A seller who has owned a building for thirty years is almost never offered seller financing as the first option by his broker. Most brokers don't bring it up because most sellers don't want to be lenders. Most sellers don't want to be lenders because they don't understand the math of what carrying a note actually does to their after-tax outcome. The combination is that one of the more powerful structures available to LA multifamily sellers — particularly older sellers with significant unrealized gain — is simply not in most conversations.
Seller financing is not the right structure for every sale. It is the right structure for a specific seller profile that shows up in LA multifamily more often than the buyer-side framing of the transaction would suggest. The framework below is when the structure works, when it does not, and what the math actually says.
The seller acts as the lender on some or all of the purchase price. At close, the buyer pays the seller a down payment in cash and signs a promissory note for the balance, secured by a deed of trust on the building. The buyer makes monthly payments to the seller over a defined term, typically 5 to 15 years, at an agreed interest rate. The seller has converted his equity into a stream of interest-bearing payments backed by the building.
Three variations show up regularly.
Full seller carryback. The seller carries the entire purchase price minus the down payment. The buyer has no bank loan. The seller is the only lender. Rare on larger multifamily transactions because few sellers want full single-asset exposure.
Seller-carry second behind a bank first. The buyer obtains traditional commercial financing for part of the purchase price; the seller carries a second-position note for the gap between the bank loan and the down payment. Common on mid-sized transactions where the buyer cannot quite reach the seller's price with bank financing alone.
Wraparound note. The seller's existing loan stays in place (or is assumed by the buyer or wrapped around), and the seller carries a note that includes the existing debt. Tax and legal mechanics are more complicated; not common in LA multifamily.
The second variation (seller-carry second) is the structure most LA multifamily sellers should know about, because it is the one that comes up most often in real negotiations.
Three scenarios make seller financing meaningfully better than a straight cash sale.
The seller is over 65 with significant unrealized gain and wants to defer the tax recognition. The IRS installment-sale rules allow capital gain to be recognized pro-rata as principal is received, rather than entirely in the year of sale. For a seller with a low basis and a large gain, this can spread the tax liability across the life of the note instead of concentrating it in one year. The interest on the note is taxed as ordinary income but the principal returns flow through the installment treatment. A seller in a high tax bracket for one year (the sale year) can drop into a lower bracket across the payment years and meaningfully reduce total tax paid.
The seller wants ongoing income without continuing to own real estate. A seller who wants to retire from active management but doesn't trust a DST sponsor and doesn't want out-of-state replacement risk can structure a seller-carry note as the de facto retirement income. Monthly payments arrive without tenant calls. Interest income at a negotiated rate, often higher than the seller would earn on bonds, with security on a building the seller knows intimately because he owned it.
The seller is selling at a price the buyer cannot quite reach with bank financing alone. Sometimes the gap between what the building is worth and what the bank will lend is filled by seller financing. The seller captures full market price for the building (rather than discounting to a price the buyer can finance with bank debt alone). The seller's collateral position behind the bank is junior, but the building is the seller's known asset.
The structure fails when the seller's situation does not match the scenarios above.
The seller needs the proceeds for a 1031 exchange. Section 1031 requires the seller to take constructive receipt of the replacement property within 180 days. A seller-financed installment note is generally not 1031-eligible as cash to acquire replacement property. The seller-carry portion of the transaction cannot defer through a 1031; it is taxable on installment terms. For a seller whose primary tax planning involves a 1031, seller financing complicates the structure significantly.
The seller needs liquidity for a defined use within the term of the note. Seller-carry notes are illiquid. A secondary market for private mortgage notes exists but is thin and prices notes at material discounts to par. A seller who needs $2M of liquid capital in three years cannot reliably produce it by selling a five-year carry note without taking a haircut.
The buyer is the wrong credit. The note is only as good as the buyer's ability to perform. A buyer with thin operational history, weak personal financial statements, or a track record of stress in prior LA multifamily deals is a poor counterparty regardless of the LTV on the seller's note. The seller's recovery in default is foreclosure, which means becoming the owner again — of a building the seller already decided he didn't want to own.
The collateral position is uneconomic in default. A seller-carry second behind a 70% LTV bank first leaves the seller's note in the top 15% of the capital stack. If the building falls 20% in value and the buyer defaults, the bank gets paid in foreclosure and the seller's note is wiped out. The thinner the equity cushion above the seller's note, the more the seller is exposed to building-value risk on someone else's operational decisions.
Seller financing done well includes structural protections that align the buyer's incentives with the seller's recovery in default.
Substantial down payment. Twenty-five percent is the practical floor for serious carry transactions; thirty percent or more is preferable. The down payment is the buyer's stake in not defaulting. Too thin a down payment is the highest predictor of trouble downstream.
