WEBVTT 00:00:00.000 --> 00:00:02.299 All right. Welcome back to the deep dive. I want 00:00:02.299 --> 00:00:05.440 you to picture something for me. You're driving 00:00:05.440 --> 00:00:07.940 down, you know, one of those big commercial strips 00:00:07.940 --> 00:00:10.039 you find in pretty much any town in America. 00:00:10.800 --> 00:00:13.480 You go past the fast food places, the auto parts 00:00:13.480 --> 00:00:16.769 store, and then you see it. It always has this 00:00:16.769 --> 00:00:19.550 big, bright sign in the window. You can't miss 00:00:19.550 --> 00:00:21.910 it. Exactly. Maybe it says no credit needed or 00:00:21.910 --> 00:00:25.489 like $19 .99 a week. And when you look inside, 00:00:25.589 --> 00:00:29.089 you see these rows of, I don't know, 75 -inch 00:00:29.089 --> 00:00:33.369 4K TVs, huge leather sectionals, gaming laptops. 00:00:33.950 --> 00:00:36.130 A whole nine yards. We are talking, of course, 00:00:36.149 --> 00:00:38.770 about the world of rent -to -own. It's a landscape 00:00:38.770 --> 00:00:41.909 that is, I think, simultaneously incredibly familiar 00:00:41.909 --> 00:00:44.530 to everyone and at the same time almost completely 00:00:44.530 --> 00:00:47.320 misunderstood. Yes. It's just it's part of the 00:00:47.320 --> 00:00:49.740 background radiation of the American retail experience. 00:00:50.140 --> 00:00:51.780 It really is. And I'll be totally honest. When 00:00:51.780 --> 00:00:53.359 I first started looking at the research for this, 00:00:53.420 --> 00:00:55.460 I had a very specific idea in my head. I thought, 00:00:55.479 --> 00:00:56.700 OK, this will be simple. We're going to talk 00:00:56.700 --> 00:00:58.780 about washing machines, high interest rates and, 00:00:58.899 --> 00:01:01.179 you know, maybe some predatory practices. Pretty 00:01:01.179 --> 00:01:03.119 straightforward story. That's what I thought. 00:01:03.299 --> 00:01:05.540 But as I started digging into these notes, we've 00:01:05.540 --> 00:01:08.260 got court cases, academic papers, FTC reports. 00:01:08.799 --> 00:01:11.519 I realized how wrong I was about the scope of 00:01:11.519 --> 00:01:14.640 this. This is not just about sofas. It is a massive. 00:01:15.469 --> 00:01:18.290 incredibly complex legal and financial ecosystem. 00:01:18.489 --> 00:01:20.650 It is. It starts with washing machines, sure, 00:01:20.750 --> 00:01:23.129 but it spans all the way to high stakes real 00:01:23.129 --> 00:01:25.269 estate deals. And it gets even weirder from there. 00:01:25.390 --> 00:01:28.189 Oh, yeah. If you follow the thread all the way 00:01:28.189 --> 00:01:30.709 to the end, you find yourself talking about things 00:01:30.709 --> 00:01:34.629 like digital gold and theoretical inflation proof 00:01:34.629 --> 00:01:37.349 savings accounts. It is a genuine rabbit hole. 00:01:37.609 --> 00:01:39.989 So that's our mission for this deep dive. We 00:01:39.989 --> 00:01:42.090 are going to map out. that entire ecosystem. 00:01:42.370 --> 00:01:44.030 We need to figure out the mechanics of it. Like, 00:01:44.049 --> 00:01:45.989 how does this actually work? Why does it even 00:01:45.989 --> 00:01:48.409 exist in the first place? And why is it so controversial? 00:01:48.670 --> 00:01:50.510 And this, I think, is the most important part. 00:01:50.930 --> 00:01:53.349 How is it legally different from me just, you 00:01:53.349 --> 00:01:55.450 know, slapping that TV on my Visa card? Because 00:01:55.450 --> 00:01:57.310 that legal distinction is the linchpin. It's 00:01:57.310 --> 00:02:00.189 everything. It is absolutely everything. And 00:02:00.189 --> 00:02:02.670 to get there, we have to start with the definition. 00:02:03.109 --> 00:02:06.430 Because rent to own is a great marketing term, 00:02:06.530 --> 00:02:10.189 but it is also a very specific legal construct. 00:02:10.699 --> 00:02:12.659 Okay, so let's clear the fog right away. When 00:02:12.659 --> 00:02:14.460 I walk into that store and I sign the paper, 00:02:14.620 --> 00:02:17.280 what am I actually agreeing to? At its most basic 00:02:17.280 --> 00:02:20.060 level, rent to own, and you'll hear other names 00:02:20.060 --> 00:02:22.580 like rental purchase or rent to buy, is a legally 00:02:22.580 --> 00:02:25.639 documented transaction for tangible property. 00:02:25.840 --> 00:02:28.599 Tangible property. So stuff. Stuff you can touch. 00:02:28.759 --> 00:02:31.199 Exactly. Furniture, electronics, appliances, 00:02:31.560 --> 00:02:34.500 even cars. And then in the housing market, of 00:02:34.500 --> 00:02:36.969 course, the home itself. the lessee, that's you, 00:02:37.030 --> 00:02:39.530 the customer, you agree to make a payment, usually 00:02:39.530 --> 00:02:41.789 weekly or monthly, to use that item. Okay, so 00:02:41.789 --> 00:02:43.889 far that just sounds like renting. It does, but 00:02:43.889 --> 00:02:46.110 here's the defining feature, the thing that makes 00:02:46.110 --> 00:02:48.789 it rent -to -own, and not just rent, it's the 00:02:48.789 --> 00:02:51.449 option to purchase. Right, so there is a light 00:02:51.449 --> 00:02:53.550 at the end of the tunnel. I'm renting, but someday, 00:02:53.669 --> 00:02:56.250 maybe, I can actually own this thing. But this 00:02:56.250 --> 00:02:58.490 is where I get a little stuck. How is that different 00:02:58.490 --> 00:03:01.189 from, say, a traditional lease, or something 00:03:01.189 --> 00:03:03.949 like a higher purchase plan? This is the crucial 00:03:03.949 --> 00:03:06.180 distinction. This is the legal ground the entire 00:03:06.180 --> 00:03:09.159 industry is built on. And it's almost like a 00:03:09.159 --> 00:03:13.039 magic trick. There are two really big differences. 00:03:13.360 --> 00:03:16.080 Okay. First, unlike a traditional lease thing, 00:03:16.120 --> 00:03:17.900 think about leasing a car for three years in 00:03:17.900 --> 00:03:21.580 a rent -to -own agreement. You, the lessee, have 00:03:21.580 --> 00:03:24.759 the specific right to purchase the item during 00:03:24.759 --> 00:03:26.909 the agreement. You don't always have to wait 00:03:26.909 --> 00:03:28.669 until the end. Okay, so there's an early out 00:03:28.669 --> 00:03:30.370 option. That's nice. But I'm guessing the second 00:03:30.370 --> 00:03:32.469 distinction is the really big one. It's the game 00:03:32.469 --> 00:03:35.569 changer. This is what separates RTO from what 00:03:35.569 --> 00:03:38.090 they call higher purchase or any kind of installment 00:03:38.090 --> 00:03:40.939 plan. Yeah. In a rent -to -own agreement, the 00:03:40.939 --> 00:03:43.800 lessee can terminate the entire agreement by 00:03:43.800 --> 00:03:46.439 simply returning the property. At any time? At 00:03:46.439 --> 00:03:48.759 any time, with no further obligation. Okay, let's 00:03:48.759 --> 00:03:50.240 stop right there and really unpack that, because 00:03:50.240 --> 00:03:52.300 I think for a lot of people this is the aha moment. 00:03:52.400 --> 00:03:55.039 Let's do a comparison. If I walk into a big box 00:03:55.039 --> 00:03:58.419 electronics store and I buy a $1 ,000 TV on their 00:03:58.419 --> 00:04:00.780 store credit card, what have I actually done? 00:04:00.979 --> 00:04:04.039 You have purchased that TV. The second you sign, 00:04:04.219 --> 00:04:07.680 you own the TV, but you also own the debt. You've 00:04:07.680 --> 00:04:09.460 signed what's called a promissory note. You're 00:04:09.460 --> 00:04:13.060 saying, I promise to pay $1 ,000 plus interest. 00:04:13.780 --> 00:04:16.259 If you stop paying three weeks later, you have 00:04:16.259 --> 00:04:19.170 defaulted on a loan. It's a breach of contract. 00:04:19.490 --> 00:04:22.170 They can sue you. They will absolutely ding your 00:04:22.170 --> 00:04:24.629 credit score. They can send debt collectors after 00:04:24.629 --> 00:04:27.449 you for the full balance. Right. I'm on the hook 00:04:27.449 --> 00:04:29.990 for the entire gram the minute I sign that paper. 