Owner Financing Commercial Property in Texas
How seller financing works as an alternative to bank loans, for sellers and buyers
What owner financing is, how the agreement and loan terms work, the benefits and risks for each side, and when it actually helps a commercial transaction close.
What Is Owner Financing for Commercial Property?
Owner financing commercial property means the seller acts as the lender. Instead of the buyer taking out a bank loan for the full purchase price, the seller accepts a down payment, finances the remaining portion of the price, and the buyer repays the seller over time under a written agreement. The property secures the debt, so if the buyer defaults, the seller can take it back through foreclosure. It is also called seller financing, and it is a form of private lending between the two parties to the transaction.
In plain English, it works like this. The parties sign a purchase agreement that includes the financing terms. At closing, the seller deeds the property to the buyer. The buyer signs a promissory note for the loan amount and a deed of trust that gives the seller a lien, then makes payments to the seller on an agreed repayment schedule, often with a balloon payment for the remaining balance at the end. Interest rates, down payments and loan terms are negotiated between buyer and seller rather than set by a bank’s loan programs.
For a Houston-area owner selling a small office building, a retail pad, a shop with a yard or a tract of commercial land, owner financing can widen the buyer pool and help a deal close when bank lending is tight. For a buyer, it can open doors to a property lenders would not finance on their own. Stacy Sherman, Broker works residential and commercial property from her Kingwood office and sees both sides: the owner planning an exit and the buyer trying to acquire.
How Owner Financing Works: The Agreement, the Note and the Deed of Trust
A simple, hypothetical example: a retiring owner of a small shop building accepts a down payment from a local contractor with steady income but a short credit history, carries the balance at a negotiated rate, and collects monthly payments until the contractor refinances with a bank. Because there is no bank in the middle, the agreement and the loan documents carry all of the protection.
The Documents That Make It Work
Promissory note
The buyer's written promise to repay: principal, interest rate, payment schedule, maturity or balloon date, late charges, default and acceleration terms.
Deed of trust
The security instrument in Texas. It names a trustee and gives the seller the power to foreclose if the buyer defaults, and it is recorded in the county real property records.
Personal or corporate guaranty
When the buyer is an LLC, the seller often asks the owners to guarantee the note personally so there is more than one source of repayment.
Title insurance and closing through a title company
A title company closes the sale, records the documents and can issue title coverage protecting the seller's lien as well as the buyer's ownership.
Pros and Cons: Benefits and Risks for Sellers and Buyers
Seller advantages
A wider buyer pool and often a faster sale, interest income on the note, the flexibility to set terms, and the possible tax benefit of spreading the gain through an installment sale.
Seller disadvantages
No lump sum at closing, capital tied up for years, the risk of buyer default and foreclosure, and the ongoing work of servicing the loan.
Buyer advantages
Access to a property when bank loans are hard to get, flexible loan terms and down payment options, no bank loan application or underwriting, and potentially a faster closing.
Buyer disadvantages
Interest rates may be higher than bank loans, the balloon payment usually has to be refinanced, and there are fewer standardized protections than in a bank loan program, so the documents matter more.
Typical Owner Financing Terms and Loan Structure
Every owner-financed transaction is negotiated, so there are no standard numbers. What is standard is the list of loan terms the agreement has to address:
Balloon Payments: Plan the Exit Early
A common structure amortizes payments over a longer schedule to keep them manageable but makes the remaining balance due in a single balloon payment at an agreed maturity date. For the seller, that shortens the time capital is tied up. For the buyer, it is the biggest risk in the deal: if a refinance is not available when the balloon comes due, the buyer may have to sell or negotiate an extension. Agree on the exit plan before signing.
Owner Financing vs. Bank Loans: How the Options Compare
Most commercial buyers finance with bank loans or SBA-backed loans from lenders. Owner financing is an alternative, and the right choice depends on the property and both parties’ goals.
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Types of Owner Financing: First-Lien Seller Notes, Wraparounds and Texas Rules
In a first-lien seller note, the seller owns the property free and clear (or pays off the existing loan at closing) and carries the buyer’s note in first position. This is the cleanest arrangement.
In a wraparound, the seller still has a loan on the property and leaves it in place. The buyer signs a new note to the seller that includes, or wraps around, the balance of the existing loan, secured by a wraparound deed of trust that sits behind the original lien. The buyer pays the seller, and the seller keeps paying the original lender. The big question is the existing loan’s due-on-sale language: Texas real estate attorneys note that commercial deeds of trust are more likely than residential ones to prohibit any transfer without the lender’s prior consent. A wrap on commercial property without that consent can put both parties at risk of the underlying loan being called.
