Seller Financing and Lease Option Structures

Seller financing and lease options are the most flexible creative structures with customizable terms.

Seller Financing

Seller acts as the bank. Negotiable: down payment (5-20%), rate (5-8%), amortization (15-30yr), balloon (3-7yr). Works best when seller owns free and clear and wants income.

Sample Seller Financing Term Sheet

**Property**: 123 Main St, Anytown, USA (3BR/2BA, 1,450 SF) **Market Value**: $285,000 **Proposed Terms**: - Purchase Price: $270,000 (5.3% below market) - Down Payment: $15,000 (5.6% of purchase price) - Loan Amount: $255,000 - Interest Rate: 5.5% fixed (vs. 7.25% conventional) - Term: 30 years, amortized over 30 years - Monthly P&I Payment: $1,448.24 - Balloon Payment: None (full amortization) - Prepayment Penalty: None - Late Fee: 5% of payment after 15-day grace period - Secured By: First-position deed of trust on the property **Seller Benefit**: Receives $15K cash today, earns $521,366 total ($255K principal + $266,366 interest) over 30 years — $236,366 MORE than a cash sale. Tax benefits from installment sale treatment (IRS Section 453). **Investor Benefit**: Below-market rate (5.5% vs. 7.25%), low down payment, no bank qualification required.

Term	Range	Leverage	Impact
Down Payment	5-20%	Higher = lower rate	Capital requirement
Rate	5-8%	Higher price = lower rate	Cash flow
Amortization	15-30 years	Longer = lower payment	Monthly payment
Balloon	3-7 years	Longer = less pressure	Refi timeline
Prepayment	0-3%	Negotiable	Flexibility

Seller financing terms

Lease Option Structure

Lease + purchase option. Option fee (1-5%) credited toward purchase. Rent credits ($200/mo typical). Price set at signing. 1-3 year option period. If not exercised, tenant forfeits fee and credits.

Lease Option Economics

Option Fee: $10,000 (5% of $200K) Rent: $1,500/mo ($200/mo credit) Period: 2 years | Price: $200,000 Credits if exercised: $10K + $4,800 = $14,800 toward purchase

Wraparound Mortgage

Seller-financed loan wrapping around existing mortgage. Buyer pays seller on wrap amount at higher rate; seller pays existing mortgage at lower rate, profiting from spread. Complex—requires escrow/servicing and may be restricted in some states.

Key Takeaways

✓Seller financing works best with free-and-clear sellers wanting income.
✓Lease options provide low-capital entry with purchase option.
✓Wraps profit from interest rate spread.
✓All structures require attorney-prepared documentation.

Sources

IRS — Publication 537: Installment Sales(2025-01-15)
National REIA — Seller Financing Terms Benchmarking(2025-01-15)

Common Mistakes to Avoid

Combining lease and option into a single document

Consequence: Courts may interpret the combined document as an installment sale, triggering different tax and legal treatment

Correction: Always use two separate documents: a lease agreement and a separate option agreement.

Setting lease option purchase price below current market value

Consequence: Reduced profit if tenant exercises; potential lender issues at refinance

Correction: Set the option price at or slightly above current market value — the tenant benefits from below-market entry via credits.

Key Takeaways