Rent-to-own

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Lease purchase agreement (click to view pages) Lease Purchase Agreement.pdf
Lease purchase agreement (click to view pages)

Rent-to-own, also known as rental purchase or rent-to-buy, is a type of legally documented transaction under which tangible property, such as furniture, consumer electronics, motor vehicles, home appliances, engagement rings, and real property, is leased in exchange for a weekly or monthly payment, with the option to purchase at some point during the agreement.

Contents

A rent-to-own transaction differs from a traditional lease, in that the lessee can purchase the leased item at any time during the agreement (in a traditional lease the lessee has no such right), and from a hire purchase/installment plan, in that the lessee can terminate the agreement by simply returning the property (in a hire purchase the buyer has a limited time, if any, to cancel the agreement). [1]

The usage of rent-to-own transactions began in the United Kingdom and Europe,[ when? ] and first appeared in the United States during the 1950s and 1960s. [2] While rent-to-own terminology is most commonly associated with consumer goods transactions, the term is sometimes used in connection with real estate transactions. [3]

Furniture, electronics, and appliances

History

The concept of the rent-to-own transactions first emerged in the United Kingdom and continental European countries under the hire purchase model. One of the first rent-to-own retail stores established in the U.K. was Lotus Radio, which began operating as a radio rental business in 1933. [4] Within the United States, the practice of retail-based rent-to-own businesses began to develop in the 1950s and 1960s. [2] Individuals cited as key figures in the history of the rent-to-own transaction and application as a business model include Charles Loudermilk Sr., who in 1955 began renting out Army surplus chairs and later founded Aaron Rents, and J. Ernest Talley, who started Mr. T’s Rental in Wichita, Kansas in 1963, and later helped establish Rent-A-Center. [2] [5]

In response to a growing desire to share information, develop uniform practices and procedures, and cultivate a positive public image within the growing rent-to-own industry in the United States, rent-to-own dealers established a trade association, the Association of Progressive Rental Organizations (APRO), in 1980. APRO began with approximately 40 original member companies and elected an initial board of 16. [6] Today the association has approximately 350 member companies representing approximately 10,400 stores in all 50 states, Mexico and Canada. Rent-to-own serves 4.8 million customers at any given time in the year. [7]

Transaction structure

Rent-to-own agreements are based on a weekly or monthly rental term. In the structure of this type of transaction, the consumer (lessee)—at the end of each week or month—can choose either to renew the lease on a weekly or monthly basis by making renewal payments, or to terminate the agreement with no further obligation by returning the tangible property. [8] Though not obligated to do so, the consumer can choose to continue making interval payments on the merchandise for a pre-specified period of time, at which point they would own the good outright. [9] An alternative purchase option is commonly provisioned for, allowing the consumer to pay off the remaining balance on the agreement at any point in time in order to obtain permanent ownership. [10]

According to a Federal Trade Commission (FTC) survey on the rent-to-own industry in the United States conducted in 2000, consumers reported that they chose to engage in rent-to-own transactions for a variety of reasons, including: "the lack of a credit check", "the ability to obtain merchandise they otherwise could not", and, "the convenience and flexibility of the transaction". [1] The most common reason cited for dissatisfaction within the survey was high prices. In addition, some survey respondents reported poor treatment by employees in connection with late rental payments, problems with repair services, and hidden or added costs. [1]

The cost incurred by consumers in rent-to-own transactions has been the subject of long-term debate and differing opinion. Historically, consumer advocates, some U.S. state attorneys general and some academic researchers have expressed concern that consumers entering into rent-to-own agreements may be unaware of the potentially high long-term costs of rent-to-own in comparison to traditional installment or layaway plans. [11] Often mentioned alongside most critiques is the question of whether prices paid for services of this type are adequate for lower-income individuals who can least afford additional financial outlays. [12] At the same time, other academic researchers and representatives of industry associations have contended that rent-to-own transactions are not comparable to traditional methods of purchasing or financing consumer goods, in that they include services such as delivery, assembly, service and repair, all of which are factored into the higher assessed value and corresponding price charged. [13] [14] Also frequently noted by proponents of the unique nature of rent-to-own transactions is the point that they are not obligations to purchase, since the agreement can be terminated by the lessee at any point in time with the return of the property. [15]

