The luxury real estate market of Malibu, California, famous for its prestige and high property values, is currently navigating a period of significant macroeconomic transition. As interest rates have climbed from historic lows to multi-decade highs, the traditional avenues of mortgage financing have become increasingly restrictive for potential buyers. In an environment where a five-million-dollar property becomes exponentially more expensive to carry as mortgage rates move from three percent to seven percent, the annual interest burden alone can add hundreds of thousands of dollars to your yearly payments. This shift has necessitated a return to more strategic and flexible financial arrangements, most notably the "seller carryback", or "Seller Financing". Seller Financing allows a purchaser to bypass or supplement institutional lending by borrowing directly from the property owner. Malibu's is in a buyers market and for those who want to take action on buying a Luxury property in Malibu, the carryback represents a useful tool to maintain purchasing power and secure value/affordability in one of the world's most limited real estate markets.
The Evolution of the Malibu Real Estate Market: 2024 to 2026
To understand the utility of seller financing, one must first analyze the data-driven reality of the Malibu market as it stood in late 2025. Following the frenzied peak of 2021, when Malibu beach homes were snapped up at record prices driven by a 153 percent increase in market activity, the region has transitioned into a more tempered phase. By December 2025, the median sale price in Malibu had declined to $3,625,000, an 18.5 percent drop from the previous year. This cooling was accompanied by a significant increase in the median days on market, 171 in December of 2025 vs 36 in December 2024.
This slowdown is not necessarily a sign of fading prestige but rather a result of a disconnect between seller expectations and buyer affordability in a high-rate climate. While the median sold price has seen downward pressure, active list prices remain high, with the median list price often exceeding $5.6 million. This gap between the list price and the actual sale price highlights the negotiation leverage currently available to buyers. (For more data on the Malibu Real Estate Market check out our full 2025 recap here!) (Additional Source used for this article)
Malibu Real Estate 2024 vs 2025 Data (Averages)
| Malibu Real Estate Market Indicator | Year 2024 | Year 2025 | Yearly Change |
| Active Listings | 182.8 | 213.5 | +30.8 (+16.8%) |
| New Listings | 391 | 455 | +64 listings (+16.4%) |
| Closed Sales | 160 | 110 | -50 sales (-31.25%) |
| Months Supply | 12.7 | 24.6 | +94% |
| Days on Market | 73.25 days | 81.08 days | +10.7% |
| % of Last List Price | 91.0% | 89.5% | -1.5% |
| Average Sold $/Sqft | $1,632 | $1,395 | -14.6% |
Seller Financing and the Architecture of the Carryback
For the uninitiated buyer, real estate financing often seems limited to the choice between cash or a bank loan. However, seller financing—often called a "partial buy" or "owner financing"—functions as a third path where the seller effectively acts as the bank. A seller "carryback" specifically refers to a situation where the seller of the property extends credit to the buyer for a portion of the purchase price, receiving payments over time rather than a single lump sum at the close of escrow.
To grasp how this works in practice, one must understand the two foundational legal documents involved: the promissory note and the deed of trust. A promissory note is a written contract where the borrower makes an unconditional promise to repay a specific sum of money at a predetermined interest rate and schedule. The deed of trust is the security instrument that protects the lender's interest. In California, a deed of trust involves three parties: the trustor (the buyer), the beneficiary (the seller/lender), and the trustee (a neutral third party who holds the "naked title" until the loan is paid). This structure ensures that if the buyer defaults on their payments, the seller has the legal right to initiate a foreclosure to reclaim the property.
Conventional Mortgage VS Seller Financing
For buyers looking for more affordable options to secure value or a loan on your home, here are the clear differences between a conventional mortgage and seller financing.
| Financing Component | Conventional Mortgage | Seller Financing |
| Lender | Institutional Bank | Individual Property Owner |
| Terms | Rigid/Standardized | Negotiable/Custom |
| Speed of Closing | 30-60 Days | 7-21 Days |
| Interest Rates | Market Dependent | Mutually Agreed Upon |
| Loan Fees | High (Origination, Appraisal, etc.) | Low to None |
As you can see there are many advantages if seller financing that may make the purchase of a Malibu real estate much more affordable and logistically convenient for both the buyer and the seller.
As we get into the nitty gritty of seller financing, here are key terms for those unfamiliar with the loan process.
- Principal: This refers to the original amount of money borrowed from the seller, excluding interest. In a five-million-dollar purchase, if the seller carries back one million dollars, that one million represents the principal.
- Amortization: This is the schedule by which the loan is paid off over time. A loan "amortized over thirty years" means the monthly payments are calculated as if the loan would take thirty years to pay off, making the payments smaller and more affordable for the buyer.
