Owner Carry, Seller Financing Property: A guide to how it works

The Ultimate Guide to Seller Financing in Real Estate

Look up property mortgage and property liens before entering into a contract to buy.

What Is Seller Financing?

Seller financing, also known as owner-carry contracts, represents a powerful alternative path to property ownership. In this arrangement, the property seller acts as the lender, eliminating the need for traditional bank financing. This creative solution opens doors for buyers facing obstacles with conventional lending institutions.

When Seller Financing Makes Sense

Seller financing becomes particularly attractive when:

• You’re recovering from bankruptcy
• You’re dealing with temporary credit challenges
• You have insufficient employment history
• You’re self-employed without meeting minimum tax return requirements
• You’re navigating stricter lending criteria implemented after the Dodd-Frank Act

How Much Down Payment Is Required?

In most seller financing arrangements, a down payment of 10-20% can secure the deal. The seller then carries the financing for 1-5 years or sometimes longer, depending on their needs and objectives. Interest rates typically exceed standard bank rates, reflecting the seller’s assumption of risk in carrying the note.

Despite this premium, the buyer gains:

• Immediate interest in the property
• Rights to improve the property
• Ability to lease the property
• Option to sell the property

The Seller as Your Bank

In this arrangement, the property seller essentially functions as a bank, collecting interest income like a traditional lender would. Payment structures offer flexibility:

• Fully amortized payments over time
• Interest-only payments (common with shorter terms)
• Custom terms for renovation and resale scenarios

The seller typically secures a guaranteed cash-out price by a specified date. All contract elements remain negotiable, including:

• Default provisions
• Tax payment responsibilities
• Tax deduction allocations
• HOA assessment obligations
• Insurance requirements
• Foreclosure rights
• Timeframes to remedy defaults

Essential Due Diligence Steps

Before committing to a seller financing arrangement, thorough property research is critical. This represents a common pitfall for real estate investors.

Parties should carefully investigate:

• Existing mortgages and their terms
• Potential due-on-sale clauses
• Title conditions and marketability

Professional Title Research

Engaging a title company provides a preliminary title report revealing:

• Deeds of trust
• Outstanding issues and liabilities
• Tax liens
• Judgment liens
• HOA liens
• Medical liens
• Mechanic’s liens
• Existing mortgages
• Lines of credit

Important Note: IRS tax liens against individuals may affect properties they own but don’t always appear on property-specific lien reports. Conduct searches under the seller’s legal name in the county where the property is located.

Understanding Value and Setting Up Payments

Equally important is understanding:

• The seller’s equity position relative to cash-out/sale price
• Neighborhood statistics
• Truly comparable properties in the area

For properties with existing mortgages, establishing a servicing account ensures:

• Payments reach the mortgage company
• Taxes are paid on time
• Insurance remains current
• HOA assessments are handled promptly

The modest servicing fee delivers significant peace of mind.

The Win-Win Potential

When executed properly, seller financing creates advantages for both parties—provided negotiations incorporate all relevant facts and contract terms are precisely drafted.

Buyers gain property access despite financing challenges, while sellers can often secure better returns than traditional investments while facilitating their property sale.

---

This article provides general information and should not be construed as legal or financial advice. Always consult with qualified professionals before entering real estate transactions.