Standardised grading scheme aims to take inconsistencies out of valuations

The National Association of Motor Auctions (NAMA) will launch a standardised grading system for the condition of used cars in the first quarter of 2012.

It hopes that an industry-wide standard will help auction customers when buying cars, eliminating some of the inconsistencies in the way different auction houses grade vehicles, and prove particularly helpful to online buyers.

However, a number of leasing companies are concerned that it will give auction houses ammunition to go back to the seller and get the vehicle’s reserve lowered.

John Lewis, chief executive at the BVRLA, echoed those fears in a recent BVRLA newsletter when he said: “We are naturally concerned that the auction houses could undervalue vehicles by putting them in a lower condition category in order to avoid any challenges from buyers.”

Undervalued vehicles would force leasing companies to reassess their contract hire rates, potentially raising monthly fees to offset the anticipated lower re-sale values.

For outright purchase fleets and those taking all or sharing in the residual value risk, the NAMA grading system could improve consistency when selling vehicles through a variety of auction companies, but, equally, any undervaluing could cost them money.

Since raising his initial concerns, Lewis told Fleet News that the BVRLA had now been asked to help in the development of the new system.

“We are now in discussions with the NAMA group responsible for progressing this work and it wouldn’t be appropriate to comment on the project at this stage,” he added.

NAMA refuted suggestions that an industry standard will lead to an undervaluing of vehicles, adding “the new grading system will have the benefit of transparency and will help customers recognise the type of vehicles they wish to buy”.

Work started on the scheme around six months ago and Adrian Rushmore, managing editor of Glass’s, who has been working with NAMA on the grading system, explained the importance of establishing alignment between the prices achieved at auction and the corresponding values.

“This grading project is the first serious attempt ever to determine prices in relation to condition,” said Rushmore. “It will go a long way to remove the confusion around market prices.

“To this end it is worth noting that as much as 30% of a vehicle price could be attributable to condition alone. We will also be able to produce values that are more targeted.

“As the market gains more confidence around price and learns to make the necessary condition adjustments in arriving at realistic reserve prices, the whole process of selling and buying cars will be more efficient.”

NAMA states that, like many of the grading systems currently in use by its members, it anticipates working with a five-tier system, while the exact details are still under development.

It is speaking to auction companies, leasing companies, dealers and trade associations to ensure buy-in for the new voluntary system.

Tim Hudson, deputy chairman of NAMA and managing director of Aston Barclay, said: “We are very aware of the sensitivities of this topic and consequently are engaging in a number of conversations and welcome any concerns or views from any interested parties.”

CAP also welcomed the grading scheme, as it introduces changes to its own forecasting and valuation systems. It analyses more than one million pieces of transactional data, but has been over-reliant on auction information in the past. It now speaks to other remarketing companies to get more data on vehicles being sold by manufacturers, dealers and car supermarkets.

Working towards a common approach

Both BCA and Manheim have been heavily involved in the development of NAMA’s grading system.

BCA’s communications director Tony Gannon explained how it had introduced an appraisal and grading system some time ago, with other auction companies doing likewise but independently.

He said: “NAMA is working towards a common approach for the industry.”

BCA’s Auto Grade system automatically generates a vehicle condition grade based on the defects identified, as opposed to the appraiser deciding on the grade to be applied from one to five.

The purpose is to identify and describe any interior and exterior defects on a vehicle, not to record any mechanical defects. BCA said this gives buyers confidence and vendors a consistent appraisal of vehicles.

Manheim similarly employs a five grade system, from A-E, for a vehicle’s exterior and interior condition. It told Fleet News that the standardised grading system would offer an objective point scoring approach that gives the entire industry pre-defined standards to benchmark against.

Manheim also wanted to allay any industry fears. A spokesman said: “The new grading system will lead to a more balanced and accurate approach to the valuations of vehicles. This means that all vehicles are appraised and graded with exactly the same objective process regardless of which auction business or inspector has inspected the vehicle.”