Seller Financing and Owner Financing: How It Works for Sellers

By Skyline Capital Investments · Updated October 28, 2026 · 8 min read

What is seller financing?

A sale with seller financing is one where the seller takes back a promissory note from the buyer for part or all of the price. Title passes to the buyer at closing, the note is secured by a mortgage or deed of trust on the property, and the buyer makes payments to the seller over time, the way they would to a bank.

This type of financing is also called owner financing, a seller carryback, seller carry or a purchase-money note. In every case the seller receives part of the price at closing and the rest later, along with interest.

Seller financing is common when lenders are unwilling to lend on a property, when the buyer needs speed or flexibility, and when the seller would rather collect payments over time than take a lump sum. You see it most in sales of apartment buildings, small commercial property, land and businesses, and less often with single-family homes.

How does seller financing work?

With seller financing, the seller writes the loan terms and collects the payments. Otherwise, the process is the same as a bank-financed sale. Here’s how a typical deal moves:

• Agree on price and terms: down payment, note amount, interest rate, payment schedule, term and balloon date, usually in the letter of intent or purchase contract.
• Check the buyer: credit, experience with similar property, financial statements and the buyer’s plan for the building.
• Have an attorney draft the documents: a promissory note for the debt and a mortgage or deed of trust that secures it.
• Close through a title or escrow company: the buyer pays the down payment, the deed is recorded to the buyer and the seller’s lien is recorded against the property.
• Collect payments: the buyer pays you monthly or on the agreed schedule. Many sellers use a loan servicing company to collect payments, track the balance and send year-end tax forms.
• Get paid off: the buyer pays the balance at the balloon date, usually by refinancing or selling, and your lien is released.

Common seller financing structures

There are several ways to set up owner financing, and each one changes how much risk the seller keeps. Here’s what you’ll most likely see.

The terms you negotiate

However the deal is organized, it always comes down to a few key terms. They are linked, so decide what matters most to you before you negotiate.

• Down payment: the cash you get at closing. More cash at closing gives the buyer more to lose and leaves you less exposed if values drop.
• Note amount and lien position: how much you lend, and whether you are first in line or behind a bank.
• Interest rate: your return on the money you lend. Federal tax rules set a minimum rate, covered below, and some states cap rates under their usury laws.
• Amortization: whether payments include principal, and over how many years the principal is spread.
• Term and balloon: when the remaining balance comes due in one payment.
• Protections: required insurance and property tax payments, financial reporting, late fees, default terms, any personal guarantee and whether the buyer can prepay or sell before you are paid.

What goes into an owner financing contract

An owner financing contract is really a set of documents: the purchase agreement that sets the price and terms, a promissory note for the debt, and a mortgage or deed of trust that secures the note against the property. A land contract is the exception, because the contract itself is the financing and the seller keeps title until it is paid.

Whatever form it takes, a well-drafted contract answers the same questions. Have a real estate attorney in the state where the property sits prepare it, and have the title or escrow company record the security document at closing.

• Parties, property description and purchase price, with the down payment due at closing.
• Note amount, interest rate, how interest is calculated, payment amount and due date, and where payments go.
• Amortization period, maturity date and the balloon amount, plus any right to extend.
• Prepayment terms: whether the buyer can pay early and whether any premium applies.
• Late charges, the default and cure period, acceleration, and the foreclosure remedy under state law.
• Insurance with the seller named as mortgagee, property tax payments or an escrow for them, and upkeep of the property.
• A due-on-sale clause, limits on further liens, and reporting such as rent rolls and operating statements for income property.
• Any personal guarantee, the servicing arrangement, and who pays recording and title costs.

Worked example: owner financing a $2 million apartment building

Say a building sells for $2,000,000. The buyer pays $500,000 (25%) down and the seller takes a $1,500,000 first-position note at 7%, amortized over 25 years with a balloon at year 7.

The monthly payment is $10,601.69, or $127,220 a year. Of the first year’s payments, $104,273 is interest and $22,947 is principal. Over the 7 years the seller collects $890,542 in payments, $690,561 of which is interest. At the balloon date the buyer still owes about $1,300,020 and would normally refinance to pay it.

