When traditional lending tightens, deals don’t stop. They evolve.
In today’s commercial real estate market, elevated interest rates and conservative underwriting standards have made it more difficult to close transactions using conventional bank financing alone. In response, seller financing is re-emerging as a practical, and often strategic, way to bridge valuation gaps and get transactions across the finish line.
But seller financing is not simply a gap-filler. It is a deliberate reallocation of risk, and can fundamentally reshape the profile of a deal. When used strategically, it can unlock value and expand optionality. When structured casually, it can create long-term exposure for both parties that will last well beyond closing.
Understanding that distinction is critical.
Here is what buyers and seller should consider before incorporating seller financing into a deal.
What is Seller Financing?
In a typical commercial transaction, the seller receives the full purchase price at closing, and the buyer repays a third-party lender over time.
In a seller-financed transaction, the seller agrees to accept a promissory note for a portion of the purchase price. In effect, the seller becomes the lender.
For example, in a $4 million acquisition, a buyer may obtain $3 million from a bank and ask the seller to “carry back” a $1 million note payable over several years. That $1 million is no longer immediate sale proceeds, it is credit risk. That shift alone changes the entire dynamic of the transaction.
Why It’s Trending Again
Seller financing tends to reappear in markets where:
- Interest rates are high
- Lenders are conservative
- Certain asset classes are harder to finance
- Buyers require additional flexibility to stabilize or reposition assets
It can be attractive because it:
- Expands the pool of potential buyers
- Bridges valuation gaps
- Provides sellers with ongoing income
- Potentially allows tax deferral through installment treatment
However, the strategic advantage only exists if the documentation properly accounts for the fact that the seller is now underwriting repayment risk.
The Purchase Agreement is Where the Work Happens
One of the most common mistakes in seller-financed transactions is treating the promissory note as an afterthought.
If seller financing is part of the deal, the material economic and legal terms should be negotiated during the purchase agreement stage – not left for later.
Material items that should be addressed upfront include:
- Interest rate and amortization
- Maturity date
- Prepayment rights
- Default interest
- Collateral and security
- Guarantees
Leaving these items open for future negotiation often creates leverage imbalances late in the process and can jeopardize closing.
Default Provisions Matter More Than You Think
Seller financing turns the seller into a creditor. And creditors must think about worst-case scenarios.
Key considerations include:
- How long does the buyer have to cure a missed payment?
- Is the loan accelerated upon default?
- Is there default interest?
- Does the seller have the right to collect rents?
- Is there a payment or performance guaranty?
If the buyer is a newly formed single-purpose entity — which is common in commercial real estate — sellers should carefully evaluate whether a personal guaranty is appropriate, in addition to any lien on the property being conveyed.
When Seller Financing Makes Strategic Sense
Seller financing is not appropriate for every transaction. It may make particular sense when:
- The asset has strong cash flow but limited lending appetite
- The seller has confidence in the property’s continued performance
- The buyer needs flexibility during stabilization or lease-up
- Both parties want to avoid extended lender approval timelines
In some cases, offering seller financing can support stronger pricing or accelerate closing timelines. In others, it may simply shift disproportionate risk onto the seller without adequate compensation.
The distinction lies in how the deal is structured.
The Bottom Line
Seller financing can be a powerful tool in today’s commercial real estate market. But it transforms the seller from a passive recipient of sale proceeds into an active lender – with all the attendant risks that status carries.
For buyers, it can unlock opportunity and provide flexibility. For sellers, it can generate income and create strategic optionality. For both parties, the success of the structure depends on careful negotiation, thoughtful documentation, and a clear understanding of how risk shifts once the deal closes.
Like most things in commercial real estate, the concept may be straightforward — but the details are not, and in seller‑financed transactions, those details matter.
Buyers and sellers considering this structure should work with experienced counsel to ensure that risk, economics, and documentation are properly aligned. The attorneys at Liff, Walsh & Simmons regularly advise clients on complex commercial real estate transactions, including those involving seller financing, and are available to discuss how these issues may apply to a specific deal.
Kathleen S. Millrood of Liff, Walsh & Simmons is the author of this article and a member of the Banking & Finance Law, Business Counseling, Contracts & Transactional Law, and Real Estate Law practices.
At Liff, Walsh & Simmons, our attorneys possess the wide array of skills necessary in today’s marketplace to navigate even the most complex real estate transactions. Our clients benefit from our firm’s comprehensive set of service areas and cross disciplinary approach ensuring that our client’s interests are protected at all stages of a transaction. Please contact Liff, Walsh & Simmons at 410-266-9500 to schedule a consultation.
