Sunday, September 9, 2007

Real-Life House Flipping Horrors

My Dad retired from an international purveyor of paper products about 4 years ago. He was almost 60 when he retired. He had worked his way up to a vice president position after being with the company over 30 years. I'm fairly certain it was the first real job he had after graduating from University of Missouri.

Having grown up in the foothills of the Ozarks, his mother and father with 8th and 6th grade educations (respectively), the fact that he even went to college was amazing. His father, my grandfather, was a drunk. No one has been extremely forthright about my grandfather, but from what I've gleaned he was probably abusive to his children and his wife. I know he commonly exhibited classy behavior like borrowing money from my Dad when he was in college. My Dad literally saved his lunch money so that he could escape what he must have seen as hell on Earth, and when he finally escapes, his own father is borrowing money from him. My Dad had no scholarships. He put himself through college on his saved lunch money and money he had made from his milk-cow business, as well as working at the cafeteria at U of M. My grandfather died of Lou Gehrig's disease 5 or 6 years before I was born. I do not believe he ever paid back the loans he took from my Dad.

When my Dad retired, he had about 750K in his 401K and IRA. Like most successful men, when he retired, he was immediately looking for something to do, although he and my mother were taking monthly trips to exotic locations around the world. He knew a friend of the family, a young guy in his early 30s, who wanted to start a house-flipping and renovation business. This friend of the family, we'll call him John, was a handy type, with basic carpentry, tile, plumbing, and painting skills. While John did not have any of his own capital, in fact, he was living paycheck to paycheck, he did have a strong desire to become better off, and provide more for his family-- hence, the desire to jump on the house-flipping bandwagon. My Dad likely saw in this young man what he thought was a little of himself. And I'm sure my Dad remembered how he had wished to have someone who believed in him when he was just getting started back in Missouri.

My Dad and John went into business, forming an LLC. My Dad would provide the capital, and John would contribute the bulk of the labor. I should mention that as a kid, my Dad did help his brother-in-law build houses, so he does have some basic skills. Their first house, which they would have made some money on, was found to have an issue with the title, right before they closed with the buyer. The title insurance company, whose job it was to perform the title search, screwed up. The title insurance company, believing that this company would probably go under within a year or two, chose not to pay the damages. My Dad is still in litigation with this company. Long story short, they made little or no money on the first house due to the carrying costs incurred while they battled with the title insurance company.

I believe they made some money on the 2nd house, probably 30-40K. Keep in mind though, all this time, John is getting paid for his labor, at $15.00/hr. and also gets to split the profits, less any interest my Dad paid. Also, right after they sold the second house, my Dad's tax attorney advised him to no longer contribute any sweat-equity on the houses due to possible tax implications. Therefore, he decided to step back from the jobs, and let John run things.

While working on the 3rd house, which was basically being built from the foundation up, with John acting as general contractor, John decided that the money wasn't coming in fast enough, and that he wanted to take on some renovations-- jobs like termite repair, for example. He hired a couple of other workers to help him. At some point, John decided he needed some money, likely so that he wouldn't have to float payroll, or to buy some tools for a particular job, and he drew this money against the loan on the 3rd house. Basically, he borrowed money from the business. For whatever reason, John continued visiting the money tree, never telling his business partner what he was doing. My Dad, to this day, is still not sure about how much money he ended up taking against the house as John will still not turn over any records, but he figures it was probably around 70K. It was not until the house was finished and on the market that my Dad figured out what was going on. When the house sold, my Dad had to kick in some cash, due to all the money that was borrowed.

At this point my Mom was absolutely horrified. She begged my Dad to end the partnership, take his loss, and move on. She told him things such as, "Don't throw good money after bad." I advised my Dad the same thing. My Dad, being the perennial optimist, still had some faith in John (I can not begin to figure that out, to this day), and decided to go in on one more house.

The last house was a beautiful place in Mt. Pleasant, S.C., not far from the Charleston harbor. John had already secured financing for buying the house by partnering with one of the men with whom he'd been performing renovations. The problem was that neither John nor his partner, we'll call him Carl, had enough money to cover the renovations or carrying costs. My Dad worked out a deal with John and Carl where if he threw in more capital so the house could be finished, John and Carl could still keep the labor, but my Dad would receive all the profit, effectively returning him his money lost on the previous deal. I believe that Carl initially bought the house for around 350K, and my Dad threw in another 125K for all other costs. Obviously my Dad screwed up again by providing such a huge budget for renovations. It is important to note that they bought this house at the top of the housing boom in 2006.

John and Carl both took forever completing the house, and why not? With my Dad providing basically free money, why not work slow and profit from the labor? The house was finished in December of 2006, and went on the market in January 2007. It was listed at 700K. At that price, my Dad would break even, and he would close out his partnership with John.