- Balloon Payment: This is a large lump sum due at the end of a short-term loan. Most seller financing deals in Malibu are not intended to last thirty years; instead, they might have a term of five years. If the payments were amortized over thirty years, the buyer would owe the remaining "balloon" of the principal at the end of the five-year term.
- Junior Lien: Also known as a "second position" loan, this occurs when a seller carries back a loan that is subordinate to a primary bank mortgage. If the property goes into foreclosure, the bank in the "first position" is paid off entirely before the seller in the "second position" receives any funds.
- Default Interest: This is a higher interest rate that is triggered only if the buyer fails to make payments on time. It serves as a penalty to encourage compliance with the promissory note
Strategic Advantages for the Malibu Buyer
Another use for seller financing is to fill the gap between a loan that may not cover the full purchase price of a property, or offer a way for the buyer to get a less expensive conventional loan. In a cooling market, banks often utilize conservative appraisals. If a buyer agrees to purchase an oceanfront estate for $10 million, but the bank's appraisal comes in at $9 million, the bank will only provide a loan based on the $9 million figure. The buyer is then left with a $1 million shortfall. Seller financing can bridge the bank loan and purchase price (by financing the seller a $1 million dollar loan), allowing the seller to achieve their desired sale price while the buyer avoids having to liquidate additional assets to cover the down payment.
Furthermore, the carryback allows for the customization of the interest rate and payment structure. In many Malibu transactions, buyers choose "interest-only" payments. This means that for the duration of the loan term, the buyer only pays the interest on the principal, which significantly reduces the monthly cash outflow. This is particularly advantageous in a high-interest rate cycle where the buyer anticipates that rates will eventually fall, at which point they can refinance with a traditional bank and pay off the seller's balloon payment.
Comparison of Monthly Carry Costs: Bank vs. Hybrid Carryback
Consider a hypothetical purchase of a $5,000,000 home in Malibu Park. In a conventional scenario, the buyer secures an 80 percent loan from a bank. In the hybrid scenario, the buyer secures a 60 percent loan from a bank and a 20 percent carryback from the seller.
Why Would a Seller Do This?
To successfully negotiate a carryback, a buyer must understand that this arrangement is often a "win-win." Sellers in Malibu, particularly those who have owned their properties for decades, face immense tax liabilities upon sale. California's state capital gains tax is treated as ordinary income and can reach rates as high as 13.3 percent. Combined with federal capital gains taxes and the 3.8 percent Net Investment Income Tax (NIIT), a seller could easily lose over 37 percent of their profit to taxes in the year of the sale.
Under Internal Revenue Code Section 453, a seller can utilize the "installment sale" method, which allows them to recognize the gain only as they receive the principal payments. By carrying back a portion of the price, the seller defers their tax liability over several years, potentially staying in a lower tax bracket and earning interest on money that would have otherwise gone to the IRS.
For a seller, acting as the "bank" for a qualified buyer allows them to convert a volatile real estate asset into a stable, high-yield income stream secured by a property they already know and trust. Until the full payment of the seller financed has been made the seller maintains ownership of the property. If the buyer defaults, the seller keeps the down payment and forecloses, potentially selling the home again to a new buyer.
Legal Framework and Protections
In California, the primary instrument used to organize a seller-financed transaction is the "Seller Financing Addendum and Disclosure," or "SFA". When a Malibu buyer presents an offer involving a carryback, the SFA will outline several critical details:
- Creditworthiness Representations: The buyer must provide a detailed representation of their financial standing. Sellers often require credit reports and tax returns, acting with the same diligence as a professional underwriter.
- Balloon Payment Disclosures: If the loan involves a balloon payment, California law (Civil Code Sections 2956-2967) requires explicit notice of the payment amount and the date it is due. It must also clarify that the seller is not obligated to refinance the loan when it matures.
- Late Charge Limitations: For owner-occupied residential properties, California law limits late fees to 6 percent of the installment due or five dollars, whichever is greater. This prevents sellers from imposing predatory penalties on buyers.
- Substitution of Buyers: The SFA typically states that any addition or deletion of buyers from the title requires the seller's written consent. This ensures the seller knows exactly who is responsible for the debt.
Malibu Real Estate Agents Role of the "Arranger of Credit"
In most Malibu transactions, the buyer's real estate agent serves as the arranger of credit. The arranger must ensure that all disclosures are made in writing and that both the buyer and seller understand the implications of the financing, particularly the "due-on-sale" clause found in most existing mortgages, which "requires the borrower to repay the remaining loan balance in full immediately upon selling or transferring the property without the lender's (banks) prior consent".
