In a seller-financed sale the seller acts as the lender: the buyer makes a down payment, signs a note, and pays the seller over time instead of a bank. There is no loan underwriting, no origination, and terms are whatever the two parties agree. It is the most flexible financing in real estate and the most dependent on documentation quality — the paperwork is the entire protection for both sides.
How it is structured
The buyer takes title at closing. The seller records a mortgage or deed of trust securing a promissory note for the financed balance. The note sets rate, term, amortisation, any balloon, late charges and default remedies. If the seller owns the property free and clear, this is clean — one lien, one lender, no third party. If the seller still has a mortgage, the transaction becomes a wraparound and the underlying lender’s due-on-sale right comes into play.
What is actually negotiable
Everything, which is the point. Down payment is commonly 10–20% but is set by agreement. The rate is whatever the parties accept — often below market because the seller is comparing it against a bond, not against a mortgage desk. Amortisation can run thirty years even when the balloon is five, which keeps payments low. Interest-only periods, step rates, prepayment terms and substitution-of-collateral clauses are all available. None of this requires anyone’s approval.
Why sellers agree: the instalment sale
Under IRC § 453, a seller receiving payments across more than one tax year may report gain as payments are received rather than all at once, spreading the tax liability. For an owner with a low basis and a large gain, that deferral can be worth more than a higher cash price. Depreciation recapture is generally not eligible for instalment treatment and is taxed in the year of sale, which is the detail most often missed — sellers should model it with their CPA before agreeing terms, not after.
The regulatory line investors must not cross
Business-purpose lending on investment property sits largely outside the consumer mortgage rules. Seller financing to an owner-occupant buyer does not. The Dodd-Frank ability-to-repay provisions and the SAFE Act’s licensing requirements apply to residential mortgage loans made to consumers, with narrow exclusions for sellers financing a small number of properties per year. If the buyer intends to live in the property, get a lawyer before writing the note. Investor-to-investor financing on a rental is a different regulatory question from financing a family’s home.
The exit, for both sides
Most seller-financed notes balloon within three to seven years, so the buyer needs permanent financing before the date. On a tenanted rental this is generally a DSCR refinance — qualifying on rent coverage rather than tax returns, which suits exactly the buyer who took seller financing because conventional underwriting did not fit. Sellers holding a note have their own exit: performing notes can be sold to note buyers at a discount, and a well-documented note with a seasoned payment history sells at a far better price than a loose one.
Seller Financing for Investment Property FAQ
There is no standard. Rates commonly land between conventional mortgage rates and hard money rates, but the number is negotiated. Sellers often accept less than a bank would because their alternative is a lump sum they must then reinvest.
In a mortgage or deed-of-trust structure, yes — title transfers and the seller holds a lien. In a land contract, title is withheld until payoff, which changes the buyer’s position on default substantially. Know which one you are signing.
The seller forecloses under the state’s procedure for the instrument used, which may be judicial or non-judicial and may take months. The seller recovers the property, generally keeping payments received. Remedies and timelines are state-specific.
Yes, but the existing loan does not disappear — the transaction becomes a wraparound and the underlying lender retains its due-on-sale right. Both parties should understand that before closing.
Usually not, unless a third-party servicer that reports is engaged. Buyers who want the payment history to build credit should arrange reporting deliberately at the outset.
Like any other loan payoff. For a rental, DSCR lenders will refinance a seller-financed note; they will want the note, the payment history, a lease, and title seasoning that varies by lender. Twelve months of clean, documented payments materially improves the outcome, which is another argument for third-party servicing.