Deal Structures for Agents

“Owner financing” isn’t one-size-fits-all. There are four primary structures, each with different legal implications, risks, and benefits. As an agent, understanding these structures helps you match the right deal to the right buyer and seller situation. This page breaks down each structure so you can explain them confidently to clients and know when to recommend each one.

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The Four Main Deal Structures

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Structure 1: Seller Finance (Most Common)

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How It Works

Seller directly finances the buyer. Buyer makes monthly payments to seller. Buyer receives deed immediately at closing (ownership transfers right away). The Flow:

1. Buyer and seller agree on price and terms
2. Buyer makes down payment (5–25%)
3. Seller finances remaining balance
4. Buyer receives deed and becomes legal owner
5. Buyer makes monthly payments to seller
6. Seller holds promissory note and deed of trust as security

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Key Features

Down Payment:

• Typical: 10–20% of purchase price
• Flexible (can be 5% or more)

Interest Rate:

• Seller and buyer negotiate
• Typical range: 6–10% (varies by market and buyer profile)
• Can be fixed or adjustable (fixed recommended)

Loan Term:

• Common: 15, 20, or 30 years
• Can be custom (e.g., 10 years or 25 years)
• Shorter term = higher monthly payment but less total interest

Balloon Payment (Optional):

• Lump sum due at end (e.g., 5–7 years)
• Buyer typically refinances at that point
• Allows buyer to make smaller payments while still paying off quickly

Monthly Payment:

• Principal + interest
• No taxes, insurance, or HOA (buyer pays separately)

Deed Transfer:

• Buyer receives deed at closing
• Buyer is legal owner immediately
• Buyer can refinance or resell later

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Pros for Buyers

• Faster closing (7–14 days vs. 30–45 days for banks)
• Flexible credit requirements
• Lower down payment than traditional mortgages
• Ownership transferred immediately
• Refinance option (if balloon or refinancing desired)

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Pros for Sellers

• Faster sale (reach larger buyer pool)
• Interest income over time
• Property sold above market (due to interest income)
• Maintain security via deed of trust

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Cons for Buyers

• Higher interest rate than bank mortgages (trade-off for flexibility)
• No escrow account (buyer manages taxes, insurance, HOA)
• Balloon payment may require refinancing
• Fewer legal protections (compare to bank-financed deals)

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Cons for Sellers

• Payment risk (buyer may default)
• Income spread over years (not upfront capital)
• Complexity of loan servicing

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Best For

• Credit-challenged buyers with stable income
• Self-employed buyers with variable income
• First-time homebuyers with limited savings
• Sellers motivated to sell quickly
• Properties that won’t qualify for traditional financing

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Legal Protection

• Promissory note (defines loan terms)
• Deed of trust (gives seller lien; allows foreclosure if default)
• Buyer gets clear deed (ownership is certain)
• Professional documentation (attorney-drafted)

Red Flags to Avoid:

• No written promissory note
• No deed of trust recorded
• Vague payment terms
• No title insurance

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Structure 2: Subject-To

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How It Works

Buyer takes property “subject-to” the existing mortgage. Buyer makes payments on the original mortgage (which stays in seller’s name). Seller’s original lender may or may not know about the change. The Flow:

1. Property has existing mortgage (seller owes bank)
2. Buyer agrees to take over payments
3. Deed transfers to buyer
4. Original mortgage stays in seller’s name (due-on-sale clause might trigger)
5. Buyer makes payments directly to bank
6. If buyer stops paying, bank forecloses on buyer

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Key Features

Existing Mortgage:

• Buyer assumes payment obligation
• Original lender’s terms remain in place
• Buyer typically doesn’t formally assume (just pays)

Down Payment:

• Negotiated between buyer and seller
• Often less than traditional down payment (difference between property value and mortgage)
• Example: $300k property;$200k mortgage owed; buyer pays seller $50k down, takes over$200k mortgage

Interest Rate:

• Already set by original lender
• Buyer doesn’t negotiate (it’s the bank’s rate)

Monthly Payment:

• Goes to original lender (bank)
• Includes principal, interest, taxes, insurance, HOA (if escrowed)
• Amount set by original mortgage

Deed Transfer:

• Buyer receives deed (ownership transfers to buyer)
• Original mortgage remains in seller’s name (legally)

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Why It’s Called “Subject-To”

Buyer is buying the property “subject to” the existing mortgage. The mortgage stays, but buyer controls the property and makes payments.

