The Definitive Guide to Using Seller Financing to Buy Real Estate

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One of the most popular methods of using low or no money down when investing in real estate is using “seller financing.” Perhaps one of the oldest of “creative financing” methods we talk about here on BiggerPockets, seller financing seems to have become less and less popular in recent years – largely for reasons we will look at in this section. However, knowing how to effectively use seller financing in your business can help you get more deals done, faster, for less money – so don’t simply toss the idea of seller financing out the window. This post is going to show you exactly what seller financing is, how you can get use it in your investing business, and the dangers to look out for.

What is Seller Financing

Seller financing is just what it sounds like: the seller provides the financing. In other words, the owner of the property acts as the bank and, although legal ownership is changed hands, the payment is sent directly to the previous owner rather than a bank.

For example:

I want to purchase a particular rental house but do not want, or lack the ability, to get traditional bank financing. The seller would like $100,000 for the property, but is willing to “carry the contract” – which is investor jargon for someone who agrees to finance a property they own. The owner asks for $5,000 down and a 7% interest rate on the remaining $95,000 amortized over 30 years for a monthly payment of $632.03. I agree to his terms and after doing my due diligence, I close on the property through my local title company. I then look for a tenant who rents the home for $1400 per month and collect the cash flow difference each month.

In the scenario above, the seller gets a good, fixed interest rate on their money, I get to buy the house for just $5,000 down, and I don’t have to deal with a bank at all. Seller financing can be another great win-win for all parties involved. But … what’s the catch? Why aren’t these more popular?

Why Doesn’t Everyone Buy with Seller Financing?

There is one major problem with seller financing that puts a wrench in the whole strategy: the “due on sale clause.”  The “due on sale clause” is a legal part of nearly every mortgage that gives the bank the right to demand that the loan be paid back, in full, immediately if the property is sold (hence the name “due on sale.”)

So you can see the problem with seller financing: the property is being sold, so it doesn’t work real well when you have an existing mortgage on the property. In other words, if you have a mortgage on a property, and you sell it using seller financing, then the bank could come to you and demand to be paid back right now or foreclose on you.

Will that happen?

Well, remember that the “due on sale clause” gives the bank the RIGHT to demand full payment, it doesn’t require the bank to do so. The bank may be perfectly fine with the arrangement and never say a word – or they may never find out. However, the risk you carry is great any time you sell a property with a due on sale clause. When I invest in real estate, I want to decrease the amount of risk I am taking, so I personally don’t flirt with the due on sale clause. So how do I use seller financing?

So how do you get around the Due on Sale Clause?

As I mentioned above, the danger of using seller financing when the seller already has a mortgage is that it may trigger the “due on sale clause.” If this happens, and you can’t pay the bank back the entire loan balance, the property may be foreclosed on. If you are buying from a homeowner, the homeowner may get foreclosed on and both of you would lose the property. Obviously this is not a situation you want to find yourself in, so there is one simple solution:

Only use seller financing when the home is owned free-and-clear. (There are some exceptions, which we will cover later.)

In other words, if the owner of the home currently has a mortgage on the property, don’t use seller financing to buy it from them unless you pay off the existing loan first. Your goal when buying using seller financing is to find sellers who don’t have a mortgage. This way, they can provide the financing without the risk of them being foreclosed upon.

The Benefits of Using Seller Financing

There can be numerous benefits to using seller financing, so let’s take a look at a few of the most common:

  1. Ease of Financing: As mentioned earlier, when you use pure seller financing to purchase a property, you avoid the need to use a bank – which can mean the difference between a deal and no deal for many people. If you are “tapped out” on the number of mortgages you can get, seller financing can be a great tool in your toolbox to obtain additional rental property.
  2. Possible No or Low Down Payments: Because you are dealing directly with a homeowner seller, there are no “cut and dry” rules when it comes to the down payment. You aren’t dealing with rigid rules from Fannie Mae or Freddie Mac – which require 20%-30% down on an investment property. Instead, you get what you negotiate with the seller. The seller may want nothing down, or they may want 50% – you won’t know until you ask and negotiate.
  3. Option for Creativity in Structuring the Deal: As I mentioned above – the rules when dealing with banks can be extremely rigid – but not so with seller financing. Seller financing gives you the ability to get creative to solve a problem. Rate, term, payment amount, payment dates, and everything else is completely negotiable, which can turn a mediocre deal into a great deal. I’ve known investors to negotiate a 0% seller financing situation with the seller – talk about being creative!
  4. Purchase “Un-Financable” Properties: Sometimes, the condition of a property may be too poor to use traditional financing. In these cases, seller financing can give the buyer a chance to own the property, begin fixing it up, and possibly refinance into a more traditional form of financing later on.
  5. Doesn’t Show On Your Credit Report: Unless the seller of the home signs up with one of the credit reporting agencies to report the debt (very unlikely) chances are your seller financed deal will not end up on your credit report, which can make it easier to obtain other loans and mortgages in the future.

There are no-doubt numerous other reasons why you may want to use seller financing, so don’t be afraid to seek out opportunities where you can use it. It truly can be a great way to finance properties of any size. However, if it’s so good for the buyer – are there also good reasons for a seller to agree to it?

Why Would Sellers Sell Via Seller Financing? (Say that Five Times Fast!)