00:04:30.129 --> 00:04:32.110 Correct. Now, let's look at the rent -to -own 00:04:32.110 --> 00:04:35.930 contract for that same TV. In that scenario, 00:04:36.269 --> 00:04:39.189 you are not buying the TV. I'm not. No. You are 00:04:39.189 --> 00:04:42.290 renting it for one week. That is the entirety 00:04:42.290 --> 00:04:44.589 of your legal commitment. One week. So when I 00:04:44.589 --> 00:04:46.170 sign the contract, I don't owe them $1 ,000. 00:04:46.410 --> 00:04:49.389 Nope. You owe them, let's say, $20, the price 00:04:49.389 --> 00:04:51.670 of one week's rent. At the end of that week, 00:04:51.769 --> 00:04:54.730 you have what the law calls a unilateral option. 00:04:55.129 --> 00:04:57.509 Unilateral meaning it's all my choice. It's all 00:04:57.509 --> 00:05:00.029 your choice. You can choose to renew the agreement 00:05:00.029 --> 00:05:03.430 for another week by paying another $20, or you 00:05:03.430 --> 00:05:05.550 can hand the TV back to the store and walk away. 00:05:05.850 --> 00:05:08.550 And if I walk away, what happens? Absolutely 00:05:08.550 --> 00:05:10.689 nothing. You owe nothing. There's no remaining 00:05:10.689 --> 00:05:12.889 balance. There's no default on your credit report. 00:05:14.000 --> 00:05:16.540 Because you have the right to terminate at will, 00:05:16.740 --> 00:05:20.300 the law, at least in most states, says you technically 00:05:20.300 --> 00:05:25.040 do not have any debt. That is, wow, that is incredibly 00:05:25.040 --> 00:05:27.920 slippery. It's like Schrodinger's debt. Schrodinger's 00:05:27.920 --> 00:05:29.759 debt is actually a perfect way to describe it. 00:05:29.819 --> 00:05:32.139 It exists if I keep the TV, but the second I 00:05:32.139 --> 00:05:35.399 return it, poof, it vanishes from reality. Exactly. 00:05:35.480 --> 00:05:38.220 And that terminable at will clause is the legal 00:05:38.220 --> 00:05:41.660 shield. It protects the entire industry from 00:05:41.660 --> 00:05:44.509 being classified as a lender. If you can terminate 00:05:44.509 --> 00:05:47.290 at will, it's not a loan. And if it's not a loan, 00:05:47.470 --> 00:05:49.550 you don't have to follow federal lending laws. 00:05:49.790 --> 00:05:51.990 And there's no interest rate cap. There is no 00:05:51.990 --> 00:05:53.990 interest rate cap. Which explains how you can 00:05:53.990 --> 00:05:56.889 end up paying three times the retail price. But 00:05:56.889 --> 00:05:58.509 we'll get to the math of that in a little bit. 00:05:58.610 --> 00:06:00.449 I want to understand where this whole idea came 00:06:00.449 --> 00:06:02.370 from. Because looking at our notes, I really 00:06:02.370 --> 00:06:04.189 did assume this was an American invention. It 00:06:04.189 --> 00:06:07.089 just feels so American, you know? Yeah. Consumerism, 00:06:07.129 --> 00:06:09.930 instant gratification. Totally. But that's not 00:06:09.930 --> 00:06:12.639 the real origin story. Not entirely. I mean, 00:06:12.639 --> 00:06:15.060 the U .S. market absolutely perfected the scale 00:06:15.060 --> 00:06:17.680 and the branding of it. But the core concept 00:06:17.680 --> 00:06:20.759 actually has these deep roots across the pond. 00:06:20.920 --> 00:06:22.720 Okay. The use of these kinds of transactions 00:06:22.720 --> 00:06:25.300 really began in the United Kingdom and in Europe 00:06:25.300 --> 00:06:28.180 under a model they called higher purchase. And 00:06:28.180 --> 00:06:31.079 we have a really specific and I think cool example 00:06:31.079 --> 00:06:34.339 of this, a company called Lotus Radio. Yes, Lotus 00:06:34.339 --> 00:06:36.639 Radio in the U .K. They were established in 1933. 00:06:37.199 --> 00:06:39.699 1933. So we are deep in the Great Depression. 00:06:39.839 --> 00:06:42.149 This isn't about... Getting a new toy. This is 00:06:42.149 --> 00:06:44.670 something else. The context is everything here. 00:06:44.850 --> 00:06:48.029 Yeah. In 1933, a radio wasn't just a gadget. 00:06:48.110 --> 00:06:50.870 It was your internet, your TV, and your newspaper 00:06:50.870 --> 00:06:53.850 all rolled into one device. For many people, 00:06:53.910 --> 00:06:56.110 it was the only connection to the outside world. 00:06:56.310 --> 00:06:58.009 But they were brand new tech, so they had to 00:06:58.009 --> 00:07:00.750 be incredibly expensive. Hugely expensive. Very 00:07:00.750 --> 00:07:02.430 few working class families in the Depression 00:07:02.430 --> 00:07:04.949 era, Britain could just, you know, slap down 00:07:04.949 --> 00:07:06.730 the cash to buy one outright. It was impossible. 00:07:07.129 --> 00:07:09.730 So Lotus Radio stepped into that gap. They step 00:07:09.730 --> 00:07:12.920 in. They operated as a radio rental business. 00:07:13.220 --> 00:07:15.680 You couldn't afford to buy, but you could afford 00:07:15.680 --> 00:07:18.160 to rent it for a few shillings a week. You get 00:07:18.160 --> 00:07:19.759 the news, you get the entertainment, you get 00:07:19.759 --> 00:07:21.879 the status of having a radio in your parlor. 00:07:21.920 --> 00:07:24.120 But you don't need the capital up front. Exactly. 00:07:24.120 --> 00:07:26.220 It's almost like the Netflix subscription of 00:07:26.220 --> 00:07:29.360 its day, but for the actual hardware. It solves 00:07:29.360 --> 00:07:32.100 a problem of access. And that fundamental dynamic, 00:07:32.459 --> 00:07:36.160 providing access without requiring capital. That's 00:07:36.160 --> 00:07:38.120 the DNA of the industry, isn't it? It's the same 00:07:38.120 --> 00:07:40.519 principle today. It is exactly the same. But 00:07:40.519 --> 00:07:42.600 that idea did eventually make its way over the 00:07:42.600 --> 00:07:45.639 Atlantic. Right. It lands in post -war America. 00:07:45.759 --> 00:07:49.579 We're talking the 1950s and 60s, this huge economic 00:07:49.579 --> 00:07:52.779 boom. And our notes point to a couple of founding 00:07:52.779 --> 00:07:55.319 fathers of the American industry. Yeah, it's 00:07:55.319 --> 00:07:57.600 a classic American entrepreneurial story, really. 00:07:57.740 --> 00:08:00.120 First, you have a guy named Charles Loudermilk 00:08:00.120 --> 00:08:03.779 Sr. OK. In 1955, he started a business. And what 00:08:03.779 --> 00:08:06.500 he did was he rented out army surplus chairs. 00:08:06.519 --> 00:08:08.800 Army surplus chairs. You can't get a more humble 00:08:08.800 --> 00:08:11.079 beginning than that. I mean, it's as grassroots 00:08:11.079 --> 00:08:13.439 as it gets. He was renting them out for events, 00:08:13.600 --> 00:08:15.279 you know, weddings, parties, that kind of thing. 00:08:15.779 --> 00:08:19.459 But he must have realized the power of the rental 00:08:19.459 --> 00:08:23.220 model itself. That little chair business eventually 00:08:23.220 --> 00:08:26.819 evolved into Aaron Rents. Aaron Rents. OK, now 00:08:26.819 --> 00:08:28.480 that's a name that pretty much everyone in the 00:08:28.480 --> 00:08:30.300 U .S. has seen on a strip mall somewhere. They're 00:08:30.300 --> 00:08:32.840 a giant. One of the two giants. So who's the 00:08:32.840 --> 00:08:36.559 other titan? A man named Jay Ernest Talley. He 00:08:36.559 --> 00:08:40.139 started a shop in 1963 in Wichita, Kansas, called 00:08:40.139 --> 00:08:43.860 Mr. T's Rental. Mr. T's Rental. I love that name. 00:08:43.919 --> 00:08:46.740 It's fantastic. It is. And he later helped establish 00:08:46.740 --> 00:08:49.379 the other big name in the industry, Rent -A -Center. 