Owner Financing and Land Contracts in Tennessee

Owner financing, also called seller financing, means the seller acts as the lender: instead of getting the full price at closing, the seller is paid over time. It can open a sale to buyers who cannot get a bank loan and can give the seller a steady return. In Tennessee, though, the paperwork chosen at the start makes a large difference to both sides.

Two ways to structure it

• Deed now, with a deed of trust back. The buyer receives the deed at closing and signs a promissory note and a deed of trust to secure it. The buyer owns the property; the seller holds a recorded lien.
• Land contract (contract for deed). The seller keeps legal title, and the buyer makes payments and usually takes possession. The deed is delivered only when the price is paid in full.

The first works like an ordinary mortgage loan. The second keeps the seller on title, which feels safer to many sellers but raises its own problems on both sides.

Land contracts: what Tennessee law says

Tennessee has no comprehensive statute regulating land contracts; a 2021 bill that would have regulated installment land contracts did not pass. The contract and court decisions largely control. Courts treat the buyer as having an equitable ownership interest in the property. In King v. Dunlap (Tenn. Ct. App. 1996), insurance proceeds after a fire that exceeded what the buyer still owed were held for the buyer's benefit.

Forfeiture clauses get close scrutiny. Many land contracts say that if the buyer defaults, the seller keeps every payment as rent or liquidated damages. In Harmon v. Eggers (Tenn. Ct. App. 1985), the buyers had paid more than half the price, and the court refused to enforce that kind of clause, calling it a forfeiture and penalty. It sent the case back to measure the seller's actual damages instead. The Tennessee Supreme Court later overruled Harmon to the extent it judged a liquidated damages clause by looking back at the actual damages; the question now is whether the amount was a reasonable estimate of potential damages when the contract was made, and whether actual damages were hard to measure at that time (Guiliano v. Cleo, Inc., Tenn. 1999). Harmon turned on its facts, including that more than half the price had been paid, so how a court treats a smaller forfeiture depends on the circumstances. In Bull Market, Inc. v. Elrafei (Tenn. Ct. App. 2017), a commercial contract for deed, the seller had accepted payments around the 15th of the month for years; the court held that course of conduct had changed the due date, so the buyer was not in default and the seller could not declare the contract void.

Why recording matters

Agreements to convey real estate can be recorded with the register of deeds once the signatures are acknowledged (Tenn. Code Ann. §§ 66-24-101, 66-22-101). Since April 27, 2026, an agreement for the conveyance or sale of real property must carry the authenticated signatures of the owner and the buyer and state its expiration date by day, month, and year to be registered (2026 Tenn. Pub. Acts ch. 865). An unrecorded agreement still binds the buyer and seller, but under § 66-26-103 it is void against the seller's existing or later creditors and against later purchasers who had no notice.

For a buyer under an unrecorded land contract, that creates real risk: a judgment against the seller can become a lien on the property, an instrument not recorded within 60 days of the seller's death can be void against innocent purchasers from the heirs or devisees (§ 66-26-104), the seller's personal representative cannot be required to sign the deed under the statutory procedure unless the registered contract or a certified copy is produced (§ 66-4-102), leaving the buyer to sue for specific performance (Wright v. Universal Tire, Inc., Tenn. Ct. App. 1978), and a bankruptcy trustee takes the position of a good-faith purchaser (11 U.S.C. § 544(a)(3)). Recording, early, is the main protection.

The seller's existing mortgage

If the seller still owes on a mortgage, that loan very likely has a due-on-sale clause. Federal law lets lenders enforce those clauses (12 U.S.C. § 1701j-3), and the federal rule implementing that statute lists land contracts, contracts for deed, and lease-option contracts as transfers (12 C.F.R. § 191.2). The statute's exceptions cover situations like transfers to a spouse or into a living trust, not a sale on owner-financed terms. A land contract or a deed with a deed of trust back can both trigger the clause, leaving the seller facing a demand to pay off the loan.

Federal and Tennessee lending rules

A seller who finances a home sale can fall under federal mortgage rules. Regulation Z excludes some seller-financers from the loan-originator rules, with conditions (12 C.F.R. § 1026.36(a)(4) and (a)(5)):

• a seller financing three or fewer properties in 12 months must, among other things, use a fully amortizing loan with no balloon and determine in good faith that the buyer can reasonably repay;
• an individual, estate, or trust financing only one property in 12 months may use a balloon but cannot use negative amortization;
• in both cases the seller must own the property and must not have built the home as a builder in the ordinary course of business, and any adjustable rate must stay fixed for at least five years and follow a widely available index with reasonable caps.

These exclusions apply only to the loan-originator rules; other Regulation Z requirements can still apply depending on how many loans the seller makes.

Tennessee's mortgage licensing law exempts, among others, a loan secured by a dwelling that was the individual's own residence and a seller making five or fewer residential mortgage loans in 12 months who does not hold out to the public (Tenn. Code Ann. § 45-13-201(b)). Whether those licensing rules reach a title-retaining land contract is not settled. A seller planning more than an occasional owner-financed sale should get advice on these rules before signing.

Interest rates

Tennessee's general rate ceiling for written contracts is the applicable formula rate under Tenn. Code Ann. § 47-14-103, and on a sale of a home the buyer will own and occupy as a principal residence, a time-price differential is treated as interest (§ 47-14-102). Federal law separately preempts state rate limits for some first-lien residential financing, including by an individual who finances the sale of a home the individual owns and lives in, or has lived in, as a principal residence (12 U.S.C. § 1735f-7a). Which rule applies depends on the deal, so the rate should be checked rather than assumed.

Rent-to-own and lease-options

A lease with an option to buy is not a sale until the option is exercised. Where Tennessee's Uniform Residential Landlord and Tenant Act applies (counties above its population threshold), a true lease-option tenant gets its protections, including notice and an opportunity to cure for unpaid rent (§ 66-28-505), although the lease can waive that notice if the waiver appears in 12-point bold type or larger. The Act excludes a buyer occupying under a contract of sale, unless the arrangement was set up to avoid the Act (§ 66-28-102). Labeling matters less than how the deal actually works.

When payments stop

• Deed of trust: the seller forecloses through a trustee's sale under the deed of trust, with the notices Tennessee requires. Since July 1, 2025, the sale must be advertised at least twice in a newspaper published in the county, with the first notice at least 20 days before the sale, and posted online by a third-party internet posting company for at least 20 continuous days. A copy of the notice must also be sent to the debtor by registered or certified mail by the first publication date, a requirement that was already in the statute before 2025 (Tenn. Code Ann. § 35-5-101, as amended by 2025 Tenn. Pub. Acts ch. 515).
• Land contract: sellers have sought possession through detainer actions in general sessions court, as in Harmon and Bull Market, but a buyer who has paid a substantial part of the price can have restitution claims under cases like Harmon. A default on a land contract tends to become a dispute about money as well as possession.

Owner financing is a contract-drafting problem first. If you are considering a seller-financed sale, or a land contract has gone into default, my office can review the structure and the documents with you. See also land contracts.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal, tax, or lending-compliance advice for any specific transaction.