What Is It? HOW IT WORKS. How You Benefit.

By Bruce Kellogg

In a real estate transaction, seller financing takes place when the seller and the buyer agree that the seller will lend some of the purchase price to the buyer to facilitate the sale.

This is often labeled “owner will carry” (“owc”), and is a well-trodden path in residential, commercial, and land transactions.


As in any real estate transaction, buyer and the seller negotiate the terms of the loan, including the amount, due date, interest rate, and monthly payment. Other terms could include a late charge and a “due on sale” clause, and more.

The documents consist of a promissory note and a deed-of-trust or mortgage, depending upon the laws of the state for securing loans to real property. Depending upon the state, an attorney, escrow company, or title  company will prepare the documents for the parties, making the process very straightforward, though not necessarily simple.


Down payments are usually between 10% and 30%, depending upon the buyer’s financial position, the buy-er’s creditworthiness, and the seller’s need for cash. A credit report on the buyer is essential.

It is possible to have a loan where the payments are interest-only, but some degree of amortization is preferable so the buyer is building up equity and can refinance more readily in the future. The interest rate should be a “market rate”, or less if lending to a friend or family member. Excessive interest rates do nobody any good, just making it harder for the buyer to succeed with the property.

The length (“term”) of the loan is negotiable based on the needs of the parties. The note could be written with one or more “options to extend” in case conditions for refinancing are not favorable when the loan matures. The idea is not to create a condition where the buyer cannot pay off the loan when it comes due.


Sometimes with seller financing the buyer will neglect to pay the property taxes or keep the premises insured. The best way to prevent this is to hire a “loan servicing company”.

They will do everything, and even foreclose, if the need arises. The cost is reasonable, and the piece-of-mind is priceless!


There are three alternatives. The obvious one is to hire an attorney or foreclosure company to legally recover the property. Then, it’ll be necessary to make repairs and re-sell the property, or rent it out. This should be chosen if the buyer’s default appears to be permanent, and cannot be corrected.

If the buyer’s default appears to be temporary, a job loss for example, then it’s best to suspend payments. Once the situation is resolved, modify the note to include the missed payments and proceed as before.

The third alternative is to sell the note at a discount and let someone else deal with the default.

Discounts on defaulted notes are typically 40 –  80%. This is a terrible idea! Don’t do it!!!


There are several alternatives here, also. The first is to sell the entire note at a discount. Since the note will be “performing” (i.e., not in default), the discount could be in the 20 – 30% range, which isn’t so bad if you need cash.

But maybe you don’t need to use the entire note. You could sell just part of the note, or just a certain portion of the payments. There are markets for notes across the country and over the internet. Notes can be very “liquid” nowadays.

Finally, you could borrow against the note. The legal term for this is “hypothecation”. Private parties, banks, credit unions, and “factoring companies” all do note hypothecations. Check the internet first.


There are two primary benefits to the buyer. The first is that the buyer can negotiate a “customized” loan with the seller to accommodate the buyer’s circumstances. Banks and mortgage brokers usually sell their loans on Wall Street, so the loans are standardized. These don’t necessarily fit everyone!

In addition, commercial lenders charge “loan origination fees”, also known as “points”. Most sellers do not charge fees for lending, and in many states they cannot. This saves quite a bit for the buyer.


There are two benefits to the seller. The first is that carrying some financing facilitates the sale. No doubt about it!

Secondly, the note that is carried back generates a regular monthly income stream that is secured directly by the property. This makes it a very good, long-term investment.


Bruce Kellogg has been a Realtor® and investor for 35 years. He has transacted about 500 properties for clients, and about 300 properties for himself in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings, land, lots, mobile homes, cabins, and churches. He is available for listing, selling, consulting, mentoring, and partnering. Readers can reach him directly at: [email protected] , or (408) 489-0131.