Lease vis-à-vis sale

The legal controversy surrounding rent-to-own transactions has centered primarily on the question of whether the transaction should be treated as a lease or a credit sale. The industry has contended that the transaction is a lease; [16] while consumer advocacy groups have advocated for the transaction to be treated as a credit sale. As of 2011, forty-seven U.S. states, Guam, Puerto Rico, and the District of Columbia have passed laws characterizing the transaction as a lease. [17] Of the five U.S. state supreme courts that have addressed the question, three (Massachusetts, Arkansas and Maine) concluded that the transaction was a lease. [17] [18] [19] New Jersey and Minnesota concluded it was a credit sale based upon those states’ credit laws. [20] [21] [22] A federal district court in Wisconsin also found the transaction to be a credit sale under Wisconsin state law. [23]

As of 2011, no U.S. federal consumer protection law specifically addresses rent-to-own transactions, but through litigation, efforts have been made in attempt to bring rent-to-own agreements under the definition of "credit sale" in the Truth in Lending Act. However, courts have not, as of 2011, ruled in favor of making this change at a federal level. [24] [25] [26] In 2006, the United States Department of Defense labeled rent-to-own a predatory lending practice, defining it as an, "unfair or abusive loan or credit sale transaction or collection practice", along with payday loans, title loans, refund anticipation loans and other similar practices. [27] In 2007, the United States Government Accountability Office raised concerns with the methodology and structure of this research. [28] Later in the same year, the Department of Defense ultimately concluded that rent-to-own was not a form of credit and excluded it from its regulation on predatory lending practices. [29]

Collection practices

Consumer advocates and plaintiffs testifying in legal proceedings have at times alleged that rent-to-own stores routinely repossess merchandise when a consumer is close to acquiring ownership. [30] At the time of a 2000 FTC survey, individuals who engaged in rent-to-own transactions reported a "low incidence of late-term repossessions", which the FTC suggested might be due to the reinstatement rights mandated in most states, [1] as these rights allow consumers to reinstate this type of contract after repossession. [31]

Real estate

A typical rent-to-own process. May vary by country and by US state. Rtoprocess.jpg
A typical rent-to-own process. May vary by country and by US state.

While rent-to-own transactions are most commonly conducted for purchasing consumer goods at a retail store, this term also describes a specialized real estate agreement. The rent-to-own housing option is typically exercised more often during housing market downturns, such as the late 2000s (decade) financial crisis. [32] Because the most recent housing market downturn was accompanied by protective regulatory scrutiny of lending practices and consumer credit agencies, acquiring a loan has become more difficult for Subprime borrowers. [33]

Imperfect credit scores

Tenant/buyers who have imperfect credit scores are typically drawn to rent-to-own properties [34] since the lease terms allow them to live in the home while they take the steps necessary to fix their credit and secure a mortgage. Most lease purchase agreements allow them to lock in a market rate when they sign the contract. People with poor credit find the leasing period a crucial opportunity to repair their financial profile to secure a loan. A common complaint tenant/buyers have with rent-to-own agreements, however, stems from their inability to secure a loan in time to purchase the property, whether due to insufficient downpayment or credit, at which point they are left to restructure the agreement or forced to walk away.