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Pros for Buyers

• Faster closing (if seller cooperative)
• Down payment often smaller (not 10–20%, just difference in value)
• Interest rate may be lower (original mortgage rate, not negotiated)
• No bank approval needed (don’t need to qualify)
• Get deed (ownership transfers)

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Pros for Sellers

• Sell property quickly (don’t need to find bank buyer)
• Get cash (down payment from buyer)
• Original mortgage continues (seller still has obligation, but buyer pays)

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Cons for Buyers (SIGNIFICANT RISKS)

Due-on-Sale Clause Risk:

• Most mortgages have “due-on-sale” clause
• If bank discovers sale, can demand full payoff immediately
• Buyer then can’t pay = foreclosure

Liability Risk:

• If buyer stops paying, bank forecloses on buyer
• Seller still liable (mortgage in seller’s name)
• Seller’s credit destroyed if buyer defaults
• Bank can pursue seller for deficiency judgment

Refinancing Risk:

• Buyer can’t refinance (not on loan documents)
• Stuck with original terms
• If balloon payment comes due on original mortgage, buyer responsible

Title Risk:

• Seller still has claim (mortgage in seller’s name)
• Seller could refinance and take money out
• If seller faces foreclosure from other debts, impacts buyer

No Customization:

• Terms set by original lender; can’t negotiate
• Interest rate locked in (could be good or bad)

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Cons for Sellers

• Still liable (mortgage in seller’s name)
• Credit damaged if buyer doesn’t pay
• Can’t escape loan obligation
• Bank may demand full payoff if discovery occurs

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Best For

• Rare scenarios only
• Sellers desperate to sell and avoid foreclosure
• Short-term solutions (buyer plans to refinance quickly)
• NOT recommended for agents unfamiliar with legalities

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Legal Protection

Minimal. Subject-to is legally risky:

• No promissory note (buyer not personally liable to seller)
• Seller still liable to bank
• Buyer could walk away; seller loses everything
• Due-on-sale clause violation (possible)

Red Flags:

• Lender discovers transfer (may demand payoff)
• Original mortgage balloon payment
• Buyer stops paying (seller liable to bank)
• Seller has no recourse if buyer defaults

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Why Most Agents Avoid Subject-To

Subject-to deals are risky and complex. Unless buyer is very sophisticated and attorney-reviewed, not recommended.

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Structure 3: Contract for Deed

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How It Works

Seller and buyer sign contract. Buyer makes payments over time. Buyer does NOT get deed until contract is paid in full. Seller holds deed as security. The Flow:

1. Buyer and seller sign contract for deed
2. Buyer moves into property and makes payments
3. Seller holds deed (legal ownership)
4. Buyer has “equitable interest” (right to own if payments continue)
5. When payments complete, buyer gets deed and becomes owner
6. If buyer stops paying, seller keeps property and payments

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Key Features

Down Payment:

• Typical: 10–20%
• Varies by agreement

Monthly Payment:

• Principal + interest
• Buyer often pays taxes, insurance, HOA separately

Deed Timing:

• Critical difference from seller finance: Buyer does NOT get deed until paid off
• Deed stays with seller until final payment or milestone reached

Loan Term:

• Custom; varies widely
• Often shorter (10–15 years) since balloon is common

Balloon Payment:

• Very common in contracts for deed
• Example: 5 years of payments, then balloon due

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Pros for Buyers

• No bank qualification needed
• Flexible terms
• Can buy property without traditional financing

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Cons for Buyers (MAJOR RISKS)

No Ownership:

• Buyer doesn’t get deed until paid off
• Legally, seller still owns property
• Buyer is building equity but not owner

Limited Remedies If Seller Defaults:

• If seller defaults to bank (on first mortgage), buyer’s contract could be wiped out
• Buyer loses payments and property
• Buyer has no recourse

Difficulty Refinancing:

• Buyer can’t refinance (doesn’t own property)
• Can’t get traditional loan (lender won’t lend on property buyer doesn’t own)
• Stuck making payments to seller

Equity Risk:

• If property appreciates, seller benefits (not buyer)
• Buyer builds equity through payments, but seller owns the appreciation

Foreclosure/Eviction:

• If buyer defaults, seller can evict (not formal foreclosure)
• Can be quicker and more aggressive than foreclosure
• Less legal protection for buyer

State-Specific Issues:

• Some states have contract for deed tenant protections
• Some states allow seller to keep all payments if buyer defaults (harsh)
• Varies widely; attorney review essential

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Pros for Sellers

• Keep deed (security)
• If buyer defaults, keep property + all payments made
• No foreclosure process needed

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Cons for Sellers

• Buyer has equitable interest (some rights)
• Some states require seller to maintain property
• Seller still responsible for HOA, taxes, insurance (typically)

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Best For

• Rare scenarios
• Sellers wanting maximum security (keep deed)
• Short-term arrangements
• NOT recommended for most buyers without attorney review

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Legal Protection

For Buyer: Minimal and risky

• No deed; seller owns property
• If seller defaults to bank, buyer loses everything
• Limited legal recourse
• State laws vary (some protect buyers; some don’t)

For Seller: Strong

• Keeps deed (owns property)
• If buyer defaults, can evict or keep property

Red Flags:

• Buyer doesn’t realize they don’t own property
• No title insurance for buyer
• Seller defaults to bank (wipes out buyer’s equity)
• Seller promises deed but doesn’t deliver

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Structure 4: Lease-to-Own

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How It Works

Buyer leases property from seller with option to purchase later. Buyer pays rent + potentially some rent credits toward purchase. Option gives buyer right (not obligation) to buy. The Flow:

