Author: Dan Francis

Seller financing isn’t exotic. It’s a promissory note, a deed of trust, and two people who agreed on price without a bank dictating the terms. I’ve closed these on burned-out rentals, inherited duplexes, and pre-foreclosure houses where a conventional lender wouldn’t touch the property. The steps are repeatable. Most agents just never learned them because their brokers didn’t either.

Step 1: Confirm 40% Equity Before the Appointment

Seller financing without equity is a dead end. If the seller owes $130,000 on a $150,000 house, there is no deal structure that makes this work. You need room between the payoff and the purchase price to build terms that make sense for both sides.

In practice: target properties where the owner has held for 10-plus years, paid cash, or inherited with no mortgage. Texas county appraisal district records are public and free at most CAD websites. Five minutes of research tells you whether the equity exists before you leave your driveway.

The mistake that blows this step: over-screening appointments. I drove to a lead once that sounded uncertain over the phone, the kind of call most agents talk themselves out of. The seller owned two units in the same complex. Both sold. Pick up the phone, set the appointment, go.

Step 2: Run ARV and Your Maximum Offer Before You Sit Down

Walk in with a number. You need three inputs: an after-repair value from 3 closed comps (not automated valuations), a repair estimate within $10,000, and a maximum offer based on the math.

For buy-and-hold: ARV × 0.75 minus repairs equals your ceiling. On a $200,000 ARV property needing $20,000 in work, that’s $130,000. That is the number you work backward from when you structure the note.

The mistake that blows this step: going in blank and asking what the seller wants. You anchor the conversation or someone else will.

Step 3: Know the Texas Three-Property Rule Before You Structure Anything

Under Dodd-Frank, a seller financing a residential 1-4 family property can avoid registering as a mortgage loan originator under a specific exemption: they cannot finance more than 3 properties per year, must meet documentation requirements around the buyer’s ability to repay, and the note must carry a fixed rate or, if adjustable, cannot adjust in the first five years.

One of those three annual deals carries an additional restriction: the seller cannot make that loan to a buyer who lacks the ability to repay by conventional standards.

Before you structure anything, ask the seller directly: “Have you seller-financed any other properties this year?” If the answer is two, you may be working with the restricted transaction in the group. That requires an attorney, not a workaround.

The mistake that blows this step: assuming seller finance is always unregulated. It isn’t. Violating Dodd-Frank in a residential transaction can expose the seller to regulatory action, and you put that deal together.

Step 4: Build the Note Around Three Numbers

Every seller-finance note negotiates down to three figures: purchase price, interest rate, and balloon date.

Interest rates on seller-carried notes in Texas currently run 7-10%. Sellers accept below-market rates because spreading the sale over the term of the note also spreads the capital gains tax hit. That’s a real benefit worth spelling out when you’re negotiating rate, not something to bury.

A concrete example: $130,000 purchase price, 8% interest, 30-year amortization, 5-year balloon. Monthly payment: approximately $954. Balance due at month 60: approximately $124,600. The buyer refinances conventionally when they qualify; the seller has received five years of income and a clean payoff.

The mistake that blows this step: leaving the balloon unaddressed. Buyers will sign anything that lowers the monthly payment today. Explain month 60 in plain language before signatures happen, not after.

Step 5: Hire a Real Estate Attorney to Draft the Documents

Title companies close transactions. They don’t draft custom promissory notes or deeds of trust. A real estate attorney does, and in Texas, a standard seller-finance document package (note, deed of trust, required addenda) runs $750-1,500 for a straightforward deal.

Texas Property Code Chapter 5 governs executory contracts (contracts for deed, land contracts) separately from traditional seller-finance transactions secured by a deed of trust. The two structures carry different statutory disclosure requirements. Know which one you’re using before you call the attorney, because they are not the same animal.

The mistake that blows this step: using a generic form downloaded from the internet. A Texas court will not enforce a defective note. The $1,000 attorney fee protects a six-figure transaction. There is no version of this where it’s optional.

Step 6: Close With a Title Company That Has Done This in the Last 90 Days

Call before you’re under contract. Ask directly: “Have you closed seller-financed transactions recently?” If they hesitate, keep calling.

At closing, the title company runs a full title search ($200-400 in most Texas markets), issues a title commitment, and records the deed of trust with the county clerk ($25-75 per document depending on county). Total closing costs on a seller-financed deal: $1,500-3,500, versus $6,000-12,000 on a conventional purchase at a similar price point. That gap is real negotiating room.