Transaction structure

In a rent-to-own transaction, the tenant lives on the real property and pay towards purchasing the property at a fixed price within a specific period of time, usually one to three years. [3] As part of the contract, the renter may be required to make a nonrefundable deposit [3] often included as part of a down payment at the end of the lease term. In addition to monthly rent, often an additional amount called a rent credit is paid into an escrow account during the lease period. This amount is added to the deposit and used as part of the down payment at the end of the lease term. This pushes the rent above the market rate but helps build savings for purchase if the buy option is taken. [35] At the end of the lease term, the tenant is offered right of first refusal to purchase the property at the agreed upon sale price, or walk away and forfeit the deposit. [36] If the tenant is unable or unwilling to exercise the option to buy, the owner is then free to rent or sell the property to another buyer, or to restructure the contract. [3] [35]

Scams

Because rent-to-own real estate contracts are flexible open-source documents, there is room for scammers to take advantage of unprepared tenants. [37]

See also

Related Research Articles

<span class="mw-page-title-main">Renting</span> Payment for temporary use; hiring

Renting, also known as hiring or letting, is an agreement where a payment is made for the use of a good, service or property owned by another over a fixed period of time. To maintain such an agreement, a rental agreement is signed to establish the roles and expectations of both the tenant and landlord. There are many different types of leases. The type and terms of a lease are decided by the landlord and agreed upon by the renting tenant.

<span class="mw-page-title-main">Lease</span> Contractual agreement in which an assets owner lets someone else use it in exchange for payment

A lease is a contractual arrangement calling for the user to pay the owner for the use of an asset. Property, buildings and vehicles are common assets that are leased. Industrial or business equipment are also leased. In essence, a lease agreement is a contract between two parties: the lessor and the lessee. The lessor is the legal owner of the asset, while the lessee obtains the right to use the asset in return for regular rental payments. The lessee also agrees to abide by various conditions regarding their use of the property or equipment. For example, a person leasing a car may agree to the condition that the car will only be used for personal use.

<span class="mw-page-title-main">Lease purchase contract</span>

A Lease-Purchase Contract, also known as a lease purchase agreement or rent-to-own agreement, allows consumers to obtain durable goods or rent-to-own real estate without entering into a standard credit contract. It is a shortened name for a lease with option to purchase contract. For real estate, a lease purchase contract combines elements of a traditional rental agreement with an exclusive right of first refusal option for later purchase of the home.

A rental agreement is a contract of rental, usually written, between the owner of a property and a renter who desires to have temporary possession of the property; it is distinguished from a lease, which is more typically for a fixed term. As a minimum, the agreement identifies the parties, the property, the term of the rental, and the amount of rent for the term. The owner of the property may be referred to as the lessor and the renter as the lessee.

<span class="mw-page-title-main">Commercial property</span> Buildings or land intended to generate a profit, either from capital gain or rental income

Commercial property, also called commercial real estate, investment property or income property, is real estate intended to generate a profit, either from capital gains or rental income. Commercial property includes office buildings, medical centers, hotels, malls, retail stores, multifamily housing buildings, farm land, warehouses, and garages. In many U.S. states, residential property containing more than a certain number of units qualifies as commercial property for borrowing and tax purposes.

<span class="mw-page-title-main">Accounting for leases in the United States</span> US accounting standard

Accounting for leases in the United States is regulated by the Financial Accounting Standards Board (FASB) by the Financial Accounting Standards Number 13, now known as Accounting Standards Codification Topic 840. These standards were effective as of January 1, 1977. The FASB completed in February 2016 a revision of the lease accounting standard, referred to as ASC 842.

A lease option is a type of contract used in both residential and commercial real estate. In a lease-option, a property owner and tenant agree that, at the end of a specified rental period for a given property, the renter has the option of purchasing the property.

A credit tenant lease is a method of financing real estate. A "credit tenant lease" is a lease from a landlord to a tenant that carries sufficient guarantees that lenders will perceive the rent cash flows from the lease are as reliable as a corporate bond. This typically requires that the tenant have exceptionally good credit, often that the property is essential to the tenant, and contractual obligations that ensure that these rents will be among the tenant's highest obligations. Usually, the lease is structured as a triple net lease, in which a tenant is responsible for insurance, property taxes, and most or all repair and maintenance costs.

