For Sellers Considering Seller Financing - The structure most agents WON'T discuss.

A: Seller financing is a real estate sale structure in which the seller, rather than a bank, lends the purchase money to the buyer. The buyer makes a down payment at closing and then makes monthly payments of principal and interest secured by a promissory note and a deed of trust on the property. Payments should ALWAYS be made to a third party Account Servicing company (for end of year tax reporting and payment receipt date accuracy - to avoid late payment charges), along with an impound account for 1/12th monthly property taxes and homeowners insurance. Account servicing then pays the underlying mortgage (if any) and then the difference between the underlying mortgage payment and the monthly amount due per the promissory note are paid to the seller. Any HOA dues and/or solar payments are made by the buyer directly to that provider. The note may run 3-10 years before a balloon payment is due, if any. 

A: Yes, seller financing is legal in Arizona. Sellers are permitted to carry notes from buyers, with several federal and state regulatory requirements to follow. The Dodd-Frank Act, through the SAFE Act, imposes restrictions on individuals who finance more than three properties in a twelve-month period — these high-volume sellers may need to engage a licensed mortgage loan originator. Owner-occupied transactions have additional consumer protection requirements that do not apply to investment property sales. The note must comply with Arizona's usury and lending laws, and the documentation should be prepared or reviewed by a licensed Arizona attorney to ensure enforceability. Seller financing is legal in all fifty states including Arizona, has been used in American real estate for over a century, and is increasingly common in high-interest-rate environments where traditional bank financing limits the qualified buyer pool.  

A: An IRC §453 installment sale allows a property seller to recognize capital gains pro-rata over the life of a promissory note, rather than recognizing the entire gain in the year of sale. The formula is: Gross Profit Ratio multiplied by Principal Received in any given year. The gross profit ratio equals total gain divided by total contract price. Interest received on the note is taxed separately as ordinary income in the year received. Depreciation recapture is a key exception — under §453(i), recapture is recognized in the year of sale and is not eligible for installment treatment, which makes properly sizing the down payment essential for investor sellers. 

A: A qualifying installment sale may allow eligible gain to be recognized as principal payments are received instead of entirely in the year of sale. Interest is generally reported separately, and depreciation recapture or other portions of the transaction may receive different treatment. The result depends on the seller, property and transaction. A CPA should model the tax consequences before terms are offered to a buyer.

A: You qualify a seller-finance buyer using essentially the same documentation a bank would: credit pull, employment and income verification, two years of tax returns or W-2s, asset and reserves verification, debt-to-income calculation, and identity verification. Many seller-finance buyers are self-employed or recently relocated individuals who can document income but cannot fit conventional bank guidelines — they are not unqualified, they are unconventional. The down payment requirement, typically 10 to 25 percent, serves as the primary protection against default. The promissory note and deed of trust provide foreclosure rights identical to those of a bank. 

A: If a buyer defaults on a seller-financed note, the seller's remedies are the same as a bank's: declaration of default after a cure period, formal notice of acceleration, and ultimately foreclosure. Arizona allows non-judicial foreclosure when the note is secured by a deed of trust, which is faster and less expensive than judicial foreclosure. In a properly underwritten transaction the seller keeps the down payment, all interest and principal received to date, and recovers the property — usually at a basis below current  

A: Down payments on seller-financed transactions typically range from 10 to 25 percent of the sale price. The right number depends on the seller's tax exposure (down payment should at minimum cover year-of-sale depreciation recapture if applicable), the buyer's profile (stronger buyers can accept lower down payments while weaker buyers should be required to put more skin in the game), and the property type (owner-occupied homes generally require higher down payments than investment properties). I model multiple down payment scenarios with each client to identify the balance point between buyer affordability and seller protection. 

A: The interest rate on a seller-financed   note must be at or above the Applicable Federal Rate (AFR) published monthly   by the IRS — typically 4 to 5 percent in 2026 depending on the term. Most   seller-financed notes carry rates between 6.5 and 9.0 percent. The rate must   be high enough to compensate the seller for tying up capital, low enough to   attract the buyer, and competitive with what the buyer could obtain elsewhere   given their qualification profile. Below-AFR notes trigger imputed interest   under §1274 and create unwanted tax complications.

A: A balloon payment is a single lump-sum payment that pays off the remaining principal balance of a seller-financed note at a defined point — typically year 5, 7, or 10. Most seller-financed notes are structured with a 30-year amortization schedule but a balloon payoff in the earlier year. This produces low monthly payments for the buyer (sized as if it were a 30-year loan) while giving the seller a defined exit date. At balloon, the buyer refinances with a conventional lender, sells the property, or pays off the note from other resources. 

A: No, but I highly recommended you do seek legal counsel. Seller financing requires properly drafted documents including a promissory note, deed of trust or mortgage, and any applicable disclosures. These are typically created as boiler plate documents provided by an escrow officer-but are recommended to be reviewed by a licensed Arizona attorney to ensure enforceability and compliance with state and federal law. The attorney coordinates with the title company, escrow officer, and the seller's CPA to make sure the entire transaction is documented correctly. The cost of attorney involvement is typically 0.1 to 0.3 percent of the sale price - a fraction of what a poorly documented transaction can cost in default or tax-treatment problems later.