What was your first reaction when you saw “salvage title” in the headline? Cringe and shudder? Outrage, that anybody could seriously suggest something so risky on a respectable site like this? In mixed company, no less? Step away from the ledge, slowly, exhale, and then hear me out.
I used to feel the same way … until my friend Peter showed me his “new” 4Runner. Peter is a super-frugalista, and he saw the surprise in my eyes. He laughed, “Hey, it's a salvage title — I got it real cheap.”
He bought his son one of those, seven years back, and that car has run problem-free all that time. So he thought, “Why not get one for myself?”
Why not, indeed?
What is a salvage title?
It begins with what people sometimes refer to as a car being “totaled” or “written off.” “Total” is simply shorthand for “total loss,” meaning the amount an insurance company pays out for the car's full insured value. Most often, it's a collision that causes a car to be totaled; but they can also be totaled after a fire, flood, hail, or even theft. (If a car is stolen and not recovered for three to four weeks, depending on the jurisdiction, the insurance companies have to pay the insured, which, of course, turns the theft into a total loss.)
Insurance companies typically total a car damaged by accident, fire, hail or flood when that damage is greater than its value. They naturally want to pay the smallest amount possible and, if that's the value of the car, then that's what they pay. When they do that, they effectively buy the car and its title passes to them. If they subsequently sell it, they are required to sell it with what's called a salvage title.
Why even consider a salvage title?
A car only gets a salvage title when something bad happened to it. Buying a used car is such a crapshoot to begin with, why compound that by even thinking about buying one with a salvage title?
One word, the word we associate most with Get Rich Slowly — “money.”
A fully repaired car with a salvage title typically sells for 30 to 40 percent less than one with a clean title. If you were eyeing that $15,000 used minivan, a comparable (i.e., fully repaired) one with a salvage title would typically go for $9,000. That's a savings of $6,000.
That's a pretty compelling number if you're interested to save money.
I don't know if you heard, but someone just paid more than $30 million for a used Ferrari at the Pebble Beach auctions last week. The car was in a major wreck, but it was restored. The point is: a wreck doesn't necessarily mean the utter demise of a car. Any car can be repaired or restored to mint condition. The trick, of course, is not to overspend — and to know it was done right.
Does a salvage title make sense for you?
The first thing you need to do is find out if your state allows vehicles with a salvage title on the road. Colorado, where I live, does. (That's how I found out about it.) So, if your state allows it, you could potentially save a lot of money on your next car if you are one of the following kinds of people:
1. You drive your cars for many years. A salvage title stays with the car for the rest of its life. If you bought it for 60 percent of its normal value, you will only be able to get 60 percent of its normal value when you sell it. The longer you drive the car, the smaller the penalty at the time of selling. The net result is that you save a lot when you keep it for a long time. However, if you sell your car every two or three years, your savings at the time of buying will be negated at the time of selling, when you'll have a harder time trying to sell it and you'll have to take less. (In most states, sellers have to disclose a salvage title at the time of sale.)
Also keep in mind that most dealers will not take a car with a salvage title as a trade-in.
2. You usually buy older cars to begin with. The cost to repair a new car is not much different than repairing an older car. That means it will take pretty extensive damage to a fairly new car to get it totaled, because it's still quite valuable. On the other hand, an older car is worth much less, even if it's in good condition, and it doesn't take much in the way of damage to get the insurance company to total it. In fact, a fender bender will often do it.
What that means is you can save 30 to 40 percent on an older car with a salvage title that has suffered only minor damage. (It's a good general rule to stay away from salvage-title cars less than three or four years old.)
3. You're not afraid to do some repair work yourself. If you know your way around a junk yard and you're not averse to scraping your knuckles a bit, you can save even more than the 30 to 40 percent by buying a salvage-title car that hasn't been fully repaired yet. If you can figure the cost of the repairs still needed, you deduct that from the 60 to 70 percent before you make your offer. Then you add some weekend and evening sweat equity to add that value back to the car — and you know the quality of the work that's been done.
