Seller financing is an arrangement where the property owner acts as the lender, letting the buyer pay for the property over time instead of bringing a bank loan to the closing table. The buyer takes title and signs a promissory note and a mortgage (or deed of trust) in the seller's favor, then makes monthly payments directly to the seller until the balance is paid off or refinanced.
Because no institutional lender is involved, the terms are whatever the two parties agree to in writing: the interest rate, the down payment, the amortization schedule, and whether the loan carries a balloon payment. That flexibility is the appeal, and also where the risk hides.
In practice
Say you buy a fourplex for $400,000. The seller agrees to carry the financing: you put 15% down, or $60,000, and sign a note for the remaining $340,000 at 7% interest, amortized over 30 years, with a balloon due in year 5.
Your monthly payment on a $340,000 loan at 7% over 30 years works out to about $2,262 of principal and interest. You pay the seller that amount every month, not a bank. After five years of payments the loan balance has only dropped to roughly $320,000, and the balloon clause means that entire $320,000 comes due at once. You either refinance into a conventional loan by then, sell, or pay it off. If you cannot, you can lose the property. The 5-year clock is the part people underestimate.
Why it matters to a small landlord
Seller financing can open a deal that a bank would not touch, on a property with deferred maintenance, on a buyer with a thin tax return, or when conventional rates make the numbers fail. Before you sign, run the deal on the actual carry terms, not on the seller's asking rent. Walk it through a full deal analysis and check the financing structure against the financing options for 1-10 unit landlords so you know what your exit looks like when the balloon arrives.
Two structural traps deserve a hard look. If the seller still has a mortgage on the property, their loan may carry a clause that lets the original lender call the full balance the moment title transfers, which can collapse the whole arrangement. And a short balloon term puts a refinance deadline on your calendar whether the market cooperates or not.
Seller financing sits next to a few terms worth knowing before you negotiate: the balloon payment that sets your refinance deadline, a subject-to deal where you take over the seller's existing payments without formally assuming the loan, and the due-on-sale clause that can trigger when ownership changes hands. Get all three on paper with a real estate attorney before you wire a dollar, because federal rules under Dodd-Frank and the SAFE Act can apply to owner-financed notes, and this is a concept, not legal advice.