Owner Financing – A More Viable Investment Strategy
For several years individuals interested in owner (seller) financing and hard money lending have been restricted by a cap on the interest that they could charge by virtue of a low Arkansas usury rate. The Arkansas Constitution set the rate at 5% above the Federal Reserve Primary Credit Rate or 17%, which ever was less. For the last few years the Primary Credit Rate has been .5 and .75 percent, capping the usury at 5.5 and 5.75 percent. Federal preemption exempted banks from the obligation to comply with this rate restriction; however private investors have been limited in what they could lawfully charge in interest.
This limited the profitability of owner financing and hard money lending as an instrument of successful investing. Typically individuals found that the risk was not worth the relatively low return. However, all of that changed with the passage of Issue 2 in 2010 which modified interest rates limits on individuals acting as private lenders. This limit is now restricted to an interest rate not exceeding 17 percent per annum, which is the existing limit for consumer debt under the Arkansas Constitution, and there is no longer a restriction that interest rates charged cannot be greater than five percent above the Federal Discount Rate. This includes an interest rate on a real estate transaction in which an individual finances the purchase.
Conventional financing offers the benefit of the inclusion of a lending professional who is able to walk a buyer through the process and allows the seller to realize the funds in cash at the closing. This cash allows the seller the option to reinvest the equity in other property if necessary and to avoid the potential hassles that can be associated with acting as a private lender. In short, there are real benefits to conventional financing, however not all individuals or properties qualify for conventional financing.
For the transactions that may not qualify for conventional financing, the option of owner financing of real estate becomes viable, and possibly even highly profitable, with the road block of the low capped rate removed.
There are also many other advantages to owner financing and hard money lending for both the buyer and seller. Sometimes the benefits are greater for one or the other, but in most cases it is a “win/win” for both parties.
Here is more information on Owner Financing.
by: Robert A. Ballinger, Attorney at Law