Seller Financing: Buy Real Estate Without Bank Approval
Seller financing cuts banks out of the equation entirely. The seller acts as your lender, allowing you to make payments directly to them instead of getting a traditional mortgage. It's one of the most powerful tools in creative real estate financing.
What is Seller Financing?
Seller financing (also called owner financing or seller carryback) is when the property seller provides financing to the buyer instead of requiring cash or traditional bank financing. The seller essentially becomes the bank.
How It Works: You make a down payment to the seller (typically 10-30%), then make monthly payments directly to them over an agreed term. The deed transfers to you, but the seller holds a mortgage/note on the property until paid in full.
Types of Seller Financing
1. Full Seller Financing
Seller finances 100% of the purchase (or close to it). No bank involved at all.
Example:
Purchase Price: $250,000
Down Payment: $25,000 (10%)
Seller Financed: $225,000
Terms: 6% interest, 30-year amortization
Balloon Payment: 5 years
Monthly Payment: $1,349
After 5 years:
Principal Paid Down: ~$12,000
Balloon Payment Due: $213,000
Strategy: Refinance into bank loan or sell
2. Seller Second (Junior Lien)
You get a first mortgage from a bank for most of the purchase, and the seller carries a second mortgage for the remainder.
Example:
Purchase Price: $300,000
Bank First Mortgage (70%): $210,000
Seller Second Mortgage (20%): $60,000
Your Down Payment (10%): $30,000
Seller Second Terms: 8%, 10-year balloon, interest-only
Monthly Payments:
Bank (P&I): $1,444
Seller (Interest Only): $400
Total: $1,844/month
This reduces your down payment requirement and makes deals possible when you don't have 20-30% cash.
3. Land Contract (Contract for Deed)
Similar to seller financing, but the deed doesn't transfer until you've made all payments. You have equitable interest but seller retains legal title.
Warning: Land contracts carry more risk for buyers. If you miss payments, the seller can cancel the contract and keep all your payments. Prefer traditional seller financing where you get the deed upfront.
Why Sellers Accept Owner Financing
1. Higher Sale Price
Sellers often accept seller financing in exchange for full asking price (or higher). You pay slightly more but get flexible terms.
2. Tax Benefits (Installment Sale)
Spreading capital gains over multiple years reduces the seller's tax burden significantly.
Example:
Seller has $150K in capital gains. If they receive all cash, they owe ~$30K in taxes immediately. With seller financing over 5 years, they pay ~$6K/year in taxes instead - improving cash flow and potentially keeping them in a lower tax bracket.
3. Steady Monthly Income
Retired sellers often prefer monthly payments over a lump sum. It's like having a high-yield savings account secured by real estate.
4. Property Won't Qualify for Traditional Financing
If the property has issues (structural, zoning, title), seller financing may be the only option. This gives you negotiating leverage.
5. Can't Sell Otherwise
Property has been on market for months with no offers. Seller financing opens the door to buyers who can't get bank loans.
How to Structure Seller Financing Terms
Down Payment
- 10-20%: Standard for seller financing (vs. 20-25% for bank loans)
- Lower is better: Negotiate as low as possible (sometimes even 5%)
- Seller's perspective: Higher down payment = more commitment from buyer
Interest Rate
- Market rate - 1%: Slightly below bank rates as incentive
- Typical range: 5-8% depending on market and risk
- Negotiable: Sellers often flexible if other terms are favorable
Loan Term and Amortization
Amortization Period: Length used to calculate monthly payment
Balloon Payment: When full balance is due
Common Structure:
30-year amortization (lower monthly payments)
5-year balloon (full balance due in 5 years)
This keeps payments affordable while giving you time to:
• Build equity
• Improve the property
• Increase your income
• Improve your credit
• Refinance into bank loan or sell
Prepayment Penalty
Avoid if possible. Negotiate no prepayment penalty so you can refinance or sell without extra fees.
Due-on-Sale Clause
Some sellers include this clause preventing you from selling without paying them off first. Try to exclude this for maximum flexibility.
The Negotiation Process
Step 1: Make a Traditional Offer First
Always start with a conventional offer at a lower price. This establishes your position as a serious buyer and gives you leverage if they counter with seller financing.
Step 2: Identify the Seller's Motivation
Ask questions like:
- What are your plans after selling?
- Are you looking for monthly income or a lump sum?
- Have you considered the tax implications of an all-cash sale?
- How quickly do you need to close?
