What Is Seller Financing? How Owner Finance Works for Real Estate Investors

Seller financing — also called owner financing or seller carryback — is a transaction where the property seller acts as the lender instead of a bank. The buyer makes monthly payments directly to the seller based on agreed-upon terms: interest rate, loan amount, term length, and any balloon payment.

No bank qualification. No appraisal requirement. No 45-day closing timeline. Just two parties agreeing on terms and getting a deal done.

How Seller Finance Works

In a typical seller finance deal, the property is owned free and clear — meaning there's no existing mortgage. The seller is willing to carry a note (act as the lender) in exchange for a down payment and monthly installments.

1. Buyer and seller agree on price, down payment, interest rate, and term
2. Buyer pays the down payment at closing
3. Seller transfers the deed to the buyer
4. Buyer makes monthly payments to the seller per the promissory note
5. If there's a balloon payment, buyer refinances or sells before it's due

Typical Seller Finance Terms

• Down payment: 5–20% of purchase price (negotiable)
• Interest rate: 4–7% (below conventional, above savings accounts)
• Term: 15–30 years amortization, often with a 3–7 year balloon
• Balloon payment: Balance due at end of term — buyer refinances conventionally
• Prepayment: Usually no penalty (negotiate this upfront)

Real Seller Finance Example

Pros and Cons for Buyers

Why Would a Seller Agree to Carry a Note?

• Tax advantages — installment sale spreads capital gains over time instead of one lump sum
• Passive income — monthly payments are simpler than managing the property themselves
• Higher price — sellers often get asking price or above in exchange for favorable terms
• Faster close — no bank means no appraisal contingency or underwriting delays
• Trust a known buyer — some sellers prefer a vetted investor over an unknown MLS buyer

Seller Finance vs. Subject-To

These two strategies are often confused but they're fundamentally different. In seller finance, the property is typically free and clear and the seller creates a new loan. In subject-to, there's an existing bank mortgage that the buyer takes over by making payments. Both are creative finance strategies — they just apply to different seller situations.

The Morby Method / Stack Method

One advanced variation combines subject-to and seller finance in a single deal — sometimes called the Morby Method or Stack Method. The buyer takes over the existing mortgage (sub-to) AND negotiates an additional seller carryback for the equity gap. This lets buyers acquire properties with minimal cash while the seller gets their equity out over time instead of all at once. It's one of the most powerful structures in creative finance when the numbers align.