Add the $500,000 down payment, the $890,542 of payments and the $1,300,020 balloon and the seller collects about $2,690,561. Waiting 7 years and carrying the risk that the buyer doesn’t pay earns the seller about $690,000 more than an all-cash sale at the same price. You can change any of these numbers in our seller financing calculator.

Pros and cons of seller financing for sellers

With seller financing you can sell at a better price and earn steady income, but you take on a lender’s risk and wait to get paid. Think about what you need the sale proceeds for and decide from there.

Why buyers ask for owner financing

Buyers turn to owner financing when bank money is slow, expensive or unavailable. A seller can close in weeks, skip the lender’s approval process and take on a building with low occupancy. In return, the buyer usually accepts a higher price, a shorter term and a balloon payment that has to be refinanced on time.

Why the buyer wants seller financing tells you a lot about the terms you can ask for. A buyer who could get a bank loan but wants speed can usually put more money down. A buyer who can’t get a loan at all is a bigger risk for you, and the down payment and protections should reflect that.

How seller financing is taxed

Seller financing usually makes your sale an installment sale under Section 453 of the tax code. You report the gain as you receive principal, on Form 6252, instead of all in the year you close. That can spread the tax over several years and keep more of the gain in lower brackets. Our installment sale guide walks through the math.

Three rules limit the benefit. First, interest you receive on the note is ordinary income in the year you receive it. Second, depreciation recapture taxed at ordinary rates, such as recapture on items from a cost segregation study, is reported in the year of sale even if you have not been paid yet. Straight-line depreciation on the building is different: that layer, taxed at up to 25%, comes out of each payment first as it is received. Third, if your installment notes from sales over $150,000 total more than $5 million at year-end, Section 453A charges interest on the deferred tax.

The IRS also sets a minimum interest rate. If a seller-financed note charges less than the applicable federal rate, the IRS treats part of the principal as interest under Sections 483 and 1274. IRS Publication 537 explains which test rate applies, and your CPA can help you set the rate before you sign.

Seller financing a house vs an apartment building

The rules depend on what you sell and who buys it. If the property is a home with one to four units and the buyer will live in it, the seller may have to follow consumer lending rules under the Truth in Lending Act and Regulation Z, which can limit how often you seller-finance and require you to check the buyer’s ability to repay. Some states also have their own licensing rules for residential loans.

Credit extended to an investor buying an apartment building with five or more units is generally business-purpose credit, and Regulation Z exempts credit extended mainly for business purposes. State usury limits, recording rules and foreclosure procedures still apply, so have a local real estate attorney draft the note and security documents either way.

How sellers protect themselves

The best protection is a good buyer and a strong structure. These are the safeguards most sellers want.

• A real down payment, so the buyer has meaningful money at risk.
• A recorded first-position lien, or a clear agreement with the senior lender if you are in second position.
• Proof of insurance with you named on the policy, and property taxes paid on time.
• Regular rent rolls and operating statements for income property.
• A due-on-sale clause, so the buyer cannot sell the property and leave your note behind.
• Default terms, late fees and the right to accelerate the note if payments stop.
• A personal guarantee or extra collateral when the buyer is new or thinly capitalized.
• A loan servicer to collect payments and keep records both sides trust.

Selling your apartment building with seller financing

Skyline Capital Investments buys apartment buildings with five or more units nationwide, and seller-carry terms are part of many of our offers. Sometimes that means a larger note with a smaller down payment. Other times it is a smaller note behind a bank loan. We spell out the down payment, rate, payment, term and security in the letter of intent, so you and your advisors can judge the whole offer and not just the price.

If you want to be paid in full at closing, just let us know. We are happy to put an all-cash offer and a financed offer side by side. Send the address and unit count through the form on this page or call (469) 660-2977, and we typically respond within 48 hours. Our seller financing guide for apartment buildings goes deeper into how we structure these deals.