The Expert Podcast

All right, not to keep beating on a dead horse, but this Carvana thing is getting out of control. Carvana's dealer's license was suspended again this week—this is October of 2022 in Michigan. This comes after many suspensions in multiple states, such as Illinois and Florida, over the last couple of years, with title problems going back even farther than that. So, what gives? What could be behind this?

Now, what we're going to say here is not anything that's known for a fact. It's all speculative and hypothetical—just spitballing. So don't take this as a fact, an opinion, or an indictment of Carvana. It’s not even derogatory toward Carvana. These are just questions about how this could be happening because this is not a normal title problem.

Look, every dealership sometimes runs into issues processing paperwork. They might lose a good employee and get jammed up. But to have it happen chronically for two years could indicate some deeper problems. One possibility could be that they don't have a competent title department. But you would think that after a year or two, they could address this, even by throwing money at the problem—hire five or ten great title people, or experts in this process. The fact that after being suspended two or three times in other states, they were suspended again at the end of 2022 suggests that maybe the problem is outside their control.

What problem could that be? Again, this is not fact—this is pure hypothetical, just a question. Could Carvana be what's called “out of trust”?

Out of trust happens when a dealership is not keeping up with their floor plan payments. Floor plan is a line of credit that dealerships use to finance their inventory. For example, a new car dealer with 100 cars on their lot, each worth $30,000–$50,000, might have millions of dollars worth of inventory at any given location. Carvana, with multiple locations, could have tens, if not hundreds, of millions of dollars in inventory.

Most companies, big or small, don’t have that kind of cash sitting idle. So, they get a line of credit. The way it works is when they buy vehicles, the lender fronts them the money and holds the titles. When a vehicle is sold, the dealer takes the customer's payment, keeps their profit, and pays the lender. Then, the lender releases the title, which the dealer processes with the DMV for the new owner.

But what happens if they don’t have the money? If they take the customer's $30,000–$40,000 payment and use it for payroll, rent, or other expenses instead of paying off the credit line, the lender still holds the title. Dealers are supposed to pay off the lender within 48 hours of a sale, according to most floor plan contracts. If they don’t, they’re considered out of trust. This means they’ve collected money that belongs to the lender, not the dealership, which violates their agreement.

Could this be happening to Carvana? It would explain why they don’t have the titles to give to customers. If they can’t pay off these loans quickly enough because they need the cash for other things, it could cause chronic title issues. Carvana isn’t exactly flush with cash—they have negative cash flow. While they might have capital reserves, financing arrangements, or other cash sources, they’re likely burning through cash on operations.

Again, this is purely hypothetical. We’re not saying this is the case, but we’re questioning whether this might be why a national, publicly traded company with multiple locations keeps running into title problems. I don’t know what other reasons people have considered, but this is one possibility.

Are they out of trust with their floor plan lender? We don’t know if they even have a floor plan. They might own their cars outright for cash. If they do have a floor plan, we don’t know who their lender is. Typically, floor plan lenders conduct audits to check inventory, but being a public company, perhaps Carvana isn’t audited as heavily. There are also ways to circumvent floor plan audits.

If a dealership has title issues once or twice over a couple of months, there could be other reasons. But if it’s chronic and happens in different states and regions, it points to something systemic within the company. After all, in Illinois, one of their executives was reportedly arrested or indicted under criminal law for title problems. If that happens, wouldn’t you make sure such issues don’t occur elsewhere, like in Michigan?

If these problems persist, it might indicate they’re beyond Carvana’s control. Could it be a floor plan out of trust issue? For those unfamiliar, this is common in the automotive industry. Every dealership has a floor plan line of credit. Even small used car lots often have $200,000 worth of inventory financed. For a company like Carvana, the inventory capital could be enormous.

Floor plan issues have shut down dealerships before, leaving millions of dollars unpaid to lenders. Sometimes, dealers must pay off older inventory to get new stock, creating a shell game. If Carvana is in such a scenario, this could be their Achilles’ heel.

It’s possible Carvana might recover, fix their problems, and hire great title staff. But given their stock price struggles and the used car market’s upheaval, it might be too late. It will be interesting to see how this unfolds.

Again, this is not fact—just speculation. No one knows what’s happening. I feel bad for them. If you’re a big company, you want to fix these problems. But if the issues keep happening, maybe they can’t. A big company would usually throw everything at such a problem to solve it. If that’s not working, what’s really going on behind the scenes? I wish I knew. I hope journalists dig into this, but even for a public company, many internal finances remain trade secrets.