CRE 101 · deweyluong.realtor

Seller Financing Explained: When the Seller Is the Bank in a Commercial Deal

Most commercial purchases need a bank. Some cannot get one on the deal's timeline — or at all — and some do not need one, because the seller is willing to be the bank: the buyer puts cash down, signs a note and a security deed to the seller, and pays the seller monthly instead of a lender. On the made-up example on this page, a $1,500,000 building the bank would only fund at 65% changes hands with $300,000 down instead of $525,000 — and the seller spreads an $800,000 gain over the life of the note instead of recognizing it all in the year of the sale. By Túy “Dewey” Luong, CCIM — Founding Broker, SERHANT. Atlanta · 318 closed sales / $281.2M career volume · 678-707-2498

The worked example uses made-up, rounded numbers to teach the mechanics. Real seller-financed deals are papered by attorneys — in Georgia, usually a promissory note plus a security deed, with taxes and insurance often escrowed or verified annually — and the tax treatment runs through the installment-sale rules, which have exclusions and elections only a CPA should apply to a real transaction. This page is general education, not legal, lending, or tax advice.

What seller financing actually is

• The deed still transfers at closing: seller financing is not rent-to-own and not a lease option. The buyer becomes the owner on day one, exactly as in a sale-leaseback the paperwork — not possession or title — is what differs. What the seller keeps is a note and a lien, not the building.
• The seller underwrites, not a committee: there is no bank appraisal contingency, no lender's debt-yield floor, no committee calendar. The seller decides what down payment, rate, and proof of capacity make the risk acceptable — which is why deals a bank cannot touch (short operating history, special-use buildings, thin rent rolls) can still close.
• Everything is negotiable — including the trade between price and terms: down payment, interest rate, amortization, balloon date, prepayment rights, guarantees, and escrows are all bargaining chips. A seller who holds firm on price often gives on rate; a buyer who needs a lower rate can pay for it with a bigger down payment. Price the whole structure, not the headline number — the same discipline as effective rent on a lease.
• Georgia mechanics: the buyer's promise is a promissory note; the seller's protection is a security deed recorded against the property, which in Georgia allows non-judicial foreclosure if the buyer defaults — faster than a mortgage state's court process, but still a cost, a timeline, and a building coming back in unknown condition. Both sides use their own attorneys; there is no standard form that makes this safe by default.
• An existing mortgage changes everything: if the seller still owes a bank, the loan almost certainly has a due-on-sale clause, and transferring title can let that lender call the loan. Structures that try to hide the transfer from the existing lender put both parties at risk. Clean seller financing starts with a property the seller owns free and clear, or a lender who has consented in writing.

Worked example: one $1,500,000 building, two ways to fund it (made-up numbers, labeled as such)