If I gave you the choice of getting $100 today or $1 per month for the next 30 years, which would you take?

Most of you would want the $100 right now, but if you do the math – $1 per month for 30 years is $360, which is more than 3x more than the lump sum! How about now? Did you change your mind?  Doubtful.  Chances are you still would want the $100.00 because of your current position in life – you would rather have $100 now than $360 spread out over many years. However, others may choose to take the $1 per month, because they don’t need the cash now and would rather have the security of a monthly dollar.

The same principle is true for home sellers. If a home owner owns their home free and clear, many of them would rather just get the cash and move on. However, for a large number of sellers, the value of getting monthly payments outweighs the need for a large check. Let’s take a closer look at why owners would choose to sell via seller financing as opposed to just getting cashed out.

  1. Monthly Income: Perhaps the most common reason sellers would prefer to sell via seller financing is to get monthly income. Just like in the example I used above, with the $100 or $1 per month – there are a lot of individuals who would simply prefer to get steady checks each month instead of one lump sum. This is especially true for older sellers, who need monthly income to survive and pay the bills. A $100,000 chunk of money would only last so long for an older seller, but if that income is financed over 30 years, the money will last them a lot further into retirement.
  2. Better ROI: Many homeowners and investors choose to sell with seller financing because the interest they get from the financing is greater than they will likely get elsewhere. For example, if the homeowner were to sell a home for $100,000, they could put that money into a Certificate of Deposit at the bank to get 1.5% APY… or they could seller finance their home and get 8%. Which is better?Many seasoned real estate investors understand this concept and eventually move their portfolio from a “holding” phase to a “selling phase” where they use seller financing to unload the hassle of being an owner but still collect monthly income by carrying the contract and providing seller financing. At that point, the investor leaves the “landlord” business and enters the “note buying” business. For more tips on buying and selling notes, check out Five Advantages of Note Investing. 
  3. Spread Out Taxes: Anytime you make money – the government wants it’s share, and when you sell real estate it’s no different. This issue may not be as important for homeowners, because of the IRS rule that allows homeowners to avoid paying taxes on up to $500,000 in profit from selling their primary residence – as long as it meets certain specific criteria.However, investors are not so lucky and are forced to pay taxes when they sell. For example, if an investor spends 30 years paying off a rental property mortgage, and now owns the home free and clear – and decides to sell the property for $100,000 – the investor would need to pay taxes on that $100,000, which could result in a nearly $50,000 tax bill. Additionally, the investor will also need to pay a “recapture of depreciation” tax that could add much more to that tax bill.Therefore, many investors choose to seller using seller financing rather than getting a lump sum, in order to defer most of those tax payments. You see, the IRS has special tax rules for installment sales, such as using seller financing, so the seller may only need to pay a small portion of that tax bill each year while the loan is being paid off.

    This also comes back to the “ROI” concern. If an investor were to sell a property for $100,000 – they could easily lose half that amount, or more, to taxes, being left with only $50,000 to invest in something else with. Even if they could obtain 12% in the stock market – that 12% is only going to be on the $50,000 – not the $100,000 that they sold. However, if they provide seller financing at 8% , they will actually make more because the interest received is on the “pre-taxed” interest.

  4. Can’t Sell Otherwise: As mentioned in the previous section, many properties simply are not sellable to a typical bank-financed borrower. Offering seller financing can provide a way for the seller to unload a property without needing to do the work to fix it up.

Personal Case Study of a Seller Financed Deal

Have you ever read a book that changed your life?

A number of years ago I had just finished reading “The ABCs of Real Estate Investing” by Ken McElroy (*Publisher), which dealt heavily with the process of buying and selling mid-size apartment buildings. I was so enamored with the thought of investing in these apartment buildings and, although I didn’t know a lot, I knew it was a path I wanted to take.

The next day I was speaking with an older gentleman from my church and I casually mentioned the book and that someday I’d love to invest in mid-size apartment buildings. He looked at me funny and said “that’s ironic, because I might have an apartment complex I’m looking to sell.”

It turns out – this gentleman and his wife had owned a 24 unit apartment complex near my town for many years but had sold it using seller financing eight years previous to fund their retirement. However, the current owner (the man they sold it to) had refused to fix up any of the units as they went vacant, so one by one – they property began to lose money, causing the buyer to stop paying the monthly mortgage to the seller, the man I was speaking with. He was nearing the end of the foreclosure process and was about to take back the property but didn’t want to get back into the real estate investing game, and especially didn’t want to have to go in to fix up the units that had been neglected for so long.

The conversation couldn’t have happened at a better time. We spoke numerous times on the subject after that initial conversation, and about a year later the man and his wife officially sold the property to my wife and I for just 3% down payment (to cover the back-taxes on the property.) I still own this apartment complex today, and every month make a mortgage payment to the retired couple who travel around the country in an RV – enjoying the retirement while I own the property.

I tell this story not to brag – but to show you what’s possible with seller financing. These kind of deals exist in every market, in every price range, with every property type – but you’ll never know if you don’t start asking and talking about it. Like my story above- seller financing can create amazing win-win transactions for all parties involved. Had I not read that book, and had I not mentioned my ambitions to this man I barely knew – I would not have that apartment complex today.

