The value of previously damaged vehicles continues to entertain debate in the auto industry with the advent of COPART taking over almost the entire total loss vehicle inventory from the insurance industry. More and more individuals and re-builders are purchasing cars from online auctions from across the country. The value of these cars is not nearly as subjective as some casual observers might think or as the insurance companies are attempting to assert. There is actually a correlation between reclaimed homes (flips) and rebuilt autos (reconstructed or salvage titled).
The newer the car the greater disparity between the going retail price as marketed by dealers vs. the R title vehicles usually sold by individuals. Understanding why is critical, rather than using guesswork.
First and foremost is the gross inconsistency of the insurance companies - deeming vehicles as totaled losses, when it is apparent that the damage is only an actual fraction of the retail cost. But, why would they do it, being as it seems inconsistent with their profit motive? Why total a vehicle that is clearly repairable? Here are some answers:
1. First issue is of course the hidden damage concern - especially on high-end vehicles or water-damaged cars. That, in the insurance mind, could bleed them out. While, in almost any collision damage or water damage, there are usually adjustments to the damage estimates. Over the years these percentages of dollar amounts over the actual estimate continue to shrink for two reasons:
- The build technology for more and more vehicles demands more dismantling labor because the systems of body frame chassis, interior, glass, and drive trains are often interlocked. Thus, when an additional item of damage is found, often there is a very small labor upgrade, as most of the labor was already required;
- Secondly, because so many of the components are sold as systems that include certain parts that were not specifically damaged though included in that system, and thus are already accounted for cost-wise.
There does seem to be some rethinking amongst the adjusters and insurance companies on these issues, realizing that while certain cars with potential hidden damage may be a "bleeder", the vast majority won't be. The other problem is the customer of the new car. They paid for and want a new car so those customers can be problematic. Every auction has insurance buybacks where the customer simply couldn't be satisfied with the end result of a car that was repaired.
2. Seasonal casualty is another issue. There are certain conditions or phenomena that arise where a certain area is hit with heavy losses. Some will start totaling cars to clear cases for fear of backlog at local shops, which will also often take advantage of this phenom of supply and demand by driving up their labor costs. This can then create other collateral costs.
3. We have also seen fleet cars or manufacturer owned cars that are written-off as total losses because they are part of a profit-driven venture, or the manufacturer does not want to be connected to previously damaged vehicles.
4. Last, but not least, some insurance policies are guaranteeing replacement of vehicle as part of their policy benefits. These are some of the reasons that vehicles, which should never be considered total losses, are ending up as rebuilds at bargain prices before repair. How these vehicles resell at a certain price is not a mystery for those who actually handle them. Newer upscale cars (BMW, Cadillac, Lexus, etc.) bearing R titles can often be purchased for 20% less than going retail rates for similar non-repaired cars.
Why the discount because of prior damage which has been properly repaired? The answer may surprise you. It seems that the warranty issue is a bigger deal than ever. Most manufacturers will void their warranties on a rebuild. Why not? It lessens their potential liability. But to the many who are buying a one or two-year old car and still spending $25,000 plus, they want the warranty and saving 20% does not satisfy them. Others will rather save the money and move up in terms of car standard. Of course, dealers have no idea on how this works because they do not sell rebuilds. The vast majority of rebuilds still change hands via local owners or body shops, not new or used car dealers. So asking them to supply information, resale numbers, estimates or appraisals is guesswork on their part. As the cars in question get older and acquire their own particular track record, their value continues to equalize and be very close to the going market rate. This has surprised many in the auto industry, but unless they have first-hand knowledge of not just what these rebuilds are selling for, but maybe more importantly, how they are being sold, they will never understand it.
So, the rebuild that has been driven 10 or 15 thousand miles since its repair, over a year or two period, will actually continue to equalize in value in the market. In most cases it is sold by an individual and not a dealer. Everyone knows that individuals selling cars are more likely to sell that car to a friend or acquaintance who knows the seller, but in this case they also know that the vehicle was previously repaired. They also have the benefit of knowing firsthand its record of service - something the dealer, despite their best intentions, can't generally claim. They, unlike the dealer, are not buying for resale, but for use. If it's the car they want, that has served someone they know well, they are often very comfortable paying the market value rather than buying from a dealer, hoping the car is what the dealer represents it to be.
A classic illustration of this would be Tom C. Tom has a 9-year old Ford Ranger. He purchased the truck seven years ago from a buddy he works with. That person bought it from a friend, who "rebuilt the truck". When Tom's friend wanted to resell it to get a bigger truck several guys were interested. Tom bought the truck just at book rate and felt good about it. He knew the vehicle; he knew the seller. Seven years later he decided to sell the same truck. Once again, several buddies were interested and had no hesitation, because Tom had owned this truck for seven years. He actually sold it for more than the local dealers were getting. Why? They wanted the vehicle. So, as the vehicle in question accumulates its total record of mileage and time, its value for the purpose of use, not for the purpose of dealer resale, continues to normalize.
This understanding has now generated a subculture In the auto repair/resale world with local body shops buying and reselling salvaged rebuilds and water damaged cars as a cottage industry. While these body shops cannot demonstrate the service record like Tom and many others could, they are building their reputation on the cars that have gone before them and the local buyer almost always knows someone who has had a good experience. That's what makes things sell! While these body shops can't match the equity of the guy you work with, in most cases, their sales figure is very competitive with local dealers.
As I mentioned in the beginning of the article, this pattern is also true in the housing market. House flips or reconstruction are usually initially viewed with some suspicion. Were the repairs made correctly, etc? Some mortgage companies will not mortgage a flip until it's been lived in at least a year. However, like the auto rebuilds, the flips normalize in price as they develop their own history proving the job was well done.
Look for this trend to continue and grow, especially since COPART has just announced that they will now allow individuals, not just salvage yards, body shops and dealers, to bid at online auctions. This will, of course, drive up the price of totaled cars and put more R title vehicles on the road, which will systematically affect the stigma that, in many cases, has been wrongly associated with a well-repaired car.
