Question 1

What is seller financing?

Accepted Answer

Seller financing, also called owner financing or a seller carryback, is when the seller of a business or property acts as the lender instead of a bank. The buyer makes a down payment and signs a promissory note to pay the rest over time at an agreed interest rate. It is common when a buyer cannot get a conventional loan or when the seller wants an income stream and a faster sale. The seller holds a lien on the asset until the note is paid off.

Question 2

How is the monthly payment on a seller-financed note calculated?

Accepted Answer

The payment is a standard amortized loan payment on the financed amount, which is the price minus the down payment, at the note rate over the amortization term. A longer amortization lowers the monthly payment. The twist in owner-carry deals is that the payment is often amortized over 25 or 30 years to stay affordable, even when the note is only meant to last five to seven years before a balloon comes due.

Question 3

What is a balloon payment?

Accepted Answer

A balloon payment is the entire remaining balance of the note, due in one lump sum on a set date that arrives long before the amortization schedule would pay the loan off. For example, a note amortized over 30 years with a five-year balloon means the buyer makes small 30-year-style payments for five years, then owes the large remaining balance all at once. The buyer usually has to refinance or sell the asset to cover it, which is the main risk of a balloon.

Question 4

What return does the seller earn on a carryback note?

Accepted Answer

If the seller holds the note to the end, the yield equals the note interest rate, and the total return is the sum of all the interest collected on top of getting the principal back. That interest income can be substantial over the life of a note. The tradeoff is that the seller does not get all their cash at closing and takes on the risk that the buyer stops paying, which is why the note is secured by a lien on the asset.

Question 5

Can the seller sell the note for cash later?

Accepted Answer

Yes. A seller who wants cash can sell the promissory note to a note buyer on the secondary market. But note buyers pay less than the remaining balance so they can earn a higher yield than the note rate. The gap between the note balance and what a buyer will pay is the discount. A higher target yield or a riskier note means a bigger discount. This calculator estimates that resale value so a seller can see what the note is really worth if they need to cash out.

Question 6

Is seller financing a good idea for the buyer?

Accepted Answer

It can be, when a conventional loan is not available or the terms are better, but the buyer has to respect the balloon. Owner-carry deals often have higher interest rates than bank loans and a balloon that forces a refinance or sale within a few years. If the buyer cannot refinance when the balloon hits, they can lose the asset and everything paid in. The right move is to model the balloon before signing and have an exit plan for it, not to focus only on the comfortable monthly payment.

Seller Financing Calculator

The Deal

The Full Picture

How an owner-carry note actually works