Owner Financed Notes for Houses, Commercial Property and Land
What are owner financed notes? Owner financing is one of the best ways to create a real estate note without relying on a bank. Instead of a buyer getting a traditional mortgage, the seller provides the financing. The buyer makes payments over time, and the seller holds a promissory note secured by the property.
For real estate investors and note buyers, owner financing is especially valuable because it creates something sellable: a properly documented, income-producing note. When structured correctly, seller financing can produce a strong first-lien note that performs like a mortgage and can be sold later for a lump sum.
This article explains how owner financing works for houses, commercial properties, and land, how to create a note, and the exact steps to close the transaction properly.
What Is Owner Financing?
Owner financing (also called seller financing) is when the seller agrees to accept monthly payments instead of receiving the full purchase price at closing.
In an owner-financed deal:
The buyer signs a promissory note
The note is secured by the property using a mortgage, deed of trust, or land contract
The seller becomes the lender
The buyer becomes the borrower
This structure allows the buyer to purchase the property without bank approval, and it allows the seller to generate cash flow and potentially sell the note later.
Owner Financing for Houses (Residential)
Residential owner financing is the most common form of seller financing because it mirrors a standard mortgage transaction.
Typical Residential Owner Financing Terms
Most residential seller-financed notes include:
Down payment: 5%–20%
Interest rate: 7%–12% (varies by market)
Amortization: 20–30 years
Balloon payment: 3–7 years (optional but common)
The strongest residential notes—especially those attractive to note buyers—usually have a solid down payment and a recorded first lien.
Common Residential Structure
In most states, residential seller financing uses:
Promissory Note + Mortgage, or
Promissory Note + Deed of Trust
The note defines the repayment terms, while the mortgage or deed of trust secures the debt against the property.
Owner Financing for Commercial Properties
Commercial owner financing is extremely common because banks can be strict and slow with commercial loans. Seller financing often becomes the easiest path to closing.
Commercial seller financing works well for:
Retail buildings
Small office buildings
Warehouses
Mixed-use properties
Multifamily (5+ units)
Typical Commercial Note Terms
Commercial notes usually have:
Down payment: 20%–30%
Interest rate: 8%–14%
Amortization: 15–25 years
Balloon: 3–10 years
Commercial notes often include stronger lender protections such as default interest, reporting requirements, and sometimes personal guarantees.
Owner Financing for Land (Vacant Lots and Acreage)
Land is one of the best asset types for owner financing because many banks won’t lend on raw land unless the buyer is extremely strong.
Land seller financing is common for:
Rural acreage
Recreational land
Lots for future construction
Subdivision parcels
Typical Land Note Terms
Land notes typically include:
Down payment: 15%–35%
Interest rate: 10%–16%
Amortization: 10–20 years
Balloon: 3–7 years
Land notes often carry higher interest rates because they are riskier and harder to liquidate than houses.
Security Instrument for Land
Land can be secured by:
Mortgage
Deed of trust
Contract for deed / land contract (state-dependent)
If your goal is to create a note you can sell later, a recorded lien is usually the cleanest structure.
What Documents Create a Note?
A real owner-financed note transaction requires two core documents:
1) Promissory Note
This is the legal promise to repay. It includes:
Loan amount
Interest rate
Payment amount
Due date
Late fees
Default terms
Balloon terms (if any)
2) Security Instrument (Mortgage / Deed of Trust)
This ties the debt to the property and is recorded in county records. It gives the lender foreclosure rights if the buyer defaults.
A promissory note without a properly recorded lien is far less valuable and much harder to sell.
Step-by-Step: How to Create Owner Financed Notes
If you want to create a note that is enforceable and attractive to note buyers, follow these steps.
Step 1: Negotiate Price and Down Payment
Start with:
Purchase price
Down payment
Closing date
Who pays closing costs
A higher down payment reduces risk and makes the note stronger.
Step 2: Set the Loan Terms for Owner Financed Notes
Define:
Interest rate
Amortization schedule
Monthly payment
Balloon date (if applicable)
A common structure is a 30-year amortization with a 5-year balloon, which keeps payments affordable but forces a refinance or payoff later.
Step 3: Choose the Correct Legal Structure for Owner Financed Notes
The structure depends on your state and the property type:
Mortgage
Deed of trust
Land contract (only if appropriate in that state)
If you want to sell the note later, use the structure preferred by note buyers in your state.
Step 4: Underwrite the Buyer
Seller financing works best when the seller acts like a lender.
At minimum, verify:
Credit report
Income and employment
Down payment source
Payment history (rent or mortgage)
For commercial, review:
Leases
Rent roll
Property income and expenses
Good underwriting increases the odds that the note performs and increases its resale value.
Step 5: Draft the Owner Financed Promissory Note
A strong promissory note should include:
Borrower and lender names
Loan amount and interest rate
Payment schedule
Late fee and grace period
Default and acceleration clause
Balloon terms
Prepayment clause
Attorney fees clause
For commercial notes, additional lender protections are often added.
Step 6: Draft and Record the Mortgage/Deed of Trust
This document should include:
Legal description
Lien position
Tax and insurance requirements
Default remedies
Recording the lien is critical. It protects the seller and makes the note far more marketable.
Step 7: Close Through a Title Company or Attorney
A professional closing typically includes:
Title search
Settlement statement
Notarized documents
Recording
Title insurance (recommended)
This prevents common errors that later cause problems when selling the note.
Step 8: Use a Loan Servicing Company
Loan servicing is not required, but it’s strongly recommended.
A loan servicer provides:
Payment tracking
Monthly statements
Payment history
1098 tax forms
Default notices if needed
From a note buyer perspective, third-party servicing makes the note more credible and easier to purchase.
Step 9: Maintain a Complete Owner Financed Note File
If you want the note to be sellable, keep:
Signed promissory note
Recorded mortgage/deed of trust
Settlement statement
Title policy
Proof of insurance
Tax status proof
Payment history
Borrower underwriting documents
A clean file can be the difference between a strong offer and a steep discount.
Owner Financed Notes FAQ
What are owner financed notes?
An owner financed note is a promissory note created when the seller finances the buyer’s purchase. The buyer makes monthly payments to the seller instead of a bank, and the note is secured by the property.
What documents are needed for owner financing?
Owner financing typically requires a promissory note and a security instrument such as a mortgage or deed of trust. The lien should be recorded in county records.
Is owner financing legal?
Yes, owner financing is legal in all states, but the rules and required disclosures vary. It’s best to close through a title company or real estate attorney.
Can you owner finance land?
Yes. Owner financing is very common for land because banks often won’t lend on vacant lots or acreage. Land notes typically require higher down payments and interest rates.
Can you sell owner financed notes?
Yes. Seller-financed notes can be sold to note buyers. Notes with strong documentation, recorded liens, and good payment history usually sell for the best price.
First Capital provides FAST CASH for Notes in Most States. Do you have questions about Owner Financed Notes? Are you ready to sell a note today? Contact First Capital where our Note experts are ready to assist and answer your questions.