Seller Financing: What it Is and How to Use it To Invest in Real Estate

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You want buy a deal,but cannot get a mortgage. What should you do? You should just forget about the deal and move on, right?

No! That is loser talk. Instead try to approach the owner with a seller-finance strategy.

When you have lack of capital and/or credit then seller financing can be the strategy for you to consider. Seller financing is a forgotten strategy that is starting to make a comeback given the current condition of the credit market. Utilizing this strategy can allow you buy an asset that is not feasible given either credit, cash, or asking price constraints.

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What is a Seller Finance Strategy?

Seller-finance strategy is a strategy wherein the seller of a free-and-clear asset (typically but can be a property with a small mortgage on it) becomes your bank along with being the seller.

Pros and Cons of Seller Financing


  • You get the ability to purchase the asset on terms that maybe more beneficial for your capital investment table.
  • Seller gets monthly payments and the benefit of treating the sale as an installment sale thus allowing them to defer any capital gains taxes that may be due.


  • You maybe locked into a mortgage with a pre-payment penalty or may not be able to resell the property immediately. This strategy is typically not meant for flipping but can definitely be used for that purpose if structured correctly.
  • The biggest downside for the seller is that they do not get all their money at the time of the sale unlike a traditional transaction. If that is a big con to the seller then you can guide them on a process of selling their note for a note buyer for a lump sum.

Who Would be Willing to Accept a Seller Finance Strategy?

The answer to that question is it depends. You will need to define a Marketing Thesis which should identify the seller and asset profile within a specific trade area that you theorize would be most accepting of a seller finance strategy. My marketing thesis for a seller finance strategy is defined below:

Marketing Thesis Layout


Ownership Type: Out of State and/or Absentee Owner

Equity: 50% to 100%

Date of Last Purchase/Refinance:  1995 or earlier


Tax Record Description: 3S-B-3U (3 Story-Brick-3 Units) or 2S-2U (2 Sotry-2units)

Asset Type: Multifamily or 4C (Commercial Apartment Building)

Areas: Newark, Jersey City, Clifton

Once you define your marketing thesis then you can utilize Tax Records and/or a third party vendor like ListSource to purchase a list of leads that match your criteria and develop a marketing plan to target the leads.

You should develop a marketing plan that defines you how and when you will be reaching out to your list of leads. Remember: It usually takes Seven Touches before a lead would think about reach back out to you.

Once You Get Them to Call You… Then What?

Slowly but steadily your leads will start calling you as long as you are consistent with your marketing efforts. Once you start getting calls then you need to set up appointments to meet with your leads ideally in person. When you are meeting your leads for the first time you should be to find out as much as you can. This is when you have to be like a Bloodhound or a Detective. To make sure you find out the right facts you should develop a list of questions that you want the seller to answer.

Below is the list of questions that I usually try to work into conversation so that I can better understand the sellers needs, wants and pain points:

  1. Why are they looking to sell?
  2. How much cash do they need and how much cash do they want?
  3. What will they be doing with the cash exactly?
  4. How soon do they want to sell the asset?
  5. Do they have enough monthly cash flow coming in to pay their expenses?
  6. Do they owe any mortgage on their property?
  7. Are they willing to take payments instead of a lump sum of cash? (Try to make this question unnecessary by having your marketing educate the sellers on seller financing benefits)

Once you have collected your answers then you can start drafting a offer that is a win for the seller which will turn into a win for you. There are many ways to compose a seller finance offer and the best advice I can give is to setup an offer that solves your sellers’ pain points and addresses their cash needs.

