Seller financing is when the person selling the property also lends you the money to buy it. No bank. No mortgage broker. Just a promissory note signed between you and the seller.
It sounds weird. It happens more often than you think.
Why Would a Seller Finance?
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They can't sell conventionally. The property doesn't appraise, or it's a unique multi-unit situation that conventional lenders won't touch. The owner wants out, so they finance you at reasonable terms to make it happen.
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They want monthly income. A 68-year-old retired couple just sold a fourplex they've owned for 30 years. Instead of taking a lump-sum check and letting it sit in a 0.5% savings account, they carry the note at 5%, collecting $1,200/month for 10 years. That's $144,000 of predictable income. Beats CDs.
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Tax deferral. Seller-financed deals are installment sales. The seller spreads capital gains taxes over multiple years instead of paying it all in the year of sale. Their tax bill is lower, and that savings gets built into better terms for you.
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Equity trapped in depreciation. An owner has a building worth $400k with a $150k mortgage. If they sell for cash, they owe capital gains tax on $250k of appreciation. If they finance you at $400k over 10 years, they're not paying all that tax upfront.
Structure: The Promissory Note
A seller-financed deal requires a promissory note (the loan agreement) and a mortgage or deed of trust (the security interest). Your attorney draws these; they're not complex, but they matter.
Key terms to negotiate:
| Term | Typical Range | Your Goal |
|---|---|---|
| Interest rate | 4.5–6.5% | Lock in rate; if seller wants 6% and rates are 7%, take it |
| Term (years) | 5–15 years | Longer is easier monthly cash flow; 10 years is market standard |
| Amortization | 20–30 years | Standard; lower your monthly payment |
| Due-on-sale clause | Usually included | Normal; you can't flip without paying off the note |
| Prepayment penalty | 0–3 years | Avoid if possible; seller is getting the rate, shouldn't get extra cash if you pay early |
| Assumability | Negotiate | If you can assume the seller's bank loan, carry seller financing for top X%, you win |
A Real Scenario
You find a $350k triplex. The owner is 72, tired of managing it, and doesn't want to pay capital gains tax on a sale. You propose:
- You put 15% down ($52,500)
- Seller finances the remaining $297,500 at 5% interest over 10 years
- Monthly payment to seller: $2,812
- Your cash invested: $52,500 (plus closing costs ~$5k)
- Rent: $3,800/month
- Your monthly cash flow: $3,800 − $2,812 − taxes/insurance/maintenance = ~$650/month
In year 11, the note is paid off. You own the building free and clear (well, minus any bank mortgage on the equity).
The Risks
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Balloon payment: If the note is amortized over 30 years but matures in 10, you owe a lump-sum "balloon" of $200k+ at maturity. Refinance or pay cash. If rates are high in year 10, this sucks.
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Acceleration clause: If you miss one payment, the seller can demand the full note immediately. Property laws vary by state, but this is real risk. Make payments on time.
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Illiquidity: You can't easily sell because a standard buyer has to assume the note or get new financing. Your exit strategy is limited.
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Seller risk: If the seller dies before the note is paid, their heirs might demand the balloon immediately. Get it in writing what happens.
When Seller Financing Is a Win
- The property wouldn't qualify for conventional financing (unique, old, mixed-use)
- You have strong income and reserves; the seller's terms are relaxed
- You're building long-term equity and don't mind illiquidity
- The seller is tax-motivated and gives you a rate 1–2% below market
Comparison: Seller Financing vs. DSCR vs. Conventional
| Factor | Seller Finance | DSCR | Conventional |
|---|---|---|---|
| Down payment | 10–25% (flexible) | 20–25% | 20–25% |
| Interest rate | 4.5–6.5% | 6.5–7.5% | 6.0–6.75% |
| Approval speed | 1–2 weeks | 30–45 days | 30–45 days |
| Flexibility | Very high | Medium | Low |
| Liquidity / sellability | Low (note assumed) | High | High |
| Best for | Unconventional properties | Self-employed investors | W-2 employees |
The Play
If you're buying a property that won't conventional-finance, ask the seller to carry paper. Come with a clear note structure, proof of your cash reserves, and a credit report. You'll be shocked how many sellers say yes — especially if you offer to pay off their underlying mortgage with your down payment.
It's not common, but it wins deals that nothing else can touch.