Equity stripping, also known as equity skimming, is a type of foreclosure rescue scheme. Often considered a form of predatory lending, equity stripping became increasingly widespread in the early 2000s. In an equity stripping scheme an investor buys the property from a homeowner facing foreclosure and agrees to lease the home to the homeowner who may remain in the home as a tenant. Often, these transactions take advantage of uninformed, low-income homeowners; because of the complexity of the transaction, victims are often unaware that they are giving away their property and equity. Several states have taken steps to confront the more unscrupulous practices of equity stripping. Although "foreclosure re-conveyance" schemes can be beneficial and ethically conducted in some circumstances, many times the practice relies on fraud and egregious or unmeetable terms.

Leaseback, short for "sale-and-leaseback", is a financial transaction in which one sells an asset and leases it back for the long term; therefore, one continues to be able to use the asset but no longer owns it. The transaction is generally done for fixed assets, notably real estate, as well as for durable and capital goods such as airplanes and trains. The concept can also be applied by national governments to territorial assets; prior to the Falklands War, the government of the United Kingdom proposed a leaseback arrangement whereby the Falklands Islands would be transferred to Argentina, with a 99-year leaseback period, and a similar arrangement, also for 99 years, had been in place prior to the handover of Hong Kong to mainland China. Leaseback arrangements are usually employed because they confer financing, accounting or taxation benefits.

In the field of commercial real estate, especially in the United States, a net lease requires the tenant to pay, in addition to rent, some or all of the property expenses that normally would be paid by the property owner. These include expenses such as property taxes, insurance, maintenance, repair, and operations, utilities, and other items. These expenses are often categorized into the "three nets": property taxes, insurance, and maintenance. In US parlance, a lease where all three of these expenses are paid by the tenant is known as a triple net lease, NNN Lease, or triple-N for short and sometimes written NNN.

Vehicle leasing is the leasing of a motor vehicle for a fixed period of time at an agreed amount of money for the lease. It is commonly offered by dealers as an alternative to vehicle purchase but is widely used by businesses as a method of acquiring vehicles for business, without the usually needed cash outlay. The key difference in a lease is that after the primary term the vehicle has to either be returned to the leasing company or purchased for the residual value.

Seller financing is a loan provided by the seller of a property or business to the purchaser. When used in the context of residential real estate, it is also called "bond-for-title" or "owner financing." Usually, the purchaser will make some sort of down payment to the seller, and then make installment payments over a specified time, at an agreed-upon interest rate, until the loan is fully repaid. In layman's terms, this is when the seller in a transaction offers the buyer a loan rather than the buyer obtaining one from a bank. To a seller, this is an investment in which the return is guaranteed only by the buyer's credit-worthiness or ability and motivation to pay the mortgage. For a buyer it is often beneficial, because he/she may not be able to obtain a loan from a bank. In general, the loan is secured by the property being sold. In the event that the buyer defaults, the property is repossessed or foreclosed on exactly as it would be by a bank.

<span class="mw-page-title-main">Car finance</span> Financial products enabling ownership of a car

Car finance refers to the various financial products which allow someone to acquire a car, including car loans and leases.

Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant, and accurate picture of transactions and events". If an entity practices the 'substance over form' concept, then the financial statements will convey the overall financial reality of the entity, rather than simply reporting the legal record of transactions (form). In accounting for business transactions and other events, the measurement and reporting is for the economic impact of an event, instead of its legal form. Substance over form is critical for reliable financial reporting. It is particularly relevant in cases of revenue recognition, sale and purchase agreements, etc. The key point of the concept is that a transaction should not be recorded in such a manner as to hide the true intent of the transaction, which would mislead the readers of a company's financial statements.

Flexirent Capital Pty Ltd. or more commonly Flexirent, is an Australian consumer leasing service of business and consumer electronics and is the primary product of FlexiGroup.

