What seller financing on a paid off rental actually looks like end to end, a case worth studying
Take a seller who owns one rental free and clear, a 3 bed 1 bath, roughly 1,000 square feet, on a decent street in a small midwest town, held nine years. Listed for a cash sale, two offers come in under the target price, then a couple who was pre approved and then un approved when the wife's business income got looked at properly asks the seller to carry. A workable structure: price 152,000, down payment of 20 percent, note at 7.25 percent on a 30 year amortization with a 7 year balloon. Principal and interest lands near 830 a month, plus roughly 290 a month escrow for taxes and insurance, plus a small servicing fee the buyers pay. The seller collects the down payment at closing and a note yielding more than most CDs on the market. The part that tends to make or break a deal like this is underwriting the buyers the way a lender would: two years of business returns, several months of bank statements, and a credit pull, even though the seller isn't a bank. Income can look fine while cash is thin, and a down payment partly funded by a gift that hasn't cleared yet can stall closing right up against the deadline. A seller in that position typically gives a short, firm window for the funds to land and is prepared to walk if they don't, since a smaller effective down payment usually means thinner post-closing reserves against a house with aging major systems, which is the real risk, not the percentage itself. Most title companies won't draft the note or the deed of trust for a private seller-financed sale, so paying a real estate attorney to draft both and explain what foreclosure actually looks like in that state if it ever comes to that is money well spent relative to the risk being taken on. Structuring the gain as an installment sale for tax purposes, spreading it across the years payments are collected, is a common approach worth raising with a CPA, since the right structure depends heavily on the seller's broader tax picture.