00:08:49.840 --> 00:08:52.320 So between Loudermilk and Tally, starting with 00:08:52.320 --> 00:08:54.700 chairs and some basic appliances in the mid -century, 00:08:54.899 --> 00:08:57.779 you basically have the seeds of the two biggest 00:08:57.779 --> 00:09:00.259 heavyweights in the entire American market. You 00:09:00.259 --> 00:09:02.299 do. They built the whole thing. And heavyweight 00:09:02.299 --> 00:09:04.279 is definitely the right word. I was looking at 00:09:04.279 --> 00:09:06.980 the stats for their trade association, APRO. 00:09:07.100 --> 00:09:09.159 This isn't some noosh little corner of the retail 00:09:09.159 --> 00:09:12.059 market anymore. No, it's a behemoth. So APRO, 00:09:12.159 --> 00:09:13.740 that's the Association of Progressive Rental 00:09:13.740 --> 00:09:17.470 Organizations. They formed back in 1980. At the 00:09:17.470 --> 00:09:20.350 time, they had about 40 member companies. And 00:09:20.350 --> 00:09:22.289 they really formed because the industry was getting 00:09:22.289 --> 00:09:24.590 a bit of a Wild West reputation. They needed 00:09:24.590 --> 00:09:26.889 to standardize their practices and, let's be 00:09:26.889 --> 00:09:29.190 honest, polish their public image. So how big 00:09:29.190 --> 00:09:31.730 are they today? Today, APRO represents about 00:09:31.730 --> 00:09:34.830 350 member companies. And those companies operate 00:09:34.830 --> 00:09:38.590 roughly 10 ,400 stores. 10 ,000 stores? Across 00:09:38.590 --> 00:09:40.769 all 50 states. Plus, they've expanded into Mexico 00:09:40.769 --> 00:09:43.210 and Canada. But here's the number that really 00:09:43.210 --> 00:09:46.350 blew my mind. At any given time during the year, 00:09:46.470 --> 00:09:50.110 they're actively serving about 4 .8 million customers. 00:09:50.429 --> 00:09:53.289 4 .8 million people. That's larger than the population 00:09:53.289 --> 00:09:56.009 of Los Angeles. That is a significant chunk of 00:09:56.009 --> 00:09:58.009 the economy that is actively using this model 00:09:58.009 --> 00:10:01.389 to get goods. A huge chunk. And it's not just 00:10:01.389 --> 00:10:03.070 a North American thing anymore. It's growing 00:10:03.070 --> 00:10:05.470 globally. The source material we have specifically 00:10:05.470 --> 00:10:09.409 calls out South Africa as this new booming market 00:10:09.409 --> 00:10:11.929 for RTO. Why South Africa? What's special there? 00:10:12.129 --> 00:10:14.250 It's sort of the perfect storm for... this business 00:10:14.250 --> 00:10:16.730 model. You have a rapidly growing middle class 00:10:16.730 --> 00:10:19.289 that, you know, has the desire for consumer goods. 00:10:19.389 --> 00:10:21.149 They want the tech, the appliances, the nice 00:10:21.149 --> 00:10:23.309 furniture. But you also have a financial system 00:10:23.309 --> 00:10:25.509 where a lot of those same people don't have an 00:10:25.509 --> 00:10:27.370 established credit history or they don't have 00:10:27.370 --> 00:10:29.830 deep savings. So there's a gap. The same gap 00:10:29.830 --> 00:10:32.750 Lotus Radio was filling in 1933. Exactly the 00:10:32.750 --> 00:10:35.309 same gap. And it's working. The projected revenue 00:10:35.309 --> 00:10:38.309 for RTO in South Africa is expected to hit over 00:10:38.309 --> 00:10:42.350 357 million U .S. dollars by 2025. Wow. So the 00:10:42.350 --> 00:10:44.669 model travels really well. Right. Wherever you 00:10:44.669 --> 00:10:47.929 find that gap between consumer desire and access 00:10:47.929 --> 00:10:50.570 to traditional capital, RTO can slot right in. 00:10:50.629 --> 00:10:52.350 It slots right in and fills the vacuum. Okay. 00:10:52.750 --> 00:10:54.450 So we've got the history. We know the scale. 00:10:54.590 --> 00:10:56.629 Now I want to get back into the weeds of the 00:10:56.629 --> 00:10:59.350 transaction itself. Let's return to that SOFA 00:10:59.350 --> 00:11:02.409 scenario. I walk into the store. I see the SOFA 00:11:02.409 --> 00:11:04.370 I want. I sign the paper. How does the money 00:11:04.370 --> 00:11:06.610 actually work week by week? Okay, let's break 00:11:06.610 --> 00:11:09.370 it down. You sign an agreement for a rental term. 00:11:09.450 --> 00:11:11.850 It's usually weekly or monthly. You pay your 00:11:11.850 --> 00:11:14.539 first week's rent. Let's call it $30. You take 00:11:14.539 --> 00:11:16.919 the sofa home. Now, at the end of that first 00:11:16.919 --> 00:11:19.440 week, you are at a decision point. This is the 00:11:19.440 --> 00:11:21.960 option part of rent to own. This is the option. 00:11:22.159 --> 00:11:25.620 You have choice A. You renew. You pay another 00:11:25.620 --> 00:11:28.460 $30. You get to keep the sofa for another week. 00:11:28.799 --> 00:11:31.320 The contract continues. And choice B. Choice 00:11:31.320 --> 00:11:34.879 B, you terminate. You call them up. They come 00:11:34.879 --> 00:11:36.759 get the sofa, or you bring it back, and the deal 00:11:36.759 --> 00:11:39.769 is done. You're out. But most people go in wanting 00:11:39.769 --> 00:11:41.649 to own the thing, right? They don't just want 00:11:41.649 --> 00:11:44.570 to rent a sofa for a few weeks. What is the actual 00:11:44.570 --> 00:11:47.289 path to ownership? There are generally two paths. 00:11:47.629 --> 00:11:49.750 The first one is just endurance. You just keep 00:11:49.750 --> 00:11:52.070 making those weekly payments for the full term 00:11:52.070 --> 00:11:53.990 laid out in the contract. And how long is that 00:11:53.990 --> 00:11:56.450 usually? It varies, but typically it's something 00:11:56.450 --> 00:11:59.950 like 12, 18, maybe 24 months. If you make every 00:11:59.950 --> 00:12:02.450 single one of those weekly payments without missing 00:12:02.450 --> 00:12:05.470 one, at the end of that term, the store hands 00:12:05.470 --> 00:12:08.730 you the title. The sofa is yours, free and clear. 00:12:08.929 --> 00:12:12.049 But if I do the math on that, $30 a week for, 00:12:12.149 --> 00:12:15.250 say, 18 months, that's a lot more than the sofa 00:12:15.250 --> 00:12:17.129 would cost at a regular furniture store. It is. 00:12:17.169 --> 00:12:19.409 It's a lot more. And that's usually why there's 00:12:19.409 --> 00:12:21.610 a second path. Most of these agreements have 00:12:21.610 --> 00:12:24.429 what's called an early payoff option. This allows 00:12:24.429 --> 00:12:27.370 you to buy the item outright at any point during 00:12:27.370 --> 00:12:30.519 the rental period. And usually there's a formula 00:12:30.519 --> 00:12:33.059 for it, often a discount if you paid off sooner 00:12:33.059 --> 00:12:34.980 rather than later. So maybe three months in, 00:12:35.059 --> 00:12:36.919 you get your tax refund and you say, you know 00:12:36.919 --> 00:12:38.179 what, I'm just going to pay off the rest and 00:12:38.179 --> 00:12:40.259 be done with it. So there is some flexibility 00:12:40.259 --> 00:12:43.100 built in. And according to the FTC survey data 00:12:43.100 --> 00:12:45.960 we have from back in 2000, that flexibility is 00:12:45.960 --> 00:12:48.440 a really big deal for the people who use this. 00:12:48.639 --> 00:12:50.500 It is a huge deal. The Federal Trade Commission 00:12:50.500 --> 00:12:53.980 did a pretty deep dive into customer motivation. 00:12:54.799 --> 00:12:56.860 And the results were really interesting. I think 00:12:56.860 --> 00:12:59.159 there's this assumption that people use RTO because 00:12:59.159 --> 00:13:01.600 they're financially illiterate or they're being 00:13:01.600 --> 00:13:04.500 tricked. But the survey suggests it's much more 00:13:04.500 --> 00:13:07.100 about necessity and a lack of other options. 00:13:07.259 --> 00:13:09.419 So what was the number one driver for customers? 00:13:09.639 --> 00:13:11.659 Why did they choose this? The number one reason, 00:13:11.740 --> 00:13:14.259 by a long shot, was the lack of a credit check. 00:13:14.419 --> 00:13:17.460 Yes. That's the key. If you have bad credit. 00:13:17.690 --> 00:13:19.649 or maybe no credit history at all. You could 00:13:19.649 --> 00:13:21.529 be young. You could be a new immigrant. Maybe 00:13:21.529 --> 00:13:24.129 you went through a bankruptcy. You simply cannot 00:13:24.129 --> 00:13:26.889 get a traditional loan. The door is closed. So 00:13:26.889 --> 00:13:29.210 rent -to -own is literally the only door that's 00:13:29.210 --> 00:13:32.429 still open. For many people, it is. The second 00:13:32.429 --> 00:13:34.669 big driver was just the ability to get merchandise 00:13:34.669 --> 00:13:36.889 they couldn't otherwise get. Yeah. Think about 00:13:36.889 --> 00:13:38.970 it. If your refrigerator dies tonight, you know, 00:13:39.009 --> 00:13:40.909 wait two weeks. You need a refrigerator now. 00:13:41.049 --> 00:13:43.850 And if you don't have 800 bucks cash or a credit 00:13:43.850 --> 00:13:45.769 card with a high enough limit. You're stuck. 