Rent to Own Franchise Week 2007

There’s a lot of discussion these days about the profit potential for renting tires and wheels. But imagine renting an entire vehicle to your customers.

Fred Pearson, former co-owner of Furniture and Appliances Now, Arkansas’ largest independent RTO chain. - "I’ve learned never to say no about renting something until I’ve had a chance to really examine the potential,” says Fred Pearson,

Everyone knows rent-to-own tires and wheels is a hot concept, but have you considered the potential of rent-to-own automobiles? Some estimates say as many as 80% of car shoppers have credit too poor to lease or purchase a vehicle through traditional means. SEADRA (South East Auto Dealers Rental Association, Inc.) is the largest and fastest-growing automobile RTO system in the country and their program is helping established industry veterans like Fred Pearson flourish as an auto dealer.

There’s a lot of discussion these days about the profit potential for renting tires and wheels. But imagine renting an entire vehicle to your customers. It is, after all, an item that most customers require for things like getting to work, taking their children to school, visiting the doctor, and feeling in charge of their own schedule.

“I’ve learned never to say no about renting something until I’ve had a chance to really examine the potential,” says Fred Pearson, former co-owner of Furniture and Appliances Now, Arkansas’ largest independent RTO chain.

“RTO has always been an easy way for customers to obtain something which they didn’t have enough money for right away. A car is a huge expense and an absolute necessity in our society – much more than a television, or a stereo, or a sofa. I’d give up my sofa before I gave up my car.”

Pearson appears to have hit both a nerve and also a need with rental customers. He sold his stake in the Furniture and Appliances Now (‘FAN’) chain to co-owner Geron Vail in October 2005 so that he could focus on building his growing network of RTO auto lots. But before the sale, Pearson saw first-hand how well the concepts worked together.

“The furniture store fed the auto store from Day One. We definitely attracted some new customers who wanted to rent cars, but most just added a car from us as another item. These are customers who understand the rental transaction, and who liked that they could walk away without any hit to their credit report. Plus, we offered the same lifetime reinstatement benefit on our cars that we offer on any item in FAN, so they felt comfortable with their decision to rent. I’ve learned that you can leverage a good relationship into offering all kinds of different products. Cars, however, are a natural extension of something people need and will rent. This is a huge opportunity for RTO dealers.”

Pearson had been toying with the idea of rent-to-own automobiles but felt there was a missing piece to the equation.

“I was sold on the concept of renting-to-own cars, but I couldn’t figure out how to avoid liability if the customer defaulted on their car insurance while they were renting the vehicle. I first learned about SEADRA through the Arkansas Used Car Association. SEADRA was the safety net if a customer defaulted on their insurance and that was the final piece I needed to jump into this business.”

In fact, before a customer ever leaves one of Pearson’s lots they must provide proof of insurance that lists his company as an additional insured party. That way, when the renewal comes up Pearson’s staff is notified. Should a customer default on their car insurance while in possession of the vehicle, SEADRA’s insurance coverage kicks in, protecting the dealer from any repercussions.
There are other considerations before a dealer jumps into the rental auto business, including the fact that it’s critical to have a ‘car person’ on staff. Donnie Cochran is another successful dealer who is thriving under the SEADRA program as he prepares to open his second RTO automotive lot in Louisiana.

“Probably the biggest difference is the way you acquire the merchandise. It’s not as simple as getting on the phone and ordering a truckload of 1999 Honda’s with 80,000 miles on them. You’ve got to have someone who knows the car business and understands where and how to acquire the right type of used vehicles for your customers.”

Cochran says auctions, wholesalers, brokers and even the classified ads are a source of vehicles for his lots. But both Cochran and Pearson agree that an ever-changing assortment of cars on the lot attracts plenty of attention.

“I try to keep a minimum of ten cars on the lot and I’ve learned some customer favorites in my area are the Grand Am, Grand Prix, and Impala,” says Pearson.

According to Cochran, what’s popular will vary by geographic area and his mix is a little different.

“I’d say we keep 30 to 35 cars on the lot and we deal with a little bit of everything. Hondas, Toyotas, vans and trucks from 1998 through 2002 seem to rent the best for us.”

Both dealers agree one of the keys to success is setting up customer payments according to their pay cycle. The majority of payments are made bi-weekly, and average about $350 - $380 per month. Once a payment is made either on-site or via phone, the customer is given a code to enter into the starter-interrupt device installed on each vehicle. This device will beep on the day a payment is due, as a reminder to the customer. Should the customer default on his or her payment, after a predetermined grace period, the car simply won’t start. Since ownership of the car is retained by the car lot it’s easy for the dealer to reclaim the vehicle.

“That’s one of the benefits of offering rent-to-own vehicles over Buy Here-Pay Here vehicles,” says Cochran. “We retain ownership of the car until the customer pays off the vehicle. That means if a customer declares bankruptcy, we still own that car. If a customer vanishes with a car we have the option of filing felony theft charges, making it easier to recover the vehicle. Because this is a rental transaction, we can resolve unfortunate issues much quicker and much simpler than the Buy Here-Pay Here dealers can.”

There are other benefits that dealers should consider, as well. Since the transaction is not a sale, there is no up-front tax collected or paid. Taxes are calculated on a cash basis and not an accrued basis, so dealers only pay tax on the payments they collect and not what they have the potential to collect.

“This is a good business,” Cochran adds. “I make a good living, I help people and I wouldn’t want to do anything else.”

Pearson is equally happy with his choice to leave sofas behind for the automotive business. “This is a big opportunity for rental dealers. Most of the dealers I know have worked hard to develop strong relationships with their customers. They have poured themselves into their business over the years and the customers trust them. SEADRA’s program provides a chance for dealers to offer a product customers need and provide it with the type of customer service that has made them successful in the traditional rent-to-own industry. Offering rent-to-own automobiles is a natural progression if a dealer can find and hire that ‘car person’ and leverage their existing customer base into a great opportunity.”

Go the Extra Mile

In 2006, domestic used car sales totaled a record $99 Billion. SEADRA offers a unique, turn-key program that allows rental dealers to tap into this huge and growing market by offering pre-owned vehicles on a rent-to-own basis.

Since 1999, the SEADRA rent-to-own automobile program has been used successfully by dealers who have rented more than 50,000 vehicles. It’s a turn-key, effective system that allows rental dealers to leverage the power of their customer relationships and join the profitable automotive industry. Here’s how it works:

Each vehicle sold using the SEADRA system is titled at point of sale in the dealership name and has two auto liability policies in place during the length of the contract.

The first is provided by the renter through their own insurance company, and proof of coverage must be furnished prior to the dealer releasing the vehicle. The dealer must be named on each liability policy. In the event the insurance lapses and the renter fails to reinstate his or her policy, the vehicle must be returned to the dealer as stated in the rental agreement.

The second auto liability policy is provided by SEADRA in the form of a Contingent Auto Liability Policy. This policy extends to each vehicle rented using the SEADRA program and is provided through an A-rated, admitted insurance company.

Contractually, the renter must keep the vehicle in good working order, thereby agreeing that any and all maintenance or repairs to the rented property must be performed by the renter at the renter’s sole expense
The renter may return the vehicle at any time, or trade up to a different vehicle at any time

Many rent-to-own auto dealers offer some form of warranty on the vehicle and some also include a lifetime reinstatement benefit, so the customer never loses what they have invested in the vehicle.

SEADRA provides all materials, forms, training and on-going support needed to sell vehicles on a rent-to-own basis

For more information, contact SEADRA at 877-573-2372 or visit the website at www.seadraonline.com.