What is the first thing that comes to mind when you hear the phrase “rent-to-own?” (1) Some people think about shiny appliances paid off across several months, while others get a vision of clothing, vehicles, or engagement rings.
For those who have considered buying a home, you might have your mind go toward a home with a garage, a pool, and beautiful furniture. However, no matter what kind of rent-to-own items are first to cross your mind, they all have the same history.
Rent-to-own agreements have been around for hundreds of years – and offer many people the chance to own new items without paying for them on an entirely upfront basis. But it can be interesting to look at how these agreements started and how far they have come in the time since then.
The United Kingdom and the Start of the Rent-to-Own Agreement
The first time that rent-to-own transactions took place was in the early 1900s. One of the first retail stores that capitalized on this kind of agreement was Lotus Radio. This was a store that rented out radios starting in 1933. It was a revolutionary concept at the time – one that has become part of everyday life.
The rent-to-own agreement first started as a hire purchase plan. This is also known as the never-never installment plan. It involves having a customer sign a contract agreeing to make payments in order to take over ownership of some piece of property they want to have for their own.
With hire purchase plans, the customer would first put down an installment fee in order to obtain the item. Then, the rest of the amount (typically 60% of the amount) would be paid over time with added interest. Finally, the customer would own the item when the total amount was paid.
This type of plan was put in place as a way to help those with a lack of cash make expensive purchases that might otherwise have to wait. However, if the customer doesn’t make all the payments, the original owner is able to take back the goods.
Many buyers appreciate this type of system since it allows them to quickly get something otherwise unobtainable and spread out the payments over a more extended period. It can also be helpful for businesses due to the tax and balance sheet treatment of these goods on the company’s taxable income.
In most cases, contracts such as these are used for expensive electronic devices and automobiles. It gives customers access to something new and exciting without paying for it in a single lump sum.
The Move to Rent-to-Own in the United States
As far as the United States goes, rent-to-own businesses started to pop up in the 1950s and 1960s. Several people are considered essential to beginning the practice and causing it to proliferate and continue until modern times.
For instance, Charles Loudermilk, Sr., started to rent out Army surplus chairs. Later on, he was able to found Aaron Rents which was focused on rent-to-own products for sale. In addition, J. Ernest Talley was the mind behind Mr. T’s Rental in 1963 in Wichita, KS. Later on, he was also a part of the team that established Rent-A-Center.
The industry continued to grow, which led those involved to want to develop uniform procedures and practices and share information with one another. There was also a desire to create a positive reputation for rent-to-own retailers, which led to the establishment of the Association of Progressive Rental Organizations (APRO) (2). It started in 1980 with 40 companies and a board of 16.
Today, APRO has about 350 companies under it that constitute more than 10,000 stores across every state, as well as Canada and Mexico. In addition, rent-to-own agreements serve nearly five million customers at any time of the year.
The Structure of Rent-to-Own Transactions
In most cases, rent-to-own agreements are based on monthly or weekly terms. The person leasing the product can renew the lease at the end of each term by making a payment or terminate by returning the item they initially started to lease. In most cases, the buyer can make additional or larger payments to own the product faster than usual.
Based on a survey by the Federal Trade Commission from 2000, the most common reasons to choose rent-to-own agreements are the lack of a credit check, the flexibility and convenience of the option, and the ability to get items faster than expected if they are out of budget.
On the other hand, the main complaint about rent-to-own agreements relates to high payments. Some also have issues with added hidden costs, lack of repair services, and poor customer service in situations pertaining to late payments.
Rent-to-Own Real Estate Agreements
Retail stores are the most common source of rent-to-own agreements, but they can also be used for real estate. While rent-to-own homes can be found at any time in cities and smaller locations, it’s much more robust in times of a downturn. For instance, the 2000 financial crisis led to many people choosing rent-to-own agreements as buyers and sellers.
With modern rent-to-own agreements for real estate, the person buying the home lives in it as a renter for the first few years (3). The rent paid to the seller is also used to help build up money to purchase the home or building down the line. In many cases, a nonrefundable deposit is required to avoid people moving in to rent who have no intention of buying.
Besides the traditional rent, an amount often called “rent credit” is placed in an escrow account while the house is being leased. This and the deposit are combined to create a down payment when the lease is over, often after three years. This makes the rent a bit more expensive than the market rate but helps with saving for a home purchase.
Once the lease is complete, the person living in the home can choose to purchase the house at the sale price agreed to earlier in the process. On the other hand, they can choose to give up the deposit and walk away from the sale. If the person decides not to buy, the seller can sell or rent the home to someone else or create a new contract that is acceptable to both parties.
Rent-to-own agreements have been around for about 100 years and are still used today. Whether you are looking to buy or sell homes, they can even be used for real estate. In addition, it offers another way to access goods and services that might be out of reach by making several payments over an extended period.
(1) – Nolo.com
(3) – Investopedia