In commercial real estate leases in the United States, the tenant, rather than the landlord, is usually responsible for real estate taxes, maintenance, and insurance. In a "net lease", in addition to base rent, the tenant or lessee is responsible for paying some or all of the recoverable expenses related to real-estate ownership. As the rent collected under a net lease is "net" after expenses are passed through to tenants to be paid, the rent tends to be lower than rent charged under a "gross lease".

The South African law of lease is an area of the legal system in South Africa which describes the rules applicable to a contract of lease. This is broadly defined as a synallagmatic contract between two parties, the lessor and the lessee, in terms of which one, the lessor, binds himself to give the other, the lessee, the temporary use and enjoyment of a thing, in whole or in part, or of his services or those of another person; the lessee, meanwhile, binds himself to pay a sum of money as compensation, or rent, for that use and enjoyment. The law of lease is often discussed as a counterpart to the law of sale.

A telecommunications lease is a lease that exists between a telecommunications provider, or a wireless company, and a landowner. Similar to other real estate leases, a telecommunications lease is put in place as an agreement to lease space on the landowner's property for a telecommunications site or cellular tower for a specified length of time. In exchange for the use of space, the telecommunications provider agrees to pay the landowner rent. Telecom leases can be excellent sources of ancillary income, in some cases providing the landowner with thousands of dollars per month.

<span class="mw-page-title-main">Ijarah</span> Term of Fiqh in Islamic banking

Ijarah,, is a term of fiqh and product in Islamic banking and finance. In traditional fiqh, it means a contract for the hiring of persons or renting/leasing of the services or the “usufruct” of a property, generally for a fixed period and price. In hiring, the employer is called musta’jir, while the employee is called ajir. Ijarah need not lead to purchase. In conventional leasing an "operating lease" does not end in a change of ownership, nor does the type of ijarah known as al-ijarah (tashghiliyah).

