The Expert Podcast

Okay, what can you make of the news and information and maybe some conspiracies surrounding Carvana, the stock price, the financial disclosures, and even the title problems that are being investigated in multiple states by government agencies, attorneys general, and even law enforcement? The possibilities and the hypothetical reasons for these title problems may be related to the finances of the company. So, we're going to talk about possible hypotheticals. We have no knowledge of any of this. We're not saying this is true, but we're just describing one way that a dealer, a licensed automotive dealer, can get into trouble with titles. Matter of fact, this is the most common reason that dealers get into title problems, and a lot of it has to do with fraud, floor plan out-of-trust situations, and double financing of vehicles. Again, we're not saying that this is what's happening at Carvana. We're not accusing them of anything. We're not stating that this is fact. We're saying here is one scenario of how a dealership, and that's what Carvana is—they're a car dealership.

Their business model appears slightly different on the outside in terms of an online seller, but deep down inside, they're just an ordinary car dealer and they have inventory. So, the way that dealerships obtain vehicles that do not have a new car franchise, because Carvana doesn't sell new cars—they only sell used cars—is they purchase vehicles from auto auctions and from consumers. The only way they can get cars, and there are two major auto auction chains in the country: one is Odessa, one is Mannheim. These two auto auction chains have multiple locations, and Carvana will buy cars in large volumes from these chains. They may buy a hundred cars a day, two hundred cars a day from these auctions.

And when a dealership purchases a vehicle from an auction, the auction offers them a line of credit. You don't have to pay for the vehicle the same day you buy it. Most auto auctions give you a credit line for your purchases. So, you buy a truckload of cars—let's say there are ten thirty-thousand-dollar cars. That's three hundred thousand dollars worth of inventory. You sign a promissory note for those vehicles, and you drive off with your cars. Now, the auction is going to hold the titles for those cars. They're going to use that as collateral. Now, when you sell one and you need that title to give to a customer, you notify the auction, "I've sold this vehicle. Here's the VIN number, here's the money, now give me my title," and they send the title over to you as a dealer. It's a great way for auctions to sell more cars. It's a great way for dealers to have better inventory because, you know, if you keep 40 or 50 or 60 cars on your lot, that could be millions of dollars—two or three million dollars of inventory. Most dealerships don't want to have that much cash or don't even have that much cash laying out on their inventory. So, the auctions provide that financing and they have outside sources of money that offer this line of credit.

Now, the car gets to the dealer's lot. It's sitting here on their lot. Now, dealerships also have their own internal line of credit. It's called a floor plan, and it comes from the word "showroom floor." Your showroom floor has vehicles on it, and your floor plan line of credit is obtained by you as a dealer from a bank to fund your inventory. So, sometimes when a dealer, again, we're not saying Carvana does this, but this is hypothetical, gets cars in, they notify their line of credit and say, "Look, we have these 20 cars. We want you to fund them to us." The floor plan line of credit gives you the money. What you're supposed to do is use that money to actually pay for the vehicles. But what happens if you just notify the floor plan line of credit, "Hey, we bought these cars from an auction. Give us the money," and then now they give you money and you don't send it to the auction? Now the vehicles are financed twice. You have the vehicle you didn't pay money for, and you have several hundred thousand dollars of extra working capital. Now those cars get sold. Let's say you sell the car to Joe Schmoe, a retail buyer. Joe Schmoe, the retail buyer, gives you the money for that car. They give you thirty thousand dollars for that car, or if they finance it, their bank gives you thirty thousand. Now, you have another funding for that vehicle. So that vehicle could be funded three times for you as a dealer. If you don't go and pay off that line of credit from the auction, you get to have the car for free and have it paid for twice, so you have this extra cash laying around. And if you float this money and float this inventory for a long time, you can actually fund your operations a lot more than just scraping up shoestring cash.

