Can a seller finance the land while a lender finances the build?
Yes, a seller can finance the land while a lender finances the build, in 1 of 2 ways: the construction loan pays the seller's note off at closing and counts the land as your equity, or the seller agrees to subordinate the note behind the construction lender, which fewer lenders allow. The first structure is common; the second needs a cooperative seller and a lender that permits secondary financing.
The two structures
| Structure | How it works | Lender view |
|---|---|---|
| Seller note paid off at construction closing | Seller carries the land for the entitlement period; the construction loan pays the note off and treats the land value as equity | Accepted by nearly all construction lenders |
| Seller subordinates | Seller's note stays in place in second position behind the construction loan | Allowed by some private lenders; rarely by banks; requires a subordination agreement |
Structure one: pay the seller off at construction
You buy the land with, say, 20 percent down and an 80 percent seller note, interest-only at 7 percent for three years. You entitle and design the project. When permits are approved, the construction loan closes, pays off the seller's note, and counts the land at appraised value as your equity. If entitlement raised the value, the equity is larger than the cash you put in.
This works because the construction lender ends up in first position with no other liens. The seller gets paid in full at the construction closing.
Structure two: subordination
The seller agrees to stay in second position. The construction lender is first; the seller is behind. Lenders that allow it will count the seller's note as part of the capital stack and require:
- A recorded subordination agreement.
- The seller's note to be interest-only or deferred during construction, so it does not compete for cash flow.
- Total leverage, first plus second, within the lender's cap, often 85 to 90 percent of cost.
- Standstill provisions so the seller cannot foreclose during the build.
Few sellers agree, because a second position behind a construction loan is risky for them. When they do, it is usually because the price is high or the seller wants the sale.
What the seller note should say
- Interest rate and payment schedule.
- Maturity that extends past the expected construction closing.
- Prepayment allowed without penalty, so the construction loan can pay it off.
- Whether the seller will subordinate, and on what terms.
- A recorded deed of trust or mortgage, drafted by an attorney.
Costs and pitfalls
- A seller note with a maturity before permits are approved creates a gap. Make the term long enough.
- An undocumented or unrecorded seller note causes title problems at the construction closing.
- Some construction lenders count only cash and appraised land value as equity, not the seller's forgiven or deferred amounts.
How CommFi handles it
Our lending desk reviews the seller note terms before you sign and structures the construction loan so the payoff or subordination works. It funds direct when it fits, and when a lender that allows seller subordination is the better fit, the desk searches a database of 7,000+ lenders and the ones that permit it compete for the file. Zero upfront fees.
Related reading
Related questions
- Can a construction lender work with seller-financed land?
- Yes. Most pay off the seller's note at closing and count the land as your equity. Some allow the seller to subordinate instead.
- What is seller subordination?
- The seller agrees to move behind the construction lender into second lien position. It requires a recorded subordination agreement and a lender that permits secondary financing.
- Will banks allow a seller note behind a construction loan?
- Rarely. Private lenders are more likely to allow it, with total leverage capped and the seller's payments deferred during construction.
- How long should a seller note on land be?
- Longer than the expected permit timeline, with prepayment allowed so the construction loan can pay it off.
- Does seller financing count as my equity?
- Not directly. Lenders count cash paid and the appraised land value; a seller's note is debt unless it is forgiven or subordinated.
Property developer and licensed appraiser. 22+ years in real estate: TIC conversions, multi-unit redevelopments, mixed-use, fix and flips, commercial DSCR.