After closing, route the monthly payments through a Texas loan servicer. First National Acceptance Company and MLG Servicing both operate here. Cost: $25-35 per month. This creates a documented payment history if the buyer refinances conventionally down the road, and it keeps you out of the collections business if a payment is late.

The mistake that blows this step: collecting payments yourself. One missed payment becomes a dispute about who said what. A third-party servicer is the neutral record that protects everyone, including you.

Start here: Your Broker Doesn't Know What to Do With Seller Financing. That's Why You Keep Losing These Deals.

Most Texas agents who’ve never done a seller financed deal aren’t avoiding them because of the law. They’re avoiding them because someone who also never did one explained why they couldn’t.

Four myths circulate in every Facebook group and every managing broker meeting. Each one kills real deals.

Myth 1: Dodd-Frank Requires an NMLS License for Seller Financing

The convincing version: “Dodd-Frank redefined ‘loan originator’ to include anyone who arranges credit secured by a dwelling. Unless you’re NMLS licensed, you’re breaking federal law.”

Why it survives: the people repeating it read the headline and not the statute.

Dodd-Frank also wrote explicit exemptions. A natural person, estate, or trust does not become a loan originator when providing seller financing if they owned the property, they’re financing no more than three properties in a 12-month period, and they didn’t build the property as part of a construction business. Texas Finance Code Chapter 156, the state’s SAFE Act implementation, tracks the same framework.

Individual sellers closing owner-financed deals legally have existed throughout the entire post-Dodd-Frank era. The law Congress passed has seller financing exemptions because Congress understood that individual sellers and the mortgage origination industry are not the same thing.

Know the conditions. Work within them.

Myth 2: The Property Has to Be Paid Off First

The convincing version: “Of course the seller has to own it free and clear. If there’s an existing loan, they’d have to pay it off at closing before they could turn around and finance it for a buyer.”

Why it survives: most people picturing seller financing picture a retired landlord with no debt. That’s one version of the deal.

A wrap mortgage keeps the existing loan in place. The seller creates a new note at a higher rate, encompassing the original balance. The buyer makes payments to the seller; the seller keeps paying their lender. On a $120,000 underlying balance at 4% wrapped into a $200,000 deal at 7%, the seller is earning 7% on the full $200,000 while paying 4% only on the $120,000 balance. The interest income on the equity portion runs at the full 7% rate. That spread is the seller’s carry income.

Texas Property Code Chapter 5, Subchapter F governs wrap transactions. It mandates specific written disclosures to the buyer about the existing lien (lender name, payoff balance, loan terms). Skip these and the buyer has statutory remedies against the seller. Do them correctly and it’s a documented, compliant transaction.

The due-on-sale clause in the underlying loan is the actual risk to evaluate. Institutional lenders rarely call performing loans, but that possibility belongs in the conversation with the seller, and that conversation should be documented.

Myth 3: Sellers Take a Haircut to Accept Creative Terms

The convincing version: “If a seller can get cash, why would they take payments? They’re discounting the price so a buyer can avoid qualifying for a real loan.”

Why it survives: in urgent-seller scenarios, that’s sometimes true. In equity-rich scenarios, it’s often backwards.

On a $200,000 seller financed deal at 8% interest with a 20-year term, the seller collects $200,000 in principal plus roughly $183,000 in interest, totaling $383,000 gross. The same property on the retail market, after commission, closing costs, and a negotiated concession to get a finicky conventional buyer to the table, might net $182,000 to $188,000 in actual proceeds.

The tax situation widens the gap further. Installment sale treatment under IRC Section 453 lets sellers spread capital gains recognition over the life of the note rather than recognizing the full gain in year one. For a seller who bought the property 20 years ago at $40,000 and is selling at $200,000, the year-one tax difference between a lump-sum close and an installment sale can run tens of thousands of dollars. Their CPA should run the numbers, but that conversation only happens if the seller knows installment sales exist.

Seller financing isn’t always the better outcome. It’s also not automatically the worse one for the seller. Those are different claims, and most agents only know the first.

Myth 4: Your Broker’s E&O Keeps You Out of These Deals

The convincing version: “My broker said our E&O explicitly excludes non-standard transactions. I’m not risking my license on a deal my brokerage won’t back.”

