lock actuator problems like crazy. They're

130 bucks online. You know, in every single car, you got four of them. Take them out. That's small.

You can put it on a shelf, you know, and you identify that they've worked before you take

them out. Yeah, if the vehicle's running and driving, but typically our CPIs come in and

they weren't on the street lawn. So, you know, we just, we just recondition the car. So we're

going to move with the expectation that it's ready to go. Yeah. And you pull those out and you

show them in a, in a stores like this, right? Yeah. Yeah. We can show them, you know, for us,

we have the space. So like we put all of our doors right there behind us. So all those doors are

complete doors, you know, so when we need a door, we'll just go grab it. Yeah. Grab a door that

matches. Is it the same color? Like, I mean, even that, right? It usually is. It usually is. They

made about four colors and that's Kia's and Kia's. But you could rob, you could rob like an actuator

or a window motor out of those two all day. Yeah. And have them. But, but if I'm a smaller guy,

I'm not stockpiling 50 doors, I might just decide, Hey, I'm going to go to the scrap yard for my

doors when I need them, but I'm going to keep these el actuators. I'm going to keep the ignition

switches. I'm going to keep headlights, tail lights. Like that's, that's really, I don't even think

about headlights, tail lights, man. I send those out with my scrap part. And you're talking about

a hundred to $150 sometimes for headlights. Oh man, more, more. It's college and HIDs. We're

spending 600 bucks. So yeah, it's interesting. I got a couple of that. So if you just have it

sitting there, you go, off you go. And then, you know, you're talking about buying engines. Yep.

You, you've got a stack of brand new engines today. We do. We do. I mean, that's gotta be

convenient. It is. It's nice having the space to be able to store engines, you know, because when

you buy in bulk and get that discount, get the discount and the time saving. I mean, like,

yeah, you have to wait. Cause if I ordered this, if I could order this engine from Hyundai,

it's going to probably take five days to get it. Yep. And then that's hard days out of recon

that, that just wasted. That's right. And then ties up a lift space for five days, or you're

pushing it out, putting the rims and tires back on, and it just becomes a headache. So for us,

yeah, you know, we monitor what we buy, monitor what we have in our inventory. You know, our rule

of thumb is pull it before you grab a new one. So if we have one out there, you spend the extra

time and go and grab it out of a car. And then if you guys, if we went to the far bay, you'd see

we got parts cars over there that are on lifts. We have open lifts that we just car comes in,

we yank the engine, we'll leave it there for a couple of days so we can start to do car pairing.

So vehicles on a lift, it's up, take everything. While it's there, we're always building

Hyundai's and Kia's, start grabbing the parts you need. But once you already know you're gonna need.

That's correct. Wow. That's so interesting. You have one tech that is just for disassembly?

No, no, our techs at this point, when they're building a car, our, our diet tech looks at

the vehicle when they're originally diagnosing it, and they have our junk parts list. So if they see

we have that junk parts, they'll put it on the ticket, grab from junk. So we won't even order

that part. So now when it comes to the build tech, and they're going to build the car,

the build car goes in, they see grabbed from junk, they go out to junk, they identify the car,

they grab the parts, and they come and build their car. The same tech is who's recounted.

How are you protecting the high dollar stuff from being sold off? You know,

like that's kind of like when you, when you talked about your guy who's posted them online,

it seems like he starts, I don't know how he's incentivized, but when he starts identifying

like, dude, I know these are going to sell quick on eBay, like I'm going to grab those the second

they come in so that I can pad my stats and make it look good. That's a good question. That's a

good question. So we kind of found that in our cats over the years, catalytic converters, they,

they did go off. They disappeared. Oh yeah. And then you were like, we just did a cat's run.

So we did last 60 days anytime. So when a vehicle, it's the shelf life is over. We've taken all the

parts it's done. We have a gentleman named Steven who comes, he picks up the car and he gives us

$200 for the car. Plus he brings me back any doors and tires that I mark. So he'll, he'll get it to

his lot. He'll go ahead and take off the doors, take off the tires, bring them back and then he

gives me 200 bucks. With that, you know, we now, when he picks up that car here, we cut off the

cat immediately. So in 60 days, we did a cat run, I think on Monday of this week and we got $5,069.

