Seller Financing: How to Analyze the Deal

It changes the loan, not the property — which means it can rescue a deal’s cash flow and quietly add a new risk.

1.03 vs 1.09

Coverage under a seller second versus a full seller carry on the same price.

What it is

The seller acts as the lender. Instead of a bank funding the purchase, the seller takes back a note secured by the property and you pay them monthly. Everything about the property is unchanged; only the financing differs — which is precisely why it is worth analysing the deal twice, once on each structure.

Structure	How it works	When you see it
Full seller carry	Seller holds the entire loan. Usually 10–25% down, amortised over 20–30 years with a 3–7 year balloon.	Property owned free and clear. The cleanest and most common version.
Seller second	An institutional first mortgage, with the seller carrying a second behind it to bridge your down payment.	Used to reduce cash in — but many lenders restrict or prohibit it. See the caution below.
Wrap-around	Seller keeps their existing mortgage and carries a larger note that “wraps” it, paying the underlying loan from your payments.	Where the seller's low-rate loan is the asset. Carries due-on-sale risk.
Lease-option / contract for deed	Possession now, title later.	Structurally different and much riskier for the buyer. Treat separately and get counsel.

Two structures on the same property

The $240,000 example, NOI $15,004. Bank financing at 25% down and 6.75% produces $14,009 of annual debt service, a 1.07 DSCR and $995 of cash flow. Here are two alternatives:

A — Full seller carry: 20% down, $192,000 at 6.0%, 30-year amortisation, 5-year balloon

Down payment: $48,000
Annual debt service: $13,814
Annual cash flow: $1,190
DSCR: 1.09
Closing costs (no lender fees, no appraisal): ≈ $3,000

Less cash in, better coverage, better cash flow — and a balloon in five years.

B — Seller second: bank first $144,000 at 6.75%, seller second $48,000 at 7% interest-only

Down payment: $48,000
First mortgage debt service: $11,208
Seller second (interest only): $3,360
Total annual debt service: $14,568
Annual cash flow: $436
DSCR: 1.03

Same cash in as A, worse on every other measure.

Structure A wins here for an unglamorous reason: one loan at 6.0% is cheaper than a blend of 6.75% and 7%. That is the general rule — seller financing helps when the seller’s rate beats the market, and helps very little when it merely matches it.

A seller second behind a bank first is often not allowed

Most conventional investment-property lenders either prohibit secondary financing at purchase or require it disclosed and counted in the combined loan-to-value. Undisclosed seller seconds are a serious problem, not a technicality — they misrepresent the down payment to the first lender. If you want structure B, you need a portfolio or DSCR lender that permits it in writing, before you make the offer.

Why a seller would agree

Seller motivation	What it means for your negotiation
Spreading the gain over years rather than recognising it all at once	The most common reason. It is their accountant's question, not yours — but it is why price is often less negotiable than terms.
Monthly income at a better rate than they would get elsewhere	You are competing with bonds, not with buyers. A rate slightly above deposit rates can look attractive to them.
A property that is hard to finance conventionally	Unpermitted work, an unusual unit count, a non-warrantable condo. Understand why before you accept it.
Speed and certainty — no appraisal, no lender conditions	Genuinely valuable to a seller. Worth something in the price.
An estate or a tired landlord who wants out cleanly	Often the best deals, and the most sensitive conversations.

Trade price against terms deliberately

Sellers who carry paper frequently care more about price than rate, because the price is what they tell people. Paying full asking at 5.5% over thirty years with a seven-year balloon can beat a 5% discount at market financing by a wide margin. Price the two versions properly before you decide which to push on — the calculator will show you both in a minute, and the full analyzer supports a secondary loan alongside the first so you can model structure B exactly.

The balloon is the whole risk

Under structure A, the balance after five years is about $178,664, and it becomes due in one payment. You refinance, sell, or default — and you do not control which options exist on that date.

Refinance rate in year 5	New annual debt service	DSCR at year-5 NOI of $17,394
6.00%	$12,854	1.35
7.50%	$14,991	1.16
9.00%	$17,251	1.01
10.50%	$19,612	0.89

Balance of $178,663 refinanced over 30 years. NOI grown at 3% a year.

Stress it before you sign, not in year four. And negotiate protection into the note while you still have leverage: an extension option for a fee, a longer initial term, or a right to prepay without penalty. A seven-year balloon is meaningfully safer than a three-year one and often costs nothing to ask for.

Diligence specific to seller paper

Check	Why
Does the seller own free and clear?	A payoff or a wrap changes the structure entirely, and an underlying lender may have a due-on-sale right.
Who services the loan?	A third-party servicer costs little and prevents years of disputed payment records.
Prepayment terms	You need the right to refinance out. A penalty can trap you at the balloon.
Lien position and title insurance	You are relying on documents, not on an institution's process. Use a real closing attorney or title company.
Insurance and tax escrow	Agree who holds and pays. Sellers rarely have escrow infrastructure.
Default and cure terms	Read them as though you will need them, because that is when they matter.

Get it papered properly

Seller financing is a legal instrument, and the informality that makes it attractive is also what makes it risky. Use an attorney experienced in these notes in your state, and do not rely on a template. Nothing here is legal or tax advice.

Frequently asked questions

How does seller financing work on a rental property?

The seller takes back a note secured by the property instead of you obtaining a bank loan. You typically put 10 to 25% down and make monthly payments amortised over 20 to 30 years, with the full balance due as a balloon after three to seven years.

Is seller financing a good deal for the buyer?

It can be, when the seller's rate beats market financing or when the property is hard to finance conventionally. The advantages are lower closing costs, speed and negotiable terms; the main risk is the balloon payment, since you will have to refinance at whatever rates exist on that date.

Can I combine seller financing with a bank loan?

Sometimes, but most conventional investment lenders either prohibit secondary financing at purchase or require it disclosed and included in the combined loan-to-value. You need written permission from the first lender before structuring it that way — an undisclosed seller second misrepresents the transaction.

What happens at the balloon payment?

The remaining balance becomes due in a single payment, and you must refinance, sell or repay it. Stress-test the refinance at rates well above today's before agreeing to the note, and negotiate an extension option or a longer initial term while you still have leverage.