In a seller-financed sale the buyer pays the seller over time, and no bank lends the money. The buyer signs a promise to pay, the property stands behind that promise, and the seller ends up in the lender’s seat.
Every private note we are asked to price began as a deal like this. It has few parts, and they are the same parts a note buyer asks about years later, so it pays to know them by name.
How it differs from a bank-financed sale
When a bank finances a purchase, the seller leaves closing with the full price and the bank spends the following years collecting. Take the bank out and the collecting falls to the seller. The buyer puts down some cash, the down payment, and owes the seller the remainder, which arrives as monthly payments with interest. Owner financing and seller carryback are other names for seller financing.
The people, and the names the paperwork gives them
The seller becomes the lender. Documents may call this person the note holder, the payee, the mortgagee or the beneficiary, and on this site we say note holder. The buyer becomes the borrower, who may appear in the papers as the payer, payor, maker, mortgagor or trustor. We say payer or borrower.
Some deals add a loan servicer, a company that collects the payments, keeps the ledger and sends the year-end statements. Nothing obliges a private seller to hire one, though a servicer’s ledger is the kind of payment record an outsider accepts without argument.
The papers behind the deal
A seller-financed sale of real estate rests on a promissory note and a security instrument, and each does a different job.
| Document | What it does | Where it lives |
|---|---|---|
| Promissory note | Holds the borrower’s written promise: the amount, the rate, the payment, the dates and what counts as late. | The signed original stays with the note holder. It is generally not recorded. |
| Security instrument | Ties the promise to the property, so that a borrower who stops paying can lose the property through a legal process. | Recorded in the county land records. |
Whether the security instrument is a mortgage or a deed of trust depends on the state. Under either one the deed passes to the buyer at closing and the seller holds the note. A land contract, also called a contract for deed, works another way: one agreement does both jobs, and the deed stays in the seller’s name until the price is paid.
The terms that define a note
Almost any seller-financed note can be described with the figures below.
- Sale price and down payment. The price less the down payment is the amount financed. The more the borrower puts down, the more of their own money is in the property from the first day.
- Interest rate. What the borrower pays for the use of your money, as a yearly percentage of the balance.
- Term. How long the payments run.
- Payment. The monthly amount. On an amortized note each payment covers that month’s interest and takes a little off the balance, so the last payment brings the loan to zero.
- Balloon, if any. A large final payment that falls due before level payments would have cleared the loan. A seller may ask for one to shorten the wait for the money.
As an example with round figures, a $200,000 sale with $40,000 down leaves $160,000 financed. The borrower in that example starts with 20% of the price in the property, and the seller holds a note for the other 80%. The rate, the term and any balloon then decide how that $160,000 comes back and how much interest arrives with it.
Why each side agrees to it
For a seller, offering terms widens the pool of people who can buy. Raw land, rural homes, mixed-use buildings and houses that need work can be hard to finance through a bank, and a seller willing to carry the loan removes that obstacle. The seller also earns interest on money that would otherwise have arrived as one sum. When the price comes in over several years, the tax on the gain may be spread across those years as well, and how that applies to you is a question for a CPA.
A buyer may ask for seller financing because their income is hard to document, because they are new to the country or to credit, or because the property is one a bank will not lend against. A deal between two private parties can also involve less paperwork than a bank loan. None of that makes the buyer a poor risk, but it does leave the checking to the seller, since no bank has done it.
What the seller takes on
The price of that income is risk and work, and both are worth weighing before you carry a note and again whenever you consider keeping one.
The borrower may stop paying. Your remedy is then foreclosure or a similar legal process, which costs money, takes time and follows rules that differ from state to state. The property is what stands behind the debt, so unpaid property taxes or lapsed insurance put the value behind your note at risk even while the payments keep coming. Your money is tied up as well, because you are owed a large sum and receive it in small pieces.
The deal is also regulated. Federal and state law both reach it, and the rules on seller financing fall most heavily on sales where the buyer will live in the home.
The note is an asset you can sell
A note belongs to its holder, and the right to collect its payments can be sold to someone else. A note buyer pays a lump sum today for payments that would have reached you over years. Because the buyer waits for the money and carries the risk that the borrower stops, the price is lower than the balance owed. How much lower depends on the terms, the payer’s record and the property, so a real figure needs the details of the note. You can ask us to price yours, which is worth doing even if you expect to keep it.
A holder can sell every remaining payment, or sell a set number of them and keep the rest, which is called a partial. A holder can also keep the note. If you do not need the cash and the payer has been reliable, keeping it means you collect every payment, interest included, and nothing is given up to a buyer.
If you are about to carry a note, or already hold one
The choices made before the papers are drawn decide what the note is worth later, so go through how a seller-financed note is created before you sign anything. Any term on this page that is still unclear has a plain definition in the learning center.
If the note already exists, find the signed original and put together a record of every payment received, with dates and amounts. Whether you keep the note or sell it later, those two things are what the decision will rest on.
Related questions
Is seller financing the same as owner financing?
Yes. Both names describe a sale where the seller takes payments over time in place of a bank loan. Seller carryback is a third name for the same arrangement.
Does the seller keep the deed in a seller-financed sale?
It depends on the documents. With a note and a mortgage or deed of trust, the deed passes to the buyer at closing and the seller holds a lien. Under a land contract the seller keeps the deed until the price is paid.
Can I sell a seller-financed note later?
The right to collect the payments belongs to you and can be sold, in whole or in part, for a lump sum, provided a buyer is satisfied with the paperwork and the payer. The price will be below the balance owed, and keeping the note is sometimes the better choice.