Put simply, diminished value is a state in which a vehicle suffers a loss in value as a result of an accident or damage, despite correct repair work having been completed. When compared to a similar model with a clean history, a vehicle with a bad history report is not worth as much.
How Did Diminished Value Become a Thing?
Before vehicle history reports existed, only individuals who actually had knowledge of and experience with cars were able to identify repair work that would reveal a vehicle had either been in an accident or sustained damage. As a result most consumers were blissfully unaware that the used car they were about to buy had been in an accident and, as long as repair work had been completed properly, dealers didn't need to adjust their prices because of a vehicle's accident history. That isn't the case any longer though. Carfax and Autocheck history reports are readily available to professionals and consumers alike. Understandably, consumers are using a bad history report to negotiate a better price when buying a used car and dealers are responding in kind to the detriment of customers that are trading in their vehicles, who are starting to learn about the impact of a bad history report and diminished value.
A Lesson Learned The Hard Way
Imagine the following scenario: A customer is at a dealership to buy a new car. They’ve picked out the exact vehicle that they want, have done their homework and actually have a realistic expectation of what their trade-in is worth. While appraising the vehicle they are trading in the salesman asks them about the accident recorded on the Carfax. “No big deal” the customer says, “I was sitting at a light and someone bumped into me. It was just a nudge really with light damage to the bumper and their insurance fixed it quickly.” The customer can see that the salesman’s concerns aren’t assuaged by their explanation though; a fact that is confirmed when the salesman tells them that their trade is worth less because of the accident, even though it has been properly repaired. At this point the customer is angry at the salesman, the idiot that hit them, their insurance company and possibly themselves for accepting the insurance settlement without giving any thought to diminished value.
Diminished Value as a Dealer
Car industry professionals have long since known how a bad history report negatively impacts the ACV (actual cash value) of a vehicle. They are the ones that have been on the front lines dealing with customers using a bad Carfax to beat them up on their prices for years now. It was inevitable that the market would regulate itself accordingly, driving down bad history vehicle values. As long as a car dealer pays attention to history reports and the resulting necessary market adjustment for a specific vehicle they are buying or selling, they can maintain the margins that they need. There is a little extra effort required when it comes to dealing with customers, which demands that a dealer be well informed of their market and the difference between a clean history and a bad one. Having good data on hand can make it easier to salvage a deal when customers are caught off guard and unhappy.
Consumers Fighting Back
Despite there being an average of 6 million reported accidents every year in the US, consumers have been the ones that were relatively slow on the uptake of diminished value and what that meant for their vehicles. Considering that most people don't really investigate the value of their vehicle unless they are planning to sell, it's hardly surprising that it has taken some time for diminished value to become common knowledge among consumers and owners as a whole. Now that they are aware of the loss they will incur when involved in an accident, those not at fault are fighting back as best they can and pursuing insurance companies for diminished value compensation.
Diminished Value And The Law
Legally, it's still a bit of a gray area in a lot of states meaning that diminished value claims can be difficult, if not impossible. In some states, like Ohio, legal precedent allowing diminished value claims does now exist, meaning owners can take legal action. Independent vehicle appraisers suddenly have a new revenue stream as their services are now in demand as expert witnesses in court on behalf of both consumers and insurance companies.
Now that everyone else is catching up to what the car dealers have known for some time and legal precedent is being set, the industry needs to standardize history specific values. Carfax have been providing history specific values for some time now but in the absence of other data sources those values can seem questionable at times. Black Book® has also recently started offering history adjusted values which certainly helps when looking for more references. It likely won't take too much longer until all the major guide books provide their own history adjusted values so that those in the business will be able to appraise accurately using multiple sources of data.