What is Seller Financing?

Written By Brandon Bramley

When it comes to selling a property most people think of the traditional route which is hiring a realtor, listing it on the MLS (so it appears on platforms like Redfin or Zillow), hosting multiple showings, and finally accepting an offer. In this familiar scenario the buyer secures financing (typically through a bank) and you receive a lump sum of cash at closing minus any remaining mortgage balance, realtor fees, and capital gains taxes.

However, there’s another powerful and creative way to sell your property which is called seller financing. In this guide, we try to answer the most common questions we get about seller financing and we’ll explain exactly what is seller financing, how it works, its benefits, risks, downsides, and why it might be a smart selling strategy for you.

Want a Seller Financed Offer on Your Property? Get an offer from our team. We specialize in purchasing properties directly from owners with seller financing.

Seller financing is not a new concept and it’s been around for quite some time. In a seller financing arrangement, the seller acts as the lender and provides a loan to the buyer. The buyer then repays the loan in monthly installments (which typically include interest) until the loan is fully paid off or the agreed term ends. It’s really that simple. 

You may have heard seller financing referred to as owner financing or owner carry but they all mean the same thing. Essentially, the property owner leverages the equity they’ve built up to loan money directly to the buyer and earn interest in the process. Unlike traditional mortgages where terms are dictated by banks or lenders, the seller and buyer set their own terms which include the loan period, interest rate, down payment, and repayment schedule. The loan is secured by the property itself, with the owner placing a first-position lien on it until the loan is fully repaid.

Once the property is sold the buyer becomes the owner and takes on all responsibilities including home maintenance, property taxes, insurance, and general upkeep. For the seller this means they no longer have the headaches of property ownership but can still enjoy truly passive income from their property’s equity.

JUST TO BE CLEAR – WHAT IS SELLER FINANCING?

To sum it up, seller financing is a property sale where the seller acts as the lender and offers a loan directly to the buyer. The buyer then makes monthly payments to the seller until the loan is repaid over the agreed term. That’s it – one seller, one buyer, and no bank involved.

What is an Example of Seller Financing?

Let’s use a seller financing example to explain how this works in a real-world scenario. Imagine an Owner decides to sell their property to a Buyer using seller financing. Instead of the Buyer securing a traditional mortgage from a bank the Owner acts as the lender. The two parties agree to the following terms:

  • Purchase Price: $500,000

  • Down Payment: $50,000 (10%)

  • Loan Amount: $450,000 (remaining balance)

  • Loan Amortization Period: 30 years (used to calculate monthly payments)

  • Payback Term: 15 years (the timeframe to repay the loan)

  • Interest Rate: 4.00%

  • Monthly Payment: $2,148

The Buyer makes a $50,000 down payment to the Owner upfront which leaves a loan balance of $450,000. The Owner finances the loan at a 4.00% interest rate over a 30-year amortization schedule which results in monthly payments of $2,148 from the Buyer to the Owner. Now while the loan payments are calculated on a 30-year amortization schedule the payback term is only 15 years. This means that at the end of 15 years the Buyer will pay the remaining balance as a lump sum (often referred to as a balloon payment).

In this seller financing example, the Owner benefits by earning interest income on the loan in the amount of $227,149 over the 15 years. By the end of the 15 years, the total amount paid to the Owner by the Buyer is $727,149 which includes:

  • $50,000 down payment

  • $450,000 in principal payments

  • $227,149 in interest payments

This means the Owner earns an extra $227,149 (or roughly $18,929 per year) in passive interest income by offering seller financing, which is all while the Buyer assumes responsibility for the property and its upkeep. That is the power of seller financing.

Feel free to use our Seller Financing Analysis Tool to play around with your own examples and structure your seller finance terms.

Why Would Someone Offer Seller Financing?

There are several reasons why someone might offer seller financing. It’s a great way to earn a stable return on the equity in your property while generating passive income. Whether you’re looking for retirement income or consistent cash flow to sustain your lifestyle, seller financing allows you to get paid monthly without becoming a landlord or dealing with tenant-related headaches.

It also eliminates the pressure of figuring out what to do with a lump sum of cash after a traditional sale. Not everyone is an investment expert and seller financing can provide a reliable monthly return while keeping your loan secured by the property as collateral.

Additionally, seller financing offers significant tax benefits as detailed in our Seller Financing Tax Benefits article. It allows you to delay capital gains taxes which enables you to earn interest on that money in the interim. In a traditional cash sale, you would owe capital gains taxes in the year of the sale on any appreciation since you purchased the property. However, with seller financing, the transaction may qualify as an installment sale under IRS rules which means you only pay capital gains taxes on the principal as you receive it. This allows you to spread the tax payments over the life of the loan’s payback term.

Many people also use seller financing to sell their properties to family or friends. Instead of gifting the property they structure a seller financed deal which can create a win-win solution for both parties.

Is Seller Financing a Good Idea?

Seller financing can be a great option if you’re looking for a creative way to sell your property while earning steady principal and interest payments over time instead of receiving a lump sum upfront. It’s especially appealing if you want to generate passive income and a consistent return on the equity in your property.

However, seller financing may not be ideal if you need immediate cash to purchase a new property or cover other large expenses as the payments are made in monthly installments rather than all at once. Whether seller financing is a good idea depends on your financial goals and what matters most to you during the sale of your property.

What Are Typical Terms for Seller Financing?

