Have you ever been involved in an expert appraisal of vehicles that are being returned? If so, you’ve probably seen German meticulousness in action: An elaborate lighting set-up and pairs of mirrors are used to determine whether there are any dings in the body that cannot be seen with the naked eye. Then, depending on the catalog of damages, the current condition is assessed to determine whether a value reduction is called for. In some cases, not only two but numerous measurements are taken because different service providers and associations use different catalogs of criteria. For example, the Association of Brand-Independent Mobility and Fleet Management Companies (VMF) has published “The VMF Fair Vehicle Valuation”; TÜV NORD offers a certified international standard, but as a service provider for paying manufacturers, it also tests according to other criteria. 

A Question of Definition 

The only thing that is undisputed is this: Our fleet vehicles are commodities that do not need to be in like-new condition when they are returned. This sounds reasonable, but in practice it is often frustrating—and pricey. If you are saddled with the value-reduction bill at the end of the return, you might be wondering, “Am I actually allowed to use the vehicle or am I expected to dutifully make my lease payments and then return the car as good as new?” But seriously, the controversial question of what constitutes normal wear and tear has been occupying our industry for years, as the industry publication Autoflotte [Auto Fleet] describes in its recent article on the subject, which is well worth reading. 

So let’s just ask the question: What is normal wear and tear? What do the experts say? Most experts agree on “scratches in the paint on door handles and doors” as well as “car wash scratches” and “small scratches on the surface.” “Paint damage that requires repainting” and “severe scratches on alloy wheels,” on the other hand, are usually at least questioned. And you can argue about everything in between. 

Are These Petty Skirmishes Worth It?

What appears to be a minor clash can have financial consequences. The agent whose prerogative it is to set value reductions can make significant additional demands regarding the overall value. This frivolous battle becomes correspondingly bitter: In the catalogs of criteria, not a single millimeter of sheet metal is voluntarily relinquished. There are lists of accepted minimum tread depths, various sizes of dents and dings measured in millimeters, scratches and deformations on bumpers, and even dirty interiors. In cases of doubt, the customer, who typically has neither experience as a claims expert nor time for disputes, must nevertheless contend with expensive expert opinions, counter-evaluations, and professionals.  Isn’t there some alternative? 

We think there is. In fact, we think that this dispute could be completely unnecessary. Imagine that you lay out in the sun without sunscreen—but buy an expensive tube of Fenistil and cooling pads beforehand because you expect to see your sunburned face in the bathroom mirror in the evening. Why not apply sunscreen protection from the start and sit in the shade every now and then? This analogy can also be applied to the return process at the end of a lease. Why not apply the sunscreen from the start—in this case, take advantage of a leasing model in which, for example, no reduced values are found in the end, no claim settlement is due, and you don’t get burned in the process? There are a few ways to handle vehicle returns. At Holman, we’ve been using one in particular for years. 

It requires attention and fairness. First, you need to understand what’s actually behind the concept of value reductions. When the lessee returns a vehicle, thereby transferring the risk of resale to the lessor, value reductions symbolize the degree of risk. It’s really quite easy and inexpensive. 

But year after year, lessors are charging more and more for this risk. Value reductions are the vehicle for price increases. Why? The value reductions are subjective and are undergirded by expert opinions—and lessors can therefore make a good argument for them. Granted, repairs and material costs have risen significantly in the last decade. These increases, however, are disproportionate to the sometimes massive increases in value-reduction settlements at the end of a lease. 

They very often exceed the vehicles’ actual loss in value and do not necessarily reflect a realistic resolution of supply and demand. We should ask ourselves whether this approach is the best solution with respect to the almost inflationary depreciation and claim settlements described here. 

What Are the Alternatives?

The really interesting question is how much depreciation the vehicle actually incurs on the used car market. What price are buyers willing to pay for the car despite its condition? And how do buyers price the damage into the purchase price? Buyers are not interested in scientific value reductions or curves that can only be detected by using two mirrors. They recognize the true value of the car on their own and pay it. We call this the market price. In our experience as fleet managers of more than 100,000 vehicles under our supervision in Germany, this market price depends far less on a value-reduction appraisal than is credibly asserted to customers in the market. 

As a fleet operator, what alternatives do you have to avoid your dependence on such value-reduction appraisals and claim payments? 

• Option 1: You can go back to the concept of a fleet of purchased vehicles. The vehicles are owned by the company, which sells its vehicles itself or through a professional service provider. When selling, the best possible realistic price is targeted—any value reductions are already incorporated into the sales price. 

• Option 2: You switch to an open-end leasing model—for example, our Holman FlexLease. You remember—like the scenario of using sunscreen right before sunbathing. Here, as well, the lessee has a marketing opportunity, similar to the purchase scenario. The lessor does not carry out value-reduction appraisals, which, in case of doubt, result in subjective claim settlements and their associated penalties. The lessor sells the car for the customer. The lessee receives the full proceeds after the sale. This means the market decides how much the vehicle is worth. The buyer pays, and the full proceeds go to the customer. 

Either of these options might be a good choice for the customer if they are laid out transparently for the customer to choose from. 

Finally, once again, to be perfectly clear: Of course, anyone in a free economy can demand whatever premiums they like. However, we argue that customers should never simply pay for subjectively evaluated, theoretical value reductions, but that they learn at the time of sale the extent to which any damage actually reduces the value. In the US, this form of cooperation and leasing has been used successfully for decades. At Holman in Germany, we have been offering this solution to our customers since 2018. With us, lessees and lessors do not spar over claim settlements or value reductions. On the contrary, we work in partnership to find a holistic, functional solution for each fleet. Never off-the-shelf, always tailor-made for your requirements. 

We will be happy to advise you on an open leasing model.