Seller financing isn't exotic. It's one of the oldest deal structures in real estate -- and it works best when you understand exactly what motivates sellers to say yes.
What Is Seller Financing?
Seller financing (also called owner financing) is when the person selling the property acts as the bank. Instead of getting a mortgage from a lender, you make monthly payments directly to the seller based on a promissory note you both sign.
The deed transfers to you at closing. The seller holds a lien on the property (like a mortgage) until you pay off the note or refinance. If you default, they get the property back through foreclosure -- just like a bank would.
When Sellers Actually Agree to It
Most sellers won't offer financing unless you ask -- and even then, many will say no. Here's who says yes:
Free-and-clear sellers own the property outright with no mortgage. They can carry a note without triggering a bank's "due on sale" clause. This is the most common scenario.
Retirement-aged sellers who want income without the hassle of managing property. Instead of getting $200,000 at closing and reinvesting it, they receive $1,400 per month for 20 years at 7% interest. That's annuity-style cash flow without the stock market.
Sellers who can't find buyers -- especially on hard-to-finance properties like vacant land, commercial-residential mixed use, or homes with functional obsolescence.
Tax-motivated sellers who want to spread their capital gains over multiple years using an installment sale (IRS Form 6252). They pay taxes only as they receive payments.
How to Structure a Seller-Financed Deal
Every seller-financed deal has four main levers:
Purchase price: What you're paying for the property.
Down payment: The cash you pay at closing. Typical range is 5-20% for seller financing. More down = easier to get the seller to agree.
Interest rate: The annual rate the seller charges on the outstanding balance. Today's seller-financed deals typically range from 5-8%. I aim for 6-7%.
Balloon payment: A date (often 3-7 years out) when the remaining balance is due in full. You'll refinance or sell before then.
Purchase price: $120,000 Down payment: $12,000 (10%) Loan amount: $108,000 Interest rate: 6.5% Term: 30 years amortized, 5-year balloon Monthly payment: $682
After 5 years, remaining balance owed: ~$100,400
The Interest Rate Conversation
Sellers often start by asking for prime rate or higher. Here's how to negotiate:
First, validate their position. "That's fair, and I appreciate you working with me on this." Then offer a tradeoff: "If we can get to 6%, I can do 15% down instead of 10%." More down payment reduces their risk, which justifies a lower rate.
Second, tie your offer to their alternative. "If you list this with an agent, you're paying 6% commission plus repairs. I'm closing in 2 weeks, no repairs, no agent fees. That flexibility is worth something."
Never argue over interest rates in isolation. Show the full picture -- net proceeds, timeline, certainty.
Wrap Mortgages: When the Seller Still Has a Mortgage
A wrap mortgage (or wraparound mortgage) is a seller-financed deal where the seller still has an underlying mortgage on the property.
Here's how it works: You pay the seller $1,200/month. The seller pays their existing mortgage of $800/month. They pocket the $400 spread plus principal pay-down.
This is related to subject-to deals, which are a different but similar creative structure. Learn how subject-to deals work.
Risks for Buyers
Seller financing is powerful but not risk-free. Know these going in:
Balloon payment risk: If you can't refinance when the balloon comes due (bad market, bad credit, job loss), you could lose the property. Plan your exit before you buy.
Title and lien issues: Always get a title search and title insurance. The seller might have mechanic's liens, judgment liens, or IRS liens you don't know about.
No escrow by default: Banks automatically collect taxes and insurance in escrow. With seller financing, you handle those directly. Don't forget.
Seller death: If the seller dies, their heirs inherit the note. Make sure the promissory note is documented properly and recorded so the new heirs can't claim they don't owe you the property.
Why holding seller-financed properties in an LLC protects you
Risks for Sellers
Sellers take on real risk too, which is why many say no. They're acting as the bank -- they have to trust you'll pay. If you default, they have to foreclose, which costs time and money.
This is why a solid down payment matters. Skin in the game makes you a better borrower. And it makes the seller more likely to say yes.
See our full guide to creative financing strategies
Analyzing a Seller-Financed Deal
The biggest mistake investors make with seller financing is buying an overpriced property and justifying it with "great terms." The terms are the icing. The deal still has to pencil.
Before you agree to any seller-financing structure, run your numbers:
- What's the ARV?
- What are comparable sales showing?
- What are the carrying costs at that interest rate?
- Does it cash flow after PITI (principal, interest, taxes, insurance)?
Analyze Any Deal in 30 Seconds
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FAQ
Can I get seller financing on any property?
Not any property -- it depends on whether the seller is willing to carry the note and whether they own the property free and clear (or are willing to do a wrap). Vacant land, commercial properties, and distressed homes are common seller-financing opportunities.
Is seller financing the same as rent-to-own?
No. Rent-to-own (lease option) means you rent the property with an option to buy later. Seller financing means you actually buy the property at closing -- you just make payments to the seller instead of a bank.
How long can seller financing terms be?
They can be any length both parties agree to. Common structures are 15 or 30-year amortizations with 3-7 year balloons. Fully amortized 30-year seller-financed loans are less common but do happen with free-and-clear sellers seeking long-term income.
What happens if the seller dies during a seller-financed deal?
The promissory note becomes part of the seller's estate. Their heirs or executor inherit the right to receive payments. Your obligation continues. That's why proper documentation and recording the deed of trust is essential -- it protects you from disputes.
Do I need an attorney for seller financing?
Yes. Every seller-financed deal should be documented by a real estate attorney familiar with your state's laws. The promissory note, deed of trust (or mortgage), and closing disclosure need to be correct. This isn't a handshake deal.