With a classic car, make sure you can insure it first
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Every ten years or so, I’m asked to appraise a vehicle that I can’t. This week I had two. One car and one motorcycle. It’s not that I don’t have an idea of how much they’re worth, because I do. And even if I don’t, I can always ask someone who does. The problem is that I can’t prove it.
The proof that I need are called “comps,” short for comparables, as in comparable vehicles. They don’t have to be exact, but they do have to be similar in the attributes that form the basis for the intrinsic value of the vehicle. For example, if I’m appraising a blue 1969 Mustang Mach I with a 428 Cobra Jet engine and a 4-speed transmission, I can’t use a blue 1969 Mustang Fastback with a 302 engine and an automatic transmission as a “comp.” But I can use a red 1970 Mach I with a 428 Cobra Jet engine and a 4-speed transmission because the intrinsic value lies in that fact that it is a Mach I with the same drive-train.
No matter how well we know the value of a vehicle, the research and the methodology that go into substantiating the value is the difference between providing an appraisal and providing an opinion. The I.R.S., insurance companies, and courts all want appraisals, not opinions. Most appraisers use a formula consisting of publicly recorded sales, published figures, and their own knowledge of the market to arrive at a value. The percentage of each is their own secret recipe, but rest assured that their own knowledge of the market makes up a very small percentage of that formula because it is the most difficult to substantiate.
So what happens when a customer needs an appraisal on a vehicle for which there is not one single record of a publicly recorded sale, and not one single published figure? Simple. I can’t do the appraisal. At least not in the ordinary manner. And this can lead to a problem, because it is often the case that the insurance company will not insure it without an appraisal. And that’s exactly what happened with those two vehicles this week.
It’s important to understand that this applies predominantly to vehicles that will have an “agreed value” policy with an insurance company that specializes in collector vehicles. With an “actual cash value” policy, which is the conventional type of policy most of us have on our daily drivers, an appraisal is of little value. That’s because the insurance company, not you, determines the value of the vehicle at the time of the loss. In the event of a loss, what you paid for the car, or what it was worth when you bought it, or how much you have invested in it, will often have very little bearing on what you’ll get paid.
Let’s get back to the two original vehicles that I started writing about. What’s an owner to do? The first thing to do is to assign a value, and then try to build a plausible case that the insurance underwriter will understand and agree to. Which takes us right back to our “comps.” The only difference is that we will need to expand the definition of what is an acceptable “comp.” Whereas I normally try to find “comps” that are located in the United States and are no more than a year old, I might have to perform a worldwide search and go back ten or twenty years. From there I have to account for factors such as inflation, appreciation or depreciation of similar vehicles, geographical location, and even the season. Fortunately I have data-bases that track most of these sales. All of these numbers are crunched until I arrive at a value that I can plausibly defend should it be challenged.
The insurance companies that specialize in collector vehicles are generally very fair and reasonable. You can be sure that this is not the first time that they’ve been asked to insure a unique car. If you have a reasonable methodology for assigning a value, they will accept it in most cases. However, if you grossly overpay for a vehicle, or spend three times its value on a restoration, you most likely will not be able to have the insurance cover your investment.
If you are buying a particularly rare car, one that will be difficult to appraise, you might want to check with your insurance company to make sure that you’ll be able to protect your investment should the unforeseen happen. The time to check is not after you’ve purchased the car.