How a 20-Year-Old is Buying a House with Seller Financing
In 2015 when my dad was in the process of moving back to our hometown of Muskegon, Michigan, I found a house for sale that would be perfect for him.
It was a simple, one-level, two-bed / one-bath home with an attached garage and a fenced back yard.
We made the purchase, and he lived in it right through his final weekend before going into hospice.
Last week, while I was talking to some of our closest family friends, Wayne and Dawn, they asked what my plan was with the house.
"I'm just going to sell it," I said. It had served our family well and I wasn't particularly interested in keeping it as a rental.Wayne mentioned that their grandson, Kohl, would be potentially interested in buying it.Kohl is 20 years old and works as a carpenter, just like I did around that age.
He had been living at home and paying rent to his parents.
His parents, though, had been setting aside that rent money for him to use a down payment when he was ready to start house-shopping.
For young Kohl, the stars were beginning to align.
The real estate market in western Michigan is every bit as lean as it is here in Whatcom County.
It would not be too great of a burden to have the house cleaned and painted, some new flooring put down, then get a Realtor to stage it up and list it.But the appeal of skipping all that, and also of helping the industrious grandson of friends we've considered "like family" for over 50 years, was even greater.
So here's what we did:
We had a Realtor out to give us a probable market value of the home. He put it at $145K.I backed off the cost of the obvious fix-up items and the Realtor fees, and arrived at a slightly-rounded $130K.Kohl loved $130K and he loved the idea of not having to endure a bidding war, which he certainly would have for any decent house at that price point.
Between what his parents had set aside and his own savings, he has $10,000 for a down payment and closing costs.
But he has two hurdles facing him:
He has not yet established a credit history, and...
He's a 1099 contractor versus a W2 employee, so he needs 3 years of work history (per Michigan lending standards) before he can qualify for a formal home loan through a bank.
But Kohl was in luck, because I was willing to offer him Seller Financing -- or what is called a "Land Contract" in Michigan.
I own the home free and clear, so there's no mortgage balance I need to pay off. (If there was, I would almost certainly need to sell on the open market to find a buyer who could pay cash or at least get a full home loan.)I offered Kohl these terms:
The sale is "as-is", in its current condition, for $130,000
$5000 down payment (so he keeps some cash on hand for repairs, emergencies, etc.)
4% interest rate (a little higher than what banks are charging)
30-year amortization (so he could afford the monthly payments of $596.77)
3-year balloon (meaning he will owe me the balance no later than 3 years from now)
He is 100% responsible for all taxes, insurance, utilities, repairs, maintenance... everything the "owner" would normally have to cover.
There's no early-payoff penalty, so as soon as he can qualify for a conventional mortgage and gets it refinanced, he can pay me the balance due and be done.
This "land contract" is secured by a promissory note and deed of trust, the same instruments a bank would use to secure a loan.
If Kohl defaults on the loan, I foreclose and take the house back.
If he sells it, I am in first lien position to be paid in full.
If he takes the land contract full term, then on February 1, 2025 he will owe me the balance due of $117,920.38.
What's my advice to other 20-year-olds like Kohl?
unicorn
I absolutely love that Kohl decided at such a young age to start saving money for a house purchase.
I compliment his parents just as much for charging him rent to live at home, but setting that money aside to help him purchase an asset when he was ready.
To every 20-year-old and parents who are in this co-living arrangement:
Follow this formula!
Kohl and his family also took a chance and asked me if I would sell to him, and if I would finance his purchase.They used their words.I happened to be in a place where I was able, willing, and happy to do it.And I have worked with others -- including readers of this blog post -- who have asked investment property sellers in Bellingham if they would seller-finance at favorable terms.
And the answer was YES!
This scenario is NOT a total unicorn. It happens.
Here's what excites me about Kohl's journey even more:
He's learning a trade.
He's working as a carpenter, making $30/hour at 20 years old, and learning the skills to be able to improve and maintain this house and others he buys in the future.
At a time of so much uncertainty in the world, especially for young people, the mountain of debt that many of them are incurring, the insecurity of both housing and steady employment, Kohl and his family have found a path to buttress against those things.
Whether you're 20, or about to turn 50, or have kids, whatever... I hope there are some take-aways in that story that you can use, or share.Hey, it never hurts to ask!
Hey Young People:
CONSIDER THE TRADES!
Gone are the days of tradespeople being considered second-class citizens.
For generations, people who made their living on their feet or with their hands were looked down upon.
Well that era is over.Now it's a matter (or a full-blown emergency) of attracting young men and women into the world of construction, providing first-class educational opportunities, and providing attractive enough pay, benefits, and working conditions to keep them on the job site.I called a local friend of mine who owns several related construction businesses, one of which is an electrical contracting company.
"How much are you charging per hour for residential electrical work?" I asked him.
"We're at two-hundred-fifteen dollars an hour," he said.
Two. Hundred. Fifteen. Dollars. Per. Hour.
In a 40-hour a week, 2000-hour year, that's $430K in professional service revenue for one electrician.
"How about plumbers?" I asked him.
"We're at one-hundred-eighty-five an hour for plumbers," he said.
"And how's business?" I asked him.
"Well," he said, "if I could find more people to actually hire, we could be doing better. But it's hard to find people to even interview right now."
Just for reference, if you take it upon yourself to master a trade, go in business for yourself booking 40-hour weeks at $215/hour, that doesn't put you in the "upper-middle-class" income bracket in America.
It puts you in the class labeled as "Rich".
Let's be realistic, though. You won't be billing all 40 hours every week. For good measure let's cut it in half, so you're only billing 20-hour weeks at $215/hour.
Your monthly income is just shy of $18K.You're making a very, very good living, in today's dollars.
What am I trying to say?
I'm saying, kids, the world is changing. Past tense: It HAS CHANGED.
Mastering a trade in the same time or less than it takes to get a bachelor's degree can provide abundant job and business-ownership opportunities unlike anything previously seen or experienced.
You can launch into the world of Electrical at Bellingham Technical College (BTC) (my alma mater), completing their program in 5 quarters for total tuition and fees of $12,930 plus books and supplies.
The trades are experiencing the same things as the real estate market: Scarcity of availability driving prices up.
Take advantage of it.If you master a trade and take care of your health, you will always, always have the ability to make a living, not to mention the ability to take care of your properties.
If you know a young person who might resonate with the messages in this blog post, or parents of a young person, why don't you share it with them?
Either forward this entire blog post, or copy/paste this link over to them:https://conta.cc/3eRSdB4
That share may change the course of someone's life, the way my life changed in January 2004 when I enrolled in the Home Inspection program at BTC.
It may be a message they've heard a hundred times in the past, but for some reason right now they're ready to really take action on it.
The world desperately needs those people, and that need is only going to grow.
