The part that becomes faulty is the arm gets gunk and stuff in it and it does not move freely anymore and causes the error. I have 2 sitting infront of me right now, i am replacing the right rear because the check engine code informed me that was the one that had the problem.
I have the same connector, but the 3 spare holes in mine have 3 rubber plugs to prevent the water and dirt going in there. When i removed the sensor, the arm doesnt move freely and get stuck in places. Will replace it on friday when the new bracket and screws arrive.
I will update the other thread and this one if possible.
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Originally Posted by jmagne
Guess I found why the issue is so common. Honestly, not wise from BMW engineers on that one  .
I had the same SELFLEVEL SUSP INAC. message on my X5 4.4i '05.
I had had my car diagnose by BMW dealer (see post http://www.xoutpost.com/472994-post12.html) and the problem raised is "Ride-level sensor, left faulty".
I looked for more information on that sensor and found this:
http://www.bmwmotorsports.org/BMW_docs/x5selflevel.pdf
So 3 wires there: POWER, GROUND and SIGNAL.
A magnet... very few chances to be faulty to my opinion. I then had a closer look to the electrical connection and here is my conclusion/fix:
The electrical connector is a waterproof connector because of it's location (right over the suspension arm) BUT.. the connector has 6 rooms with only 3 actually wired:

The result is that the 3 empty holes retain water that gently goes down into the connector... - unplug your connector
- cleanup connections with contact cleaner
- fill the 3 empty rooms with a little drop of silicone
- plug it back
Now have to go back to dealer again to have my fault codes reset and verify all is working properly 
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