The Reality of Diminished Value:
How Auto Manufacturers' "Pre-Owned" Certification Contributes to Diminished Value
By E. L. Eversman, Esq.
In commentary to "Star", the fourth in a series of short films in the first season of The Hire, by BMW Films, director Guy Ritchie discusses how marriage to Madonna has changed his understanding of the way in which fans damage any car she rides in. By jumping on the hood of the car, their belt buckles, jewelry, clothing rivets, and zippers scratch the vehicle so severely that the hood (naturally, he referred to the bonnet) has to be repainted. When I heard those words, I cringed, because at the moment he says this, the underlay shows us Madonna riding in a silver 2001 BMW M5 Sedan, which is about to be mobbed by eager fans. In 2001, the base manufacturer's suggested retail price for the M5 was $69,400, and the thought of what repainting part of that car would do to its value was more than I wanted to think about. As a vehicle broker I know bluntly puts it, "Paintwork is the kiss of death on a BMW", or a Mercedes, Jaguar, Audi, or any other high-line vehicle, for that matter.
Certification
While paintwork on a BMW has a negative effect on its value, some paintwork usually will not preclude the car from being BMW certified as a "certified pre-owned, BMW", which the manufacturer will resell with its own warranty. The operative word in that description, however, is "some". If one part, a door or a fender, has been repainted, that repair is likely to be acceptable for BMW certification - provided that it has been properly repainted and exhibits an excellent color match. When many parts have been repainted, or if underlying structural damage was caused, even if properly repaired, the vehicle will not meet pre-owned certification standards. Unfortunately, that means that if you have recently had an accident, and the collision caused any type of unibody or frame damage, your vehicle will not be eligible for certification, and that results in decreased value. The inspection checklist for BMW's certification program is onerous, to say the least, but it ensures that the high standards historically exhibited by BMW products, and expected by purchasers, will continue to be met. The checklist and requirements are available for review at BMW's website under the Certification Program heading. (Manufacturers often refer to their certification programs with the acronym CPO, and sometimes you have to hunt through their websites to find them.)
Certification - Not Just About Reputation
In addition to maintaining a reputation associated with producing a quality product, manufacturers have other practical considerations for being selective in their certification processes: Liability and cost. When vehicles are placed into the stream of commerce, they must meet federal safety guidelines, and manufacturers are responsible under state products liability laws for design and manufacturing defects. If the manufacturer sells an automobile as "certified pre-owned" which has previously suffered structural damage from a collision, and someone is harmed as a result of failure associated with metal fatigue, the manufacturer will likely be liable for the injuries suffered. While you might think that this was exactly the situation before certification and resale, it is not. When the vehicle was damaged by the accident and then repaired, and someone is injured by a subsequent failure due to metal fatigue, the manufacturer can assert that this is not the vehicle it placed into the stream of commerce, and that the injuries resulted from a material alteration to its product, not from a design or manufacturing defect. Once it inspects, certifies, and resells, the manufacturer loses its defense based on material change because the manufacturer has again placed the vehicle into the stream of commerce with its endorsement after the vehicle was altered by the collision repair.
Manufacturers are also cost sensitive. If they resell vehicles with new (or renewed) manufacturers' warranties, they will bear the associated costs involved in honoring those warranties. In other words, servicing vehicles under warranty costs manufacturers money. Therefore, they have an economic incentive to sell those products that have functioned with the fewest problems and have a documented history.
While manufacturers of high-line vehicles offer pre-owned certification programs for their vehicles (e.g., Lexus, Jaguar, Mercedes-Benz), so do many other auto makers like
Acura,
Chrysler,
Ford,
General Motors,
Honda,
Toyota, and
Volkswagen
to name a few. Damage to these vehicles also impacts their ability to be certified and contributes to the diminished value as a result.
Diminished Value Examples
Consider some examples of diminished value, provided courtesy of Vehicle Information Services, Inc.:
- A 2002 Chevy Camaro Z28 SS suffering structural damage resulted in a reduction of the value of the vehicle by $8,500.
- A 2000 Acura 2.5RL with structural damage was decreased by $6,000.
- A 1999 Ford Explorer XLT with rollover damage suffered a $2,000 loss.
- A 2003 Ford Expedition sold with disclosure that the manufacturer had voided the warranty negatively affected the value by $9,000.
- A 1998 Dodge Durango SLT with structural damage decreased in value by $2,000.
- A 1995 Honda Prelude suffered $1,800 in decreased value from a collision.
- A 2002 Mercedes-Benz SLK 230 suffered $8,000 as a result of structural damage and a 1999 model year of the same vehicle suffered $4,000.
- A 2002 BMW 530I with structural damage and a major damage history disclosure reduced the value of the automobile by $10,000.
- A 1999 Jaguar XJ8 with structural damage and a major damage history resulted in a reduction in value of $20,000.
Of course, whether a vehicle suffers diminished value and how much depends on many variables, some of which include the age of the vehicle, manufacturer, mileage, date of loss, nature of the damage, and prior damage history - so keep in mind that the specific examples described are not necessarily applicable to your vehicle. Also important with particular vehicles are the products and methods used in the repair. High-line vehicles and luxury imports, for example, often use specialty paints during the manufacturing process, and a paint repair using some other paint product is unlikely to match.
The End Result
The net impact these certification programs have is that they provide a great deal of security to buyer and assure them that they are purchasing a reliable, manufacturer-backed, used vehicle. However, these programs also highlight the differences in "certifiable" vehicles and ones that cannot meet the certification standards - and that very often translates into diminished value and dollar loss. Therefore, it's rather comforting to know that even stars like Mrs. Ritchie may have trouble getting her car certified.
E. L. Eversman
The information provided in this column is for information purposes only and should not be construed as legal advice. You should always consult an attorney licensed to practice in your Country, State, and/or Territory as laws vary from Country to Country, State to State, and Territory to Territory. The author is delighted to share information but cannot be responsible for damage or adversity encountered by reliance upon that information and urges you to consult with local counsel.
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