00:13:46.549 --> 00:13:49.870 RTO solves that immediate emergency problem. 00:13:50.429 --> 00:13:53.840 And then people also cited things like. You know, 00:13:53.860 --> 00:13:56.740 the free delivery and set up, the speed of the 00:13:56.740 --> 00:13:59.019 whole process. But the industry also has a defense 00:13:59.019 --> 00:14:01.779 for that high sticker price, right? They don't 00:14:01.779 --> 00:14:04.299 just say it costs more. They say you're getting 00:14:04.299 --> 00:14:07.179 more. Yes. This is a very important part of their 00:14:07.179 --> 00:14:09.299 argument. They say that when you compare the 00:14:09.299 --> 00:14:12.240 total RTO price to the cash price at a retail 00:14:12.240 --> 00:14:14.639 store, you're not comparing apples to apples. 00:14:14.799 --> 00:14:16.740 Why not? Because the RTO price includes what 00:14:16.740 --> 00:14:18.720 they call a bundle of services. Okay. What's 00:14:18.720 --> 00:14:21.080 in the bundle? Well, delivery and assembly is 00:14:21.080 --> 00:14:23.659 one. But the really big one is service and repair. 00:14:24.120 --> 00:14:26.779 If you buy a washer from a big box store and 00:14:26.779 --> 00:14:29.860 it breaks in month 13, right after the manufacturer's 00:14:29.860 --> 00:14:32.120 warranty expires. You're on your own. You're 00:14:32.120 --> 00:14:34.700 paying for a repairman or a new machine. Right. 00:14:34.820 --> 00:14:38.139 But in an RTO agreement, because you are technically 00:14:38.139 --> 00:14:41.500 still renting the item until the very last payment, 00:14:41.659 --> 00:14:44.379 the store is usually responsible for fixing it. 00:14:44.480 --> 00:14:47.600 If your RTO washer breaks, you call them and 00:14:47.600 --> 00:14:49.179 they have to come out and repair it or replace 00:14:49.179 --> 00:14:52.529 it. usually at no extra cost to you. So it's 00:14:52.529 --> 00:14:54.549 like a service plan or an insurance policy is 00:14:54.549 --> 00:14:57.710 baked into that weekly fee. That's the argument 00:14:57.710 --> 00:15:00.269 they make. They also point to the risk that they 00:15:00.269 --> 00:15:02.710 take on. Because you can return that sofa at 00:15:02.710 --> 00:15:04.750 any time, they're running the risk of getting 00:15:04.750 --> 00:15:07.629 back a used, slightly worn piece of furniture 00:15:07.629 --> 00:15:10.090 that they can't resell for full price. So that 00:15:10.090 --> 00:15:12.529 depreciation risk gets priced in. They argue 00:15:12.529 --> 00:15:15.470 that it has to. However... We absolutely have 00:15:15.470 --> 00:15:18.090 to talk about the controversy because you don't 00:15:18.090 --> 00:15:21.029 get 47 states passing specific laws to regulate 00:15:21.029 --> 00:15:23.350 an industry if everything is sunshine and roses. 00:15:23.590 --> 00:15:26.190 And the cost is the main friction point, isn't 00:15:26.190 --> 00:15:28.429 it? It's the lightning rod. It's what gets all 00:15:28.429 --> 00:15:30.769 the attention from consumer advocates, from attorneys 00:15:30.769 --> 00:15:33.330 general, from legal aid societies. They've all 00:15:33.330 --> 00:15:35.830 banged the drum on this for years. And the numbers 00:15:35.830 --> 00:15:39.269 can be pretty shocking. They can. When you do 00:15:39.269 --> 00:15:41.929 the math and you calculate what the effective 00:15:41.929 --> 00:15:44.279 interest rate would be. if you treated it like 00:15:44.279 --> 00:15:47.840 a loan, it can be astronomical. We're talking 00:15:47.840 --> 00:15:51.759 100%, 200%, sometimes even higher. So you could 00:15:51.759 --> 00:15:54.360 end up paying $3 ,000 for a TV that you could 00:15:54.360 --> 00:15:57.460 have bought for $1 ,000. Easily. And the core 00:15:57.460 --> 00:15:59.899 criticism is that this model disproportionately 00:15:59.899 --> 00:16:03.600 targets the people who can least afford that 00:16:03.600 --> 00:16:05.879 premium. It's what some people call the poverty 00:16:05.879 --> 00:16:08.700 premium. Exactly. The idea that it costs more 00:16:08.700 --> 00:16:11.740 to be poor. If you had good credit or cash in 00:16:11.740 --> 00:16:15.120 the bank, you'd pay $1 ,000 because you end up 00:16:15.120 --> 00:16:18.299 paying $3 ,000. Did the customers in that FTC 00:16:18.299 --> 00:16:21.360 survey, did they feel ripped off? What was the 00:16:21.360 --> 00:16:23.820 sentiment? It was a bit mixed, but high prices 00:16:23.820 --> 00:16:26.000 were by far the number one complaint. People 00:16:26.000 --> 00:16:27.679 weren't naive. They knew they were paying more 00:16:27.679 --> 00:16:29.559 and they didn't like it. What else did they complain 00:16:29.559 --> 00:16:31.480 about? There were also a lot of complaints about 00:16:31.480 --> 00:16:33.659 how employees treated them when payments were 00:16:33.659 --> 00:16:36.539 late. You know, aggressive collection tactics, 00:16:36.779 --> 00:16:39.860 constant phone calls, that sort of thing. Speaking 00:16:39.860 --> 00:16:41.720 of collections, we have to talk about the repo 00:16:41.720 --> 00:16:43.919 man. There's this cultural myth, this horror 00:16:43.919 --> 00:16:47.120 story that RTO stores will wait until you've 00:16:47.120 --> 00:16:50.519 made like 99 % of your payments. You're one week 00:16:50.519 --> 00:16:53.039 away from owning it. And then if you're one day 00:16:53.039 --> 00:16:55.899 late, they snatch the TV back so they can rent 00:16:55.899 --> 00:16:58.059 it out to someone else and start the whole cycle 00:16:58.059 --> 00:17:01.570 over. It's a pervasive story. And it's a terrifying 00:17:01.570 --> 00:17:04.170 one, right? The idea that you could invest all 00:17:04.170 --> 00:17:06.509 that money and build up all that equity only 00:17:06.509 --> 00:17:08.589 to lose it all right at the finish line. So is 00:17:08.589 --> 00:17:11.230 it true? Does that really happen? According to 00:17:11.230 --> 00:17:13.869 the FTC's own research, they found a low incidence 00:17:13.869 --> 00:17:16.589 of this actually happening. Really? Why not? 00:17:16.670 --> 00:17:19.029 I mean, it seems like a profitable, if evil, 00:17:19.130 --> 00:17:21.410 thing to do. Are the stores just being nice? 00:17:21.750 --> 00:17:23.970 Not necessarily. It's mostly because of state 00:17:23.970 --> 00:17:26.670 laws. Most states have passed laws creating what 00:17:26.670 --> 00:17:28.829 are called reinstatement rights. Reinstatement 00:17:28.829 --> 00:17:31.380 rights. How does that work? It's a huge consumer 00:17:31.380 --> 00:17:34.079 protection. Most state laws say that if you default 00:17:34.079 --> 00:17:36.400 on your agreement and the store takes the item 00:17:36.400 --> 00:17:39.079 back, you have a certain window of time, maybe 00:17:39.079 --> 00:17:41.859 a week, maybe a month, to reinstate the contract. 00:17:42.059 --> 00:17:44.960 So you can get it back. Yes. If you come up with 00:17:44.960 --> 00:17:47.420 the money you owe within that window. The store 00:17:47.420 --> 00:17:49.500 is legally required to give you the item back 00:17:49.500 --> 00:17:52.440 or a comparable one and let you pick up the contract 00:17:52.440 --> 00:17:55.019 exactly where you left off. You don't lose all 00:17:55.019 --> 00:17:57.220 the progress you've made. Wow. That's a massive 00:17:57.220 --> 00:18:00.740 protection. It basically neuters that whole predatory 00:18:00.740 --> 00:18:03.799 snatch and grab tactic. It does. It forces them 00:18:03.799 --> 00:18:06.319 to preserve the equity that the consumer has 00:18:06.319 --> 00:18:08.039 already built up in the product. OK, so we've 00:18:08.039 --> 00:18:09.859 got the mechanics, the motivations, the pros, 00:18:10.019 --> 00:18:12.700 the cons. But this leads us directly into what 00:18:12.700 --> 00:18:15.200 you call the engine room of the whole industry, 00:18:15.380 --> 00:18:18.599 the legal. battlefield. Because as we talked 00:18:18.599 --> 00:18:20.980 about with Schrodinger's debt, the definition 00:18:20.980 --> 00:18:22.960 of this transaction is literally everything. 