Salvage titles exist because it is obviously profitable for someone to buy totaled cars and rebuild them. But this even existing would imply that in some cases, an insurance company paid out more than the actual cost to repair the vehicle, because otherwise it couldn’t possibly be profitable.
For example, let’s say a car has a value of $30k and gets totaled. The insurance pays the owner $30k and sells the wrecked car to a rebuilder for $1k, so they are out $29k. If the rebuilder then spends $15k repairing the car and sells it for $20k due to its reduced value, they will make a $4k profit.
Thus, why wouldn’t it be better for the insurance company to just spend the $15k themselves to repair the car, write the owner a check for $10k for diminished value, and pocket the $4k while also avoiding whatever overhead it takes to do the transaction to sell the wreck? In addition, one would imagine that insurance companies could achieve much better scale and/or vertical integration by moving this operation in-house vs. small rebuilders.
In: Economics
It is one thing to fix a car to ‘as new’ condition. It is another to fix it to ‘eh, fuck it. Good enough’ condition. Used parts, glued parts, there are a lot of shortcuts for a creative rebuilder to get a vehicle to the point of being an imperfect daily driver.
A lot of people who do this DIY the work, which saves a fortune in labor.
That’s the economics of it.
If you know how to do it, it’s well worth it, especially for something you might only use for racing or off-roading.
The insurance company isn’t in the business of rebuilding and selling cars, they’re in the business of collecting premiums and only occasionally paying out. They don’t want to take the risk on spending time and money on rebuilding it to sell it; it’s possible that the market crashes after they invest in the parts but before it’s fixed and able to be sold. Additionally, when selling a car, it’s always possible something is still wrong with, and even though used car sales in the US are as is, someone may still sue over that issue. Even if they win, it costs time and effort to fight. So basically, the insurance company sees a lot of risk for something that doesn’t align with their business model.
Now, why would they total a car that may still be fixable? The insurance company looks at other costs than just the cost of repair. If the repair will take 8 months due to supply chain issues (which absolutely are still happening), the insurance company may have to pay for a rental car for that time. That may end up costing a lot more than the repair cost, so it’s cheaper for the company to write a check for the value of the car and sell it as scrap.
Edited to add: I haven’t looked at a lot of salvaged cars, but I think you’re also vastly over estimating the amount a salvaged car will sell for. In fact, I’ve never seen one sold. All the salvage titles I’ve ever seen or talked about are from the original owner buying it off the insurance company (e.g., their 30k payout is reduced by the 1k the company would have sold it for) and then the owner rebuilds it because it has some sort of value outside of just being a car.
The economics just don’t work for the insurance company, primarily because they have plenty of money because every driver needs to pay them. The overhead of trying to manage the repair and resell process is just, frankly, not worth it.
Sometimes it is worth it, but for far more valuable things. A couple of pilots pulled off an amazing landing on a frozen lake in Alaska, at night, dead stick on a Pilatus PC-12. They were wise and landed it belly because they reasoned the damage is better than risking having those wheels go straight through the ice. The result was the wings were fractured. I kid you not, insurance paid for a helicopter to go out and pick up the hull and they repaired it. The average PC-12 sells new for about $4.8 million and there is at least a year wait for one. They probably spent in order of $600,000 to fix it, more if they had to replace the turbine. That is still worth it over scrapping it and giving the TIV to the customer. Now, bear in mind airplane insurance is super-expensive, it can be anywhere between $18,000 to $45,000 a year depending on the experience and qualifications of the operator. In the 30+ years they have been built they have sold 2,000 units. Ford would have to close factories if they only sold 2000 of anything over that time frame. That should demonstrate the scale of the difference between commodity insurance for cars and insurance for more expensive items.
Insurance companies are in the insurance business, not the auto repair business. If they repaired the car, they carry the liability of a quality repair, which, done right is fairly expensive. However, me and my friend have no such obligation and can repair to whatever standards that will pass inspection and not get caught. I can also use under the table labor sources.
I can pay a local shop to replace my alternator for $165/hour, plus 65% margin on the part. If the part is $300 from their “partnered supplier”, it’d be $750. Assume 2 hours labor. If I take it to that shop, it’ll be $1,080. If I just want my car to be good as used, I can probably get one from a salvage yard for $50, and install it myself. Total cost to me now: $50. Both repairs are functional and result in a used car with used parts. They don’t have the second option, though. Even if I myself bought the new part and put it in myself, I still save around $750. That’s about 1/4 the estimated repair cost through the shop.
Now scale that up. That can easily make something ‘not worth it’ to have a shop repair, while being plenty worth it for myself to repair. I might also not care, in the case of say a front end collision for instance, if the panel colors match, or the one panel is a little broken still, or the rim that got scratched gets fixed too, etc. Paint can be a HUGE portion of a collision repair, and insurance isn’t allowed to just tell you “tough shit, live with the cosmetic loss”. You however can make that call.
This simplifies things a bit because repair shops (which I have a lot of experience in) and collision shops (which I have comparatively little experience in) have different practices, standards, rules/regulations, and so on, especially with insurance involved. But you get the gist.
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Even if the vehicle is drivable, it’ll never be as safe, as reliable, won’t have warranty protection, etc. Some people are willing to take those risks on a vehicle but others are not.
Insurance sells the vehicles, but they get a LOT more than $1k for a totaled vehicle if it’s worth $30k. It can either be parted out for spare parts or it can be rebuilt. But they might get more like $15k than $1k.
Because if you take the car to an actual body shop it will cost more than the $30k the car is worth. They get estimates for how much it would cost to fix the damage to the car and if the cost to fix the car is more than the car they total it.
If the insurance company had the option to pay $15k instead of the $30k they would.
It’s usually only profitable if you ignore a lot of the ‘hidden’ costs (especially time) and only do it as a “side hustle”. A lot of guys doing that are restoring a handful of cars a *year*, and spending a lot of their free time scouring the net and local junk shops to find cheap parts. They’re storing the cars they’re working on (and likely some “parts cars”) on their property. And so on.
The net result is that if you wanted to make a real business out of doing that, buying a shop and lot instead of just storing crap in your backyard, and were paying someone for every hour they spent looking for parts, driving out to buy them, looking at the totalled cars in the first place to find ones worth trying to fix, etc., etc., suddenly you aren’t even paying yourself minimum wage.
The reality is the rebuilder buys the totalled car for $1k, spends $4k *in parts* fixing it, then sells it for more like $10k because a salvage title and the vehicle history of a wreck tanks the value a lot more… but if you divide that $5k profit by several hundred man-hours, and suddenly the effective wage is in the gutter, compared to that guy just doing ‘normal’ auto work with the same skills.
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