1. Buyer and seller sign lease-to-own agreement
2. Buyer leases property and makes rent payments
3. Portion of rent credited toward future purchase (e.g., $1,500 rent;$300 credited)
4. At end of lease term (typically 2–5 years), buyer can exercise purchase option
5. If buyer exercises option, rent credits applied to down payment
6. Buyer then obtains financing (traditional or owner finance) to buy
7. If buyer doesn’t exercise, buyer leaves; seller keeps property and rent payments

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Key Features

Lease Term:

• Typical: 2–5 years
• Gives buyer time to improve credit/save money

Rent Payment:

• Market rent (what property would lease for)
• Part credited toward purchase (e.g., 10–30% of rent)

Rent Credits:

• Example: $2,000 monthly rent;$300 credited = $3,600/year toward purchase
• After 5 years: $18,000 accumulated credits

Purchase Option:

• Locked-in purchase price (agreed at beginning)
• Buyer has right (but no obligation) to buy at end of lease
• If buyer doesn’t buy, option expires and buyer leaves

Financing Terms:

• Buyer must obtain financing at end of lease (traditional or owner finance)
• If buyer can’t qualify, option expires and buyer loses credits

Down Payment:

• Typically small or none (rent credits used instead)
• Option consideration fee paid upfront (e.g., $1,000–$5,000)

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Pros for Buyers

• Extended lease period (2–5 years) to improve credit
• Rent credits build equity over time
• Option (not obligation) to buy
• Time to save additional down payment
• Ability to refinance into traditional mortgage once credit improves
• Experience owning before committing

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Pros for Sellers

• Rental income during lease term
• Property marketed to buyer (better maintained)
• Option fee upfront (cash)
• If buyer doesn’t exercise option, keep property + all rent + credits (in some arrangements)
• Potential sale at end of lease term

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Cons for Buyers

• Rent may be above market (to compensate seller for option)
• Rent credits are forfeited if buyer doesn’t exercise option
• Must qualify for financing at end of lease (no guarantee)
• If can’t qualify at end, loses all rent credits
• Property market may change (locked-in price could become unfavorable)
• Limited legal protection (varies by state)

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Cons for Sellers

• Gives buyer rights (equitable interest in some states)
• Complex accounting (rent vs. credits)
• Buyer may not exercise option (property still needs to be marketed)
• Must maintain property during lease term (landlord obligations)

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Best For

• Buyers with poor credit wanting to rebuild
• Buyers needing time to save down payment
• Buyers wanting to “test” property before committing
• Sellers wanting rental income with eventual sale potential

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Legal Protection

For Buyer:

• Option contract (specifies locked-in price)
• Rent credits documented
• Right to exercise option (if conditions met)
• Limited: if can’t qualify for financing at end, option expires

For Seller:

• Lease agreement (standard rental contract)
• Option fee paid upfront
• Property remains seller’s until option exercised

Red Flags:

• Rent credits not documented
• No clear purchase price locked in
• Option expires before buyer has time to qualify for financing
• Buyer can’t obtain financing at end (loses all credits)

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Comparison Table: All Four Structures

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Which Structure for Your Situation?

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For Buyers

Seller Finance (Recommended):

• Good credit but financing obstacles
• Self-employed with income to show
• Want to build equity immediately
• Don’t want to wait (faster closing)

Lease-to-Own:

• Poor credit but improving
• Need time to save more down payment
• Want to test property first
• Can qualify for financing in 2–5 years

Subject-To (NOT Recommended):

• Very risky; avoid unless attorney-guided

Contract for Deed (NOT Recommended):

• Very risky for buyers; avoid unless attorney-guided

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For Sellers

Seller Finance (Recommended):

• Want to sell quickly
• Property won’t qualify for traditional financing
• Want interest income
• Trust buyer to perform

Lease-to-Own:

• Want rental income with eventual sale
• Uncertain if buyer will buy (backup rental income)
• Want to test buyer before sale

Subject-To (Rare):

• Desperate situation only
• Need to transfer property quickly
• Willing to stay liable to bank (risky)

Contract for Deed (Rare):

• Want maximum security (keep deed)
• Short-term arrangement only
• Uncertain buyer will complete purchase

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Your Role as Agent: Recommending Structures

For Most Deals: Recommend Seller Finance

• Safest for buyers
• Clearest for documentation
• Professional setup
• Easiest to refinance later

For Credit-Rebuilding Buyers: Consider Lease-to-Own

• Gives buyer time
• Rent credits motivate payment
• Clear path to purchase

Avoid Recommending:

• Subject-to (unless both parties have attorney and understand risks)
• Contract for deed (unless both parties have attorney and understand risks)

Always Recommend:

• Attorney review (every structure)
• Professional documentation
• Title insurance
• Clear written terms

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Next Steps

Ready to guide clients through deal structures?

• Contracts & Security — Understand the documents for each structure
• Underwriting & Due Diligence — Verify buyer and property for any structure
• Referral Agreements — Your commission regardless of structure
• Protecting Your Buyers — Ensure compliant transactions

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Support: Not sure which structure fits a specific situation? Email support@ownerfi.ai and we’ll help you think through it.