Why Sub-Market Rates Are Possible
A seller-financed note is a private transaction. There is no rate index, no mortgage broker, and no loan committee. The rate is whatever two parties agree on. That means the rate you pay is a function of negotiation skill, not market conditions.
That said, you need to give the seller a reason to accept a below-market rate. The reason is almost always one of three things: better terms on price, a shorter balloon (their money back sooner), or a compelling framing of what their alternatives actually pay.
The CD-Yield Frame
Most retired sellers have money in CDs, bonds, or a savings account. Ask them what those pay.
"What's your money earning right now in the bank? About 4.5% on a 1-year CD? I'm offering you 5% for 7 years, secured by real estate you already know, in a neighborhood you can drive by. A bank CD is unsecured - you're lending to a faceless institution. Here, you know exactly what secures your money."
At 5%, a seller earns more than most CD alternatives while also getting a security interest in real property. That is a compelling offer. Start there.
For sellers in lower-yield environments or those who have had bad CD experiences, you can go lower. At 4%, a free-and-clear seller on a $300,000 note earns $1,000/month. That is real income for many retirees.
Anchoring to the Right Number First
Never open with your target rate. Anchor low, then negotiate up to where you want to land.
Poor approach: "I'd like to offer 5%."
Better approach: "I've looked at the market, and most seller-carry notes are pricing around 3-4% right now for well-secured positions. I'd start with 3% and we can work from there."
The seller responds to 3% with something like "I was thinking more like 7%." Now you negotiate toward 5% and both parties feel like they moved. You land where you intended.
The Rate-Price-Term Tradeoff Table
Sellers who want a lower rate (from your perspective) or who resist below-market rates need a value exchange. Show them the tradeoffs explicitly:
| Rate You Offer | Price You'll Pay | Balloon Length |
|---|---|---|
| 3.5% | Full asking price | 10 years |
| 4.5% | 2% below asking | 7 years |
| 5.5% | 4% below asking | 5 years |
| 6.5% | 6% below asking | 3 years |
The lower the rate you get, the more you can offer on price. Sellers who are attached to price will often trade rate for price. This is your leverage.
Example: Seller wants $400,000 and 7%. You want $380,000 at 5%.
Counter: "I'll pay your full $400,000 if we can agree on 4.75%. You get your price, I get a rate I can work with."
When 3% and 4% Are Actually Achievable
Sub-4% seller financing is not common, but it happens when:
- **The seller is highly tax-motivated.** They are spreading $600,000 in capital gains over 20 years. A longer term at a lower rate often costs them less in total taxes than a shorter note at a higher rate.
- **The seller has no alternatives.** A property that has been on the market for 9 months has a seller who has run out of traditional buyers. When the choice is 4% from you or another year of maintenance costs, 4% looks better.
- **You offer a short balloon.** A 3-year balloon at 4% means the seller is only in the deal for 3 years. That limits their rate exposure and makes below-market terms easier to accept.
- **The seller trusts you.** This is underrated. A seller who has had a long conversation with you, toured your existing properties, and believes you will pay is more willing to offer favorable terms than a seller who met you last week. Build rapport before presenting numbers.
The "IRA Money" Angle
Some sellers want to lend from a self-directed IRA. If they hold the note inside their IRA, interest income is tax-deferred (traditional IRA) or tax-free (Roth IRA). In this case, a higher rate benefits them less because the tax advantage reduces the urgency of maximizing yield.
In a Roth IRA scenario: "The interest you earn in your Roth is tax-free no matter the rate. At 4%, you're earning tax-free income secured by real property. The rate matters less here because you keep 100% of what you earn."
This angle does not always work, but for sellers with self-directed retirement accounts, it adds a legitimate reason for below-market pricing.
Protecting Your Returns
Before you agree to any rate, calculate your actual cash-on-cash return and DSCR at that rate. A lower rate does not automatically make the deal better - if you overpaid on price to get the rate, check the math.
Use a conservative vacancy assumption (8-10%) and include a full expense load (management, taxes, insurance, maintenance, reserves). If the deal works at 5% but not at 6.5%, then 5% is your ceiling - do not agree to more just to close.