00:18:23.339 --> 00:18:25.880 It is. This is section three of our dive. And 00:18:25.880 --> 00:18:27.420 you're right. This is where the whole business 00:18:27.420 --> 00:18:30.420 model lives or dies. It all hangs on one single 00:18:30.420 --> 00:18:34.200 massive legal question. Is rent to own a lease 00:18:34.200 --> 00:18:37.779 or is it a credit sale? Let's define the stakes 00:18:37.779 --> 00:18:40.539 here. Why does that one question matter so much? 00:18:40.720 --> 00:18:43.440 It matters because of a very powerful federal 00:18:43.440 --> 00:18:46.180 law called the Truth in Lending Act, or TILA. 00:18:46.279 --> 00:18:48.660 TILA says that if you lend money or sell something 00:18:48.660 --> 00:18:51.539 on credit, you are legally required to disallow 00:18:51.539 --> 00:18:54.480 certain things very clearly. Chief among them 00:18:54.480 --> 00:18:57.119 is the annual percentage rate, the APR. The interest 00:18:57.119 --> 00:19:00.579 rate. Right. And even more critically, many states 00:19:00.579 --> 00:19:03.000 have what are called usury laws, which put a 00:19:03.000 --> 00:19:05.700 camp on that rate. Maybe it's 25 percent or 30 00:19:05.700 --> 00:19:08.220 percent. You legally cannot charge more than 00:19:08.220 --> 00:19:10.619 that on a loan. OK, I see where this is going. 00:19:10.740 --> 00:19:13.680 So if rent to own is legally defined as a credit 00:19:13.680 --> 00:19:16.119 sale, then they would have to start calculating 00:19:16.119 --> 00:19:18.619 and disclosing an APR. And since their effective 00:19:18.619 --> 00:19:21.539 rate is often well over 100 percent, they would 00:19:21.539 --> 00:19:23.619 instantly be breaking the law in almost every 00:19:23.619 --> 00:19:26.420 single state. The business model, as it currently 00:19:26.420 --> 00:19:29.079 exists, would become illegal overnight. But if 00:19:29.079 --> 00:19:31.420 it's a lease? Leases are regulated completely 00:19:31.420 --> 00:19:33.700 differently. They don't have APRs. They don't 00:19:33.700 --> 00:19:35.660 have interest rate caps. You can charge whatever 00:19:35.660 --> 00:19:37.599 the market will bear for a one -week rental of 00:19:37.599 --> 00:19:40.000 your property. So in this massive legal war, 00:19:40.160 --> 00:19:43.180 who's winning, lease or credit? Well, the industry 00:19:43.180 --> 00:19:45.839 has fought tooth and nail for decades to cement 00:19:45.839 --> 00:19:48.920 the lease definition in law. And as of our 2011 00:19:48.920 --> 00:19:51.859 source data, they have largely succeeded. 47 00:19:51.859 --> 00:19:54.539 states, plus the District of Columbia, Guam, 00:19:54.539 --> 00:19:57.599 and Puerto Rico, have all passed specific statutes 00:19:57.599 --> 00:20:00.059 that explicitly define these transactions as 00:20:00.059 --> 00:20:03.619 leases, not credit sales. So they successfully 00:20:03.619 --> 00:20:06.359 lobbied state governments to get the law written 00:20:06.359 --> 00:20:08.940 in their favor. They did. They wanted legal certainty. 00:20:09.259 --> 00:20:11.700 They were tired of getting sued all the time 00:20:11.700 --> 00:20:14.440 by consumers and attorneys general. So they pushed 00:20:14.440 --> 00:20:16.779 for these laws that basically say, as long as 00:20:16.779 --> 00:20:18.779 you clearly disclose all the terms of the rental, 00:20:18.920 --> 00:20:22.660 this is a lease. End of story. But you said 47 00:20:22.660 --> 00:20:25.259 states, so there are a few holdouts. There are 00:20:25.259 --> 00:20:28.099 holdouts. It's not unanimous. While the state 00:20:28.099 --> 00:20:30.240 Supreme Courts in places like Massachusetts and 00:20:30.240 --> 00:20:32.240 Arkansas have sided with the industry and said, 00:20:32.299 --> 00:20:34.519 yes, it's a lease, you have these really important 00:20:34.519 --> 00:20:36.900 outliers. Like where? The state courts in New 00:20:36.900 --> 00:20:38.880 Jersey and Minnesota have both ruled that, no, 00:20:38.940 --> 00:20:41.220 this is a fiction. When you look at the economic 00:20:41.220 --> 00:20:44.140 reality of the transaction, it is a disguised 00:20:44.140 --> 00:20:46.460 credit sale. So if I live in New Jersey, the 00:20:46.460 --> 00:20:49.099 rules are completely different. Completely. In 00:20:49.099 --> 00:20:51.460 New Jersey, RTO transactions are subject to the 00:20:51.460 --> 00:20:54.500 state's criminal usury laws. That drastically 00:20:54.500 --> 00:20:56.559 changes how these companies can operate there. 00:20:56.680 --> 00:20:59.700 A federal court in Wisconsin also came to a similar 00:20:59.700 --> 00:21:02.240 conclusion. So it's a patchwork of state laws. 00:21:02.460 --> 00:21:05.480 But has the federal government ever tried to 00:21:05.480 --> 00:21:08.460 step in and say, enough of this. Here's the national 00:21:08.460 --> 00:21:12.519 rule for everyone. For the most part, no. Consumer 00:21:12.519 --> 00:21:15.740 lawyers have tried for years to get federal courts 00:21:15.740 --> 00:21:18.079 to stretch the Truth in Lending Act to cover 00:21:18.079 --> 00:21:21.039 RTO. But the courts have generally been reluctant. 00:21:21.119 --> 00:21:23.099 They always come back to that same point. The 00:21:23.099 --> 00:21:25.619 terminate at will clause. Exactly. They say, 00:21:25.660 --> 00:21:27.680 look, the consumer can walk away at any time 00:21:27.680 --> 00:21:29.539 without penalty. That means it's not credit. 00:21:29.920 --> 00:21:33.220 End of discussion. But there was one huge moment, 00:21:33.299 --> 00:21:35.200 one instance where the federal government did 00:21:35.200 --> 00:21:37.970 try to drop the hammer. And this story is fascinating 00:21:37.970 --> 00:21:40.369 because it doesn't involve the FTC or Congress. 00:21:40.490 --> 00:21:43.009 It involves the Department of Defense. This was 00:21:43.009 --> 00:21:45.349 a massive existential crisis for the industry. 00:21:45.529 --> 00:21:48.029 You have to understand the context. It's 2006. 00:21:48.309 --> 00:21:50.490 The wars in Iraq and Afghanistan are at their 00:21:50.490 --> 00:21:53.309 height. And the DOD was noticing a huge problem. 00:21:53.609 --> 00:21:56.809 Young soldiers, 19, 20 years old, getting their 00:21:56.809 --> 00:21:59.029 first regular paycheck, were getting absolutely 00:21:59.029 --> 00:22:01.970 buried in debt. They were seen as easy targets. 00:22:02.309 --> 00:22:04.829 They were prime targets. The areas around military 00:22:04.829 --> 00:22:07.369 bases were often magnets for payday lenders, 00:22:07.509 --> 00:22:10.930 title pawn shops, and, yes, rent -to -own stores. 00:22:11.630 --> 00:22:14.630 The DOD came to believe this was a military readiness 00:22:14.630 --> 00:22:17.450 issue. Oh, so? If a young soldier is stressed 00:22:17.450 --> 00:22:19.410 out about debt collectors calling his commanding 00:22:19.410 --> 00:22:22.029 officer, he's not focused on his mission. He's 00:22:22.029 --> 00:22:24.509 a security risk. So what did the DOD do about 00:22:24.509 --> 00:22:27.309 it? In 2006, they released a major report on 00:22:27.309 --> 00:22:30.069 predatory lending practices directed at members 00:22:30.069 --> 00:22:32.759 of the armed forces. And in that report, they 00:22:32.759 --> 00:22:35.859 explicitly labeled rent to own as a predatory 00:22:35.859 --> 00:22:38.299 lending practice. They lumped it right in there 00:22:38.299 --> 00:22:40.599 with payday loans and title loans. They called 00:22:40.599 --> 00:22:43.400 it an abusive credit transaction. Whoa, wait 00:22:43.400 --> 00:22:45.480 a second. If the Department of Defense officially 00:22:45.480 --> 00:22:48.299 calls it a credit transaction, that blows up 00:22:48.299 --> 00:22:50.700 the industry's entire Schrodinger's debt argument. 