Related: BiggerPockets Presents: The Best Real Estate Books Ever

Partial Seller Financing

Up until this point, I’ve discussed seller financing mostly from a “entirety” position – in that the entire property is sold using seller financing. However, as I mentioned earlier – seller financing gives you the ability to get your creative juices flowing. One such creative way to use seller financing is known as “partial seller financing.”

What if the seller didn’t own the home free-and-clear, but had some equity in the home? This kind of situation allows for you to let the seller finance just part of the deal, while a traditional lender finances the other portion. This can get a little bit confusing, so let’s look at an example.

Charlie owns his home which currently is for sale for $100,000 – but he only owes $50,000 to the bank on his mortgage. Susan is a buy and hold investor that is looking to buy Charlie’s property – but doesn’t have a large down payment to work with. So Susan works a “partial seller financed” arrangement with Charlie and her lender, in which Charlie agrees to “carry back” a second mortgage for $30,000 (in other words, Charlie “seller finances” $30,000”) as a second-mortgage *(sidebar) while the lender agrees to fund a $65,000 first mortgage. Susan is therefore able to buy the property for just $5,000 down and has two separate mortgages. The $65,000 goes to pay off the original $50,000 loan of Charlie’s, and he ends up with $15,000 in cash plus a “note” (mortgage) for $30,000, giving him some monthly income for the next X number of years.

Don’t worry if that was confusing to you – this is pretty advanced stuff! The point is, seller financing allows for some creativity and using a seller’s equity to partially fund a real estate deal is a potential path you may want to take some day. Keep in mind, however, that many banks and lending institutions do not allow seller carry-back second mortgages anymore (they were much more common in the past) and may require you to still put a certain down payment into the deal, no matter how much the seller agrees to carry. However, you won’t know until you pick up the phone and start asking different lenders what their rules are!

Five Ways to Find Seller Financed Deals

So, you now have a pretty good idea of how seller financing works and how you can use it in your real estate investing to get more deals. But how do you find owners who are willing to carry the contract and provide seller financing? Here are three simple ways to find these sellers:

  1. Ask – it may seem obvious, but sometimes all it takes is a simple question. When talking with sellers – whether directly or through your real estate agent – simply ask the question “do you need to be 100% cashed out or are you able to provide any seller financing?” As hopefully I’ve made clear – seller financing is about creating a win-win situation, not trying to take advantage of someone. Therefore, never be afraid to ask – because they may be ecstatic to provide seller financing but never thought about it before. Besides – it never hurts to ask. What’s the worse they can say?
  2. Look for Keywords – When scanning the MLS, Craigslist, or other sources of finding properties keep an eye out for phrases like “owner will carry,” “owc,” “flexible terms” “seller financing,” “motivated” or other indications that the seller is open to the conversation.
  3. Direct Mail – Although direct mail practices are far beyond the scope of this post (check out the BiggerPockets Forums for some awesome discussions on Direct Mail best practices) understand that you have the ability to purchase lists of homeowners and can specify how much “equity” the homeowner has in the property. Significant equity is a good sign that seller financing may be a possibility – so when sending out direct mail, keep an eye out for high equity and again – don’t be afraid to ask.

Risks and Drawbacks

Although seller financing can provide some excellent options for you as a buyer, the strategy is not without some risks and dangers to be aware of. This section is going to look at 3 of the most common concerns when dealing with seller financing and offer some tips on overcoming those potential problems.

  1. The Due on Sale Clause – We covered this already quite a bit, but I can’t help but rehash it here. It’s vitally important that you understand what the due on sale clause is – and why it matters. You don’t want to endanger the credit or the relationship with a seller by trying to circumvent this clause. Understand that if you buy a home using seller financing, and the home has a mortgage with a due on sale clause- the bank may foreclose on the seller, leaving both of you in a financial mess.Again, the simplest solution is to only use seller financing on properties owned free and clear. The only exception I have to this rule is through short term financing. There are investors out there who user seller financing with existing mortgages (often called a “wrap” because you wrap one mortgage over another) despite the due on sale clause – because they believe they can quickly fix the property up and either sell or refinance before the bank finds out and has an issue with it. I won’t tell you this is a great idea to do- I’ll leave that to you and your risk tolerance level.
  2. Higher Interest Rates – Although seller financing allows for incredible creativity, generally speaking you will pay a higher than normal rate with seller financing. This has not always been the case, but in today’s lending environment with under 4% loans, it’s difficult to get a seller to accept interest as low as that (though, some investors do negotiate 0% interest seller financed loans.) Just be sure to run the numbers with the interest rates you plan on obtaining, and make sure they work for the deal.
  3. Fewer Potential Properties – Let’s face it – although seller financing can be a great win-win for both parties, the vast majority of homeowners are either unable (due to existing mortgages) or unwilling to carry a contract and provide seller financing. Therefore, the pool of potential deals is significantly smaller when looking to work with seller financing.

Seller Financing Doesn’t Mean “Go Buy a Bad Deal”

Before we head out, I want to make something very clear: although seller financing allows you to obtain properties without using a bank, this does not give you an excuse to overpay for a property. Leverage is only leverage when used responsibly – or else it simply becomes a liability.

Seller financing is a tool in your tool box – not your whole game plan.  Use it when it works, but don’t try to force it when it doesn’t.  So go out there, add the “seller financing” tool to your toolbox, and go make some magic happen.

