How seller-carry works
In a seller-financed sale, you act as the lender for some or all of the purchase price. At closing the buyer pays a down payment in cash, takes title to the building and signs a promissory note promising to pay you the balance over time. The note is secured by a mortgage or deed of trust recorded against the property, so if the buyer stops paying you have the right to enforce against the building itself.
Seller financing can stand alone, or it can sit behind a new bank loan as a second-position note that fills the gap between what a lender will fund and the price you have agreed on. Where you still have a mortgage, your existing lender usually must be paid off at closing, because most commercial loans contain a due-on-sale clause.
The terms you negotiate
Every seller-carry deal comes down to a handful of variables. Moving one usually affects the others, so it helps to decide which ones matter most to you before you negotiate.
- Down payment: the cash you receive at closing. A larger down payment means the buyer has more at stake and you have less exposure.
- Note amount: the balance you finance, which may be the full remainder or a smaller piece behind a bank loan.
- Interest rate: your return on the money you are lending. It is often set with reference to market rates and the risk you are taking.
- Amortization and payment: whether payments cover interest only or also pay down principal, and on what schedule.
- Term and balloon: how long the note runs before the remaining balance is due in one payment, often when the buyer refinances or sells.
- Security and protections: lien position, insurance and tax requirements, reporting, late fees, default provisions and whether any personal recourse applies.
Why sellers choose to carry
The most common reason is price. A buyer who does not need to qualify for full bank financing on day one can often pay more, and the interest you earn adds to your total return over the life of the note. Seller financing also opens the door for properties that lenders struggle with, such as buildings with high vacancy, deferred maintenance or unusual income, where a conventional loan would be small or unavailable.
Many owners also like replacing the work of managing a building with a steady payment. For a retiring landlord, a well-secured note can feel like a predictable income stream without tenants, repairs or late-night calls.
The risks to weigh
You are taking lender risk. If the buyer mismanages the property or stops paying, you may have to go through a foreclosure process to recover the building, and it may come back to you in worse condition. You also have less cash at closing, which matters if you need the money for another purchase, a partnership buyout or retirement plans.
The best protection is the quality of the buyer and the structure itself: a meaningful down payment, a first or clearly defined lien position, requirements to keep insurance and taxes current, regular financial reporting and a balloon date that does not leave you waiting indefinitely. An attorney should draft or review the note and security documents.
Installment-sale tax treatment in general terms
Under federal rules, a sale where you receive at least one payment after the year of sale can generally be reported as an installment sale. Instead of recognizing the entire gain in the year you close, you generally recognize the gain proportionally as you receive principal payments. That can spread the tax over several years and may keep more of the gain in lower brackets.
There are important limits. Depreciation recapture on real property is generally recognized in the year of sale regardless of when you are paid, and it can be taxed at up to 25% federally. Interest you receive on the note is taxed as ordinary income. Minimum interest rules also apply to seller-financed notes. How this plays out depends on your basis, your other income and your state, so run the numbers with your CPA before you settle on a structure.
How Skyline approaches seller financing
Skyline offers seller-financing structures when they fit the deal. Sometimes that means a larger note with a modest down payment; sometimes it is a smaller second-position note that bridges a bank loan. We lay out the proposed down payment, rate, payment schedule, term and security in the written LOI so you and your advisors can evaluate the whole package, not just the price.
If you would rather be paid in full at closing, say so up front. Seller-carry is one option, not a requirement, and we are happy to compare a financed offer with a straightforward one side by side.
