‘Unrealistically high’ reserves at auction

Fleet vendors are incurring additional costs by setting reserves at ‘CAP Clean’ for cars which fail to meet the correct condition criteria.

That is the conclusion of research by CAP comparing the typical condition of cars sent for disposal at auction with reserve prices set by fleet vendors.

Based on a clear set of vehicle condition criteria, CAP Clean is widely viewed as the key performance benchmark for disposal prices across the industry. But some fleet vendors expect to receive CAP Clean values for cars which clearly fall below the required condition standards.

Researchers from CAP examined cars at a randomly selected major auction site. The condition of every vehicle was assessed and compared with the condition criteria published in CAP Black Book, which defines Clean, Average and Below Average. Of the 300 vehicles on offer, 29 per cent were in CAP Clean condition while a further 25 per cent were just below Clean, but above Average, condition.

However, the average total reserves set for the sale were 98 per cent of CAP Clean - providing a clear indication that many reserves were set unrealistically high. Of the cars judged by CAP to be in ‘Average’ condition, 60 per cent failed to sell at all because they did not reach the reserves set by vendors. Further investigation revealed that the reserves set on these vehicles were three per cent higher than the CAP Average values for those models.

CAP’s belief that setting unrealistically high reserves risks incurring additional costs for vendors is illustrated by the fact that half of the cars that remained unsold had also failed to reach reserve in at least one previous sale.

CAP Valuation Relationship Manager, Craig Bridgman, who led the research, believes there are clear lessons for those disposing of end-of-contract vehicles in the open market.

He said: “Setting CAP Clean reserves on vehicles which fail to meet the condition criteria required is a policy likely to incur additional costs. In a market that rarely sees vehicle values rise, every failed sale extends the time exposed to ongoing depreciation. Nor should holding and transportation costs be forgotten for vehicles that fail to sell on several occasions. Where damage is minor, such as bumper scuffs and shallow paintwork scratches, an investment in smart repair services and valeting may pay for itself in terms of added value and reduced holding costs by ensuring a first-time sale.

“There are always buyers for cars at the right price. If they need extensive refurbishment to turn into an attractive retail proposition there are plenty of operators who will take them on. But common sense dictates that the price paid will reflect the costs of preparation. By expecting unrealistic prices all that is achieved in practice, for vendors, is additional costs for holding and transportation.”

Bridgman added: “There is always a possibility that the market is unsettled by large numbers of cars failing to reach reserve because on the surface it can be interpreted as a sign of market weakness. Our research suggests that the truth is often less dramatic. CAP therefore remains vigilant on the question of condition because the risk of not exercising robust checks and balances in this area runs the risk of allowing inappropriate reserve prices to drive the market down.”