00:22:51.019 --> 00:22:53.859 It completely destroys it. If that definition 00:22:53.859 --> 00:22:56.400 had stuck, it could have been the domino that 00:22:56.400 --> 00:23:00.160 fell, forcing RTO under TILA regulations at the 00:23:00.160 --> 00:23:02.880 federal level. For everyone. It was a five -alarm 00:23:02.880 --> 00:23:05.079 fire for the industry. So the industry must have 00:23:05.079 --> 00:23:08.180 gone into full panic mode. Panic is an understatement. 00:23:08.440 --> 00:23:10.700 But they didn't just panic. They fought back. 00:23:10.920 --> 00:23:13.319 And what's so interesting is that the most effective 00:23:13.319 --> 00:23:16.440 pushback didn't just come from industry lobbyists. 00:23:16.559 --> 00:23:19.579 It came from another government agency. The Government 00:23:19.579 --> 00:23:22.740 Accountability Office. The GAO. Government's 00:23:22.740 --> 00:23:26.400 auditors. Right. Watchdogs. In 2007, the GAO 00:23:26.400 --> 00:23:28.720 took a look at the DOD's report and essentially 00:23:28.720 --> 00:23:31.970 said, wait a minute. Show your work. They argued 00:23:31.970 --> 00:23:34.089 that the DOD hadn't provided enough evidence 00:23:34.089 --> 00:23:36.450 to prove that RTO was actually harming soldier 00:23:36.450 --> 00:23:38.450 readiness in the same way that high interest 00:23:38.450 --> 00:23:40.630 loans were. And they brought up a very specific 00:23:40.630 --> 00:23:42.529 counter argument, didn't they? The deployment 00:23:42.529 --> 00:23:44.329 argument. This was the winning argument. This 00:23:44.329 --> 00:23:46.049 is what turned the whole thing around. The GAO 00:23:46.049 --> 00:23:48.670 pointed out that the terminated at will feature 00:23:48.670 --> 00:23:51.589 of RTO was actually a significant benefit for 00:23:51.589 --> 00:23:54.329 military personnel. Think about it. You're a 00:23:54.329 --> 00:23:57.599 soldier. You live in an apartment off base. You 00:23:57.599 --> 00:24:00.660 go to an RTO store and get a sofa and a TV. Suddenly 00:24:00.660 --> 00:24:03.480 you get deployment orders. You're shipping out 00:24:03.480 --> 00:24:06.400 to Iraq for a 12 -month tour. If you had bought 00:24:06.400 --> 00:24:09.559 that furniture on credit. You're stuck. You're 00:24:09.559 --> 00:24:12.099 stuck paying a monthly bill for a sofa that's 00:24:12.099 --> 00:24:14.359 sitting in an empty apartment thousands of miles 00:24:14.359 --> 00:24:17.059 away. It's a debt anchor around your neck while 00:24:17.059 --> 00:24:18.960 you're in a combat zone. But with rent to own. 00:24:19.140 --> 00:24:20.619 You just call the store. They come pick up the 00:24:20.619 --> 00:24:23.339 sofa and the TV. You stop paying. You deploy 00:24:23.339 --> 00:24:27.220 completely debt -free. The GAO argued that this 00:24:27.220 --> 00:24:30.460 unique flexibility was incredibly valuable for 00:24:30.460 --> 00:24:33.000 a population that's subject to sudden, long -term 00:24:33.000 --> 00:24:35.960 relocations. That is a fascinating pivot. They 00:24:35.960 --> 00:24:38.039 took the thing that critics hate, the lack of 00:24:38.039 --> 00:24:40.599 ownership, and turned it into a strategic advantage 00:24:40.599 --> 00:24:42.940 for a specific demographic. It was brilliant. 00:24:43.390 --> 00:24:45.930 And it worked. Later in 2007, the Department 00:24:45.930 --> 00:24:48.569 of Defense completely reversed course. They issued 00:24:48.569 --> 00:24:50.930 their final rule, and in it, they concluded that 00:24:50.930 --> 00:24:53.170 rent -to -own was not a form of consumer credit 00:24:53.170 --> 00:24:55.589 and excluded it from their predatory lending 00:24:55.589 --> 00:24:58.089 regulations. The industry dodged a cannonball. 00:24:58.170 --> 00:25:00.490 By the skin of his teeth. Talk about a close 00:25:00.490 --> 00:25:03.569 call. It just goes to show how fragile and important 00:25:03.569 --> 00:25:06.069 these legal definitions are. One minute you're 00:25:06.069 --> 00:25:07.769 a predator, the next minute you're providing 00:25:07.769 --> 00:25:10.970 a valuable service. It really does. And while 00:25:10.970 --> 00:25:12.950 that specific debate on the federal level kind 00:25:12.950 --> 00:25:15.890 of settled down, the RTO model didn't stop at 00:25:15.890 --> 00:25:20.410 sofas and TVs. We have to shift gears now because 00:25:20.410 --> 00:25:22.950 this is where the stakes get much, much higher. 00:25:23.170 --> 00:25:25.950 We have to talk about rent -owned real estate. 00:25:26.250 --> 00:25:28.809 This is where the numbers get a lot bigger and 00:25:28.809 --> 00:25:31.049 the potential heartbreak gets a lot more real. 00:25:31.230 --> 00:25:34.160 I mean, losing a TV is annoying. Losing your 00:25:34.160 --> 00:25:36.279 home and all the money you put into it, that's 00:25:36.279 --> 00:25:39.119 a tragedy. It's a life -altering event. And the 00:25:39.119 --> 00:25:41.079 source material we have notes that these RTO 00:25:41.079 --> 00:25:43.460 housing options tend to surge during economic 00:25:43.460 --> 00:25:46.039 downturns. We saw a huge spike in these kinds 00:25:46.039 --> 00:25:48.940 of deals after the 2008 financial crisis. Why 00:25:48.940 --> 00:25:51.039 then specifically? Because the banks slammed 00:25:51.039 --> 00:25:53.430 the door shut. After the subprime mortgage crash, 00:25:53.569 --> 00:25:55.730 getting a traditional home loan became incredibly 00:25:55.730 --> 00:25:58.190 difficult, especially for what they called subprime 00:25:58.190 --> 00:26:00.210 borrowers, people with imperfect credit scores. 00:26:00.490 --> 00:26:02.369 But those people still needed a place to live, 00:26:02.410 --> 00:26:04.509 and many of them still had the dream of owning 00:26:04.509 --> 00:26:07.930 a home. Exactly. So RTO steps into that vacuum 00:26:07.930 --> 00:26:10.990 as a kind of bridge. The pitch is, we'll get 00:26:10.990 --> 00:26:12.970 you into a house now, you can live in it like 00:26:12.970 --> 00:26:15.329 you own it, and then you can buy it from us later 00:26:15.329 --> 00:26:18.200 when your credit is fixed. So the target audience 00:26:18.200 --> 00:26:20.740 is what they call the tenant wire, someone who 00:26:20.740 --> 00:26:23.319 wants to buy but just can't get a bank loan today. 00:26:23.440 --> 00:26:26.460 That's the ideal candidate. The whole goal is 00:26:26.460 --> 00:26:28.599 for them to live in the home while they actively 00:26:28.599 --> 00:26:32.000 work on fixing their credit or saving up a bigger 00:26:32.000 --> 00:26:34.160 down payment. OK, so how does the money work 00:26:34.160 --> 00:26:36.339 in these deals? I'm guessing it's more complicated 00:26:36.339 --> 00:26:39.440 than just paying your weekly TV rental fee. It's 00:26:39.440 --> 00:26:42.099 much more complicated. The structure usually 00:26:42.099 --> 00:26:45.200 spans a period of one to three years. First, 00:26:45.440 --> 00:26:48.079 you almost always have to pay a significant non 00:26:48.079 --> 00:26:50.180 -refundable deposit up front. They often call 00:26:50.180 --> 00:26:52.220 it an option fee. And we're not talking $20. 00:26:52.400 --> 00:26:55.140 No, we're talking thousands, maybe tens of thousands 00:26:55.140 --> 00:26:57.400 of dollars. And that money buys you the exclusive 00:26:57.400 --> 00:27:00.480 right to purchase the house later at a pre -agreed 00:27:00.480 --> 00:27:04.019 price. Yes. It locks in the purchase price today. 00:27:04.519 --> 00:27:07.539 Then you start paying your monthly rent. But, 00:27:07.700 --> 00:27:10.259 and this is a critical detail, you typically 00:27:10.259 --> 00:27:14.240 pay a rent credit or a rent premium on top of 00:27:14.240 --> 00:27:16.160 the normal market rate. Can you explain that? 00:27:16.200 --> 00:27:18.220 Give me an example. Sure. Let's say the fair 00:27:18.220 --> 00:27:20.599 market rent for the house is $1 ,000 a month. 