Recycling RTO Units
The flip-side of the dealer maintaining ownership of rented vehicles is that renters can return the vehicle to the dealer at any time for any reason and leave debt free, as long as the vehicle is in good condition. Because of this, Cochran has not found any financial institutions that will buy his RTO accounts. He said, “We haven’t found a company yet that wants to purchase rent-to-own paper because the contract actually states that the person can walk away from this [agreement] at any time.”
When a customer returns a vehicle to Bayou Auto Sales, one of two things happens. It’s either “recycled”, as Cochran calls it, or it’s sent straight to the auction block. He estimated half of his vehicles are “recycled” and re-rented to a new customer, while the other half are wholesaled.
Another difference about the RTO method is the insurance dealers are required to have. Essentially, each vehicle is covered by two insurance policies. The customer must have one, and the dealer keeps all vehicles insured with a contingent liability policy.
SEADRA provides this insurance to dealers though a third party insurance company, verifies each renters insurance for dealers and then sends dealers a notice one month before each renters insurance policy expires, so the dealer can contact the renter to make sure he or she plans on renewing insurance on the vehicle. Northland Auto Enterprises also provides contingent liability coverage to its dealers.
No Taxation without Collection
One burden BHPH dealers face is paying taxes on sold units before collecting 100 percent of the money owed. Dealers using the RTO business model pay both income tax and sales tax incrementally as money is collected on accounts. Lentsch added that this is a “big cash-flow advantage for the dealer.”
Service and Maintenance
Although the dealer still owns the rented vehicles, the renter is still responsible for servicing and maintaining the vehicle. Some dealers go the extra mile and offer a free or discounted oil change to customers. For example, Zimmerman Ford in Cedar Rapids, Iowa, has a RTO location and offers its renters a discounted oil change every four months. With this arrangement, everyone’s happy. The dealership periodically sees the vehicles it owns, and the customers receive a discounted oil change.
RTO isn’t Everywhere
While RTO auto sales are available in most states, there are some states that aren’t easy to deal with. Neither Northland nor SEADRA operates in Indiana or New York because of state laws. Northland also avoids Wisconsin, but hopes to do business there and in Indiana soon. SEADRA also doesn’t do business in Massachusetts, Alaska, Hawaii and Virginia, but would like to eventually do business in all 50 states.
Business on the Bayou
In New Iberia, La., which has a population of about 32,000, Cochran and Bayou Auto Sales have five RTO competitors, but he still has 225 open rental accounts. The dealership collects an average of $175 per account every two weeks. His goal is to reach 300 accounts there, and the average contract length is between two and three years. Between 40 percent and 50 percent of their renters pay off the entire contract and become owners of their vehicles.
About an hour away in Houma, La., Cochran just opened up a new RTO store called Auto Max. Cochran saw room for expansion and seized it. He goes out on the road to purchase inventory at least three days a week for both stores. He doesn’t do much advertising in New Iberia because he’s already made a name for himself, but in Houma, he’s looking to do some TV, radio and direct mail advertising to create awareness within the community. And the Cochran brothers don’t plan on stopping at two stores; they anticipate adding a new RTO dealership every two years. Rod said, “We’re hoping to … put them all across southeast [Louisiana].”
While many BHPH dealers are thriving across the country, the RTO business model has taken off in the past 17 years, with 3,400 dealers country-wide. RTO is a viable option to BHPH and is worth consideration if you’re thinking about financing your own vehicles. Cochran serves as a prime example, but he won’t accept all the credit. He acknowledged he couldn’t have achieved the level of success he has without the help of key service providers and great employees. His business has taken off in the past six years and is growing. Garner said of Cochran, “What Donnie does, he does really well.”
Vol 5, Issue 8