You might say, "Well, does a public company need to do these kinds of techniques? Don't they have a lot of extra cash?" Well, Carvana is losing money. They have negative cash flow. They're burning through investor cash. They're selling a lot of cars, less so lately, but their cash reserves are being drained. So it's a little tempting for any dealership, again, we're not saying Carvana is doing this, to double dip their floor plan. It's called being "out of trust" because the floor plan trusts you that you're paying for the car when you sell it. They trust you. So, if you're out of trust, it means that you're not doing it properly. So let's look at an example of how this works. We'll get back to Carvana in a moment.

If you look at this news article from South Florida, "Truist Bank Shuts Down Access for This Dealership," there's a dealership in Boca Raton, Florida, called Excel Auto Group, and allegedly they did exactly that. They're accusing the owner of taking part in out-of-trust fraud. That's when a car dealership borrows money to buy cars, then sells those cars but never repays the floor plan. This auto group is accused of mismanaging millions of dollars in cash and vehicles. So, this high-end car dealership had Ferraris, Lamborghinis, high-end cars, and they would buy cars from auctions or consumers. They would get the money from their floor plan, then sell it, but not pay off the floor plan. So, they were even selling cars with liens on vehicles. Buyers were not able to get titles. Does that sound familiar? This buyer is not able to obtain a title because there's a lien on the vehicle. This is in a lawsuit. Again, this is all alleged at this time. The auto group is saying they're fifty million dollars in debt. So, it's not like we're talking small change—small potatoes. This is a big deal. So, this is how it happens. This is a recent story. This is happening right now in 2022, April 2022.

So, how does that relate to Carvana? Again, we don't know that Carvana is doing this. We don't know that this is what their M.O. is. We don't know that they're doing anything wrong, for that matter. But if you think about it, a large public company that's a professional operation, having so many title problems—people in multiple states, 15, 20 states—sometimes you see in the news, not able to get a title for their car for months and months. A month, sometimes more than a year. There's only so many reasons that a licensed car dealership is not able to provide a title to the client, to the buyer. One of the reasons is they don't have it and they can't get it. Because if they did not pay off that floor plan or the line of credit from the auction, then they don't get a title, and their buyer is out there twisting in the wind. Again, we don't know that's happening, but we're just trying to think of reasons why Carvana is not delivering titles to buyers. And it's not just isolated cases. There are multiple states, multiple attorneys general investigating this. If you could trace back some of these VIN numbers and titles, we can see maybe, you know, why this is happening.

A curious development happened a couple of months ago—well, a few weeks ago, actually. Carvana decided to buy one of the two major auto auctions, Odessa Auto Auction. Carvana did a leveraged buyout of this auto auction. Now, how can they buy it if they have no money? Well, they got financing. Carvana convinced a hedge fund to lend them 2.8 billion dollars to buy an auction. Well, if you're already struggling with your used car dealership, why would you be out looking to buy an auction? Well, again, if you buy an auction, and it's crucial for you to have more flexibility with your financing from an auction, if you own the auction, then you have more flexibility with that financing. You see where this is going. You're not saying they're doing anything wrong, but if you wanted to really have control over this title paperwork and this financing, and not have the two separate sides of your business see each other, if you own the auction, you can do the paperwork differently. Hypothetical, of course. It's all conjecture at this point, but keep an eye on the news and keep an eye on the developments about Carvana to see if any of these hypotheticals turn out to be true.

There may be a perfectly alternate explanation for all this, but when you have a large publicly traded company in multiple states having title problems, money problems, and auction problems at the same time, all of this kind of leads towards that hypothetical of, "Well, where are these titles? Who's financing these titles? Is it a floor plan? Is it an auction line of credit?" The other kind of obscure part of this is Carvana is doing their own financing for their customers, meaning that they're not telling their customers, "Go to Wells Fargo, go to Chase Bank, go to Bank of America to get your loan." They're saying, "We'll do the loan for you," and they have another bank, a third bank, that provides financing direct to the consumer that Carvana controls. That financing process is kind of like that old mortgage-backed security thing that happened with the real estate crash in 2008. It's a lot of paperwork that can be obfuscated, moved around. Just like mortgage-backed securities were thrown around the system, these title issues might be floating around the system without any real documentation backing it up. But again, it's just a hypothetical.

I hope that helps clarify some of the topics you want to address in your content! Let me know if you need further adjustments.