Why it survives: the broker said it with confidence, and most agents never checked the actual policy language.

The real issue isn’t E&O coverage. It’s that most brokers built their compliance environment around the path of least friction, and creative finance is friction. Some brokers have written policies that genuinely restrict these deals. Others have said “our E&O won’t cover it” without reading whether that’s true, because it’s easier than learning a new deal type.

Agents who want to do creative deals either skip proper documentation, or they operate outside their license entirely. Neither outcome protects anyone.

At StepStone, we get a Seller’s Disclosure Notice on every distressed transaction. Every one. Angie gets one when the house is three-quarters burned to the ground. It meets the seller’s statutory obligation and protects every licensee in the deal. We’ve processed hundreds of short sales and distressed closings since 2006. It’s built into how we work.

The sellers who will accept creative terms exist. They have equity, a specific situation, and a reason they’re not calling a listing agent. The skill that surfaces those deals isn’t mastering wrap mechanics before you pick up the phone. It’s making contact, building a real relationship with the seller, and bringing the deal to people who know how to evaluate whether it works.

Most agents never make the call. That gap is the actual opportunity.

Start here: Your Broker Doesn't Know What to Do With Seller Financing. That's Why You Keep Losing These Deals.

Picture this deal. Retired couple, North Texas, paid-off triplex they’ve owned 22 years. Value has climbed from roughly $95,000 to north of $300,000. Their CPA laid out the math on a straight sale: capital gains on that level of appreciation, after depreciation recapture, would be a six-figure tax bill. They don’t want a lump sum anyway. They’re replacing rental income with something that keeps paying every month.

The buyer is an agent-investor, licensed through our brokerage, doing fix-and-flips for the past two years. She wants a buy-and-hold. All three units are occupied, market rents at $900 per unit, asking price at $285,000. A standard 25% conventional down payment would tie up $71,250 she’d rather have deployed on her next project.

They agree on seller financing. $285,000 purchase, 7% interest, 30-year amortization, 5-year balloon. Her payment: $1,897 per month. Gross rents: $2,700. Day-one spread before taxes and insurance: $803. The seller defers a massive capital gains event and collects monthly income. The buyer acquires a cash-flowing asset without a bank ever entering the conversation. Both sides get what they actually want.

Then they go to close.

Their regular title company handles residential transactions fine. They have never processed a seller-financed deal. The escrow officer doesn’t have an approved promissory note form on file. There’s no lender payoff letter. She’s not sure who orders what, or whether a standard title policy applies. She sends a 14-page questionnaire and suggests they consult an attorney.

Two more title companies later, they’re at a wall. One declines outright. The second says they’ll “look into it” and goes quiet. Three companies, clear title, willing parties on both sides of a $285,000 deal, and it will not move.

This is exactly where your standard broker runs out of help. They’ll tell you these deals are complicated, which is true, and then steer you back to a conventional lender, which is useless. What they don’t have is a short list of title companies that do this work as their core business.

The referral Angie made was to a title company that specializes in creative transactions. That’s not a euphemism for cutting corners. They came in with a documented process: promissory note drafted by their staff attorney, deed of trust filed at closing alongside the TREC contract, ALTA owner’s policy for the buyer, lender’s policy for the seller carrying the note, settlement statement reflecting all financing terms in compliance with Texas disclosure requirements for seller-financed transactions. They had done this dozens of times. The checklist existed before anyone picked up a pen.

Time from referral to keys: 11 days.

Three things worth taking from this:

Your title company selection matters more on creative deals than on any other kind. On a standard MLS sale, almost any licensed company can execute. On a seller-financed transaction with a deed of trust and a promissory note, you’re asking them to draft and record legal instruments. That requires a different level of competency. If your broker has never done a seller-financed deal themselves, they don’t have the list. We keep it.

Creative structures don’t suspend your disclosure obligations. Our agent disclosed her license on the contract, as required. She disclosed her intent to hold as an investment. The seller signed a disclosure notice. Agents sometimes assume that working outside traditional financing means working outside traditional paperwork. It doesn’t. The paperwork is different in some ways, identical in others, and skipping it is how a clean deal becomes a liability.

