When bank financing gets expensive or hard to qualify for, many investors assume the deal is dead. But some of the most creative deals in real estate happen when the seller becomes part of the financing.

Seller financing, also called owner financing, is when the seller of a property agrees to act as the lender for part or all of the purchase price. Instead of receiving the full amount at closing, the seller receives a down payment and then monthly payments over time, secured by the property itself.

Here's how it works, why sellers say yes, and how investors use it to make deals pencil out.

How seller financing works

In a typical seller-financed deal:

1. 1Agree on termsThe buyer and seller agree on a price and terms: down payment, interest rate, payment amount, and length of the loan.
2. 2Down payment at closingThe buyer makes a down payment at closing.
3. 3The seller carries a noteThe seller carries a note for the remaining balance, secured by the property.
4. 4Payments over timeThe buyer makes payments directly to the seller, often with a balloon payment due after a set number of years.

Seller financing doesn't have to cover the whole purchase. It's often combined with a traditional bank loan to fill a gap.

Why sellers agree to finance

Many investors are surprised sellers would ever agree to this. But for the right seller, it can be a genuinely good deal.

• Potential tax advantages. When a seller receives payments over time instead of all at once, they may be able to spread out the taxable gain rather than recognizing it all in one year. Sellers should always confirm how this applies to them with their own CPA.
• Steady interest income. Instead of taking a lump sum and searching for somewhere to invest it, the seller earns interest, backed by a property they already know well.
• Security. The note is secured by the real estate. If the buyer doesn't pay, the seller has a path to recover the property.
• Getting their price. Sellers who've owned a property for decades often have a number in mind. Seller financing can let them get that price while giving the buyer terms that make the deal work.

Common seller financing structures

Bank loan + seller carry

The buyer makes a down payment, a bank provides a first mortgage, and the seller finances the remaining gap. This works well when a buyer doesn't have enough cash or experience to qualify for a larger bank loan on their own.

In some cases, offering the seller a larger down payment than they asked for, funded mostly by the bank, can make the seller more comfortable carrying the rest.

Seller-held second mortgage

When interest rates rise, a deal that worked at a lower rate may no longer cash flow. One solution is to reduce the size of the bank loan and ask the seller to carry a second mortgage at a lower rate, often interest-only with a balloon after several years. For example, a structure might look like this:

Blending a lower-rate seller note with the bank loan can bring the overall cost of debt down enough to make the property cash flow.

Full seller financing

Less common, but possible: the seller finances everything except the down payment. This is most likely with sellers who own the property free and clear and want monthly income.

How to negotiate seller financing

• Lead with what the seller wants. A useful approach is simple: "I can give you your price if you can give me my terms." Many sellers care more about the number than the structure.
• Show the math. Explain how much the property actually brings in and why the payment needs to stay at a reasonable share of the rental income. A payment that eats up too much of the gross income leaves no room for vacancies or repairs, which is risky for both of you.
• Have the conversation in person. Sitting down with the seller, and even their broker and property manager, helps everyone see the numbers together and understand why the terms matter.
• Explain the seller's benefits clearly. Many sellers have never considered the potential tax and income advantages. Educating them is part of the negotiation.

Things to watch out for

• Get everything in writing, reviewed by a real estate attorney in the state where the property is located.
• Plan for the balloon. Know how you'll pay off or refinance the seller note before it comes due.
• Don't let creative terms hide a bad deal. Seller financing makes good properties easier to buy. It doesn't make bad properties good.