Step 3: Present Seller Financing as a Solution
Frame it as solving THEIR problem, not yours:
Script Example: "Mr. Seller, I understand you're hoping to get $300K for this property. I'm prepared to pay your full asking price, and I can also help you reduce your tax burden by structuring this as an installment sale. You'd receive $50K now, then $2,000/month for 5 years at 6% interest. This spreads your capital gains and actually nets you more after taxes than an all-cash offer of $280K. Plus, the monthly income is secured by the property itself."
Step 4: Provide Professional Documentation
Work with a real estate attorney to draft:
- Promissory note (details of loan terms)
- Mortgage or deed of trust (secures the property)
- Purchase agreement (standard real estate contract)
- Title insurance (protects both parties)
Dodd-Frank Compliance for Residential Properties
Important: The Dodd-Frank Act regulates seller financing on residential properties (1-4 units) where the buyer will occupy the property.
Requirements include:
- Seller cannot finance more than 3 properties per year
- Loan must be fully amortizing (no balloon payments for owner-occupied)
- Seller must verify buyer's ability to repay
- Interest rate caps apply
Good news: These restrictions DON'T apply to:
- Investment properties (non-owner occupied)
- Commercial properties
- Land
- Properties owned by LLCs or corporations
Real-World Examples
Example 1: The Retired Landlord
Situation:
78-year-old landlord owns 4-plex free and clear, wants to retire from property management.
Your Offer:
Purchase Price: $500,000 (full asking price)
Down Payment: $75,000 (15%)
Seller Financing: $425,000
Terms: 5.5%, 25-year amortization, 10-year balloon
Monthly Payment: $2,622
Why Seller Accepted:
• Gets $75K immediately plus $2,622/month
• Spreads capital gains over 10 years (saves $40K+ in taxes)
• No more tenant headaches
• If you default, he gets property back (plus keeps down payment)
• Better return than bank CDs or bonds
Example 2: The Distressed Property
Situation:
Property needs $40K in repairs. Won't qualify for traditional financing in current condition.
Your Offer:
Purchase Price: $180,000
Down Payment: $20,000
Seller Financing: $160,000
Terms: 7%, 30-year amortization, 3-year balloon
Monthly Payment: $1,064
Your Plan:
Invest $40K in repairs immediately
Property ARV: $260,000
Rent it for $2,200/month (positive cash flow)
After 12 months, refinance at 75% LTV: $195K
Pay off seller: $160K
Pull out $35K of your original $60K invested
Risks and How to Mitigate Them
For Buyers
Risk: Balloon payment comes due and you can't refinance
- Mitigation: Negotiate extension options in advance
- Build sufficient equity to refinance (buy at 75-80% of value)
- Improve your credit during the balloon period
- Have backup refinance lenders identified early
Risk: Seller has existing mortgage (due-on-sale clause risk)
- Mitigation: Verify seller owns free and clear before offering
- If they have a mortgage, consider subject-to deal instead
- Use a loan servicer to keep payments on time
For Sellers
Risk: Buyer defaults on payments
- Mitigation: Require meaningful down payment (15-20%+)
- Verify buyer's income and credit
- Properly record mortgage to secure position
- Use loan servicer to handle payments and collections
Finding Seller Financing Opportunities
Best targets:
- FSBO (For Sale By Owner) listings: Sellers more open to creative terms
- Expired listings: Sellers who couldn't sell traditionally
- Older sellers (60+): Often prefer monthly income
- Properties owned free and clear: No existing mortgage complicating things
- Distressed properties: Won't qualify for traditional financing
- Slow markets: Properties sitting 90+ days
Pro Tip: You can often find properties owned free and clear by searching public records for properties purchased 15-30 years ago. These owners are prime candidates for seller financing.
The Bottom Line
Seller financing is one of the most powerful wealth-building tools in real estate because it:
- Eliminates bank approval requirements
- Reduces cash needed to acquire property
- Provides flexible terms not available from banks
- Creates win-win scenarios for both parties
Keys to success:
- Frame seller financing as solving the SELLER'S problems
- Target the right sellers (older, free and clear, motivated)
- Use professional documentation (attorney-drafted agreements)
- Build in realistic exit strategies for balloon payments
- Verify property value and condition thoroughly
Start by making seller financing offers on 1-2 properties per month. You'll be surprised how many sellers say yes when you present it correctly. This strategy can help you acquire 5-10 properties without ever qualifying for a single bank loan.
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