Yeah. Like that's a big deal. Cats are, are super valuable. Yeah. We kind of do sort of like that.

If we identify a car that's going to be, is CBiato or something. First thing we do is pull the battery,

pull the cat. Sometimes the batteries decay, right? Yeah. I was like, well, aren't you,

it's, I just thought about that. How may are y'all able to source a lot of tires

from, from this type of situation? Oh yeah, absolutely. So I mean, we got tires stacked up

right there as well. But yeah, when vehicles go out, we like to leave the tires on the car

until it's nearing the time to pull the engine. And then once we pull the engine,

I just take everything off. So yeah, we'll take rims and tires, the same thing with the

diagtech. Diagtech realizes we have a full set in junk. When they do the ticket, they'll say,

hey, pull from junk. Is there any way for you to kind of put a number on

how much you're saving in recon a year by using your parts compared to going to AutoZone or

wherever to get parts? Yeah. So just on our average reconditioning cost of our repos and new

units is dropped about $650 per par since we really started going crazy at this.

Let's call it 600 car. Y'all are selling 80 cars a month. Yeah. Call it 80, call it 90.

Use an even number, 100 cars a month using that $60,000 just on recycling your parts

in your cars. And that's not even the cost savings on engines or on the front end,

which is the wholesale size. $700,000 a year. Yeah. That's a big number. Yeah.

Yeah. And it's a big commitment that they do. Let's think about property because

we thought about that earlier. If we could save $700,000 a year, we could buy a pretty

decent piece of property and finance it over 10 years to actually build something like this door.

Yeah. Having it adjacent, obviously, is so crucial or when you're right here,

you walk down, you see what's there. I would think if it's across town, you're going to lose some of

those efficiencies. But if you had the opportunity to grab a half acre or acre next door, I mean,

jeez, that'd be a great way to go, man. Mitch, before we wrap up, I think it's a great segue,

man. What's going on here? Give us your FannyPak, your man purse tips for the podcast.

Man, I've been rocking a FannyPak since 2013 when I'm in car business. Oh, gee.

You put a lot of keys in a FannyPak. I mean, here's the thing. This is dressed up for me,

believe it or not. Okay. I put on my boots in suits today to hang out with y'all.

So typically, I'm a basketball shorts and actually a lot of the team makes fun because

they're usually pretty up here. They're little short shorts. So if you are a street wearer guy

and you sit in a car, all your stuff falls off. Everything falls off, man. I lost cell phones,

keys. Oh, man. I'm trying to figure out what car I got on. Oh, man. There you go. So for me,

I keep chapstick at all times. I keep my keys, right? I keep an OBD scanner at all times as well

so I can scan. See what's going on with my cars. Flostics. If you walk around the property, you'll

see flostics. And then I got no strips. You're getting stuffy out here. I get Texas Dima Alec.

Holy jeez, that takes it so fanny pack. Wall it with the passport.

She got to leave the country? You never know. You never know, dude. I'm ready to leave it all

time. I've never met a gentleman that carries his passport with him 24 seven. Awesome. That's

a cash. Stacks of cash, man. At any time he finds a key on the side of the road, he's going to

make the cash offer. Take it with you. That's it. That's it. That's it. Thanks for your time.

That's fun. That's fun. Yeah. Yeah, so much fun to be on. Appreciate it.

#421 - The Auto Cave Model: Parts, Process, & Overcoming Margin Compression

About this episode

boneyard

Kia

clock spring

steering wheel assembly

parts inventory

junk cars

buy box

common problem

Chevrolet Silverado

Chevrolet Tahoe

transmission

market price

fix and flip

engine rebuild

economies of scale

buy here, pay here dealers

wholesale price

APR

parts car

total loss

Hyundai Sonata

collision insurance repair facility

car star certified

service contracts

gap

warranties

reinsurance

reconditioning

high mileage

repo

catalytic converters

Request an Explanation

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