References

  1. 1 2 3 4 Lacko, James (April 2000). "Survey of Rent-to-Own Customers, April 2000" (PDF). Federal Trade Commission . Retrieved 7 April 2011.
  2. 1 2 3 "Rent-A-Center, Inc. History" . Retrieved 7 April 2011.
  3. 1 2 3 4 Marino, Vivian (4 December 2008). "The Maybe Option". The New York Times . Archived from the original on 2009-04-11. Retrieved 22 December 2021.
  4. ↑ International Directory of Company Histories (24 ed.). St. James Press. 1999.
  5. ↑ Rivlin, Gary (2010). Broke, USA: From Pawnshops to Poverty, Inc. - How the Working Poor Became Big Business. New York, NY: HarperCollins. p. 26. ISBN   978-0-06-173321-5.
  6. ↑ Winn, Ed. "APRO Legal Counsel". APRO. Archived from the original on 2021-12-21.
  7. ↑ "The Rent to Own Industry: An Overview". APRO. Archived from the original on 17 December 2013. Retrieved 16 December 2013.
  8. ↑ O'Donnell, Jayne; Michelle Walbaum (11 July 2009). "Consumers turn to rent-to-own stores in rickety economy". USA Today . Retrieved 26 May 2011.
  9. ↑ Feran, Tim (14 February 2010). "Rent-to-own Stores Prosper During Difficult Times". The Columbus Dispatch . Retrieved 9 August 2021.
  10. ↑ Hinds, Michael DeCourcy (4 June 1988). "Rent-and-Own Plans: Handy but Costly" . The New York Times . Archived from the original on 2013-01-30. Retrieved 9 August 2021.
  11. ↑ Gordon, Marcy (13 June 1997). "Group alleges stores gouge". The Associated Press. Retrieved 27 May 2011.
  12. ↑ Epstein, Jonathan D. (9 August 2010). "Rent-to-own law worries consumer advocates". The Buffalo News (New York) . Retrieved 27 May 2011.
  13. ↑ Hawkins, Jim (2007). "Renting the Good Life". William & Mary Law Review. 49. SSRN   1003784.
  14. ↑ "Rent-to-Own Stores Becoming a Consumer Issue". The New York Times . 15 February 1993. Retrieved 25 May 2011.
  15. ↑ Anderson, Michael; Jackson, Raymond. "A Reconsideration of Rent-to-Own". Journal of Consumer Affairs (Winter 2001). Archived from the original on 2012-06-26. Retrieved 9 August 2021.
  16. ↑ Abrams, Jim (19 September 2002). "House Passes Bill to Protect Consumers who Rent to Own". Wilmington Morning Star . AP . Retrieved 25 May 2011.
  17. 1 2 "Silva v. Rent-A-Center, Inc., 454 Mass. 667 (2009)" . Retrieved 7 April 2011.
  18. ↑ "Crumley v. Berry, 766 S.W.2d 7 (1989)". Archived from the original on 25 January 2013. Retrieved 7 April 2011.
  19. ↑ "Hawkes Television, Inc. v. Maine Bureau of Consumer Credit Protection, 462 A. 2d 1167 (1983)" . Retrieved 7 April 2011.
  20. ↑ "Perez v. Rent-A-Center, Inc., 892 A.2d 1255 (2006)" . Retrieved 7 April 2011.
  21. ↑ "Rent to Own". Rent to Own. July 2018. Retrieved 16 July 2018.
  22. ↑ "Miller v. Colortyme, 518 N.W.2d 544 (1994)" . Retrieved 7 April 2011.
  23. ↑ "Burney v. Thorn Americas, Inc., 944 F.Supp. 762 (ED. Wis. 1996)" . Retrieved 7 April 2011.
  24. ↑ "Ortiz v. Rental Management, Inc., 65 F.3d 335 (3rd Cir. 1995)" . Retrieved 7 April 2011.
  25. ↑ "In re : Hanley, 135 B.R. 311 (C.D. Ill. 1990)" . Retrieved 7 April 2011.
  26. ↑ "In re: Martin, 64 B.R. 1 (Bankr. S.D. Ga. 1984)" . Retrieved 7 April 2011.
  27. ↑ "Department of Defense Report on Predatory Lending Practices Directed at Members of the Armed Forces and Their Dependents (August 9, 2006)" (PDF). Archived from the original (PDF) on 2011-10-18. Retrieved 7 April 2011.
  28. ↑ "DOD's Predatory Lending Report Addressed Mandated Issues, but Support Is Limited for Some Findings and Recommendations, August 31, 2007" (PDF). Retrieved 2 July 2021.
  29. ↑ "32 CFR Part 232 Limitations on Terms of Consumer Credit Extended to Service Members and Dependents; Final Rule (August 31, 2007" (PDF). Retrieved 7 April 2011.
  30. ↑ "Survey of Rent-to-Own Customers: Executive Summary". April 2000. Retrieved 7 April 2011.
  31. ↑ "New Hampshire Consumer Source Book, Rent-To-Own". Archived from the original on 13 July 2010. Retrieved 7 April 2011.
  32. ↑ Rosenblum, Gail (22 November 2008). "In a down market, rent-to-own option becoming popular". The Providence Journal . Retrieved 7 April 2011.
  33. ↑ LII Staff (16 November 2012). "Dodd-Frank: Title XIV - Mortgage Reform and Anti-Predatory Lending Act".
  34. ↑ Plaehn, Tim. "How Rent-to-Own Works". Weekand.
  35. 1 2 Brigda, Carolyn (9 March 2008). "Lease-to-own homes enter in down market". Chicago Tribune . Archived from the original on 2013-01-19. Retrieved 5 December 2021.{{cite news}}: CS1 maint: unfit URL (link)
  36. ↑ "Archived copy" (PDF). www.justrenttoown.com. Archived from the original (PDF) on 6 October 2014. Retrieved 12 January 2022.{{cite web}}: CS1 maint: archived copy as title (link)
  37. ↑ "Is Rent To Own A Scam?". realtor.com. Archived from the original on 2014-10-03. Retrieved 5 December 2021.{{cite web}}: CS1 maint: unfit URL (link)
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