Used Rental Cars: Perception Versus Reality

Thousands of rental cars are sold at auction each week. So during a recent trip to the Manheim auction in Riverside, Calif., I seized opportunity to get to the heart of a nagging issue in car rental: Are used rental units really in worse shape, on average, than those from other sources?

At Manheim Riverside, Dewey Short, recon manager, sees hundreds of condition reports weekly. Off-rental units have their fair share of cosmetic blemishes, Short says, though the ones coming through his lanes do not have a greater preponderance of mechanical issues than vehicles from other types of consignors.

Others concur. “I would expect to fix wheels, paint and bumpers,” says Ron St. Denis, recon manager at ABC Auto Auction in Lancaster, Penn., regarding rental units coming through his auction. “But a car being from a rental fleet is not detrimental. There isn’t a difference mechanically.”

Does this perception actually translate to lower values?

Tom Webb, chief economist at Manheim, was asked to testify in two separate cases regarding dealer non-disclosures. He went through Manheim’s database to look at prices of prior rentals versus non-prior rentals from 2007 to 2010.

Webb compared vehicles of the same year, make, model, body style and mileage band that had at least 200 sales of off-rental units versus 200 sales from all other commercial consignors. (Another report was run of rental units versus all other vehicles, including dealer-consigned units, though many of the dealer units did not have condition reports.) Some 47 models were analyzed in all.

“We did find some statistically significant differences, but the dollar amount was very small,” Webb says. “Sometimes it was in favor of the non-rental units, sometimes in favor of the rentals. In some years, the rental units actually did better, in years with more program cars. But in reality there was not much of a difference.”

Tom Kontos, ADESA’s chief economist, agrees. “I do have some insights on this issue, from years of looking at the data and from general knowledge gained over time,” he writes. “Basically, rental cars suffer from a perception problem and the only real factor hurting their values is that they are typically high-mileage for their age.” Of course, a high-mileage vehicle suffers a standard deduct, regardless of source.

So if values aren’t affected, how did this stigma arise in the first place?

St. Denis says it stems in part from the reconditioning philosophy of the major car rental companies. Traditionally, rental consignors’ “risk” units (those purchased outright) were run through the lanes with no reconditioning whatsoever. On the other hand, cars sent to auction as part of a manufacturer’s repurchase program would be reconditioned by the manufacturer as a courtesy to its dealers who buy the cars in closed sales.

“As a buyer, my expectation would be that if I bought late-model, low-mileage rental cars, I would have reconditioning work to do when I got it back to my dealership,” St. Denis says. “I would pack my expenses into what I was willing to bid.”

Short adds that the traditional perception of the rental unit as a stripped model with the roll-up windows did not help either.

But these days, the tide of perception may finally be turning.

The bare-bones rental unit is largely a thing of the past, as OEMs are equipping cars to be sold into rental with an eye toward resale. And greater transparency has helped, too, specifically with services such as Carfax, which can disclose history as a rental (though not a requirement) along with other reported problems. This peace of mind trumps the fear of the unknown as a rental, St. Denis says. A car that passes a certified, pre-owned (CPO) inspection gives a similar stamp of approval. CPO sales have been steadily increasing, and many of those units are from rental fleets.

Nonetheless, four states — California, Maryland, Wisconsin and Maine — require dealerships to disclose vehicles’ initial use in a rental fleet.

This has detrimental side effects: “Our used car managers do distinguish true commercial fleet cars from rentals because they don't have to be disclosed as rentals. The leased units often have nicer equipment, or at least are different than the rental cars, and are older so they are at a lower price point,” writes Jeff Barron, a commercial fleet lessor with Ellis Brooks Leasing in San Francisco. “But the biggest thing is that they don't have to be disclosed as a former rental.”

These misguided laws are based solely on a misguided perception, and until they are changed, the rental car stigma will linger.

Originally posted on Business Fleet