Motorist one, let's call him Jim, just bought a used car from his neighborhood auto dealer. Meanwhile, motorist two, let's call her Jane, just lost her new car to repossession. Jim celebrated a good deal as his dealer bought the car at auction and passed on the savings to Jim. Jane couldn't afford the payments on the new car she bought a year ago, and she cried when the repo firm took it away. Jim, for the purposes of our story, is the proud new owner of Jane's repossessed car, but how did the car make it from one owner to another? We take a look at the sometimes painful and often complicated process by which a car becomes repossessed and the steps by which it makes its way back into the sales chain.

The Owner and the Lender

Jane, our fictional motorist, bought a new sports compact from her friendly local franchise with no money down and signed a five-year finance deal. Six months later, Jane lost her job as a Realtor's executive assistant amid the economic downturn. A few months later, she defaulted on her monthly payment. After several notices demanding the outstanding funds, her loan company informed her it had initiated legal proceedings to take possession of her car.

After unsuccessful negotiations with her loan company, Jane could do little else other than wait for the repo company's dreaded knock on her door, although she saved herself some costs by voluntarily allowing the car to be repossessed. But the bank or lien holder has to fulfill several legal requirements before it can repossess a car. Any lender seeking repossession must prove they have a lien on the vehicle and that the terms of the lending agreement -- often the lender's credit application -- have been upheld. Then they ask the courts to grant a levy on the vehicle. They must give the car's owner a certain number of days' notice -- which varies from state to state -- to comply with the court's order. Only when these requirements are fulfilled can a lien holder move to sell the car. A bank must also notify the borrower when and where their vehicle will be put up for sale (sometimes with a mandatory wait or notice period), to give the original buyer a chance to buy back the vehicle while paying off any fees associated with the repossession, and the lending institution will also check the car's "book-out" sheet, which allows the lender to check that all the options loaded in the car match the loan they granted for the car, and help the institution gain an idea of the car's market worth.

The Repo Agent

A repo professional at an Orange County, Calif., firm, who requested anonymity, said the economy is the main reason for a recent surge in repossessions. And it's not just the average driver losing their car -- the firm just had its "best month this year."

"Now, it's more luxury cars, a Ferrari popped up a couple weeks ago in Orange County. He had two other high end cars and he said he was in a serious pickle and he'd probably lose them too. He had a wife, three kids, upside down mortgages -- it was bad. And it's sad. Sometimes I wish business wasn't so good."

The agent said they had a long period earlier this year where they were routinely working on the case file of someone formerly employed in the mortgage industry. She said many repossessions involving mortgage lending industry workers are drying up, indicating most of these losses have worked their way through the system.

The agent said her collection agents have to abide by certain laws when repossessing a car and the lien holder has to give an order to the repo agent to possess the car. The repossession is only finalized when the collection agent is sitting in the car or the vehicle is secured in a tow truck off the owner's property. A car is repossessed largely without much trouble -- in some states, the operation must be performed peacefully by law -- though the agent has seen some upset owners in her time. Some states allow a repo worker to enter a property without the owner's permission, while some owners choose to relocate their vehicles in a bid to avoid a repo (which is also legal in some states). Usually, the repo agent, who is paid from $150-$300 per job, will be tasked with finding the owner and their car.

The Auctioneer

After Jane's car was repossessed; chances are it was taken to the repo firm's lot until it was taken to auction. Some of these auctions are public but most are private events that bring together key elements of the repossession trade: the creditors, dealerships or leasing companies that have repossessed the cars and the mom-and-pop car outlets or general retail dealerships that buy them to sell. Auction rules require at least three independent bids on any repossessed vehicle. It is up to the company that repossessed the car to decide if they want to sell the car at the price offered.

Lou Beschoff, the general manager at Prime Auto Auction in Southern California, says most of the cars often sell for under the book price. That's partially because a creditor knows that the car's previous owner is typically responsible for the difference between what they originally paid for the car and the price the creditor gets at auction.

Any reconditioning of the vehicle is "entirely up to the person who repo'd the car," Beschoff said.

"It's a financial thing: how much of a hole are you in being the lessor? [The cars] always get a wash, vacuum and cleanup. But tires, brakes it's all up to them. Some are sold as is, depending on age conditions and value. Some auction houses offer new wheels or bumper painting, but the basics are usually provided and the car is sold."

Beschoff said that though auto sales in general are falling, his company has seen an increase in the percentage of repossessed cars sold this year. Major auction houses like Manheim report a surge in repossessions this year according to Foss National Leasing, where Manheim chief economist Tom Webb blamed the current economic credit squeeze for repo's "peaking" in 2008. He predicts repo numbers will fall in 2009.

The Dealer

Steve Skarry, an independent used car dealer at Island Auto Sales in Alameda, Calif., said he has "definitely" seen more repossessions in the past year at the auctions he frequently attends.

Prices for repossessed cars are not higher or lower in any noticeable way, he says, and the crowd of 300, and sometimes more, used-car dealers always sets the market value on a vehicle, which is largely based on its condition and not its history. "It's like the dealers came together and said they would pay that and not more. Then one guy pays a little more and gets it. It's just like an art auction," Skarry said.

Though the lien holder may accept a lower price to shift the responsibility for the vehicle to someone else and recoup some of its money, Skarry said repossessed vehicles, which often will be marked with a sticker, can hang around the auction circuit for weeks before the creditor accepts an offer. Occasionally, Skarry said, the institution finally will accept an offer it had previously turned down. He said he's purchased several vehicles that way.

There is little difference in filing the vehicle's paperwork -- it's a matter of one DMV form that essentially allows the sale process to bypass the previous owner, Skarry said.

While there's no great advantage either way in buying a repossesed car, "usually the repossessed car is not as good quality," he said.

"In general, and I mean in general, you have to take into consideration how people think. If they can't make payments on their car usually they can't afford to take care of the car," Skarry explained. "Some of course are very meticulous but they just can't afford them, but 80 percent of time they've seen more abuse and haven't been taken care of."

The Circle Complete

Finally, all that's left to do is for Jim to get his loan approved and buy Jane's shiny sports compact that's sitting on the lot. It's got a slightly tangled history but its Carfax record is untainted and Jim is pretty sure the quality of the car will minimize potential risks that exist when buying any used car. He even bargained extra hard on the price as he knew it was a repo. Jim is happy, Jane probably isn't and the can't care less.

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