Seller financing in Malibu often uses an All-Inclusive Deed of Trust (AITD), where a seller keeps an existing low-rate loan in place and the buyer’s higher-rate loan wraps around it, allowing the seller to profit from the interest on the seller financed loan. The key danger with due-on-sale clause, lets the lender (bank) demand full payoff if title transfers, potentially forcing a refinance or foreclosure. This is why the buyer’s agent must deliver written disclosures, confirm both parties understand the risk, review loan restrictions, and coordinate payment servicing, reducing the chance of activating the due on sale clause.
Structuring the Offer: A Guide for the Malibu Buyer
Proposing a carryback requires a nuanced understanding of the seller's life conditions. In a high-end market like Malibu, sellers are often more concerned with the net profit (after deducting all transaction costs) and tax implications than a huge sales price. A buyer who offers a higher purchase price with a 5 percent carryback may be more attractive to a seller than a lower all cash offer that triggers a massive, immediate tax bill.
Problem Solving with a Seller Finance Offer
A buyer should frame their proposal as a solution to the seller's problems. If a home has been on the market for 160 days (Not uncommon for Malibu in 2025), the seller is likely frustrated. A buyer's proposal might look like this:
- Offer Price: Full asking price to satisfy the seller's ego and valuation expectations.
- Down Payment: 20-30 percent in cash to give the seller immediate liquidity and provide the buyer with significant "skin in the game".
- The Carryback: 70-80 percent of the balance at a 5 percent interest rate, interest-only, for a term of five years.
- The Incentive: Remind the seller that by deferring the principal, they are potentially saving $300,000+ in immediate capital gains taxes.
Treat the Deal as if a Conventional Bank was Involved
A Malibu buyer must conduct the same level of due diligence on a seller-financed deal as they would with a traditional bank. This includes:
- Professional Appraisals: To ensure the property value justifies the debt.
Title Searches: To confirm the seller has a clear title and identify any hidden liens. - Home Inspections: Since the buyer is taking on a significant financial obligation, they must ensure the property does not have undisclosed "water intrusion" or "foundation issues" that could lead to legal disputes later.
- Escrow and Servicing: Using a professional third-party servicing company to handle the monthly payments ensures that the transaction remains "arms-length" and that both parties have a clear record of the loan's amortization.
- Risk Mitigation: The Buyer's Perspective
While seller financing offers tremendous upside, it is not without risk. The buyer must be aware that if the seller defaults on their own obligations (if they have an underlying loan), the buyer's investment could be at risk.
Risk Mitigation
To mitigate these risks, the buyer should insist on:
- Title Insurance: A "purchaser's policy" of title insurance is non-negotiable. It protects the buyer if it is later discovered that the seller did not have the right to sell the property or if there were unknown encumbrances.
- Recorded Deed of Trust: The buyer must ensure that their ownership is properly recorded with the county. This "constructive notice" prevents the seller from attempting to sell the property to someone else or taking out further loans against it.
- Default Protection: Including a "right to cure" in the agreement. If the seller fails to pay an underlying mortgage, the buyer should have the right to pay that mortgage directly and deduct that amount from their payments to the seller.
Attorneys and Escrow
In the Malibu luxury real estate sector, these transactions are rarely handled solely by real estate agents. The complexity of the tax codes and the high dollar amounts involved necessitate the involvement of a specialized real estate attorney. An attorney can draft custom promissory notes that address specific Malibu concerns, such as "wildfire insurance requirements" and "coastal commission restrictions," which are often missing from standard real estate transaction forms.
Seller Financing and Working With a Realtor in Malibu
The current high-interest rate cycle has created a unique window where sellers are motivated by tax deferral and buyers are seeking relief from institutional borrowing costs. The seller carryback is not a secondary option but can be a primary tool for facilitating high-value transactions that the traditional banking sector is currently unable to support.
If you’re considering a seller carryback or any creative financing strategy to secure a Malibu property in today’s high-rate market, contact Shen Realty for a confidential, numbers-first consultation on your options and negotiating leverage. Work with a team recognized as the best malibu realtor choice for buyers who need precision, discretion, and experience trusted among Real Estate Agents Malibu CA and positioned as a top real estate agent Malibu CA resource for luxury transactions. Whether you’re searching for a realtor in Malibu CA, a seasoned Malibu real estate agent, or a realtor in malibu who can coordinate attorneys, escrow, and disclosures while protecting your downside, Shen Realty will guide you from strategy to closing with clarity and confidence.