With seller financing (also called owner carry or an installment sale), you sell your house but act as the bank for part of the price. The buyer pays some money at closing and pays you the rest over time, with interest. Your loan is secured by the house itself, just as a bank's would be.
A worked example
Say you agree on a $300,000 price with $30,000 down, and you carry the remaining $270,000 at 6%, with payments figured over 30 years and the balance due in 6 years:
| At closing | $30,000 |
|---|---|
| Every month for 6 years | $1,618.79 (principal and interest) |
| Balance paid at month 72 (the "balloon") | About $246,774 |
| Total received by the balloon | About $393,327 |
The extra roughly $93,000 above the price is interest. The buyer pays it to you instead of to a bank. Terms are negotiable: a bigger down payment, a lower rate with a higher price, interest-only payments, or no monthly payment at all with the interest built into the price.
How you're protected
- Promissory note: the buyer's written promise to pay, with the amount, rate, payment and due date.
- Deed of trust: recorded with the county Clerk and Recorder, so the house secures your loan. If payments stop, you can foreclose through the county Public Trustee, the same process a bank uses in Colorado.
- Title company closing: a neutral title company handles the paperwork, records the documents and pays out the down payment.
- Optional loan servicer: a third-party servicer can collect payments, send statements and keep records, so you don't have to.
When it can beat a cash sale
- You own the house free and clear, or have a lot of equity, and don't need all the money right away.
- You'd like steady monthly income, for example in retirement.
- The house needs work and cash offers are coming in low.
- You want to spread out the taxable gain (see below).
It's usually not the right fit if you need the full amount now, or if you still owe a lot on your mortgage. Most mortgages have a due-on-sale clause, so an existing loan normally has to be paid off at closing.
Taxes
Under the IRS installment method, you generally report the gain as payments come in rather than all in the year of sale (see IRS Publication 537 and Form 6252). Some items, such as depreciation recapture on a rental, are still taxed in the year of sale. The interest you receive is taxable income. Everyone's situation is different, so confirm with your CPA or tax professional before you decide.
Questions sellers ask
What happens if the buyer stops paying?
Because the loan is secured by a recorded deed of trust, you can foreclose through the county Public Trustee and take the property back. You keep the payments already received.
Can I sell the note later if I need cash?
Often, yes. There are investors who buy seller-financed notes, usually at a discount to the remaining balance. A well-documented note with a solid payment history sells best.
Who pays property taxes and insurance?
The buyer does after closing, and you should be listed on the insurance as the lender so you're notified if coverage lapses.
Can I do this if I still have a mortgage?
Usually the existing mortgage is paid off at closing from the down payment or other funds, because most loans have a due-on-sale clause. We'll go through your numbers and tell you plainly whether it works.
See what seller financing could look like for your house.
We'll lay out a seller-financed offer and a cash offer side by side. No fees, no obligation.
This page is general information, not legal, tax or financial advice. Gold Medal Real Property Group (GMRPG LLC) buys property as a principal; we're not a lender, mortgage broker or financial advisor. Review any agreement with an attorney or advisor of your choice.