Rent-to-own

From Wikinvestor

Rent-to-own (RTO) is an informal term for a type of business which rents assets or items, most typically furniture or appliances, with the condition that the item will be owned by the renter if the term of rent is finished, or that the lease can be converted to a sale for a nominal fee at that time. It also refers to real estate, typically a house or other home, with the same type of payment arrangement.

Contents 1 Furniture and appliances 2 Real estate 2.1 Problems with rent to own 2.2 Advantages of rent to own 2.3 Industry today 3 See also 4 External links 5 References

Furniture and appliances

Since rent to own stores often do not require payment up front, they are popular with the poor, but between high interest rates and higher cash prices than other stores, they are more expensive (often several times more expensive) than buying the same item outright. This has caused the rent to own industry to be accused of predatory lending.

The RTO industry alleges that RTO is a lease, as opposed to a credit sale, and argues that no interest is charged.^[1] This issue is in dispute, as advocates for low-income consumers have successfully defeated attempts by the RTO industry to change the laws of New Jersey, Minnesota and Wisconsin, for example, to become industry-friendly.^[2] Recently, the RTO industry lost a major lawsuit in the New Jersey Supreme Court.^[3][4] The court held that its practices are subject to the state's 30% criminal usury ceiling.

Industry-wide, 75% of all RTO transactions are weekly; the consumer agrees to pay a weekly amount for leasing property. The remaining 25% of agreements are biweekly and monthly. RTO agreements are generally written for a 12-, 18-, or 24-month term. If the consumer rents the merchandise for the full term, ownership is acquired. Most RTO transactions include an early buyout clause that allows the consumer to purchase the merchandise at any time during the term for 50% of the remaining rental payments.

A consumer may return a rental item at any time without penalty. Most companies have a lifetime reinstatement clause, allowing the consumer to re-rent a returned item (or similar item) and receive full credit for all previous rental payments made.

The United States Department of Defense considers rent-to-own a predatory lending practice (defined as an "unfair or abusive loan or credit sale transaction or collection practice"), and groups it with payday loans, title loans, refund anticipation loans and other similar practices.^[5]

Real estate

Rent-to-own is also a real estate term relating to a real estate agreement which is composed of a rental lease and a purchase agreement where the tenant has the option to purchase the property at a fixed price at a specified point of time in the future. It is also known as lease to purchase option, lease option, owner financing or lease-to-own.

The lease resembles that of a typical rental lease where the land owner, the lessor, allows the other party, the lessee, to occupy the property in return for a monthly payment. The option to purchase the property usually states the price at which the property is to be bought and the date at which the tenant is able to exercise the option.

Rent to own contracts typically become more popular during housing market downturns as landlords use them as a way to find good tenants.^[6] The seller entices the tenant by having a specified portion of the rent as a credit towards a down payment on the house, giving the tenant time to rebuild their credit if necessary.

Problems with rent to own

• As a buyer, if you choose not to buy the home you could lose the option fee
• As a seller, the buyer could back out of the transaction and not buy the home
• As a buyer, a rent increment might be put on top of the typical lease payment to cover the portion going towards the down payment.^[7]

Advantages of rent to own

• Renters are able to put money towards the equity of their home
• Renters are able to overcome possible poor credit situations
• Can help landlords find tenants in a down market and secure a good return on their investment

Industry today

The concept of rent to own is not new, but with the credit markets and housing crash, these contracts are becoming much more popular.^[8] In the first 11 months of 2007, roughly 700 homes were listed on the Charleston Trident Association of Realtors' Multiple Listing Service as available through rent-to-own contracts. This made up roughly 3% of the total listings which was significantly greater than the 1% it made up in 2006.^[8]

See also

• List of real estate topics
• Real estate appraisal
• Real estate economics
• Real estate pricing
• Real estate trends
• Real estate transaction
• Real estate broker

External links

• ilease-a-house.com. An International Rent to Own Marketplace
• FTC Rent-to-Own Transactions Testimony
• Rent-to-Own - Americans for Fairness in Lending
• From Poverty, Opportunity: Putting the Market to Work for Lower Income Families - The Brookings Institution

References