When a building has been paid off for years, the owner often has a better option than handing the whole sale to a bank. They can become the bank. Seller financing comes up in almost every commercial and investment conversation I have in Orange County and the Inland Empire right now, from both sides of the table. Here are the five questions I hear most, answered with real 2026 numbers.
How does seller financing work on a commercial property?
The seller lends the buyer part of the purchase price instead of taking all cash at closing. The buyer pays a down payment, signs a promissory note for the balance, and the seller records a deed of trust on the property as security, the same way a bank would.
In California this is often called a seller carryback. The note spells out the rate, the monthly payment, the amortization and the due date. Most commercial carrybacks are written with a payment schedule based on 20 to 30 years but come due much sooner, usually in 3 to 7 years, as a balloon payment. That gives the buyer time to season the property, raise rents or improve the numbers, and then refinance with a bank to pay the seller off. A carryback can stand alone as a first deed of trust when the seller owns the building free and clear, or it can sit behind a new bank loan as a second deed of trust, where the bank lends most of the price and the seller carries a smaller piece to close a gap. If the seller still has a loan on the property, be careful. Almost every commercial mortgage has a due on sale clause, so a "wraparound" deal that leaves the seller's loan in place can let that lender call the entire balance. Escrow, title and an attorney should see the structure before anyone signs. Most Orange County commercial sales are written on AIR CRE forms, which have their own seller financing provisions.
How much down payment do you need for seller financing?
There is no legal minimum, it is whatever the buyer and seller agree to. In practice, most commercial and investment sellers want 20 to 30 percent down, and some will accept 10 to 20 percent from a strong buyer or in exchange for a higher price or rate.
The down payment is the seller's protection. If the buyer walks away, the seller takes the property back, so the buyer needs enough of their own money in the deal that walking away hurts. For a seller, that means 25 percent or more is the comfortable zone on most commercial property. For a buyer, a larger down payment is usually the best lever you have to win a lower rate or a longer balloon. Compare that with the bank route: an owner user buying with an SBA 504 loan can put down as little as 10 percent, and investors buying with a conventional commercial loan usually put down 25 to 35 percent. A seller carryback is most useful when the bank will not lend enough, will not lend at all on the property, or will not lend fast enough to close. Before a seller agrees to a lower down payment, they should see the buyer's credit report, tax returns, financial statements and business plan, the same package a bank would ask for.
What interest rate should a seller charge for owner financing?
The rate is negotiable, but it should never fall below the IRS minimum, the Applicable Federal Rate. For October 2026, the IRS set the AFR at 4.25 percent for notes up to 3 years, 4.61 percent for 3 to 9 years and 5.22 percent for notes longer than 9 years, all with annual compounding.
Charge less than the AFR and the IRS can treat part of each principal payment as interest, which changes how both sides are taxed. Above that floor, the market decides. Industry guides put most seller financed rates somewhere around 5 to 8 percent, priced above what the seller could earn in a CD and below hard money. A useful benchmark: the 25 year SBA 504 debenture priced at about 6.54 percent in September 2026. A seller who wants a fast, clean sale might match bank pricing. A seller taking more risk, with a lower down payment or a weaker buyer, should be paid for it. Rate also interacts with price. A buyer may accept a higher price if the seller offers a lower rate, because the payment is what the property's income has to cover. That matters in Orange County, where retail cap rates averaged about 5.4 percent in the second quarter of 2026, below most bank loan rates, so a below market seller carry can be the difference between a deal that cash flows and one that does not. One more California point: a true seller carryback, where the seller extends credit for part of the price, is generally not treated as a loan under California's usury law, so the usual 10 percent cap does not normally apply. Have an attorney confirm that for your structure.
What are the tax benefits of seller financing for the seller?
The main benefit is the installment sale. Instead of paying tax on the entire gain in the year of the sale, the seller generally pays tax on the gain as the principal is actually collected, reported each year on IRS Form 6252.
Spreading the gain over several years can keep a seller out of the highest brackets, and that matters more in California than almost anywhere. California taxes capital gains as ordinary income, with a top rate of 13.3 percent, so a large gain landing in one year can push a long time Orange County owner into the top bracket at both the federal and state level. There are catches. The interest the seller earns on the note is taxed as ordinary income each year. If the owner did a cost segregation study, the depreciation taken on equipment and fixtures is recaptured and taxed in the year of sale, even if the seller collects very little that year. If the total installment notes a seller holds at year end exceed 5 million dollars, the IRS charges interest on the deferred tax. And seller financing does not work cleanly with a 1031 exchange, because a note received in the sale is generally treated as taxable boot unless it is structured carefully with your qualified intermediary. Talk to your CPA before you list, not after you accept an offer, because the structure is set in the purchase contract.
What happens if the buyer stops paying on a seller-financed property?
The seller forecloses, usually through a nonjudicial trustee's sale under the deed of trust, and takes the property back. In California the seller generally cannot also sue the buyer for any shortfall, because Code of Civil Procedure section 580b bars deficiency judgments on seller carryback notes.
That rule protects the buyer and shapes the seller's risk. The property is the seller's only real recourse, so its value and the size of the down payment are what make the note safe. A California nonjudicial foreclosure starts with a recorded notice of default, followed by a three month waiting period and then a notice of sale published at least 20 days before the auction, so plan on roughly four months at minimum before the seller has the property back. Sellers can protect themselves up front: require a solid down payment, add a late charge and a due on sale clause to the note, require the buyer to keep property taxes and insurance current with the seller named on the policy, and use a loan servicing company or a tax service to track payments. If the seller's note sits behind a bank loan, record a request for notice of default so the seller hears immediately if the buyer stops paying the bank. Buyers have their own homework: understand the balloon date and have a realistic plan to refinance before it arrives, because missing a balloon is a default like any other.
Seller financing is a tool, and it works best when both sides understand exactly what they are signing. If you own commercial or investment property in Orange County or the Inland Empire and want to see what a carryback could do for your sale, or you are a buyer looking for a deal the banks will not finance, I would be glad to run the numbers with you. Call me at (323) 320-1725 or visit kinitherealtor.com.
This article is general information, not tax, legal or lending advice. Confirm your specific situation with your CPA, attorney and lender.
Uthpala Kinivita, Kini The Realtor, Century 21 Affiliated, Cal DRE #02343809