00:27:21.379 --> 00:27:24.500 The RTO contract might require you to pay $1 00:27:24.500 --> 00:27:28.160 ,200 a month. Okay. Where does that extra $200 00:27:28.160 --> 00:27:30.440 go? It goes into a virtual bucket, an escrow 00:27:30.440 --> 00:27:33.279 account of sorts. The idea is that this is a 00:27:33.279 --> 00:27:36.859 form of forced savings, that extra money accumulates 00:27:36.859 --> 00:27:38.819 over the life of the contract to build up your 00:27:38.819 --> 00:27:40.980 down payment. I see. So at the end of the three 00:27:40.980 --> 00:27:43.599 -year term, you have the initial option fee you 00:27:43.599 --> 00:27:46.440 paid plus all that accumulated rent credit money, 00:27:46.579 --> 00:27:48.920 and you use that whole pile of cash to secure 00:27:48.920 --> 00:27:51.299 a mortgage and finally buy the house. That is 00:27:51.299 --> 00:27:53.220 the happy path. That is how it's supposed to 00:27:53.220 --> 00:27:55.380 work. But we have to talk about the trap. The 00:27:55.380 --> 00:27:57.599 trap. The trap is what happens if you get to 00:27:57.599 --> 00:27:59.859 the end of that three -year term and you still 00:27:59.859 --> 00:28:02.140 cannot qualify for a mortgage. And that could 00:28:02.140 --> 00:28:04.579 happen for any number of reasons, right? Maybe 00:28:04.579 --> 00:28:06.299 your credit score didn't go up as much as you 00:28:06.299 --> 00:28:09.299 hoped. Maybe you lost your job. Maybe the banks 00:28:09.299 --> 00:28:11.420 just tightened their lending standards again. 00:28:11.599 --> 00:28:14.339 Exactly. Any of those things. If you can't get 00:28:14.339 --> 00:28:17.220 the loan from a bank, you cannot exercise your 00:28:17.220 --> 00:28:19.539 option to purchase. You have to walk away from 00:28:19.539 --> 00:28:22.119 the deal. And what happens to all the money you 00:28:22.119 --> 00:28:25.140 paid in? The big option fee, all those extra 00:28:25.140 --> 00:28:28.339 rent credit payments? In most of these contracts, 00:28:28.619 --> 00:28:31.480 you forfeit everything. Everything. You lose 00:28:31.480 --> 00:28:34.019 the non -refundable option fee. You lose every 00:28:34.019 --> 00:28:36.640 single dollar of the extra rent credit you paid 00:28:36.640 --> 00:28:39.420 over those three years. Oh, that is brutal. So 00:28:39.420 --> 00:28:41.380 you've essentially been paying above market rent 00:28:41.380 --> 00:28:43.980 for three years. Maybe you put your own money 00:28:43.980 --> 00:28:45.980 into fixing up the place because you thought 00:28:45.980 --> 00:28:48.599 it would be yours. And you walk away with absolutely 00:28:48.599 --> 00:28:51.660 nothing to show for it. Zero. And the landlord 00:28:51.660 --> 00:28:54.750 keeps all that money. They keep the house. which 00:28:54.750 --> 00:28:57.069 you may have improved for them, and they can 00:28:57.069 --> 00:28:59.369 then turn around and offer the same deal to the 00:28:59.369 --> 00:29:01.930 next hopeful family. It can be devastating. And 00:29:01.930 --> 00:29:04.069 because these contracts aren't standardized like 00:29:04.069 --> 00:29:06.529 a normal mortgage? Exactly. The source material 00:29:06.529 --> 00:29:09.769 calls them flexible open source documents, which 00:29:09.769 --> 00:29:11.410 is a nice way of saying it's the Wild West. There's 00:29:11.410 --> 00:29:13.789 no standard form. This makes it a perfect environment 00:29:13.789 --> 00:29:16.430 for scammers who can write in clauses that make 00:29:16.430 --> 00:29:18.849 it almost impossible for the tenant to ever actually 00:29:18.849 --> 00:29:22.259 succeed. Wow. It feels it feels like such a high 00:29:22.259 --> 00:29:25.160 risk gamble. But and this is where the deep dive 00:29:25.160 --> 00:29:27.500 gets really kind of sci fi. There are people 00:29:27.500 --> 00:29:29.539 out there trying to solve this very problem. 00:29:29.680 --> 00:29:31.940 We have some really new information in our source 00:29:31.940 --> 00:29:34.700 stack academic work from just last year, 2025, 00:29:35.039 --> 00:29:38.039 that proposes a way to fix the broken math of 00:29:38.039 --> 00:29:40.839 real estate rent to own. This is the nest quest 00:29:40.839 --> 00:29:43.420 stuff. I have to admit, when I saw the phrase 00:29:43.420 --> 00:29:45.660 digital gold savings account in the research 00:29:45.660 --> 00:29:48.609 notes. I thought I was reading a crypto brochure. 00:29:48.670 --> 00:29:51.049 Me too. I was like, where are we going with this? 00:29:51.130 --> 00:29:53.390 But this is serious economic theory, isn't it? 00:29:53.450 --> 00:29:55.430 It is. It's a theoretical framework introduced 00:29:55.430 --> 00:29:58.690 by a researcher named Mohamed Billa. And the 00:29:58.690 --> 00:30:01.470 whole idea is to take the ambiguity and the all 00:30:01.470 --> 00:30:04.210 or nothing trap out of these agreements by using 00:30:04.210 --> 00:30:06.809 strict, transparent mathematical models. He calls 00:30:06.809 --> 00:30:10.019 them the Nesquest ROI models. OK, let's try to 00:30:10.019 --> 00:30:12.140 break these down. There are three different models 00:30:12.140 --> 00:30:14.140 mentioned in the notes. The first one is called 00:30:14.140 --> 00:30:18.579 the RTO model or the tripartite ledger. What 00:30:18.579 --> 00:30:20.819 on earth does that mean? Tripartite just means 00:30:20.819 --> 00:30:24.000 three parts. Bill's argument is that the current 00:30:24.000 --> 00:30:26.839 system is too opaque. You just hand over this 00:30:26.839 --> 00:30:28.619 extra money to the landlord and you hope for 00:30:28.619 --> 00:30:31.700 the best. In his model, every single payment 00:30:31.700 --> 00:30:34.299 you make is mathematically and transparently 00:30:34.299 --> 00:30:37.619 split into three specific buckets. Consumption. 00:30:38.039 --> 00:30:40.819 Equity accrual and operating costs. Consumption 00:30:40.819 --> 00:30:42.920 sounds like just plain old rent. The cost of 00:30:42.920 --> 00:30:45.480 using the house. That's it. Operating costs would 00:30:45.480 --> 00:30:47.400 cover things like property taxes and maintenance. 00:30:47.759 --> 00:30:50.460 But the equity accrual bucket is the revolutionary 00:30:50.460 --> 00:30:54.079 part. Instead of just saving cash for down payment, 00:30:54.299 --> 00:30:57.519 the tenant in this model is actually buying fractional 00:30:57.519 --> 00:30:59.980 ownership shares of the property every single 00:30:59.980 --> 00:31:02.339 month. So you're not just saving up dollars. 00:31:02.420 --> 00:31:04.759 You're literally buying, I don't know, 0 .1 % 00:31:04.759 --> 00:31:07.039 of the house this month, another 0 .1 % next 00:31:07.039 --> 00:31:10.920 month. Exactly. You are building real, tangible 00:31:10.920 --> 00:31:14.980 equity from day one. And this is key. These shares 00:31:14.980 --> 00:31:17.140 that you own adjust with the market value of 00:31:17.140 --> 00:31:19.779 the home. If a house appreciates in value, your 00:31:19.779 --> 00:31:22.140 shares are worth more. It aligns everyone's incentives. 00:31:22.480 --> 00:31:25.339 And crucially, it must protect you if you have 00:31:25.339 --> 00:31:27.420 to leave the agreement early. That's the whole 00:31:27.420 --> 00:31:30.420 point. The model has defined pre -agreed rules 00:31:30.420 --> 00:31:32.819 for things like hardship pauses or exit settlements. 00:31:33.339 --> 00:31:35.960 If you have to walk away after three years, you 00:31:35.960 --> 00:31:38.000 don't forfeit everything. You own those shares. 00:31:38.160 --> 00:31:40.119 You should be able to cash them out or sell them 00:31:40.119 --> 00:31:42.599 to the next tenant. It turns the trap into a 00:31:42.599 --> 00:31:45.079 portable asset. That sounds profoundly fair. 00:31:45.339 --> 00:31:47.299 But then we get to the second model, which sounds 00:31:47.299 --> 00:31:50.420 even crazier, the digital gold savings account. 