Seller-Financing (or owner-financing) refers to a sales transaction in which the seller allows the buyer to make payments over time for the property being purchased. This “private” financing by the seller replaces the more traditional conventional financing offered by banks.

There are many reasons why a seller might offer financing to a buyer. Perhaps the buyer is self-employed and can’t qualify for a conventional loan. Or maybe the real estate market is tight and the seller is having difficulty finding buyers.

In a seller-financed transaction, the specific details of the loan (payment amount, interest rate, term, etc.) are agreed upon between the buyer and seller. The amount financed by the seller will typically be calculated as the sales price minus the buyer’s down payment. 

Here’s an example of how it works.

An owner advertises their house for sale, either on their own or through a real estate agent.

A buyer makes the seller an offer, and they agree upon a sales price of $150,000 with a 10 percent down payment of $15,000. 

Rather than requiring the buyer to secure a bank loan for the $135,000 balance, the seller “carries back” the balance in the form of a promissory note and mortgage (or trust deed). The specific documents required will depend on the type of financing offered and the state where the property resides. A title company or real estate attorney is often used to close the transaction. 

The promissory note, or “note” for short, spells out the terms of the repayment agreement. In this case they agree to 8.0 percent interest with a payment of $990.58 per month based on a 360-month (30-year) amortization.

Because the buyer is making payments directly to the seller rather than an institutional lender like a bank, the legal arrangement is called a private mortgage, seller carry-back, installment sale, seller-financing or owner-financing.

The seller has largely the same lender rights as a bank would, so if the buyer fails to make payments (referred to as a “default”), the seller has the legal right to foreclose on the buyer and take the property back.

In our example, it might seem that the seller is locked into this financial arrangement for the full 30 years. However, that’s not actually the case. If the seller decides they’d rather have cash today instead of payments over time, their rights to some or all of the future payments on the note can be sold or assigned to a note investor on the secondary market.

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