Thoughts? Have you purchased real estate using seller financing? Would you? Let me know in the comments section and let’s chat about it! 

About Author

Brandon Turner

Brandon Turner is an active real estate investor, entrepreneur, writer, and co-host of the BiggerPockets Podcast. He began buying rental properties and flipping houses at age 21, discovering he didn’t need to work 40 years at a corporate job to have “the good life.” Today, with nearly 100 rental units and dozens of rehabs under his belt, he continues to invest in real estate while also showing others the power, and impact, of financial freedom. His writings have been featured on,,, Money Magazine, and numerous other publications across the web and in print media. He is the author of The Book on Investing in Real Estate with No (and Low) Money Down, The Book on Rental Property Investing, and co-author of The Book on Managing Rental Properties, which he wrote alongside his wife, Heather. A life-long adventurer, Brandon (along with his wife Heather and daughter Rosie) splits his time between his home in Washington State and various destinations around the globe.


  1. Awesome info Brandon! I am in the process of closing my first seller financed deal. It is a duplex that I am buying with 0% interest and only 2k down. It is an excellent way to get great terms and all you have to do is ask. Sellers are more willing than you think. It’s all about building relationships and trust with them. There’s got to be a human element in the transaction so they feel comfortable.

  2. Hi Brandon,

    Terrific man!

    My definition: Seller Financing means any way a seller helps the buyer buy the property.
    1. Lease Option
    2. Land Trust – Sell Beneficial Interest
    3. Installment Sale – Contract For Deed
    4. ROFR and lease – Right of First Refusal
    5. Wrap or All Inclusive Trust Deed (AITD)
    6. JV with Seller on a mild rehab – You both profit – better for seller than selling to a wholesaler. REI pays rehab costs, makes a minimum profit, splits remaining profit.
    7. Create a private mortgage at no interest, but Buyer pays 105% of the value of the property (over pays but gives no interest on a private note).

    There are more.

    The list is only limited to your creativity and negotiation skills.


    • That’s two references I have seen to a private note at 0% interest. Does the IRS wield the concept of “deemed interest” in the U.S.A.? If so, how do you legally avoid it?

      Here in Canada, the taxman could/would deem the interest on the note to be at least the bank prime rate.

      • Seth C.

        Yes, it is is called imputed interest in the US. It is the Federal securities rate or 9%, whichever is lower. I think the only way to avoid it would by using a lease with option or something along those lines rather than an actual note.

  3. Good topic. The last few deals I closed on we’re seller financed. You never know which seller will carry until you ask. You never see deals advertised with seller financing. Ask the question.


  4. Ben Leybovich

    Not a bad start 🙂 Brian Gibbons mentioned a few things. I’ll add that the method of collateralization of seller-financing is key to unlocking the benefits. Land Contract is only one of many possibilities.

    Sexy article though – tastes, smells, and looks like Brandon Turner 🙂

  5. ‘HOMES in different area codes” (I know Brandon likes this concept from listening to some of the podcasts).

    To be really good investors we need to stock our tool bags (1031 exchanges, heloc, seller financing, Sub2 for some, OPM) and use these tools appropriately. You wouldnt use a screwdriver to drive a nail! All these tools allow us to expand our reach and accelerate our businesses

  6. Couldn’t have come at a better time!

    Thanks for spotting out my status and sending me this link!

    So let me ask you this, if I was comfortable offering $35k for a house with $20k in rehab and an ARV of $80k or $975/mo rent potential, but the seller wouldn’t sell for less than $53k should I do the deal if I negotiate the $53k at 3% or less (0%?) interest over 30yr or would it not be a deal?

    In that case the seller would make even more money because of taxes and could be happy going into retirement with a monthly payment without headaches? Maybe I could use that at the $35k + 5%int and mention they could defer the taxes since it wasn’t their primary residence?

    • Brandon Turner

      Hey Taylor, no problem! As for your question – if you mean paying the 53k + having to pay the 20k in rehab, you’d owe $73k on a 80k property. That’s not real significant, and you could probably do better without the need of a rehab. But if your goal is cash flow, I guess it would come down to the math. 0% interest for 30 years on 53k is $147 a month + all expenses. I suppose if it made great cash flow, and that was your goal, it would seem fine to me! Thoughts?

  7. Excellent article Brandon and great timing. I am about to start selling some of my own rehabs via seller financing and was stopped in my tracks when somebody told me I could run amok with the SAFE Act and Dodd-Frank. From what I have read it seems I am safe if I “act in good faith” and sell 3 or less properties in a 12 month period via seller financing. However, I have also been told this rule may be state specific as Dodd-Frank kicked some of the grey areas over to the states to interpret (i.e. some states allow for no seller financing). Any insights on this?

    • Brandon Turner

      Hey Jeff, thanks for the comment. I’m not real good with the Dodd-Frank stuff, but I’ve been meaning to research it and write a post on it. Maybe I’ll try to tackle that in coming weeks! Maybe someone else will chime in here in the comments with more experience with it!

      • Seth C.

        AFAIK, Dodd-Frank and the SAFE act only deal with owner occupied properties. So they would not be involved in a purchase as an investor or a sale to an investor. They would only be a problem if you were purchasing with intention to live-in house hack, to assign to an owner-occupant, or otherwise extending financing to them. So it would be fine for a BRRRR strategy. Anyone else?