The executory contract rules in Chapter 5 of the Texas Property Code apply to property used, or to be used, as the purchaser’s residence, and the wrap mortgage loan rules in Chapter 159 of the Texas Finance Code are written for residential real estate. That does not make a commercial deal rule-free, so have a Texas real estate attorney draft the documents, especially if any part of the property is a residence.
7 Steps to an Owner-Financed Commercial Transaction
Know your value and your goals
Before offering terms, understand what the property is worth and what you need from the sale. A broker opinion of value or an appraisal gives you a defensible number.
Decide what you are willing to carry
Settle your minimum down payment, the longest term you will accept and whether you will subordinate to anyone.
Qualify the buyer
Review financial statements, tax returns, credit, business history and, for income property, the buyer's plan for the tenants.
Negotiate the note terms
Interest rate, amortization, balloon date, prepayment, late charges, default triggers, guaranties and reporting belong in the contract.
Have an attorney draft the documents
The note, deed of trust, guaranty and any seller finance addendum should be prepared by a Texas real estate attorney.
Close through a title company
The title company handles funds, records the deed and deed of trust, and can issue title policies for both the buyer's ownership and the seller's lien.
Service the note
Track payments, escrow or verify taxes and insurance, and keep records. A third-party loan servicer can help.
Due Diligence on the Buyer: Credit History, Down Payment and Ability to Repay
When you carry the note, the buyer’s strength matters as much as the price. Treat the buyer the way a lender would, and put the right to receive this information in the purchase contract.
Tax Considerations: Installment Sales and Capital Gains
Owner financing can change when you pay capital gains tax on the sale. Under IRS rules, a sale where at least one payment is received after the tax year of the sale is an installment sale, and gain is generally reported under the installment method on Form 6252 each year you receive payments, unless you elect out. Interest you receive on the note is ordinary income. Two cautions for commercial owners: any depreciation recapture that is ordinary income must be reported in the year of sale, even if you have not collected it yet, and a note with too little stated interest can have part of the principal recharacterized as interest based on applicable federal rates.
If you would rather defer the gain entirely and buy another property, compare owner financing with a 1031 exchange for Texas commercial property owners. Plan with your CPA before you sign a contract.
Risks on Both Sides of the Transaction
When Owner Financing Helps a Sale Close
Owner financing tends to help most when the property is hard for banks to lend on: raw or partially developed commercial land in Kingwood and greater Houston, a special-purpose building, a property with vacancy that will not support a conventional loan yet, or a buyer who is strong but new.
It helps least when the seller needs full proceeds to buy the next property or pay off debt, or when the only buyers willing to use it are ones a bank has already turned down for good reason. A sale-leaseback for Houston business owners and a conventional sale remain alternatives worth pricing out.
Weighing an Owner-Financed Sale?
Stacy Sherman, Broker can help you understand your property's value, who is likely to buy it and whether offering terms makes sense, alongside your attorney and CPA.
Request a Broker Opinion of ValueAdvice for Sellers and Buyers
If you are the seller, start with a clear read on value. A broker opinion of value from Stacy Sherman, Broker explains what your property is likely to bring and how financing terms could change the buyer pool, and a formal commercial real estate appraisal may be worth it if you want an independent number behind the note. Our owner’s guide to selling commercial property in Houston walks through the rest of the disposition. Most sellers are buying something next, and Stacy can help with that side too.
If you are the buyer, owner financing does not replace your homework. Work through a commercial due diligence checklist for Texas buyers on the property itself, run the numbers with a clear understanding of cap rates on income property, and have your own attorney review the note.
Owner Financing FAQs
Is owner financing legal for commercial property in Texas?
Yes. Sellers commonly carry notes on commercial property in Texas, secured by a deed of trust. Several Texas rules people associate with owner financing, such as the executory contract provisions in Property Code Chapter 5, target residential property used as a residence. Have a Texas real estate attorney prepare the documents.
What is a typical interest rate or down payment on seller financing?
There is no standard. Rate, down payment and term are negotiated case by case and depend on the property, the buyer and market rates at the time. We do not quote typical figures because they vary too widely to be useful.
What happens if the buyer stops paying?
The seller can accelerate the note and, if the default is not cured, foreclose under the deed of trust by following the Texas statutory process, including notice requirements and a sale on the first Tuesday of the month.
Does Stacy handle owner-financed deals?
Stacy Sherman, Broker helps sellers and buyers market, price and negotiate commercial sales, including sales with seller financing. She is not an attorney or lender, so she works alongside your attorney, CPA and title company. Reach her through the contact page or at 832-445-8934.
Please note: This article is general information, not legal, tax or financial advice. Stacy Sherman, Broker is not a lawyer, CPA or lender. Talk to a Texas real estate attorney, tax professional or lender about your situation.