• The deal: a small Gwinnett commercial building priced at $1,500,000, producing $128,000 of NOI. The seller bought it years ago for $700,000, so a sale carries roughly $800,000 of gain.
• The bank path: the lender caps the loan at 65% of value — $975,000 at a made-up 7.75% on a 20-year amortization, a payment of about $8,004 a month. The buyer must bring $525,000 of down payment, plus closing costs, plus whatever reserves the lender demands — after the appraisal, the environmental report, and the committee all say yes.
• The seller-financed path: the seller takes 20% down — $300,000 — and carries a $1,200,000 note at a made-up 7.0%, amortized over 25 years, with a balloon in 7 years. The payment is about $8,481 a month. The buyer gets in with $225,000 less cash at the closing table.
• The payment is not the prize: the seller note's payment is actually a little higher than the bank's — a bigger loan at a slightly lower rate. What the buyer bought is access and cash preservation: $225,000 that stays available for renovations, reserves, or the next deal, and a closing that is not hostage to a lender's calendar. Coverage is honest either way — $128,000 of NOI covers the seller note about 1.26 times and the bank loan about 1.33 times, the DSCR test a borrower should run before celebrating the easier path.
• The balloon is the real deadline: after 84 payments — about $712,433 handed to the seller — the buyer still owes about $1,040,016. Only about $159,984 of principal was paid down in seven years. The refinance or sale that retires that balloon has to be planned from day one; it is the same maturity risk priced in the balloon payments lesson, except here the lender is the person who used to own the building.
• Why the seller says yes — the income: in year one the note pays the seller about $83,418 of interest on top of $18,358 of principal. The seller traded a building to manage for a monthly check secured by a building they know better than any bank does.
• Why the seller says yes — the taxes: under the installment-sale method, the seller generally recognizes gain as principal is collected, not all at closing. The gain ratio here is $800,000 of gain on a $1,500,000 price — 53.33%. Year one collects $318,358 of principal ($300,000 down plus $18,358 of amortization), so roughly $169,791 of gain is recognized in year one instead of $800,000. (Interest is taxed separately, as ordinary income, as received.) The total gain is the same; like cost segregation, the benefit is timing — and like a 1031 exchange, it only works when the structure is set up before the closing, with a CPA modeling it.
• The down payment is the seller's cushion: if this buyer defaults in year three, the seller forecloses and takes back a building with a $300,000 equity cushion in front of a note balance still about $1,140,850. That cushion — plus a personal guarantee, proof of reserves, and tax-and-insurance verification — is the entire risk model. Thin down payments are where seller financing goes wrong.

When it works — and where it breaks

• Best fits: retiring owners with no mortgage and no need for a lump sum; special-use or small-balance deals banks price as nuisances; land, where bank terms are shortest; and buyers with real equity and operating strength whose paperwork a bank underwrites slowly. In each case the seller's knowledge of the asset replaces the bank's process.
• The price-for-terms trade cuts both ways: a buyer paying full asking price for cheap financing may still overpay — run the cash flows at a market rate and see what the building itself is worth. A seller commanding a premium price for offering terms should confirm the buyer's premium survives an appraisal the buyer's future lender will eventually order.
• Servicing is a job someone must do: payments collected, late fees enforced, insurance and tax receipts verified every year, balances reported for both parties' tax returns. Many seller-financed deals use a third-party loan servicer or escrow agent for a small monthly fee so the paper trail stays clean and the relationship stays a relationship.
• Default is the scenario to paper for: the note and security deed should speak plainly about late charges, cure periods, acceleration, who pays foreclosure costs, and what happens to tenant leases and deposits. The friendly version of this conversation happens at the drafting table; the expensive version happens in year four.
• Both exits need a plan B: the buyer should know, at closing, which lender would refinance the balloon and what that lender will require — seasoning, debt coverage, appraisal. The seller should know the note itself can usually be sold to a note buyer later at a discount if the lump sum becomes necessary. Neither plan B is free; both are cheaper when arranged early.

Cho nhà đầu tư người Việt

Trong nhiều thương vụ thương mại, người bán chính là "ngân hàng". Seller financing (bên bán cho vay lại) nghĩa là: người mua trả một phần tiền mặt, ký giấy nợ (promissory note) và thế chấp lại bằng chính bất động sản (security deed), rồi trả góp hàng tháng cho người bán thay vì cho ngân hàng — và quyền sở hữu vẫn sang tên ngay tại buổi closing, không phải thuê-mua. Ví dụ giả định trên trang này: tòa nhà giá $1.500.000, NOI $128.000. Ngân hàng chỉ cho vay 65% — $975.000, lãi suất giả định 7,75%, trả trong 20 năm, khoảng $8.004/tháng — người mua phải bỏ $525.000 tiền mặt. Với seller financing: người mua trả trước 20% — $300.000 — và người bán cho vay lại $1.200.000 với lãi suất giả định 7,0%, tính trả trong 25 năm nhưng đáo hạn sau 7 năm (balloon), khoảng $8.481/tháng. Người mua tiết kiệm được $225.000 tiền mặt lúc mua. Nhưng lưu ý: sau 84 kỳ trả — khoảng $712.433 — người mua vẫn còn nợ khoảng $1.040.016, nên kế hoạch tái cấp vốn (refinance) phải có từ ngày đầu. Phía người bán cũng có lợi: năm đầu họ nhận khoảng $83.418 tiền lãi và $18.358 tiền gốc; và theo phương pháp installment sale, lãi vốn $800.000 (giá bán $1.500.000 trừ giá vốn $700.000, tỷ lệ 53,33%) được khai dần theo tiền gốc thu về — năm đầu chỉ khai khoảng $169.791 thay vì toàn bộ $800.000. Điều kiện cốt lõi: người bán phải không còn nợ ngân hàng trên bất động sản (hoặc được ngân hàng đồng ý bằng văn bản), tiền đặt trước phải đủ dày để bảo vệ người bán, và mọi giấy tờ phải do luật sư soạn. Đây là thông tin giáo dục chung, không phải tư vấn thuế hay pháp lý — hãy làm việc với CPA và luật sư của bạn trước khi ký.

