Most real property (real estate) transactions for the sale and purchase of property involve a buyer who secures financing (a mortgage loan) from a bank for the purchase of the property and transfers the lump sum purchase price to the seller at the closing, in exchange for the seller transferring the deed (title) to the buyer—or to an escrow for safekeeping until the buyer repays the loan to the lender.

But if the buyer does not have good credit or a sufficient credit history—and especially if the seller wants to sell the property to a specific person—the seller may consider seller financing for the transaction. In a seller-financed transaction the buyer signs a promissory note promising to pay the purchase price of the property to the seller over time, plus a stated interest rate, which is included in a monthly installment payment projected over some number of months or years.

Seller financing is often structured for the buyer to make monthly payments for a number of years (five years, for example) and then make a balloon payment for the remaining balance of the loan. This seller financing structure anticipates the buyer being able to secure a traditional loan from a bank with improved creditworthiness and some equity in the property (a home, for example).

There are pros and cons to seller financing for both the buyer and the seller. Seller financing may reduce closing costs and shorten the time to closing, but the buyer may pay a higher interest rate and the seller will take on risk that the buyer will default on the payments and the seller will have to go through the legal process of evicting the buyer from the property.

In Arizona, seller financing is a legal alternative to traditional mortgage lending for real estate transactions. This arrangement involves the seller acting as the lender, providing the buyer with a loan to purchase the property. The buyer signs a promissory note agreeing to pay the seller the purchase price plus interest over a specified period. Payments are typically made monthly, with a balloon payment often due at the end of the term, which might be structured around a 5-year period. This allows the buyer time to build credit and equity, with the goal of refinancing through a traditional lender later on. Seller financing can offer benefits such as lower closing costs and a quicker closing process. However, it also carries risks, particularly for the seller, who may face the challenge of a buyer defaulting on the loan. In such cases, the seller might have to initiate legal proceedings to evict the buyer and reclaim the property. Arizona state statutes and federal laws regulate these transactions to ensure fairness and legal compliance, and it is advisable for both parties to consult with an attorney to navigate the complexities of seller financing agreements.