The financing structure has to solve the seller’s actual problem. This seller didn’t need cash. Once the buyer stopped asking “how do I finance this purchase?” and started asking “what does this seller need from this sale?”, the structure was obvious. Monthly income, deferred tax, a buyer who would maintain the property and carry the note. The terms wrote themselves from those three answers.

She closed the deal. She holds the triplex. A bank was never involved.

The same structure, and the same deal logic, is available across Texas on any property where the seller carries enough equity to finance the purchase. The only things standing between most agent-investors and this kind of deal are a broker who won’t sanction it and a title company that doesn’t know how to close it.

We handle both problems.

Start here: Your Broker Doesn't Know What to Do With Seller Financing. That's Why You Keep Losing These Deals.

Every real estate trainer in Texas tells sellers to take the cash, close fast, and move on. That advice costs sellers more money than bad tenants ever will.

When a seller carries the note, they become the bank. They set the rate, collect interest, and name the price. Cash buyers discount because cash is supposed to buy a haircut. Seller-financed buyers pay more because they’re getting terms they can’t find at any lender window.

Run the numbers on a straightforward $200,000 property:

• All-cash close: A buyer offering cash will typically push for 7–10% below list. Call it $185,000. After title, prorations, and carrying costs, the seller walks with somewhere south of $180,000.
• Seller-financed exit: Seller asks $210,000 at 8% interest, 30-year amortization, 5-year balloon. Monthly payment: $1,541. Over 60 months, the seller collects $92,460. The balloon payment at month 60 is approximately $199,600. Total received: $292,060.

That $112,000 gap is not a rounding error. That’s the difference between the price the cash buyer convinced your seller was “fair market” and what the same property actually earns on a note.

The Tax Argument Nobody Runs

Texas has no state income tax, but federal installment sale rules still matter. When you sell all-cash, every dollar of capital gain hits your return in year one. Carry the note and the IRS lets you report gain proportionally as payments come in, spread across the life of the note. A seller sitting on a rental they bought for $60,000 that’s now worth $220,000 can face a serious bracket problem in a cash year. Installment treatment spreads those gains thin across multiple tax years. Most sellers never hear it because their agent is focused on closing fast, not on what the client nets after April 15.

Wraps and What the Spread Actually Means

If there’s an existing mortgage on the property, the seller can still structure a wrap. A wrap-around note includes the underlying balance — the seller keeps paying their original lender and collects the higher note rate on the full balance. A seller on a 3.5% fixed loan who originates a new note at 7.5% pockets the spread on a balance they’re already servicing. That spread is real yield with no additional capital deployed.

Sub-to is the buyer’s version of this transaction. Sub-to is a financing method, not an exit strategy, and understanding that distinction gives both parties clarity on what actually transfers at closing. The deed moves. The existing mortgage stays in the seller’s name until the buyer refinances or sells. For either structure, use a title company and attorney that specializes in creative transactions. They’ll provide a proper agreement covering the servicing arrangement, default remedies, and notification requirements so neither side is exposed.

On the regulatory side, under Dodd-Frank’s seller financing exemption, an individual seller can carry the note on residential investment properties without holding a Mortgage Loan Originator license, up to three transactions per calendar year. That’s a statutory carve-out, not a workaround.

When Taking the Cash Is the Right Call

There are sellers for whom a fast cash exit is correct. If you have no equity, a short timeline, or you need capital immediately for another acquisition, carrying a note creates a liquidity problem you didn’t need. Seller financing is also the wrong structure when the buyer has no documented income and minimal skin in the game. A down payment of at least 10% (20% is better) is what gives the note real collateral value and makes a foreclosure outcome manageable if the buyer defaults. In Texas, foreclosure on a residential property is non-judicial, but it only happens on the first Tuesday of the month, and the lender (in this case, the seller) must post notice at least 21 days prior. Your down payment is your first line of defense during that window.

If the math doesn’t work for your situation, it doesn’t work. The conventional advice exists for a reason.

The Conversation That Doesn’t Happen

The default in Texas real estate is to move cash through title as fast as possible. That default serves buyers, lenders, and closing companies. It doesn’t always serve sellers.

Before signing a listing agreement that locks you into a 30-day close, have an agent who actually understands seller financed deals run both scenarios side by side: cash exit vs. a well-structured note. The difference isn’t a real estate strategy question. It’s a financial planning question, and most sellers never get to make it because nobody puts both sets of numbers in front of them.

At StepStone Realty, that’s the first conversation we have.