00:31:50.799 --> 00:31:53.279 Why are we suddenly bringing gold into a real 00:31:53.279 --> 00:31:56.289 estate transaction? One word, inflation. This 00:31:56.289 --> 00:31:59.289 is a huge hidden risk for today's RTO homebuyers. 00:31:59.390 --> 00:32:01.569 You're saving up cash for three, four, five years 00:32:01.569 --> 00:32:03.769 to buy a house. But if inflation is running high, 00:32:03.950 --> 00:32:06.049 the purchasing power of that cash you're saving 00:32:06.049 --> 00:32:08.309 is rotting away. You're running on a treadmill. 00:32:08.490 --> 00:32:10.309 The price of the house is going up because of 00:32:10.309 --> 00:32:12.890 inflation, and every dollar you save is worth 00:32:12.890 --> 00:32:15.910 a little bit less. Precisely. You can't win. 00:32:16.569 --> 00:32:19.809 So Billa proposes a dual -ledger accounting system. 00:32:20.029 --> 00:32:23.130 The system records your savings balances in two 00:32:23.130 --> 00:32:26.099 ways simultaneously. In your local currency, 00:32:26.200 --> 00:32:29.680 like U .S. dollars, A and D, in gold gram units. 00:32:29.880 --> 00:32:32.319 Why gold? Because gold has historically been 00:32:32.319 --> 00:32:35.259 a very effective hedge against inflation. The 00:32:35.259 --> 00:32:38.119 idea is to link the value of your savings to 00:32:38.119 --> 00:32:42.099 verified real -time gold price benchmarks. It's 00:32:42.099 --> 00:32:44.400 about preservation of value. It ensures that 00:32:44.400 --> 00:32:46.440 all the sweat equity you're putting in doesn't 00:32:46.440 --> 00:32:48.339 just evaporate into thin air before you get a 00:32:48.339 --> 00:32:50.319 chance to buy the house. Okay, that makes a strange 00:32:50.319 --> 00:32:52.359 kind of sense. And the third model just combines 00:32:52.359 --> 00:32:55.400 the first two, the RTO plus gold model. Yes. 00:32:55.819 --> 00:32:58.119 This is the grand synthesis. It pairs the occupant's 00:32:58.119 --> 00:33:00.799 fractional equity accumulation with a systematic 00:33:00.799 --> 00:33:03.579 reinvestment process for the sponsor. That's 00:33:03.579 --> 00:33:05.960 the landlord or the property owner. So what are 00:33:05.960 --> 00:33:07.980 they doing? As the sponsor collects the cash 00:33:07.980 --> 00:33:09.920 flows from the tenant's payments, that money 00:33:09.920 --> 00:33:12.319 is automatically converted into gold index savings 00:33:12.319 --> 00:33:14.759 for them as well. So the tenant is building home 00:33:14.759 --> 00:33:17.059 equity and the landlord is building a gold reserve. 00:33:17.299 --> 00:33:19.960 Basically, yes. Everyone in the transaction is 00:33:19.960 --> 00:33:23.180 hedged against inflation. Billa highlights this 00:33:23.180 --> 00:33:27.000 as a framework for true risk sharing and auditability. 00:33:27.539 --> 00:33:30.319 It uses transparent math to try and ensure that 00:33:30.319 --> 00:33:32.500 neither side of the deal is exploiting the other. 00:33:32.640 --> 00:33:35.259 It is absolutely amazing to see the arc of this 00:33:35.259 --> 00:33:38.279 story. We started with the family in 1933 renting 00:33:38.279 --> 00:33:40.119 a radio because they didn't have the cash to 00:33:40.119 --> 00:33:42.839 buy one. And now we are talking about mathematically 00:33:42.839 --> 00:33:46.480 formalized, gold indexed, fractional home ownership 00:33:46.480 --> 00:33:49.809 models. It's a wild evolution. But it's all an 00:33:49.809 --> 00:33:51.990 attempt to solve the exact same core problem. 00:33:52.150 --> 00:33:54.250 How do you get people access to major assets 00:33:54.250 --> 00:33:56.450 when they don't have a lump sum of capital up 00:33:56.450 --> 00:33:58.470 front? So let's try to pull all of this together. 00:33:58.650 --> 00:34:02.130 We've gone from sofas to houses to economic theory. 00:34:02.289 --> 00:34:04.750 What is the big synthesized takeaway for you 00:34:04.750 --> 00:34:06.710 after going through all this material? I think 00:34:06.710 --> 00:34:09.309 the synthesis is this. Rent to own, whether it's 00:34:09.309 --> 00:34:12.579 for a sofa or for a house, fills a vacuum. It 00:34:12.579 --> 00:34:14.239 exists because the traditional financial system 00:34:14.239 --> 00:34:17.500 banks, credit cards, mortgages, excludes a huge 00:34:17.500 --> 00:34:19.539 portion of the population for various reasons. 00:34:19.719 --> 00:34:22.000 It's a mechanism for access. It is an access 00:34:22.000 --> 00:34:24.119 mechanism. But, and this is the crucial but, 00:34:24.300 --> 00:34:27.300 that access comes at a premium. It always has. 00:34:27.480 --> 00:34:30.400 Whether it's the much higher total cost of a 00:34:30.400 --> 00:34:33.239 television or the immense risk of losing your 00:34:33.239 --> 00:34:36.400 entire deposit on a home, the consumer pays a 00:34:36.400 --> 00:34:39.340 price for that flexibility and for that lack 00:34:39.340 --> 00:34:41.820 of a credit check. The industry would call that 00:34:41.820 --> 00:34:44.280 a fee for their service and their risk. They 00:34:44.280 --> 00:34:46.400 do. And their critics would call it a poverty 00:34:46.400 --> 00:34:49.119 penalty. And as we look to the future with these 00:34:49.119 --> 00:34:52.039 new theoretical nest quest models, it seems like 00:34:52.039 --> 00:34:54.800 the goal is to try and bridge that gap. To keep 00:34:54.800 --> 00:34:57.800 the access, but to use math to lower the risk 00:34:57.800 --> 00:35:00.500 and the penalty. To maybe turn it into a legitimate 00:35:00.500 --> 00:35:02.659 pathway to wealth building instead of just a 00:35:02.659 --> 00:35:05.400 costly convenience. Precisely. If we can solve 00:35:05.400 --> 00:35:07.539 the math problem, maybe we can finally solve 00:35:07.539 --> 00:35:09.840 the fairness problem. You know, it really makes 00:35:09.840 --> 00:35:11.579 me think about where we're headed as a broader 00:35:11.579 --> 00:35:14.280 economy. We have subscriptions for our software, 00:35:14.480 --> 00:35:16.960 for our music, for our movies. We have rent to 00:35:16.960 --> 00:35:19.760 own for our furniture. We're now designing these 00:35:19.760 --> 00:35:22.460 complex rental access models for our housing. 00:35:22.880 --> 00:35:25.579 So here's my final provocative thought for you 00:35:25.579 --> 00:35:27.760 to chew on. Are we moving toward a world where 00:35:27.760 --> 00:35:30.920 ownership in the traditional sense, you know, 00:35:30.920 --> 00:35:32.860 buying something outright with cash and keeping 00:35:32.860 --> 00:35:36.440 it forever is becoming a luxury service? That 00:35:36.440 --> 00:35:39.880 is a profound question. Is the future one where 00:35:39.880 --> 00:35:42.699 access is the standard model for the masses? 00:35:42.739 --> 00:35:45.539 And true, unencumbered ownership is reserved 00:35:45.539 --> 00:35:49.420 for the wealthy few. And if these wild models 00:35:49.420 --> 00:35:52.199 like RTO plus gold ever actually take off, could 00:35:52.199 --> 00:35:54.480 our monthly rent payments eventually stop being 00:35:54.480 --> 00:35:56.599 just an expense and start looking more like our 00:35:56.599 --> 00:35:59.480 investment portfolios? Wow. I mean, if your rent 00:35:59.480 --> 00:36:01.800 payment is simultaneously buying you fractional 00:36:01.800 --> 00:36:04.719 equity and gold indexed assets, the line between 00:36:04.719 --> 00:36:07.440 renter and investor. gets very, very blurry. 00:36:07.739 --> 00:36:09.860 It could fundamentally change how we think about 00:36:09.860 --> 00:36:11.659 the concept of home. It's definitely something 00:36:11.659 --> 00:36:13.579 to think about the next time you drive past that 00:36:13.579 --> 00:36:15.559 rental store with the neon sign. It's not just 00:36:15.559 --> 00:36:18.119 sofas in there. It's a window into a whole different 00:36:18.119 --> 00:36:20.780 way of interacting with the global economy. Absolutely. 00:36:21.460 --> 00:36:23.559 That's our time for this deep dive. Thanks so 00:36:23.559 --> 00:36:25.000 much for listening, and we'll catch you on the 00:36:25.000 --> 00:36:25.320 next one.