What is Seller Financing?
Seller financing (also called owner financing or owner carry) is an arrangement where the property seller acts as the lender. Instead of the buyer obtaining a bank mortgage, the buyer makes monthly payments directly to the seller according to agreed-upon terms. The seller holds a promissory note (the debt instrument) and a deed of trust or mortgage (the security instrument) on the property. If the buyer defaults, the seller can foreclose, similar to a bank.
Seller financing creates opportunities for both parties. The buyer can purchase a property without qualifying for a bank loan, avoiding the credit checks, income verification, and lengthy approval process of conventional financing. The seller gets a higher sale price (seller-financed deals often sell at or above market value), ongoing monthly income, and potentially better tax treatment through installment sale reporting.
Typical seller financing terms
| Term | Typical Range |
|---|---|
| Down payment | 5-20% of purchase price |
| Interest rate | 6-10% (often above market) |
| Loan term | 5-30 years amortization |
| Balloon payment | 3-7 year balloon common |
| Payments | Monthly P&I |
A common structure is a 20% down payment, 7% interest rate, 30-year amortization with a 5-year balloon. This means the monthly payments are calculated as if the loan were 30 years, but the remaining balance comes due after 5 years. The buyer must refinance or sell before the balloon date.
When sellers offer financing
- Free-and-clear owners: Sellers who own the property outright with no mortgage have the most flexibility. They can carry the entire note.
- Tax planning: Installment sales spread capital gains over multiple years, potentially reducing the seller's tax burden compared to a lump-sum sale.
- Income replacement: Retired sellers may prefer steady monthly income over a lump sum, especially if they don't need the cash immediately.
- Hard-to-sell properties: Properties that won't qualify for conventional financing (condition issues, rural location, unusual property type) may be easier to sell with owner financing.
- Higher price: Sellers who offer financing can often negotiate a higher sale price because they're providing a valuable service (the financing itself).
Seller financing vs subject-to
Both are creative financing strategies, but they're fundamentally different. With subject-to, an existing bank loan stays in place and the seller's name stays on the mortgage. With seller financing, there is no bank involved -- the seller IS the lender. Seller financing requires the seller to either own the property free and clear or pay off their existing mortgage at closing (because you can't have two loans on the same property without the first lender's consent).
Seller financing in wholesale
Wholesalers occasionally encounter sellers willing to offer financing, especially elderly owners of free-and-clear properties. These deals can be assigned just like any other contract, but the end buyer needs to understand they're entering a seller-financed arrangement. Some investors specifically seek seller-financed deals because the favorable terms (lower down payment, no bank qualification) make the numbers work better than conventional purchases.
When marketing a seller-financed deal to your buyer list, highlight the terms: down payment amount, interest rate, monthly payment, balloon date, and the cash-on-cash return the buyer can expect based on projected rent minus the monthly payment.