Well, January of 2007 was not a good time to be listing a house. It made things worse that Carl and his wife, being idiots, did not want to reduce the price of the house. And so the house sat. And the relationship between my Dad and John began to deteriorate. With no more houses to work on, my Dad began trying to straighten out the books. This was made impossible by John who had either kept no receipts, or was deliberately deceitful. In April, it was time to file taxes. No taxes were filed as none of the bookkeeping was able to be completed. Meanwhile, Carl was still paying the mortgage on the house.

In May, I believe that John and Carl finally decided to lower the price to 650K. There had been zero interested buyers, and the new price brought in maybe one or two. In June, Carl began getting really nervous as he and his wife could barely make the payment on the loan, and so the price was reduced again. Meanwhile, the relationship between all the partners had become so volatile, that my Dad became concerned that if the house was sold, that Carl may be able to walk away with the cash, and not give him his profits. My Dad began seeking legal counsel, and his attorney told him that because the loan was in Carl's name, that indeed, if the house sold, Carl could walk away from the closing with the check, and short of beat the crap out of him, there was really nothing my Dad could do to get his money. If that scenario were to occur, then there would be future legal battles between my Dad and Carl, with no guarantees he would ever see his money. The attorney advised my Dad to buy the house from Carl, to ensure that when the house sells, that he will get his money.

As of last week, my Dad is now the owner of this house. He has reduced the price to 580K. There have been one or two buyers who have looked at the house. If it sells at this price, my Dad figures he is out roughly 150K. I seriously doubt the house will sell above 500K.

He has also had to pay off 20K in credit card debt that John ran up on the business account. The attorney advised him to go ahead and pay this off to avoid damaging his credit. Of course, he is in the process of dissolving the LLC.

Meanwhile, John is back working at his old job, but driving a late model vehicle which he likely bought with the money he stole from my father. He is still insisting that my Dad will owe him money when the house sells.

I am writing all of this because I do not know how else to get rid of my anger and frustration. I am so pissed off that my Dad will likely lose 1/3rd or more of his life's savings, and the idiot he believed in, and trusted to go into business with, has lost nothing. I am absolutely sick to my stomach, that my father, who worked hard and played it safe his entire life, planning for retirement so that he and my mother could fulfill some of their dreams, has had to suffer through such a painful and embarrassing loss.

29 comments:

Jeremy said...

That's terrible; I don't know you or your family, but that story makes me feel bad anyway.

Sierra Water said...

Wood, that is admirable of you to share this with us. I wish I had a magic bullet to help your dad. When bad things happen to good people it pisses me off. I will run this by my RE partner who is also an amazing RE atty to see if he can think of any recourse.

Broker A said...

Wow.

Thank you for sharing this story.

Your Father sounds like a good, trusting man. The primary mistake he made was going into business with someone who has no scratch (money).

It's one of those fucked up human vices: Greed.

The easy money became too tempting for John. I'm sure, or believe, his actions weren't premeditated-- from the start.

At first, he probably thought it would be dually beneficial for he and your Dad.

However, like most people, when the choice between business and friendship came up, he chose business.

He also chose to skim from your Dad, mainly because he felt "entitled."

I've been in several one sided ventures, despite my young age, and always got screwed.

Unfortunately, your Dad learned a life long lesson, about the price of a Yale diploma, which is: NEVER DO BUSINESS WITH POOR PEOPLE.

Inadvertently, this incredible misfortune may end up making his son (you) a better business man.

He's better off renting the house and keeping it in the Estate. Withing 5 years, the price will recoup.

newequity said...

Wood,
I usually am arrogant and mean but this story brought a tear to my eyes.

People like your father remind me of my Dad. My father died when I was 19 and his best friend still owed him a large amount of money. He trusted this friend and this guy took advantage of my dad.

The sad thing is his 'friend' never came to say goodbye to my dad after my dad was diagnosed with cancer and died shortly after.

Once again, Your father sounds like a good man and you should be proud to have him as a father.

Broker A said...

On a separate note, my brilliant Grandfather (may God rest his soul) and his ingenious brothers once devised a phenomenal "business plan" of their own.

Which consisted of burning the business to the ground, literally, in order to collect the insurance money.

By accident, he left his life long collection of stamps, which he swore were "stolen" by those "fucking firemen."

Sorry Grandpa, but your plan was fucktarded to say the least.

As a result, his closest grandson ("The Fly") has never attempted to burn his business to a cinder. And if he did, no way would his collection of stamps ever fall victim to fire to "thieving Firemen."

Woodshedder said...

Thanks guys.

Some kind words coupled with some good advice.

Woodshedder said...