  8. Like a lot of other folks have said, this couldn’t have come at a better time. I’m looking at a property now the current owner inherited, owns outright, and is motivated to sell.

    As I see it, seller financing is also a tool in the toolkit when they’re asking a bit more than you’re willing to pay in cash. As I work up the nerve to put in that lowball offer – as others have said, “if you’re not embarrassed by it, it’s not low enough” – I can later pull out seller financing if there’s still some distance to bridge.

  9. Brandon Mendoza on

    Outstanding article, Brandon. I am considering a deal with owner financing that I found using direct mail to absentee owners. The sellers countered my seller finance offer with terms that would not work out for me. However, when I was listening to last weeks podcast Mike was talking about partnerships. My ADD kicked in and I Started thinking about how I might be able to provide a solution to the sellers if I partnered with them. I would go in with the rehab money get the place fixed up, sell it on the MLS and split the profits. The sellers own free and clear and the place needs about 18k in repairs. Now I am figuring out how I would secure my 18k. Again, great article!

  10. Great article, sounds neat!

    Just trying to learn more about this tool. Follow up question: does the new owner have the same benefits (depreciation and tax-deductible interests) just like if it was a traditional financing?

    Can the new owner refinance with conventional financing later as an exit strategy?

  11. Very good piece.

    Question goes to the seller carry back. Do you know anyone that is currently doing this? I know many people that have done the other stuff you said and many of other techniques that Brian Gibbons mentioned but nobody that have had seller 2nds (on residential, commercial is different). Well at least nobody that has been investing less than 30 years and were doing them in the 70s and 80s.

    I never say never but since I don’t know anyone that is doing it and don’t even see it being mentioned on the BP forums I can’t imagine it is a generally viable solution. Any bank doing it would be a small subsection of the already limited number of portfolio lenders.

    • Hey Shaun,

      Simultaneous Closing, where you create a note and sell it at closing for cash. It is a Note Brokering Industry technique.

      Here is an article:

      Using seconds in residential used to be common in rising markets, up to 2006 or so.

      We used 2 note provisions.

      Subordination is asking someone who holds a mortgage (or deed of trust) on your property to agree to make their lien subordinate (or “second in line”) to another lien.

      Substitution of collateral
      Substitution is a method of moving a lien from one property (collateral) to another.

      Second notes in commercial are common.

      Go Bruins!
      Éirinn go Brách (Eng = Erin go Braugh)
      A little Gaelic wont kill you.

      • Brian,

        Very interesting article. Sounds like a very attractive alternative when looking to sell with owner financing.

        However I am talking a very vanilla buying scenario.
        Mr. Seller agrees to sell me his home for $100K. Mr. Seller currently has a $50K mortgage on the property and needs to have it off his credit (So no Sub2 or lease option or wrap type stuff possible) and approximately $20K cash, for a down payment, to purchase a new home.
        I can get a new 70% mortgage (residential) from Podunk Savings Bank who will allow seller 2nds. I would like Mr. Seller to carryback $30K as a 2nd after he pays off his existing mortgage and gets his $20K cash from my new 70% on a $100K purchase.
        (Take it for granted I did a proper analysis and it will be a money maker for me with the terms on the 1st and the terms I am offering on the 2nd)

        My question is in 2013 does Podunk Savings Bank exist?

        • Shaun,
          My local banker here in South Carolina recently told us he would do 70% loan with us taking back a 20-30% second. Tigray had backed off this during down turn, but apparently they are getting more aggressive now.

  12. Good read and I’m definably planning to use this much more going forward. I think it might be my only means of acquiring a rental.
    A simple question, are all owner financed contracts written differently by a Real Estate attorney ?
    Considering how much each can change i understand that being the case, or is there some other option besides paying a attorney a few hundred each time.

  13. Brandon as an investor and I am buying a single family home with owner financing. Is it illegal to structure a deal with 0% interest rate on the loan? Otherwords my monthly payment will be applied to all principal. Thanks Jim

  14. This is a great article, thanks. But I have a question that I’m struggling to answer!!

    We’re purchasing a commercial property. The owner has agreed to finance 10% of the purchase price, but only if we back it up with some form of guarantee (Letter of Credit, etc). In speaking with traditional lenders, they’ll only issue an LOC if it’s backed up with cash. All of our assets are tied up in stocks, bonds, IRA’s, etc (we have liquid assets as well but we will be using that towards the purchase).

    A “Personal Guarantee” doesn’t seem to be strong enough for the Seller, as the Seller knows they’ll be second in line to the bank if something goes wrong.

    We’ve spoken to our personal financial advisor, and unfortunately the company he is affiliated with does not have any type of financial instrument that can be used as they don’t issue them. Other lenders won’t consider issuing any type of financing back-up as they won’t be holding the collateral. So we’re a bit stuck.

    Does anyone have any suggestions?

  15. Brandon-
    Thanks for the great article. I have finally reached the point in my investor learning that I am exploring seller-finance and this article has given me some great details. Hopefully, with more research I can find a way to get this to work in my Eagle River, AK market.

  16. This is an awesome article! I have owned rental property for years, but I have always wanted to get into owner financing, instead of just renting to people. The “due on sale clause” really does create a problem. In my experience, the best thing to do is talk to the bank first. That way you don’t have to worry about them finding out in a different way.

