Module 6: Advanced Strategies

Seller Financing

Structure owner-financed deals where the seller acts as the bank, creating win-win terms and no traditional mortgage needed

What is Seller Financing?

Seller financing (also called owner financing or seller carryback) is when the property seller acts as the lender. Instead of the buyer getting a traditional bank mortgage, the seller provides the financing and the buyer makes monthly payments directly to the seller.

This creates incredible flexibility: no banks, no credit checks, no traditional underwriting. Just a negotiated agreement between seller and buyer.

How Seller Financing Works

1

Negotiate Terms

Buyer and seller agree on purchase price, down payment, interest rate, monthly payment, and loan term (e.g., $150K price, $20K down, 6% interest, 20-year amortization).

2

Execute Promissory Note & Mortgage/Deed of Trust

Buyer signs a promissory note (the loan) and a mortgage or deed of trust (secures the property as collateral). This is recorded with county.

3

Down Payment Paid

Buyer pays down payment at closing (cash to seller). This reduces seller's risk and shows buyer commitment.

4

Title Transfers to Buyer

Buyer receives the deed and takes ownership. Property is now theirs, but secured by seller's mortgage/lien.

5

Buyer Makes Monthly Payments

Buyer sends monthly principal + interest payments to seller (or servicing company) until loan is paid off or balloon payment due.

When Sellers Agree to Financing

Property is Paid Off (No Mortgage)

Seller owns property free and clear. They can offer financing without worrying about paying off existing loan. This is ideal for seller financing.

Seller Wants Passive Income

Retired or financially stable seller prefers monthly payments instead of lump sum. They earn interest and steady cash flow.

Property Won't Sell Traditionally

Slow market, dated property, or narrow buyer pool. Seller financing attracts buyers who can't get bank loans, expanding potential buyers.

Tax Deferral Benefits

Installment sale spreads capital gains tax over multiple years instead of one lump sum. Consult CPA, but this can be major incentive for sellers with large gains.

Example Seller Financing Deal

Purchase Price: $180,000
Down Payment (15%): $27,000
Financed Amount: $153,000
Interest Rate: 7% per year
Amortization: 30 years
Balloon Payment Due: 5 years
Monthly Payment (P&I): $1,018/month

What Happens:

• Buyer pays $27K at closing, gets deed
• Buyer pays $1,018/month to seller for 5 years
• After 5 years, balloon payment (~$145K) is due
• Buyer refinances or sells to pay off balloon

Key Terms in Seller Financing

Down Payment

Typical range: 10-20% of purchase price. Higher down payment reduces seller risk and shows buyer commitment.

Interest Rate

Typical range: 6-10%. Higher than bank rates since seller takes more risk. Negotiable based on deal.

Amortization Period

Length used to calculate monthly payment. Common: 15-30 years. Longer amortization = lower monthly payment.

Balloon Payment

Full balance due at specific date. Common: 3-10 years. Seller doesn't wait 30 years to be paid off. Buyer refinances or sells.

Critical Warnings

  • Due-on-Sale Clause: If property has existing mortgage, seller financing may trigger due-on-sale. Seller must pay off loan first OR structure as lease-option instead.
  • Proper Documentation: Must have promissory note, mortgage/deed of trust, recorded with county. Use real estate attorney to draft these.
  • Default Terms: Clearly outline what happens if buyer misses payments. Seller can foreclose, but process varies by state.
  • Title Insurance: Buyer should get title insurance. Seller should too if buyer defaults and property comes back.
  • Dodd-Frank Compliance: Federal law limits how many seller-financed deals a person can do per year (typically 3). Beyond that, licensing may be required. Consult attorney.