Yeah, and it would suck to find all those melted paper weights.

Broker A said...

I really must do a story about my Grandfather. Literally, he was the funniest person on the globe, without ever trying.

Interesting Fact: Grandpa carried a 22 revolver in his pocket, until the tender age of 79-- for no reason, whatsoever.

Broker A said...

Updated Note: Grandpa didn't carry the 22 revolver after 79, because he sold it to his doorman-- who was out of his mind crazy.

Woodshedder said...

Hey fucker, is your blog broke, or something?

Broker A said...

Who?

Broker A said...

Say that to me again, and the banjo goes online, if you know what I mean.

Ha!

Jeremy said...

Fly,

Do a story on your grandpa.

mdawsz said...

Wood, that is a sad story. Nothing worse than losing retirement money.

Regarding RE, I have a friend in Michigan who just lost over 40% of his home equity inside one year. He was forced to sell for personal reasons.

Woodshedder said...

Lmao...just messing with you Fly.

I'm just cracking myself up tonight.

Is your blog broke? hehehe har har har

Woodshedder said...

M- I hear it is bad in Michigan. Strange, Michigan? But that is one of the worst hit states, I believe.

Broker A said...

Heharhehar.

You sound like a pig.

Let's see, another Grandpa fact:

Often, he'd swear in Italian (he was Italian). But, he would say the most vile thing ever, no matter where he was or who he was around.

Later on in life, I found out what his "canned phrases" were and they meant: "Your Sisters cunt" and "You piece of shit."

Nice.

Woodshedder said...

According to my grandma (who I'm going to visit in MO on Wednesday)my grandpa, the one referenced in the above post, used to regularly shit himself on the way to the outhouse. Then he would make my grandma wash his shitty clothes.

No shit.

Imagine my grandpa and your grandpa, together, talking shit.

Jeremy said...

Your grandpa enjoyed cursing? I'm shocked!

No, that's funny as hell.

What else?

mdawsz said...

My Grandfather once hurled a shovel load of horse shit into a neighbors window. He was a man of great scruples.

Broker A said...

Mdawz-

That's outrageous.

Onetime my Grandmother's ex boyfriend went to visit her at he apartment in Manhattan.

However, before he could reach the top step, my Grandfather (who was only a boyfriend at the time) kicked him down the flight of steps-- for no reason.

Nice.

Jeremy said...

My Grandfather once got struck by lightning and hit by a Model T in the same month. He was a man of little fortune.

Broker A said...

Wow. Struck by lightening.

People back then were hard. None of this latte, blackberry bullshit.

My Grandfather woke up at 5am to a boiling pot of disgusting black coffee.

His breakfast was a disgusting Grapefruit with toast.

He washed his hands with some black soap, with no cold water. Only hot.

When sun bathing, he didn't use stupid tanning lotion. No way.

He rubbed olive oil on his skin. He made Mozilo's tan look pale, by summer's end.

All natural, of course.

Jeremy said...

That generation really was tough.

Both of my grandfathers had to regularly fight random strangers every single day-- only because people back then loved fighting back then.

From the stories they tell me, there was a daily quota for the number of fights you had to get into. If you didn't battle, say, 10 people in a week, you weren't a real member of society.

Things are totally different now. I don't think that I've actually had to fight anyone besides my brother.

I guess that people just do all of their fighting over the Internet now. But when you look at it that way, I guess that people are still meeting their quotas...

IIO said...

Sad story. Sometimes lessons are painful to learn. Why are you so upset though? Your dad must feel especially bad not that he lost the money but that he disappointed you and his wife.

Danny said...

damn shed how did I miss this post? I am really sorry to have read it, since at first glance I was going to claim it violated the WPP limit.

I am not kidding when I say you should shoot Carl in the knees and leave him on johns front door step.

It is clear from the nice tales that everyone has a sick-ass grandpa, my grandpa beat people up too and had a mustache. He is so sick. People really were a lot cooler back then.

Sorry to hear about the pain that douche caused.

Steve said...

Maybe one of these days, someone will be waiting at the top of the stairwell for Carl.

Anonymous said...

Seems like anyone who works hard and saves for retirement has their share of Carls and Johns. In my case, its all relatives. When I early retired at 50 both brothers, a worthless cousin and two spouses of my wife's cousins couldn't wait to share in my good fortune.

I didn't trust any of them before, sure didn't trust them then. Most of them haven't spoke to me in years. Most I did was manage the in-laws finances so that they will never need to rely on me for a roof over their head and a chicken in the stove.

Bullish Jim said...

Wood- that story sucks. I hope your dad is able to salvage something from this mess.

I'm currently in litigation over an aborted rental property flip gone really bad so I feel a fraction of your dad's pain.