Seller Financing Explained
3 min read
What You Will Learn
- How seller financing (owner financing) works step by step
- Why property condition matters for these deals
- The role of a revocable living trust and loan servicer
- What a balloon payment is and when it happens
- Why sellers and investors both benefit from this structure
What is Owner Financing?
Owner financing (also called seller financing) means the seller acts as the bank. The buyer does not get a traditional loan. Instead, the seller receives a down payment, monthly payments, and (sometimes) a final balloon payment.
This deal type is for sellers who own their property free and clear - meaning no existing mortgage. If they still have a mortgage, see our lessons on Subject-To or Hybrid Deals instead.
The process is safe and documented, often handled through a professional servicing company so both sides have a clear record of payments.
Why Condition Matters
Seller financing works best when a property is already livable and stable. When a home is turnkey or rent-ready, the buyer can start making payments to the seller immediately.
Distressed properties often need large repairs and unknown costs. They also take time before they can be lived in or rented. In these cases, a buyer would have to pay for expensive repairs and make monthly mortgage payments at the same time. This increases the risk of missed payments and failed deals.
Creative finance is meant to solve a financing problem, not a construction problem.
Common Confusion
Seller financing does NOT mean the seller still owns the home. The buyer becomes the owner. The seller just receives payments over time instead of one lump sum at closing.
Quick Warning About Slow Flips
A "slow flip" is when a distressed property is sold on seller financing and the buyer completes the repairs themselves. These repairs are usually paid for with personal cash or high-interest money.
Many buyers underestimate how much repairs will cost or how long they will take. They often find themselves unable to finish the work or refinance the property later. Because of this, slow flips carry higher risk and are often misunderstood. We focus on stable and realistic structures and do not recommend slow flips for most situations.
How Owner Financing Works: Step by Step
Seller and Buyer Agree on Terms
The seller chooses the price, the down payment, the length of the deal, and whether to include a balloon payment at the end.
No banks, no underwriting, no inspections required unless the seller wants them.
Property Transfers Into a Revocable Living Trust for Seller Safety
The deed goes into a revocable living trust, not into the buyer's LLC or personal name.
The seller stays a beneficiary of the trust until the note is paid off. This protects them from the due-on-sale clause and keeps them legally secured.
A Licensed Loan Servicer Handles All Payments
The buyer never pays the seller directly.
A neutral third-party servicer collects payments, pays taxes and insurance each month, and issues official statements for both sides. This keeps everything transparent and prevents late-payment issues.
The Seller Holds the Promissory Note
The seller becomes the "bank." The seller's note is secured by the property inside the trust.
If the buyer ever defaults, the deed-in-lieu clause and trust structure allow a fast, safe return of the property without a long legal process.
The Buyer Makes Monthly Payments to the Servicer
Payments follow a simple formula:
Down payment + monthly payments + balloon (if included) = your full agreed-upon price.
Our team generally prefers to structure deals with no complicated interest charts. Instead, we offset this by building the "interest" into the asking price in the form of a higher price (often offering 10% over asking price).
Balloon Payoff or Refinance
At the end of the term, the buyer pays the balloon amount or refinances into a regular loan.
Once the seller receives the full amount owed, the seller's beneficial interest in the trust ends and the buyer becomes the full owner.
Why Sellers Love Owner Financing
- Sell for full asking price - No discounts needed for quick sales
- No inspections required - Sell as-is (though we recommend rent-ready homes)
- Safer and faster than listing traditionally - Skip the months of showings
- Monthly income plus lump-sum payoff - Get paid over time, then receive their balloon
- Strong protection through trust + servicing - Professional setup protects both parties
- No landlord duties - The buyer handles all maintenance and repairs
- Helps buyers who cannot qualify through a bank - Expand their buyer pool
Important Considerations
For Sellers:
Only seller-finance if you can afford to wait for your money. Make sure you have proper legal documentation in place.
For Buyers:
Have a clear plan to refinance or pay off the note before any balloon payment is due. Build your credit and income documentation while making payments.