The economics of salvage titles/rebuilt cars. If rebuilding a car made financial sense, why would the insurance company total it in the first place?

Question

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

Answer 1

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.