Auctions, brokers, eBay, used car sales from the back of your lot. Is there a better way to dispose of your de-fleeted rental cars?
The “rent-to-own” concept has been around for years, but did you know that just about anything—including tires, wheels and even houses—can be set up for “rent to own?”
Why not do it with automobiles?
The rent-to-own sales idea caters to the subprime market, the same customers in the “buy-here-pay-here” used car sales market.
However, the “rent-to-own” customer completes the payment terms at twice the success rate of “buy here pay here,” says Wayne Lewis, CEO of Auto By Rent, a rent-to-own operation based in Springfield, Mo. Moreover, Lewis says net profit on an Auto By Rent location should be 20 percent after two years maturity, with very low overhead.
Auto By Rent has begun to offer rent-to-own franchise opportunities to take advantage of this healthy profit margin and growing customer segment.
Before getting into franchise specifics, it is important to understand what “rent to own” is—and what it is not.
Defining Rent to Own
Though both “rent to own” (RTO) and “buy here pay here” (BHPH) cater to the same subprime customer, the sales models are vastly different.
BHPH outlets can make good money in fees and interest; however, they must surrender the title to the high-risk buyer while the loan is sold to a subprime lender. For the BHPH customer, the upfront costs for tax, title and license can be difficult to swing, meaning the seller often has to get creative to put the deal together.
The RTO customer avoids upfront sales tax in most states and is taxed only on the payments. License fees are handled by the operation. Likewise, the RTO operation is taxed on rental receipts as opposed to gross profit booked as receivables. Taxes are paid only on actual payments received from the customer.
In the RTO model the car is not sold, it is rented. The title stays with the operation. If agreed rent payments are made the title will then pass to the renter. Auto By Rent’s average rental contract is two years, though terms can vary per customer.
Because the customer is not financing, there are no interest payments and no credit checks. The customer’s credit is not further deteriorated if they cannot complete the obligation on the rental agreement. However, the customer that walks away from the agreement has no rights to the vehicle.
Payments are made weekly, not monthly, which works better in the subprime arena, Lewis says. Ideal payments are $75-$100 per week. In the Auto By Rent program a missed payment does not incur added interest costs, just a $25 one-time late fee per late payment.
The cars that best fit this market are high mileage, mechanically sound cars bought at auction for $5,000–$6,000.
Cars are marked up about twice the wholesale price and the franchisee assesses the customer a non-refundable origination fee. The goal is to make more than 100 percent gross profit on the vehicle over the life of the rental.
In terms of car sales, a rent-to-own operation works best on its own lot, where higher priced cars available to good credit customers can be separated from the more affordable models in the price range of the subprime customer.
This avoids the touchy conversation regarding not being able to afford the car, says Roberts. “It alleviates the possibility of losing a customer who feels he is swallowing his pride.”