    Seller financing is the best way to do real estate, because you get the income benefits of owning rental property, but you aren’t responsible for any of the repairs. Plus, if the buyers default, you take the home back and you are left with an asset (if you seller-finance again) and all the money they paid in.

  17. Carolyn Powell on

    Hi Brandon Mendoza!

    Your articles are excellent and definitely kept my interest. I’m looking for a solution on how to resolve a seller carry transaction. I am acting as a dual agent in the transaction. (Im in compliance with full disclosure.) I’ve been a Realtor for 15+ years then a Mortgage Broker/Owner for 15+ years. With the market changes leaving most people with zero equity it was evident I would have to cater to the purchase money market. I decided it was time for the next chapter so I closed and went back to get my R.E.license Again:) Lot of changes in the lending since 2008. I have a buyer that is credit worthy. Due to the seller being in default fees keep adding up and they could file the Notice of Sale any day. The seller carry terms are extremely attractive for the buyer. Im having a loan serving company service the mortgage which protects my buyer. Lets face it, he can’t make a payment. Who is to say he wouldn’t keep the buyers payment. So you have to make the transaction a win win for all parties and disclose everything! My buyer is not too concerned about the Due on Sale Clause since he can obtain financing rather quickly. He only needs $60K for a down payment and the seller is letting him assume the obligation of the first with the existing terms. which is a 3.75% fixed rate with 28 years left. Purchase Price is 280,000. Its attractive to the buyer because he’s a foreign national and those loans are 30% sometimes 40% down payment plus closing costs to the mortgage company and the rate is higher. As long as he has an exist plan in place then it’s all good. One question I have is if we decided to do an AITD and if the lender calls the note due does the Due on Sale Clause supercede the seller carry transaction meaning does the lender give the new party 30 days? Technically the lender has to foreclose to get the deed back. In this case there once approved borrower already conveyed the deed to someone else. Do they look at the transaction as fraud? If so they may not have to foreclose since it may not be considered valid. Not sure why I can’t wrap my brain around this LOL! The only reason Im asking is I would never put the buyers investment at risk and I don’t want to tell him in the event it happens you have 30 days. When the Due on Sale Clause has been violated? I believe the Deed says if they call it due its due and payable immediately. Now my next hiccup is something new thats in effect. My seller has an FHA loan. Title company was notified by HUD that if they closed any seller carry transactions and got caught then they would be prohibited from closing any future government transactions. Due to this threat from HUD there is not one title company tha will issue a title policy. I was lucky to find an escrow company that would close it. Thats only because they do not cater to government loans anyway. They agree to close it with no title insurance. and the loan servicing company agrees to service the contract with no title insurance but the buyer is concerned about doing this. He is not proficient to our American ways he says:) His only real concern was if the seller had any prior issues that might pop up. I explained all of that to him. As a Realtor I can close without title insurance providing I disclose and have a held harmless signed by all parties. My question is do you know of a small Mom and Pop Title Insurance Company that doesn’t cater to government transactions therefore they’re not threatened by HUD’s request and threat! Another idea I had was close as a lease option. Title would issue a Lessee Policy which only covers the investment of the Lessee. They would not defend the title in the event the seller had a lien attach to the property. The when the Lessee exercised the option he’d be stuck to move forward without paying it. Its probably the safest way because title isn’t transferring ownership. However the Lessee doesn’t want to be referred to as a renter after paying 50K down. I assured him he is not paying 50K to buy an option. He’s paying 50K and he is reducing the sale price and the money is bringing the loan current. The monthly payment that he makes will also reduce the principle balance. When he goes to exercise the option the purchase agreement has to be clear on all this money is a credit to the buyer. My point was to him is he’s established an equitable interest since his money went towards the mortgage and it is not consider rent. I explained into to lien the property other than a mechanics lien of some sort and thats not th case since it needs rehabbed. It obvious that isn’t hangin out there:) I referred to the possibility of a bad debt and the seller gets sued and the creditor gets a judgement. He’d have to appear in front of the judge to get a writ of attachment. He barely had credit to get the loan in 2010. since then he went 14 payments down and the lender modified. That was in 2013. Now he is 15 payments down. I doubt if anyone is going to give him credit. He doesn’t have any IRS issue either. My question is how do I close this deal so it is a win win to all parties. I told him unless he pays cash there is no perfect deal. He be fine with an AITD if he got title insurance. Personal since the home is 10 years old and I know the sellers credit situation what can happen? Deed transfers on an AITD. Sellers past credit obligation just lost…according to public records he’s not the owner. No possible way of a previous mechanics lien. Home is 10 years old. I don;t foresee eminent domain 🙂 Plus an owner title policy only covers the purchase price. So what the heck is that worth in this situation?? I don’t want to twist his arm and try to convince him though. My luck something would happen and here ya go! Im a duel agent and its all my fault. Isn’t that how it goes:) On a serious note I want him to be comfortable . Like I said there is no perfect deal unless it’s cash. Even a loan in his name is double the money down and a higher rate. Plus I may not have the time since the seller has defaulted. Just picking your brain on how would you do this. Go have a beer and forget they ever called 🙂 haha ! I feel like it somedays. It’s been going back and forth for a month now. Thank you for reading my very long message:) All your ideas and thoughts and advise will be greatly appreciated! Thank you! Carolyn

  18. Zee Moore

    Just the article I was looking for!! I currrently have rental properties in my name but have maxed out on convential mortgages. I am looking to purchase 5 properties from one seller with seller finance. The seller still has a mortgage on 3 of the properties.
    1. The title company will file with the tax office and the deeds will be in my name just like with a conventional?
    2. Because they still have a bank loan, do they keep their insurance and I pay it or do I need to get insurance in place of or in addition too?
    3. The 2 properties that the seller does not have a bank mortgage, can I sell them before the end of the 10 year contract?