Three Seller Financing Offer Types

  1. 100% Seller Financing Deal: In this offer the seller funds the whole deal as a note since they have no need for the cash but rather need higher monthly payments than they are able to get from other sources.
  2. Seller Wrap Financing: In this offer the seller funds part of the deal by “wrapping” their current in-place first mortgage together with an additional amount needed to make the deal work. Usually this option is only acceptable to the highest of motivated sellers who are in some type of cash flow constraint who would consider this option.  (Disclosure: This offer structure may violate the due on sale clause of a mortgage document so please make sure that the seller is aware of that risk upfront and make sure you review the mortgage document as well)
  3. Second and Third Lien Offer: In this offer the seller takes a second & third lien mortgage assuming that the first mortgage is assumable or you can bring a first mortgage from another private lender. This strategy is highly creative as it allows the seller to sell their second mortgage position to help satisfy their cash needs while still retaining monthly payments from the third mortgage. This strategy can be executed but you will need to really educate the seller on its benefits before presenting them this type of an offer.

Seller financing strategy can be a win-win for both you the investor and the owner of an asset. You need to understand the seller pain points and educate them on the benefits of seller financing to be successfully in executing this strategy. Done correctly you can invest in real estate even with the constraints of limited cash and credit.

Share your creative investment strategy structures in the comment boxes below.

Happy Investing.

Photo: katsrcool (Kool Cats Photography)

About Author

Ankit Duggal

Ankit Duggal(G+) is the Investment Director of a New Jersey Income Operating & Consulting Company . Ankit is a seasoned value investor who enjoys achieving a zen through surfing, hot yoga, and snowboarding.


  1. Thanks for the blog. I think the biggest con to the seller you should disclose is if the buyer defaults it can be a long and costly foreclosure process. In my state that processes redemption rights can legally take up to a year, although it is typically three months. Also, here the second and third notes are whipped out. I think what happen as a result of all the savvy REI non-disclosures and fraudulent creative financing of the 90’s, get rich quick lies, the fed and states have crack down on lending laws and disclosures. You are allowed up to 10 owner finance here, after that you are looked as a lender and need a license according to the State Banker Commission Office. The FTC also monitors REI’s for non-disclosures and mortgage fraud. If you as an REI are caught you can face prison time, fines, etc. Be VERY careful here, all it would take is for an average attorney to prove you are a persuasive REI by your portfolio.

    With all the proper disclosures in place this can be a great way to buy property.

    • Ankit Duggal

      Terry thanks for the informative comment. The FTC rules I thought applies to the seller and not the buyer but correct me if I am wrong.

      Foreclosure is an implicit risk always prevalent with seller financing deals for the seller. The best way to give the seller comfort is through a deed in escrow or some type of default trigger mechanism that is held in an attorney trust account i.e. UCC lien if the asset is held by a special purpose vehicle.

  2. Hi Ankit:

    The comments that Terry P make are common for folks that do not like “Seller Financing”. I like Seller Financing. I like to buy on Seller Financing.

    I define Seller Financing as….
    “What creative non traditional way can I buy the property that is legal OR control the property that is legal that helps the seller win?”

    And I care about the risks to the Seller.

    So the tools I use are: Sub2 with or without land trusts, Agreement for Deed, Master Lease, Sandwich Lease Option, Lease with Option, Wrap – AITD, Have the seller create a note for equity. There are cousins to all of these. It does depend on the state also (e.g. Texas with Agreements for Deed).

    “Buying on a Lease Option” and assigning is a great way to avoid borrowing.

    You can decrease the anxiety of the seller by keeping a Deed in escrow if I or the buyer defaults in lieu of a foreclosure proceeding, saving time and money.

    You can do more deals if you help the Seller sell on terms.

    Nice article, Ankit, stay creative!


  3. Ankit:
    We LOVE seller financing deals and have done a lot of them. We market heavily to free-and-clear properties and always ask for seller financing.

    One of the greatest things about this method is that the sellers typically come back later, want more cash, and are willing to reduce the principle by quite a bit to get some payout. Win/win situations are always wonderful.

    Thanks for the article!

    • Ankit Duggal

      Thanks Karen.

      You are talking about the deal after the deal with the seller wanting/needing more cash.

