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Here's How to Become a Car Dealer

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author photo by Tyler Hoover November 2017

Recently, I've been starting to get random, unsolicited emails from people who are asking if I'll sell one of my cars, which usually results in such an insultingly low, ridiculously stupid offer that's hard for me to respond to politely. I also get emails with general questions -- even though I don't have a weekly column inviting people to ask questions. The most common theme among these inquiries involves the car business, and usually something along the lines of: How does one get a dealer's license, start buying hoopties and make a living selling cars? Many seem to forget I was a total failure in the car business, and I should be the last person you look towards for advice on this topic -- but I've decided to answer the question anyway.

To start, I strongly suggest anyone thinking of starting a dealership should first work in a dealership. I didn't dive into starting my own dealership totally blind, as I worked for other dealers for a few years beforehand, and I knew the business pretty well. Without this experience, I imagine there would be a pretty rough learning curve starting out, as most people need coaching on sales techniques -- as well as some training on reading credit scores, facilitating auto loans and how to do all the paperwork.

I've found many people are surprised at how challenging it can be to get a dealer's license. Many think they can easily get dealer plates, get access to wholesale auctions and flip a few cars on the side out of their home garage. In reality, most states have laws and regulations keeping you from doing this -- and I think that's a good thing.

The first major hurdle with opening a dealership is finding the right location. Every state has zoning laws to keep businesses from opening in areas not zoned for commercial use, and an application for a dealer's license must include an approval from the local zoning agent or the city council. Many people view car dealerships as eyesores -- and just because the area is zoned appropriately doesn't mean a dealership will be approved. In populated areas, finding a decent site would prove very challenging on a budget. My first space was a 2,000-square-foot storage room in a warehouse complex for $900 a month. It was hidden away from traffic, but that didn't bother me, since most modern car sales now come from the internet.

Most states also run background checks on anyone applying to be a dealer, and they don't allow convicted felons to open a car lot. Getting a license and a sales tax account from the state also requires you have no outstanding unpaid taxes with local and state governments. The wholesale auction houses will also run credit checks before qualifying you for auction access, and they can reject you (or put certain restrictions on you) if you have poor or unestablished credit.

There are also many other expenses involved in owning a car dealership that can add up to massive overhead. Car lots have a lot of risk from a liability standpoint, so insurance can be expensive. Most cities and states also have extra little taxes tacked onto businesses, and there are plenty of other expenses you probably won't think about, such as utility accounts that require a much larger deposit for nonresidential customers. When it all adds up, a full-time commitment is required just to keep your head above water financially.

Even if a person were able to find a cheap location and affordable insurance, most states require that dealers have full-time posted business hours, which means someone has to be on the lot during those posted times. Unless you can clone yourself to hit auctions and run normal business errands, you end up needing to hire somebody to babysit the lot.

So you can see that doing this as a casual, part-time income would be pretty challenging -- but what most would consider the fun part (buying cars at auction) can be even more difficult. New car dealerships get more profit from sales on their used inventory -- and because of this, they hang onto their best trade-ins. This makes the wholesale auctions a minefield of cars that were rejected due to high mileage, shady history reports or high reconditioning costs. With many used car dealers operating under a buy-here, pay-here model with high-interest loans for high-risk customers, the prices for cheaper, in-demand vehicles that aren't total junk can be ridiculous, since these dealers don't need to make money on the car itself and can instead make money on the loan. It's not unusual to see a Japanese vehicle (sought after for reliability) or any kind of pickup truck (sought after for utility) sell for thousands above any book trade-in value.

For a traditional dealer starting out, finding inventory for a wholesale price is challenging, and a small lot can't expect to sell their cars for retail prices. Given the marketing budgets and visibility of the larger lots, the only way to compete is to specialize in something unusual or sell cars at a price that's too low to resist. Given the wholesale atmosphere, at least in my area, the margins aren't very good.

I'm lucky to have one of my best friends still hustlin' his car lot, as he's done for over 25 years. Through his license, I'm able to access all the wholesale resources I had when I was a dealer -- but this is an unusual situation, and it requires a lot of trust. I have the ability to login to his online wholesale account, click a few buttons and purchase a $100,000 Bentley in five seconds. If I disappeared afterwards, his business would be on the hook to pay or risk legal action -- and he'd risk getting blocked from all auctions across the country. Now that I think about it, he must be crazy to let me do this -- especially when you consider my poor impulse control.

Tyler Hoover went broke after 10 years in the car business and now sells hamburgers to support his fleet of needy cars. He lives in Wichita, Kansas.

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Here's How to Become a Car Dealer - Autotrader