Buying a car with a salvage title is obviously not appropriate for everyone, and this post doesn't try to make that point. All I hope to do is spotlight an option you may not have considered before but which might work for you.
Tips for buying a salvage-title car
As the saying goes, there's no free lunch. In order to capture the gain of having a serviceable car at a 30 to 40 percent discount, you have to put in some time you wouldn't ordinarily spend. Remember your first reaction above when you first heard the term “salvage title”? Everyone you deal with will have the same reaction. And because they're not getting a big discount on their purchase, they don't have any incentive to stray outside the box to accommodate you. That means more work for you.
1. Negotiate. Sellers will try to slide by with a discount of, like, 15 to 20 percent on the normal price, hoping buyers won't know the appropriate discount from normal. Salvage-title vehicles is a buyer's market; be sure to pursue the maximum advantage.
2. Financing: You should be able to get financing for a car with a salvage title, but it won't be nearly as easy as for one with a regular title. The bank's problem is the resale value of the car, which is much less than that of a comparable car with no title problems. If you are paying a lot less for the car to begin with, this isn't that much of a problem. Expect to do more shopping, though. Personally, I think cash is the best way to buy a salvage-titled car, especially because of the next point.
3. Insurance: Insurance companies, for the most part, won't offer the comprehensive insurance lenders require. They will offer collision and liability coverage; but, again, expect some push-back and more time shopping around for insurance. If you buy an older car for cheap, your insurance requirements aren't that much, and you can get what you need. Most insurance companies will insure salvage titles cars just fine. Just be mindful that for them there's not much difference in repair costs; so don't expect any price break, even though your car was a lot cheaper than a comparable “regular” car.
4. History: Before you even make an offer on a car with a salvage title, you would be well advised to spend the time necessary to track the entire history of the car's title. In particular, it's important to find out (not from the person trying to sell you the car) what happened: what type of crash and the extent of the damage. CARFAX is a good starting point, but expect to do more digging.
Also included in the history research is the seller. Some businesses who sell salvage-title cars are reputable; others are not. Be sure to check with the Better Business Bureau to see if this seller has had issues.
5. Inspection: It is good practice to have a professional inspect any used car you're interested in buying. Although it may cost a hundred or two, I look at that as insurance: It's much better to find out about any defects before you plonk down your money. If it's a good idea for all used cars, it's essential for a salvage titled car. In particular, you need to have someone check out the wheel alignment. In the old days, they used to talk about frame damage, but most of today's cars don't have frames any more — the entire body acts as the frame. If the axles get twisted out of alignment, the car is a pain to drive and it will double your tire wear. A body shop inspection will quickly reveal if that's a problem or not.
6. Pre-registration: Some states require a police inspection and a certificate from the police before they will register a car with a salvage title. This is aimed at making it difficult for stolen cars to get back into circulation. You will need to do your homework on this issue before making your purchase as well.
Good wisdom says even if you buy a clean-titled, used car you should do most of these things (e.g., have someone check out the car and research the title history) so the additional legwork might not be that much for you.
My wife and I tend to buy used cars and then keep them till they're seriously long in the tooth, and then we give them away. Given the success my friend had with his salvage-title car, I'm seriously going to consider going that route next time we buy. The key, I believe, is to be very careful and to be prepared to kiss many frogs before finding the salvage-title prince.
Like many things in life, there's a reward for risk and/or hard work. If you're prepared to consider buying your next car with a salvage title, you may be able to pocket a significant savings. It's not for everyone, obviously, but it's nice to know an option like this exists.
Author: William Cowie
William Cowie spent 30 years in senior management (CFO/CEO) before retiring. He has a bachelor's, a master's, and a partial doctorate in management and strategy. Author of the book “The Four Seasons of the Economy,” William also assists medium-sized businesses in the use of the Four Season Strategy to help them capitalize on economic cycles. He runs two blogs: Bite the Bullet Investing (investing) and Drop Dead Money (the economy) and writes for several other blogs in addition.