      Is there any specific direct marketing tips that have worked well in reaching out to free-and-clear properties? Do you have any specific list provider that you utilize?

        • Karen, Ankit, you say brokers and PostcardMania (just watched the video). I’m a little confused on how they know who owns their house free and clear. My county does not record that info, others may I do not know, but how do they get the info and keep up on it? Brokers I can see maybe if the seller told they have no loan? And are willing to seller finance. I guess there are also the FSBO sites but that is going to take alot of research?

  4. I like Karen’s method, and have had it happen with maybe half my seller financed deals. Recently paid $5k to satisfy a $20k CD I owed to a guy for some land. He almost begged me to pay him cash for it, and was pleased., and now he’s out of the picture. Not a bad discount…

  5. I like multiple offers to Free and Clear Houses.

    1. Low all cash

    2. Lease Purchase and new appraisal strike price (perhaps assign for a fee)

    3. 5% above market and 180 payments with no interest, as in:
    Ex) $100K house $800 rent
    $105K offer div by 180 pmts = $583.33
    Spread = 216.67
    In 15 years you own it free and clear.

    • Brian, thats a pretty good idea, thanks! Would you recommend getting a local attorney to make sure I use the proper forms and set this up right? I’ve never done it before, but my young son is getting married soon and they don’t qualify for a bank loan yet and are renting high, the bank wants two years of W2 income. It’s not that they don’t qualify with current income they have plenty of. I figure OF is a great way if I can find them a home of their own. .

      • Hi Terry,

        This business of finding a motivated seller that will take terms instead of cash is not complicated but it takes patience.

        If you want to help your son, yes find an attorney.

        What state are you in? All states have different issues.

        Email me or call me and I will give you some ideas on marketing and negotiating with motivated sellers on terms.

        Best wishes,


    • Isaac Rothermel

      Hey Brian, I really love this strategy, particularly option number three! As a 20 y/o REI, I don’t have cash for down payments, so I have to get creative. My six month investing strategy at this point is to find homes that have two evictions in the last two years, one of the evictions being in the last six months. As I create a list of those, I’ll contact the owners, saying that I know of the trouble they’ve had finding quality tenants, and that I can take the problem off their hands with a owner-financed purchase. Since the properties won’t be “on the market,” I’ll sidestep competing offers from other REIs in my area. If the property seems like a nightmare for them, getting those monthly payments on a property owned free and clear would probably seem ideal. What do you think? I have experience as a property manager, so I’m confident that I can compile lists of qualified tenants, especially with some hustling.

  6. I finally got a chance to do a little internet research on my local area. There is not much inventory for Owner Finance, Rent to Own, other term I found used is Contract for Deed, existing inventory is in bad neighborhood I’m guessing because these properties are hard to sell. The market here is still buyer, lot of houses for sale. I found few local investors websites that buys and sells this way, but very little inventory. I talked to a agent here that said that is because this is new to the Midwest. That is not true, perhaps to his brokerage who is one of the biggest and just started a separate website to list them.

    I also search Crag’s list, very little. I thought I would put an ad out there?
    Seeking owner finance, rent to own, contract for deed, properties up to $100K in good neighborhoods. Fixer-uppers ok.

    Not sure how to read all this but it sounds like these is an open market for them for buy and holds, as a rehabber, or a builder.

  7. I recommend NOT advertising that you’re looking for RTO/CD properties. You may get some replies, but it will be the dregs. Most sellers want to know cash is at least an option. Assuming you have established colleagues/investors/landlords (or have some cash yourself), just advertise “cash paid,” or “cash buyer.” If you need partners, call the other “cash paid” ads you see out there, and offer to bird dog for them., and pass the deals on. Once you’re comfortable doing this yourself, I like the “three offers,” strategy, like Brian suggests above, and present them as if these are their only choices.