Personal guarantees from the principals. The note is signed by the entity that owns the building, but the principals personally guarantee the note. This adds recourse beyond the building itself and meaningfully reduces strategic default risk.
Acceleration on transfer. A due-on-sale clause that triggers full payment if the buyer transfers the building or the controlling interest in the buying entity. This prevents the buyer from selling the building to a less creditworthy third party and leaving the seller with a degraded counterparty.
Operating covenants. Maintenance of insurance, property tax current, RSO compliance maintained, financial reporting to the seller at defined intervals. These are operational obligations that allow the seller to monitor the building's health throughout the note term.
Reserves at the buyer's level. A required operating reserve held by the buyer protects against cash-flow disruptions that could otherwise lead to missed payments.
A seller-carry note without these protections is materially riskier than one with them. The protections are negotiable but not optional in any structure I would advise a seller into.
For a seller using installment-sale treatment, each payment received during the note term is divided into three components: return of basis (not taxed), capital gain (taxed at long-term capital gains rates if the property qualified), and interest (taxed as ordinary income). The ratios are set at the time of sale based on the seller's basis, the sale price, and the note structure.
The depreciation recapture portion of the gain is generally recognized in the year of sale regardless of installment-sale treatment, not spread over the note term. This is a common surprise for sellers expecting full deferral. The recapture is at 25%; for a building with significant depreciation taken, the year-one tax bill on a seller-financed sale is not zero — but it is materially smaller than the all-cash sale's tax bill.
A CPA familiar with installment sales should model the specific seller's tax position before the structure is committed to. The math is sensitive to basis, depreciation taken, the seller's other income, the note rate, and the term.
The first question is what the seller wants from the proceeds. If the answer is a defined replacement property (1031), seller financing is usually wrong. If the answer is ongoing income, capital preservation, and tax efficiency on a large gain, seller financing deserves a serious look — particularly for older sellers who would otherwise be choosing between a fully taxable sale and a DST structure they don't love.
The second question is who the buyer is. The structure depends on a counterparty I would actually lend to. If the buyer pool the building attracts does not include qualified credit buyers, seller financing is not the right tool — the seller is left choosing between bad buyers or a cash sale to better buyers.
The third question is whether the seller has the temperament to be a lender. Some sellers do. They like the monthly statement, they like the spread over bond yields, they don't mind monitoring the building from a distance. Other sellers don't. They want to be done. For the latter group, seller financing is a structural mismatch with their actual goal.
Seller financing is a tool. Like any tool it is the right tool for some jobs and the wrong tool for others. The mistake LA multifamily sellers make is not knowing the tool exists, or knowing it exists but never running the actual numbers on whether their situation calls for it. For the seller it is right for — older, large gain, ongoing income goals, qualified buyer in front of them — it can produce a meaningfully better lifetime outcome than the cash sale he was about to default to. For the seller it is wrong for, it is a complication that distracts from cleaner structures. Knowing which seller you are is the only judgment that matters here.
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Can I offer seller financing on my LA apartment building?
Yes. Seller financing (also called owner financing or seller carry) is a legal structure where the seller acts as the lender for some or all of the purchase price. The buyer pays a down payment and signs a promissory note secured by a deed of trust on the building. Terms are negotiated between buyer and seller.
What's a typical interest rate on seller financing for LA multifamily?
Rates are negotiated. They typically run somewhere between current bank commercial multifamily rates and a premium for the seller's risk. The applicable federal rate (AFR) sets a tax-purposes floor below which the IRS will impute additional interest. A seller-carry note priced meaningfully above current bank rates may attract buyers who couldn't access bank financing — which is information about the buyer's credit the seller should weigh.
Does seller financing defer capital gains tax?
It can spread the recognition of capital gain over the life of the installment note under IRS installment-sale rules. The seller pays capital gains tax pro-rata as principal is received rather than in a lump sum in the year of sale. Depreciation recapture is generally not deferred — it's recognized in the year of sale regardless of installment treatment.
Can I do a 1031 exchange and also offer seller financing?
The two structures are mostly incompatible. 1031 requires the seller to acquire replacement property using sale proceeds; a seller-carry note is not cash available for replacement-property acquisition. A partial structure is possible — cash portion goes to 1031, note portion is taxable on installment terms — but it is complicated and requires careful coordination with a qualified intermediary and CPA.
What protections should I require if I offer seller financing?
At minimum: a substantial down payment (typically 25% or more), personal guarantees from the buyer's principals, a due-on-sale clause, operating covenants on insurance, taxes, and regulatory compliance, and required reserves at the buyer's level. Without these structural protections, the seller-carry note carries materially more risk than the structure should.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap, specializing in Los Angeles multifamily transactions.
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