Because seller financing sounds great until you run the actual numbers
If you spend any time in the creative real estate space you hear about seller carry deals constantly. And for good reason, when they’re structured well they can be genuinely transformative. Lower barriers to entry, flexible terms, no bank approval required, and a motivated seller who wants the deal to work as much as you do.
But here’s what doesn’t get talked about enough. Seller carry deals can also be structured in ways that look attractive on the surface and quietly destroy your returns underneath. The terms matter enormously and not all seller financing is created equal.
I’ve analyzed a lot of these deals. Here’s how I think through them and what I look for before I ever say yes.
What is a seller carry deal?
For anyone newer to the concept, a seller carry deal, also called seller financing or an owner carry, is when the seller of a property acts as the lender instead of a bank. Rather than you going to a bank to borrow the purchase price the seller carries a note and you make payments directly to them over time.
The appeal is obvious. No bank qualification process, potentially lower interest rates than conventional financing, more flexible terms, and a seller who is often motivated to make the deal work because they’re receiving monthly payments rather than a lump sum.
The risk is equally obvious once you understand it. The terms are entirely negotiable which means they can be structured in your favor or against you depending on how well you understand what you’re agreeing to.
The four numbers that determine whether a seller carry deal actually works
Before I get excited about any seller carry deal I run four numbers. All four have to make sense together or I keep negotiating or I walk.
1. The interest rate
Seller carry deals typically come with interest rates somewhere between 5% and 8% in today’s market though this varies widely. The rate matters because it directly determines your monthly payment and therefore your cash flow.
A $3,000,000 seller carry note at 5% interest only for 10 years costs you $12,500 per month. The same note at 7% costs you $17,500 per month. That $5,000 monthly difference is $60,000 per year that comes directly out of your cash flow.
Always model the payment at the actual proposed rate and make sure your NOI can absorb it with adequate cushion. Which brings me to the second number.
2. The debt service coverage ratio
The DSCR is especially critical in seller carry deals because the terms are flexible and sellers sometimes propose payment structures that look affordable without being sustainable.
Divide your adjusted NOI by your annual debt service. I want to see at least 1.5x coverage, meaning my NOI covers the payments by 50%. Anything below 1.25x and I’m either renegotiating the terms or walking away.
A seller carry deal with a 1.05x DSCR looks like it works on paper. But one bad month, one unexpected expense, one occupancy dip, and you’re behind on your payments to the seller. That’s not a position you want to be in.
3. The balloon payment
Most seller carry deals have a balloon payment, a point in time where the remaining balance becomes due in full. Common balloon terms are 3, 5, 7, or 10 years.
The balloon is where a lot of buyers get into trouble. They structure a deal that cash flows well for 5 years and then discover they can’t refinance or sell at the balloon date under favorable conditions. Maybe the market shifted. Maybe their credit situation changed. Maybe interest rates moved and conventional financing no longer pencils.
Before you sign any seller carry agreement you need a clear plan for what happens at the balloon date. Can you refinance with a conventional lender at that point? Will the property have realistically appreciated enough to sell? Can you negotiate an extension with the seller if needed?
Never assume the balloon will take care of itself. Plan for it from day one.
4. The amortization schedule
This one surprises a lot of newer investors. A seller carry note can have an interest only payment structure, a fully amortizing structure, or something in between. The difference matters enormously for your cash flow and your equity building.
An interest only note means every payment goes entirely to interest and your principal balance never decreases. Your monthly payment is lower which helps cash flow but you’re not building equity through paydown and you’ll owe the full original balance at the balloon date.
A fully amortizing note means each payment includes both principal and interest. Your payment is higher but your balance decreases over time and you’re building equity with every payment.
Neither structure is automatically better. It depends on your cash flow situation, your hold period, and your exit strategy. What matters is that you understand exactly what you’re agreeing to and have modeled both scenarios.
The terms that are negotiable and the ones that matter most
Everything in a seller carry deal is negotiable. Here are the terms worth fighting hardest for:
The interest rate is obviously important but it’s not always the most important. A slightly higher rate with a longer balloon and no prepayment penalty can be better than a lower rate with a short balloon and a penalty for paying it off early.
The prepayment penalty is one people often overlook. If you plan to refinance or sell before the balloon date a prepayment penalty can cost you significantly. Always ask about prepayment terms and try to negotiate them out entirely or limit them to the first year or two.
The balloon date itself is worth negotiating hard on. Longer is almost always better because it gives you more time to stabilize the asset, build your cash reserves, and position yourself for a favorable refinance or sale.
A real world example
Let me walk you through how I analyzed the seller carry on an RV park deal recently.
The property had an adjusted NOI of approximately $400,000. The seller carry was structured at approximately $220,000 in annual debt service on a $4,500,000 purchase price.
DSCR: $400,000 divided by $220,000 equals 1.82x. Healthy coverage with good cushion.
Cash flow after debt service: $180,000 annually or $15,000 per month.
After a 5% CapEx reserve of $25,000 annually the free cash flow was $155,000 per year.
The terms worked mathematically. The deal ultimately didn’t close for reasons unrelated to the financing structure but the seller carry terms themselves were workable and the numbers supported them.
That’s what a properly analyzed seller carry deal looks like. The numbers tell a clear and consistent story at every level.
The bottom line
Seller carry deals are a powerful tool when they’re structured correctly and analyzed rigorously. They can open doors that conventional financing closes and create win-win situations for both buyer and seller.
But the flexibility that makes them attractive is the same flexibility that can get you into trouble if you don’t know what you’re analyzing. Know your four numbers. Understand your balloon. Negotiate your terms. And make sure the deal works not just at closing but at every point in your hold period.
If you want help analyzing the terms of a seller carry deal you’re looking at I would love to work through the numbers with you. That’s exactly the kind of analysis that can save you from a deal that looks good and isn’t, or give you the confidence to move forward on one that truly is.
Visit me at https://www.pvifinancial.com and let’s look at your deal together.
~Wendi | PVI Financial | Fractional CFO & Bookkeeping Services for Small Business & Outdoor Hospitality
PVI Financial 
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