    My three offers are:
    1. Highest price: $0 down, enticing monthly payments (that allow cash flow), interest rate of zero.
    2. Mid-price. Modest down ($1000-5000), again, all principal payments
    3. Lowest price. All cash.

    I don’t spend much time on the zero interest, if they don’t like it, then I say “well, that changes my calculations if you’re going to require interest. It also present tax issues for both of us as well, 1099 from you to me, more to keep track of, If they still insist and it’s a good deal, set up an amortization schedule.

    If seller has a mortgage, find out what it is, and the payments, and if it’s an ARM or not. If those numbers make sense for the deal, you can put a “subject to” offer into the mix. Definitely partner with an experienced investor (NOT an agent, most have no clue about creative REI) for that, there are several possible pitfalls there and details you must get right.

    If you’re just starting, it’s important to go out and see some houses, and let the seller tell you what solution they’re seeking. Sometimes it’s best to ask, first, “How soon do you need to sell,” and then try to figure out why.

    • “I recommend NOT advertising that you’re looking for RTO/CD properties. You may get some replies, but it will be the dregs.”

      Yeah that is what I was thinking I’d get the dregs, so will not advertise, thanks!

      “Most sellers want to know cash is at least an option”

      You are correct, most listings I seen wanted around 5% down and that is all the agent knew. The investors websites said they offer as little as 3.5% if you qualify, then we are back to that.

      “Assuming you have established colleagues/investors/landlords (or have some cash yourself), just advertise “cash paid,” or “cash buyer.”

      I went to my first REI meeting last weekend, in this small town, there are not a lot of guru REI’s, most were new. I have a cash investor with about $100K which can buy a lot of the right houses here, altho that price range is not moving as well as higher end homes right now because young have not recovered yet I hear. I’m not sure where to put the money yet. I also own a construction co here that can rehab or build new with my investors cash, then put my son in it COD with investor, but then I am out of cash. My goal is to make my investor and myself some $ and find my non-bank qualifying son and new wife a place to live 🙂 He will bank qual in about a year with more history from our business.

      “Just advertise “cash paid,” or “cash buyer.”

      Will do but won’t I still get the ‘dregs”? Would I do this on Craig list or direct mail? Who is my target since I got cash to buy out a note?

      “If you need partners, call the other “cash paid” ads you see out there, and offer to bird dog for them. and pass the deals on.”

      Sounds like a great idea, even if I got cash go find some more or sell some deals I don’t want or have money for.

      “If seller has a mortgage, find out what it is, and the payments, and if it’s an ARM or not. If those numbers make sense for the deal, you can put a “subject to” offer into the mix”

      You lost me here, subject to what?

      “If you’re just starting, it’s important to go out and see some houses, and let the seller tell you what solution they’re seeking. Sometimes it’s best to ask, first, “How soon do you need to sell,” and then try to figure out why.”

      Ok will do some educational due diligence here before I dive in. 🙂

      This is all great advice, thank you. Your right I get so frustrated dealing with agents especially kids, much better out here. 🙂 He was useful in confirming how small the market is for it and an opportunity to create one. I asked if he had done any direct marketing to find more inventory, he said he had but it is too new,it’s not people just want cash like you said, and don’t know how to make on it COD. We have seen contract companies try direct mail with little success, I’m not sure I’d get anywhere with that for now anyway, most just throw the post cards away. I would think tho that the young like my son might be a good target.

      • Forgot to mention other thing that agent said is the only way he sees to build inventory is as a developer. This may be a good market to build my spec sell it RTO/CD put my son it, then keep building. I’m just not sure where I get the cash to keep building, since I only have enough to build one. I guess once I had that first one on RTO/CD, I could use that cash flow to get more $? I think this would be a great way for a new builder to make money on a build, and as the banks would by financing them. My state laws allows be to do ten owner finances before they see me as a lender, which is plenty for starters. With the low-end homes moving slow here, this may be the way to build. Alot of builders are renting in this price range, some RTO.

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