Someone on X asked a simple question last week: why isn’t seller financing more common? Sell the house, let the buyer pay you instead of a bank, and collect 6% for years. It sounds like a landlord’s income without a landlord’s phone calls.
The thread that followed ran to dozens of replies, and almost none of them were about the 6%. They were about foreclosure timelines, state taxes, deeds in lieu, liquidity and inflation. Taken together they answered the question better than any one reply could. Seller financing is uncommon because the extra interest it pays is small, and the list of things that interest has to pay for is long.
Two ways to lend $400,000
Illustrative round numbers, simple first-year yields, income tax only. They show a method; they do not describe anyone, and none of it is advice.
A seller has $400,000 to lend. One way is to lend it to the buyer of the house at 6%, secured by the house. The other is to lend it to the United States by buying 10-year Treasuries yielding 5.3%.
The buyer: $24,000 a year in interest.
The Treasury: $21,200 a year.
The difference, $2,800 a year, is the spread: 0.7 percentage points. Every reason to prefer one loan over the other has to fit inside it.
What the $2,800 has to buy
One borrower instead of a government. A Treasury’s interest arrives whether or not any particular person keeps a job. The buyer’s arrives only if this one household does. Suppose a default costs $28,000 by the time it is resolved: about a year of missed payments ($24,000) plus legal fees. That one event erases ten years of the extra $2,800. Put the other way, the spread breaks even only if a default like that comes no more often than once a decade, a one-in-ten chance every year, on a single loan.
A bank lending to thousands of buyers can price that chance from its history and absorb it across the pool. Spread the same $400,000 across 100 notes of $4,000 and one default touches 1% of the money. (That assumes equal notes and defaults that don’t all arrive together; 2008 showed what happens when they do.) The seller has one note. There is no average, only what this buyer does.
Time, if it goes wrong. Foreclosure is slow, and how slow depends on the state. Every month of waiting is about $2,000 of interest not received ($24,000 ÷ 12), before counting the principal, the taxes and insurance the seller may have to keep paying, or the condition of the house when it comes back. A deed in lieu of foreclosure, where the buyer signs the house back, is faster and cheaper, when the buyer agrees to sign.
Liquidity. A Treasury sells in one click on any trading day. A private note can be sold too, but it means finding someone who wants one household’s IOU, and that someone will want a discount. The seller who finances is committing the money for as long as the buyer takes to pay or refinance.
Rate moves, in both directions. Liquidity can pay. If 10-year yields fell from 5.3% to 4.3%, that $400,000 of Treasuries would be worth about $432,000, 8% more, and could be sold to lock it in. If yields rose to 6.3%, it would be worth about $371,000, 7% less. The note never shows either move on a statement. That doesn’t make it immune. A 6% note in a 7% world is worth less to anyone who might buy it, and a 6% note in a 4% world tends to be refinanced away: the buyer pays it off early, and the seller reinvests at 4%. The note’s value moves like the bond’s. It just isn’t priced every day.
State tax, which can erase the spread entirely. Interest on Treasuries is exempt from state income tax. Interest on a private note is not. In California, in the 24% federal bracket with a 9.3% state rate, the note keeps 4.00% after tax, about $16,010 a year, and the Treasury keeps 4.03%, about $16,110. The 6% loan to one household pays less after tax than the 5.3% loan to the government. The crossover is a state rate of about 8.9%: above it, the Treasury wins outright. In a state with no income tax the note keeps its lead, but the lead shrinks from $2,800 to about $2,130.
What the spread doesn’t pay for
Inflation is often raised as a reason to prefer real estate to bonds. Fair enough, but the seller who finances no longer owns the real estate. The buyer does. The seller owns a fixed stream of dollars, exactly like a bondholder.
At 4% inflation, $400,000 repaid after ten years buys about $270,000 of today’s goods, note and Treasury alike. After inflation, the note earns about 1.9% a year and the Treasury about 1.25%. Inflation hits both loans the same way, so the spread is still the only difference between them. The protection that comes from owning the house belongs to the person living in it.
What the seller gets that isn’t in the rate
None of this makes seller financing a bad trade. It means the 6% is the wrong place to look for the reasons to do it.
The installment method. A seller with a large taxable gain on the property can generally report the gain as the principal arrives, rather than all in the year of sale. Spreading a gain over several years can keep more of it in lower brackets. (On a primary home, the $250,000 or $500,000 exclusion often covers the gain anyway.)
A sale that might not happen otherwise. A buyer the bank won’t serve, or a property the bank won’t lend on, can still sell. Sellers who finance sometimes get a higher price for that reason, and the higher price is part of their return, even though it never shows up in the rate.
Principal back sooner. A Treasury repays all $400,000 at the end. A 30-year note at 6% pays $2,398 a month, $28,778 a year, and returns some principal with every payment. Not much at first: in year one, $23,866 is interest and $4,912 is principal. But each payment lowers what is at risk.
A wider spread where the risk is wider. One reply in the thread was lending on raw land at 8%: $32,000 a year on $400,000, $10,800 more than the Treasury. That spread is nearly four times as wide, and land doesn’t fall apart if it has to be taken back. The size of the spread should follow the size of the risk. When it doesn’t, the lender is working for less than the job pays.
How it shows up in the wealth picture
Here is why this is a measurement problem rather than a real estate one.
A note receivable is one of the least visible assets a family can own. No brokerage holds it, so no statement shows it. It lives in a folder of paper and a row in a spreadsheet, usually carried at its remaining balance, which tells the family how much it is owed and nothing about how the loan is doing.
The questions that matter are all measurable. Did the payments arrive when the schedule said they would? What did the note actually return, counting the months that were late or missed? What did it keep after state tax, and what would the same money have earned in Treasuries over the same months? Family offices keep private loans on that kind of page, with what was scheduled beside what was received, the balance left, and the after-tax yield beside the benchmark. A loan that looks fine on paper can be earning less than a Treasury, and only the side-by-side shows it.
What the number is not
It is not a verdict on seller financing. The arithmetic depends on the state, the bracket, the buyer, the property and the terms, and it changes as rates move.
It is not legal guidance. The rules for financing a buyer, and for taking a property back, vary by state and by how often you do it. That is a conversation with a lawyer and an accountant, with the numbers in hand.
And it is not a reason to fear lending. Every bond is a loan. The point is only that the extra yield is a price, and a price should be compared with what it buys.
The older maxim
“Neither a borrower nor a lender be; for loan oft loses both itself and friend.” Shakespeare gave the line to Polonius in Hamlet, around 1600, in a speech of advice to his son that is mostly remembered for being pompous.
As a rule for money, it is wrong: every saver with a bond fund is a lender, and most are better off for it. As a description of lending to one person, it is close to exact. A private loan can lose the money and the relationship together, and the lender carries both. The spread is what the lender is paid for that. Whether it is enough is arithmetic, and the arithmetic is worth doing before the papers are signed.
Nothing here is advice. It’s the arithmetic, explained plainly.
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