What Are Seller Notes and How Do They Work?

Seller notes are a flexible financing tool used in real estate and business acquisitions. They help bridge the gap between what a buyer can pay upfront and the total purchase price. Whether you’re selling property with an existing mortgage note or negotiating a business exit, seller notes offer a way to complete the deal—without walking away empty-handed or jeopardizing the transaction.

In simple terms, a seller note is a promissory note issued by the buyer, in which the seller agrees to receive a portion of the sale price over time, with interest. It’s a form of financing that can make a deal happen when cash or bank loans fall short.

Let’s break down how seller notes work and why they’re common in mortgage note sales—and increasingly relevant in smaller business deals too.

How Seller Notes Work in Real Estate

In the mortgage note world, seller notes typically arise when a property owner provides financing to the buyer rather than requiring them to secure a traditional mortgage. Instead of receiving the full sale price at closing, the seller accepts payments over time, secured by a deed of trust or mortgage.

The seller note works like this:

1. The buyer makes a down payment.
2. The seller finances the rest through a promissory note.
3. The note is interest bearing, with fixed monthly payments over an agreed term.

The terms vary but often include:

• A 5 to 10-year term
• Monthly amortization
• Interest rates between 6% and 9%, depending on market conditions
• A balloon payment at the end (optional)

For the seller, it’s a way to sell the business or property and generate monthly income. For the buyer, it’s a way to acquire an asset without relying fully on bank financing.

Why Use a Seller Note?

The main reason: flexibility. Seller notes can step in when conventional debt financing isn’t enough.

Maybe the buyer doesn’t qualify for a full loan. Or maybe the asset doesn’t appraise high enough to cover the full price. A seller note helps bridge the gap between the available funds and the seller’s asking price.

It also shows that the seller is confident in the deal. By agreeing to receive payments over time, they’re essentially backing the asset’s value.

From the buyer’s perspective, seller notes usually come with fewer hurdles than a traditional loan. No underwriting committee. No strict collateral requirements. Just a buyer and seller coming to terms.

Structuring the Terms

A seller note is still a legal instrument. It needs to be clearly documented, with terms both parties agree on.

Key components include:

• Principal amount: The portion of the purchase price being financed
• Interest rate: Typically fixed; needs to be competitive
• Repayment schedule: Monthly, quarterly, or as negotiated
• Security interest: Especially in mortgage notes, the seller holds a lien on the property
• Default provisions: What happens if the buyer stops paying

In some real estate deals, the seller may choose to sell that note later on. That’s why clean structuring matters. The better the terms, the easier it is to resell the note if liquidity is needed.

Seller Notes Are Subordinated

This is an important point. In most deals, seller notes are subordinated to senior debt. That means if the buyer defaults and the property or business is liquidated, the seller gets paid after the bank.

It’s a risk—but one that’s manageable with a strong borrower, fair terms, and proper documentation.

Some sellers offset that risk by charging a slightly higher interest rate or requiring personal guarantees.

Role in Buy-Sell Agreements

Seller notes often show up in buy-sell agreements. When one owner exits and another takes over, the buying partner may not have enough capital to pay the full value up front.

Instead of walking away with nothing or delaying the deal, the business owner accepts a seller note. This arrangement allows the new owner to take control immediately while paying the balance over time.

Benefits of Seller Notes

Seller Notes in Business Acquisitions

While mortgage notes remain the most common place to see seller notes, they’re becoming more frequent in business acquisition deals—especially with smaller businesses.

When a buyer acquires a business, banks may only finance a portion of the purchase. The rest often comes from a seller note. This lets the buyer proceed without raising more capital or finding additional partners.

In many cases, the management team remains in place. The seller note provides stability while the business transitions to new ownership. It’s also seen as a sign of goodwill and commitment—since the seller is literally invested in the buyer’s success.

Conclusion

Seller notes fill the financing gaps that traditional lenders can’t always cover. Whether you’re selling a property or a small business, issuing a seller note can get the deal across the finish line—without compromising your goals.

It’s a form of financing that offers flexibility, income, and sometimes, better terms overall. But it requires clear terms, realistic expectations, and an understanding that seller notes are subordinated in most transactions.

If structured well, they work. For both sides.

Are you thinking of selling your seller notes? We are the top-rated mortgage note buyer in the country and can help you with the process. Contact us today.