Frequently asked questions

What is seller financing in commercial real estate?

Seller financing is a purchase structure where the seller lends the buyer part of the price instead of a bank making the loan. The buyer pays a down payment at closing, takes title to the property, and signs a promissory note secured by a security deed in the seller's favor, paying the seller monthly over an agreed schedule. On this page's made-up example, a $1,500,000 building sells with $300,000 down and a $1,200,000 seller note at 7.0% — against $525,000 down on the bank path.

Why would a seller offer financing instead of requiring a bank loan?

Three reasons, in the order sellers usually name them: it widens the buyer pool and supports the price, because more buyers can perform; it converts the building into an income stream — about $83,418 of interest in year one on this page's example note; and under the installment-sale method it spreads the tax on the gain across the years principal is collected — roughly $169,791 of an $800,000 gain recognized in year one here, instead of all $800,000 at closing.

What terms are typical on a seller-financed commercial deal?

Down payments of 20–30% are common — heavier than seller-financed houses, because the down payment is the seller's protection. Rates are usually at or somewhat above bank rates for similar risk, amortization runs 15–25 years, and a balloon typically comes due in 5–10 years: on the worked example, about $1,040,016 is still owed at the 7-year balloon. Personal guarantees, tax-and-insurance escrows or annual verification, and late-fee and default language are standard protections a seller's attorney will insist on.

What are the main risks of seller financing?

For the buyer, the balloon: seven years of payments on the example note retire only about $159,984 of principal, so the refinance must be planned from closing day, and a seller's existing mortgage with a due-on-sale clause can endanger the whole structure if title transfers without that lender's consent. For the seller, default means foreclosure costs and time, a building returned in unknown condition, and a tax picture that changes when payments stop. Both risks shrink with a larger down payment, honest underwriting of the buyer, and attorney-drafted documents.

Seller financing (bên bán cho vay lại) là gì?

Là cấu trúc mua bán trong đó người bán cho người mua vay một phần tiền mua, thay vì ngân hàng. Người mua trả tiền mặt một phần tại closing, nhận sang tên bất động sản, ký giấy nợ và security deed cho người bán, rồi trả góp hàng tháng cho người bán. Trong ví dụ của trang này, tòa nhà $1.500.000 được mua với $300.000 tiền mặt và khoản vay từ người bán $1.200.000 lãi suất 7,0% — so với $525.000 tiền mặt nếu vay ngân hàng. Người bán được lợi nhờ tiền lãi và khai thuế lãi vốn dần theo phương pháp installment sale; người mua giữ lại được $225.000 tiền mặt. Đây là thông tin giáo dục chung, không phải tư vấn thuế hay pháp lý.

Looking at a building a bank will not fund — or selling one and wondering if carrying the note beats a lump sum? Call Túy “Dewey” Luong, CCIM at 678-707-2498 or see SERHANT. Atlanta.