  19. Elizabeth Blazina

    Brandon , Great article!
    Do you ever use a third party entity in seller financing to handle all the monies involved. So this would be after the note is made and the buyer starts making payments. Sort of a buffer for the note holder to be unattached somewhat.
    Lastly, as you mentioned , anything can be negotiated, so in a seller finance loan is there variations in the way that interest is charged: simple interest vs, traditional mortgage.

    Thanks again,

  20. benjamin cowles

    Brandon, this comment really threw a wrench in my spokes:

    “If an investor were to sell a property for $100,000 – they could easily lose half that amount” (to taxes)

    In my researching thus far I’ve not come across such alarming info on taxes. Could you expand on that? What do I need to learn about to avoid losing 50% of the sales price of a property I may sell to property taxes in the future? 50% of the sales price? That seems unbelievable. More info or direction to research please.

  21. Jim Stephenson

    Great summary article. Thanks! Can you (or anyone else reading this) point me in the direction of how to do a seller finance deal as the seller? I’ve got a buy and hold property that I did a lease option with a tenant buyer 3 years ago. He has paid faithfully, but after three years still isn’t in a position to qualify for a mortgage. (Has a BofA foreclosure from his past residence that is still haunting him). I’m considering carrying a note for him, but haven’t been through the process. Do I talk to my title company? Do I have to go to an attorney? Any helps with the logistics would be appreciated.
    Jim S.

  22. Ben Staples

    Thanks so much for writing Brandon. I was recently talking to a landlord who was having a yard sale (selling stuff left in his property after a tenant left town) and he casually mentioned he was willing to consider “holding paper.” My heart skipped a beat and we talked a bit more about his real estate story, what he was looking for, etc. Like you have said before in multiple podcasts, he is older looking to get out of his buy and holds and looking for someone to pick them up while still having monthly income for a while. We traded contact info and I have since reached out but unfortunately have not yet heard back. I hope he replies!

    • Have a Las Vegas house I owe 200k on, bought 3 years ago. I have a buyer that will buy for 280k, 60k dp. The house is due to close, however the lender is requiring a private road maintenance agreement between all owners and recorded. The house is in a 4 house culdasec, with private gravel road that has maintained its condition, needs minimal maintenance. This issue never came up when I bought the house. Any suggestions on how I can sell the house without having a cash buyer? It seems carrying the note is not a option because of due sale clause here.

  23. Lauren Baker

    I am looking into seller financing as an option for buying and hacking a duplex. My s/o and I are currently renting the property and our landlord has already mentioned being willing to sell the property. Would a land contract get around the due on sale clause? Also, my understanding is a land contract simply means that the seller holds the title until the mortgage is paid in full, is this correct?

    Any help would be appreciated

  24. Your entire example on $100 vs $1 a year was just flat out wrong. Basic finance knowledge would show you. You’re neglecting the time value of money. Assuming a basic inflation rate of 3% a year (which has been the statistical average) each dollar per year would decrease by the inflation rate (basic discount rate principle). And without any interest on that $1 per year, the value further decreases. The $100 now is a FAR better option, because financially speaking, you would earn AT LEAST 4-5% after tax rate on that, for 30 years using your example. Compound that and you’re looking at an exponentially greater value than $360, which wouldn’t even be the value in 30 years due to the discount rate of inflation. The purchasing power (the sum’s real value) would be minuscule. Not sure how you could write that example and claim to be an expert on financing deals. Lost all credibility in my eyes with that one.

    • Steven Skinner

      You’re an idiot, lol. Over-complicating an intentionally simplified reflection of “money now” vs “money then,” and the benefits or disadvantages of both. And since I’m confident you won’t understand why you’re dumb just b/c I enlightened you to the fact, I’ll explain shortly: The $1.00 in the example was being compared to the rent received on a house over time, which indeed would include interest, and would also increase alongside inflation – as rent always does.

      Good thing you didn’t have any credibility in anyone’s eyes to lose with that one, huh?

  25. Courtney Marous

    Great article. I must say, that reading this convinced me to join the BP Roster, looking forward to learning more!

    Has anyone had any recent experience with CRE owner financed deals? Working on a few Industrial/warehousing deals that could be a fit but would love to hear anyone’s input.

    Happy Hunting! -CLM

  26. Hi Brandon, is there a book, blog or anything I can read about to learn how I can be the owner finance on properties I own free and clear? I’d like to learn more about rules, guidelines, how many can I do per year, etc. I’ve read different things here and there but a reference book would be great! Thanks in advance.