There are some standard terms that you will need to define in a seller financing transaction. The good news is that these terms are agreed upon directly between the owner and the buyer which allows for creativity and flexibility to meet both the interests of both parties. Here are the typical terms for seller financing:

  • Purchase Price: The agreed-upon price for the property.

  • Down Payment: The upfront cash payment required from the buyer.

  • Loan Amount: The portion of the purchase price that is financed by the seller.

  • Loan Amortization Period: The period used to calculate monthly payments (e.g., 15, 20, or 30 years).

  • Payback Term: The timeframe in which the loan must be repaid (often ending with a balloon payment if shorter than the amortization period).

  • Interest Rate: The rate of interest the buyer will pay on the loan.

While these are the typical terms for seller financing you may still include additional provisions in your seller financing agreement. For example, you can address early payback restrictions, interest rate adjustments, and auto-extension options. However, you do need to keep in mind that you’ll be managing the loan directly with the buyer so it’s often best to keep the terms simple to avoid complications.

We chat through more details on the typical seller financing down payment and interest rates in this article if you want to learn more about those components.

How Long is Seller Financing Usually?

The length of a seller financing term can vary and depends on the preferences of the buyer and seller. It’s important to understand the difference between the amortization period and the payback term when identifying the term length of seller financing. These can either be the same (which is most common) or different where the payback term is shorter and the loan is due earlier than the full amortization period.

Most seller financing agreements mirror standard mortgage structures with the payback term and amortization period set to 30 years. However, there are no restrictions so you can customize the seller financing terms to fit your goals and works for both the seller and buyer. For example, you could opt for a longer amortization period (35-40 years) or a shorter payback term (3-7 years) to ensure the loan is repaid sooner.

The key is to find a balance that aligns with your financial objectives while setting monthly payments at a level the buyer can reasonably afford to avoid the risk of default. You can use our Seller Financing Analysis Tool to explore different scenarios and find what works best for you.

What is the Downside to Seller Financing?

While seller financing has many upsides it’s important to consider the potential downsides to determine if this strategy aligns with your goals. What may be a pro for one person could be a con for another so it’s essential to weigh the benefits and risks based on your individual situation. The main downsides of seller financing include:

  • Delayed access to cash: Instead of receiving the full sale price upfront you receive monthly payments over time. This may not work for you if you need cash quickly for another property purchase or large expense.

  • Reliance on the buyer: Seller financing requires you to trust that the buyer will make consistent and on-time payments. If they default then you may face the hassle of foreclosure.

If you need immediate cash or don’t have a reliable buyer then seller financing may not be the right strategy for you. Ultimately, the downsides of seller financing depend on your financial goals and ability to manage the risks associated with this type of property sale.

What Are the Risks of Seller Financing?

Every decision comes with risks and seller financing is no exception. The primary risk is finding a reliable buyer which is someone with good credit, a solid financial history, and the ability to afford the monthly payments. If the buyer stops paying or defaults on the loan then the seller may need to go through the foreclosure process which can take several months and is far from ideal.

Repossessing the property may seem like a good backup plan but it comes with its own challenges. The home could be returned in worse condition than when it was sold or if the market declines then the property may be worth less than before. The best way to reduce the risks of seller financing is to:

  • Vet your buyer thoroughly to ensure they are financially capable.

  • Use proper contracts to outline the terms correctly.

  • Understand the rules of seller financing.

Many people successfully use seller financing without any issues but the responsibility still falls on you as the seller to do your due diligence. If you’re looking for a reliable buyer, feel free to connect with our team - we’re a property buyer and can walk you through the steps we take to verify buyer worthiness.

What Happens If a Buyer Defaults on Seller Financing?

It’s important to understand what happens if a buyer defaults on seller financing. While it’s not guaranteed to occur in a seller financing arrangement, default is the primary risk so it’s worth it to be familiar with this process. Here’s a brief overview of how the seller financing foreclosure process typically works:

  1. Missed Payments: The process begins when the buyer fails to make payments as outlined in the seller financing agreement. A grace period of 15-30 days is usually given for the buyer to catch up.

  2. Notice of Default: If the buyer remains delinquent then the seller usually issues a Notice of Default which is a formal warning that the agreement has been breached. This notice details the overdue payments and gives the buyer an opportunity to resolve the default.

  3. Cure Period: Depending on state and local laws the buyer may have a set cure period (typically 30-90 days) to pay the overdue amount and any fees or penalties to bring the loan current.

  4. Legal Action: If the buyer does not resolve the default then the seller can initiate the foreclosure process. This may be handled through Judicial Foreclosure (a court-supervised process) or a Non-Judicial Foreclosure (typically a faster out-of-court process if state laws permit). The timeline for a seller financing foreclosure can range from a few months to over a year depending on state and local regulations.

  5. Property Repossession: Once the foreclosure is complete the ownership of the property transfers back to the seller.

To minimize the risk of default when using seller financing it’s crucial to thoroughly vet your buyer and ensure your seller financing contract is legally sound and protective. Working with a sound buyer and consulting a legal advisor during the process is always a smart step to help mitigate future issues and ensure you understand this process.

Seller Financing Offer & Tools

Seller financing requires a clear understanding of the process and the right buyer. We specialize in purchasing properties with seller financing for our portfolio and can provide you with a Seller Financing Offer. Alternatively, you can leverage our Owner Financing Tools and Contract Templates to navigate the seller financing process on your own.

Brandon Bramley
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Understanding the Seller Financing Interest Rate and Seller Financing Down Payment