My sister and I inherited a property in a rural, backwater area rather inconveniently located to where we live. We've got zero interest in keeping it. To wit, we put it on sale and now are recieving a few offers. But, because this is a rural backwater where no one makes any demonstrable income, many of the potential buyers are asking us to either enter into a land contract or some sort of owner financing arrangement where we essentially play the role of the mortgage as well as the seller.

My questions are:

  • How to perform due diligence on the buyer? I'm not a bank nor a PI.
  • How to figure out what interest rate to charge?
  • Are there any strange tax implications here?
  • What sort of entity, if any, do I need to setup to handle the ongoing transactions? Property is in a state neither I or my sister reside in if that is important.

Please let me know if there are any details that are relevant here and I'll try and provide.


  • Yes, we've got representation for this whole transaction. Problem is this is a bit fubar for the guy we trust -- this sort of thing don't happen down here -- and I don't completely trust the guy up there for advice.
  • Additional question -- does anyone know of any sort of operation that handles the transactions for you. Definitely suck at accounting and cashing checks in a timely manner here.


We managed to find a vendor who would handle payment processing and took on the seller financed mortgage. Terms of the deal were roughly 33% down and a 30 year note w/ a 3 year balloon. The folks bought it, moved in, fixed it up and got a bank note late in the 2nd year of the note and it is now off our books. 10/10 would repeat.

4 Answers 4


I've done this, but on the other side. I purchased a commercial property from someone I had a previous relationship with. A traditional bank wouldn't loan me the money, but the owner was willing to finance it. All of the payments went through a professional escrow company. In our case it was a company called Westar, but I'm sure there are plenty out here. They basically serve as the middle-man, for a fee (something like $5 a payment, plus something to set it up). They have the terms of the loan, and keep track of balances, can handle extra principle payments and what that does to the term of the loan, etc.

You want to have a typical mortgage note that is recorded with the local clerk's office. If you look around, you should be able to find a real estate lawyer who can set all this up for you. It will cost you a bit up front, but it is worth it to do this right.

As far as taxes, my understanding is that the property itself is taxed the same as any other property transfer. You would owe taxes on the difference between the value of the property when you inherited it and when you sold it. The interest you get from the loan would be taxed as regular income. The escrow company should send you tax forms every year listing the amount of interest that you received. There are also deductions you can take for expenses in the process.


You need to talk to a local attorney specializing in real estate matters. The contract needs to ensure that your interests are protected. How you do that is too complex for an answer here and varies from state to state, or even jurisdictions within a state.

There are all sorts of options. Sometimes deals like this are structured so that you can actually sell your remaining equity in the property to a third party later on. If the property has value, but the banks aren't interested in lending right now, you could potentially make money on it down the road.

  • Thanks, definitely have local representation, this is more strategic/has anyone been down this path. Didn't even think of selling the deal on the back-side, great point. May 6, 2011 at 11:55

Great question, but I'm thinking you'll want to get a professional who can look at your specific situation and do it right. I wouldn't go solely on advice here. Having said that, though, my decidedly non-professional advice:

  • A credit check isn't expensive. That will give you an idea if the guy is a deadbeat. All you really care about (I would think) after the sale is seeing the checks come in regularly and on time.
  • The interest rate is negotiable. You may be able to command a higher rate than a bank would for the same terms because you would (presumably) be easier to deal with than a bank. I wouldn't skimp on trying to write up the note yourself.
  • There probably are involved tax implications that you'll want to discuss with a competent professional. You'll need to know the basis of the property, and then figure out how to apply your expenses and income to determine your taxable gain or loss.
  • The entity is your call. It might be simpler doing it in your name, but then that exposes you to all liability. Other entities are more costly to set up, but could help to protect the rest of your assets.

The other alternative is to take a bit of a profit hit, and demand that the seller pay cash. Then the transaction becomes much easier and quicker.

But again, I urge you to have a pro look at this!

  • Thanks, definitely have a few professionals involved. Trick is figuring out who is right . . . May 6, 2011 at 11:56

If you do the financing, get a large down payment and make a short loan. Do not expose yourself to risk with a 30 year note, and get some major money up front so the buyer has some skin in the game and will continue to make payments.

  • While continuing to make payments is important it is also important to consider what condition the buyer will leave the property in if you have to foreclose and resell. There is an awful lot of risk involved in seller financing.
    – stoj
    May 9, 2011 at 4:51

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.