When a Seller Note Serves Both Sides, and When It Hides a Bad Price
"Seller financing available" appears on more small property listings than it used to. Some of those offers are genuinely valuable. Some are there because the property has not sold at its asking price on bank terms.
Both can be true at once. The job is to tell the difference.
Seller financing is a structure, not a substitute for a sound price.
Why it can work for both sides
In a seller financed sale, the owner accepts part of the price as a promissory note, secured by the property, and the buyer pays it over time.
For the seller, that can mean:
- Steady monthly income in retirement, often at a rate higher than safe alternatives
- A larger pool of qualified buyers, and often a stronger price
- A security interest in a property they already understand well
- Possible tax benefits from receiving payments over time. The IRS treats many such sales as installment sales, and the seller's own advisors should evaluate what applies.
For the buyer, it can mean:
- Terms that bank debt will not offer, such as longer amortization or a lower rate
- A faster, simpler close without a full institutional loan process
- A partner who remains invested in the property's success
When a retiring owner and a patient, long term buyer meet, a seller note can be the most practical structure in the deal.
The terms that matter
Two notes with the same interest rate can be very different. We focus on:
- Rate. Fixed, and fair to both sides.
- Amortization. How long the payment schedule runs. A 30 year schedule lowers the payment significantly compared with 20 years.
- Balloon. When the remaining balance is due. A short balloon can force a refinance at a bad time.
- Prepayment. Whether the buyer can pay early, and at what cost.
- Security and priority. Whether the note is in first position, or subordinate to a bank loan.
- Default and cure. What happens if a payment is late, and how much time the buyer has to fix it.
- Existing debt. Whether the seller still has a mortgage. Many loans are due in full on sale, which can make a seller note unworkable without the lender's consent.
When a note is hiding a problem
Seller financing deserves extra scrutiny when:
- The price only works with the note. If the property cannot support debt service at conventional terms at any reasonable price, the note may be subsidizing an inflated number.
- Financials are thin. An offer of financing is sometimes paired with a missing rent roll or trailing statement. The terms should never replace the numbers.
- The balloon is short. A three year balloon on a property that will not qualify for bank debt in three years moves the problem, it does not solve it.
- The property has been listed a long time. Time on market with financing already offered is a signal the seller has room to move on price, terms, or both.
Our test is straightforward. We first value the property on its actual trailing numbers with conventional assumptions. Then we look at how seller terms improve the structure. The note should make a sound deal better, not make an unsound deal possible.
How we approach it
We are a permanent hold buyer. That makes us a natural fit for sellers who want income over time and care about who owns the property next. We typically look for:
- A meaningful down payment that shows commitment
- A fixed rate and a long amortization schedule
- A balloon long enough to refinance comfortably, or none at all
- Clear default and cure provisions that protect both sides
- Coordination with the seller's attorney and accountant from the start
Start the conversation
Draymoor Ventures is seeking small industrial, flex, yard, and workforce multifamily properties of 4 to 70 units across the Texas Triangle, the Arizona Sun Corridor, and the Colorado Front Range. If you are an owner considering financing part of your sale, we would welcome a direct conversation.
Share an opportunity: Steven@DraymoorVentures.com
Sources
- Internal Revenue Service, Publication 537, Installment Sales. General rules for reporting sales where payments are received over time. https://www.irs.gov/publications/p537