  27. Lakeem Allen

    “The owner asks for $5,000 down and a 7% interest rate on the remaining $95,000 amortized over 30 years for a monthly payment of $632.03. ”

    0.07 x 95,000 …is around $554 and some change where is the $632.03 coming from? Am I missing something?

    • Steven Skinner

      You’re reaching that $554 number using simple interest, which doesn’t factor in principal. An amortization schedule will slowly reduce interest paid, while simultaneously raising principal paid.

      It would work like this for the first 3-months (2017):

      Jun – $554.17 interest / $77.87 principal / $632.04 total.
      Jul – $553.71 interest / $78.32 principal / $632.04 total.
      Aug – $553.26 interest / $78.78 principal / $632.04 total.

      And this for the last 3-months (2047):

      Mar – $10.93 interest / $621.10 principal / $632.04 total.
      Apr – $7.31 interest / $624.73 principal / $632.04 total.
      May – $3.67 interest / $628.37 principal / $632.04 total.

      At which point your balance would reach $0.00 and you’d own it outright. Hope this helps.

    • Michael Hastings

      Hi Lakeem,

      The method you took to compute the payment is not how payments are calculated using Amortization. Payments applied on an Amortization schedule are a fixed amount and you apply portions of the payments to interest and principal as the loan principal decreases over the life of a loan. You can find a Amortization Calculator online to use for free.

  28. Sorry for this comment, but the statement that if the owner has a F + C property worth $100K, so in selling it he pays taxes on $100K is well, just plain wrong! The taxes paid are a function of the profit made…not the loan amount. A loan is a non taxable event; not reported as income and no taxes paid on the equity created by paying it off when one sells. In essence, the taxes on the loan am are paid yearly as the loan am part of the mortgage payment is not deductible, only the interest. If the property was purchased for $100 K and sold for $100K, there is no taxable profit, just depreciation recapture.

    • Steven Skinner

      Uh, yeah… if it’s free & clear and you sell it for $100k then that would equal $100k in gains, considering you have no mortgage to pay off. You mentioned how it was F&C then went on to sorely contradict yourself, talking about loans being “non-taxable events” etc etc. This is all clearly ruling out the property as being owner-occupied, which of course is very different.

      • Steve Laube

        Steven Skinner..and likel y others. Sorry you did not get this the first time around. No contradiction , errors etc in my statements. Paying off a loan reduces a debt; it affects your balance has nothing to do with income. Paying off a loan is not a taxable event; neither is taking out a loan. One more try; buy a property for $100K, hold for several yrs, sell it for $110K net…you owe cap gains taxes on the $10 k. That tax rate is typically 15% but can be 0 % or 20 % (depends on your tax bracket). The only other tax you will pay is the depreciation recapture at a max special rate of 25%. Whether you paid $100K cash, had a 90, 000 loan, paid off the 90, 000 loan, or still owe $50, 000 on the loan is not relevant to the (taxable) profit you made. No taxes on the loan amortization (principal) . Read the above again, talk to your tax guy, whatever, it is important to understand this

  29. talha makki

    Great article! I was bit confused with the case study you provided. So let’s say Susan borrowed 65,000 from her lender and that money went to pay off Charlie’s remaining mortgage how is she going to pay back her lender? Which lender would she be using? I’m pretty sure if she is looking to buy and hold she must be looking for a long term loan with higher interest rate according to the down payment she provided and giving interest rate to the lender and Charlie would be too much. And why would Charlie only “seller finance” the property for 30,000 when he had already paid of 50,000 towards his property and like you mentioned he’s trying to sell the property for 100,000 why wouldn’t Charlie seller finance the property for 50,000 instead of 30,000? I maybe not understanding it because I’m new to investing and it looks like a very extreme way of structuring a deal and I’m assuming not a lot of investors take this route just like you mentioned the risk of being foreclosed on. Again great post and looking forward to the reply!

  30. Scott Kelley

    Hi Brandon, do you have a similar article or resource for purchasing from family? I’ve been advised to use a quit claim deed to transfer the property but I need to have a contract for the seller financing also and I cannot find much info on either.

    Thanks for the help!

  31. Steve Laube

    Steven Skinner..and likel y others. Sorry you did not get this the first time around. No contradiction , errors etc in my statements. Paying off a loan reduces a debt; it affects your balance has nothing to do with income. Paying off a loan is not a taxable event; neither is taking out a loan. One more try; buy a property for $100K, hold for several yrs, sell it for $110K net…you owe cap gains taxes on the $10 k. That tax rate is typically 15% but can be 0 % or 20 % (depends on your tax bracket). The only other tax you will pay is the depreciation recapture at a max special rate of 25%. Whether you paid $100K cash, had a 90, 000 loan, paid off the 90, 000 loan, or still owe $50, 000 on the loan is not relevant to the (taxable) profit you made. No taxes on the loan amortization (principal) . Read the above again, talk to your tax guy, whatever, it is important to understand this. The comment above about buy a property for $100K cash, sell it, and owe taxes on the 100K just because there is no loan was short and to the point; read that again too.

  32. Josh Smalley

    Forgive my ignorance and I hope I’m not duplicating as already-asked question. If it’s a redundant question, please point me to the post, resource, podcast, or forum thread that might be of assistance to me.

    How do you set up the legality of the seller financing? Who does the paperwork? A lawyer?

    Thanks in advance.

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