The Find
Chapter 29

Copyright© 2010 by Openbook

By late 2007, we were beginning to see firm evidence of a collapse in the housing market. Prices had been at unsustainable levels, and, despite this, had climbed even higher. This wasn't solely confined to California, but was becoming almost a nationwide phenomenon.

By June of 2008, the whole economy was beginning to look like it was the start of a classic meltdown. Rumors of catastrophic bank failures, and of a possible nationwide economic collapse, were on the news every hour. Sub prime mortgages, credit swaps and toxic assets were all being mentioned as reasons for what was happening.

Foreclosures and defaults were everywhere it seemed. People started walking away from their homes, especially the ones who had only short term variable financing in place. They were finding it impossible to refinance, because they had negative equity in their homes.

The stock market fell by a huge amount, and the values in people's retirement accounts were cut in half in a very short time. The Congress passed some unpopular bank bail out bills, and the Federal Reserve loaned out trillions to the big banks, at zero per cent interest. Many, if not most of the banks, turned right around and purchased Government bonds with the money. If the bonds paid two percent a year, the banks locked in a profit, without incurring any risk.

The taxpayer was paying to make the banks profitable. Very few bank loans were being made. Unemployment just kept increasing. Most people were afraid that we were heading for a new Great Depression.

It was the greatest transfer of wealth in the history of this country. The banks were 'too big to fail'. Instead of letting the banks fail, with the bank stockholder's losing all their investment, the government created trillions of dollars of new taxpayer debt in order to rescue a few insolvent banks. The banks had made unprofitable gambles with their money, and now claimed they needed government help to continue to stay in business.

The government took over Fannie Mae and Freddie Mac, the two mortgage lending entities that financed most of the nation's mortgages.

The government also bailed out AIG, a large insurer, General Motors and Chrysler, as well as lending money to other large corporations such as GE.

By the time things started getting back to close to normal, the national debt had more than doubled, with Quantitative Easing programs, I, II & III. Bank interest rate on personal savings were well below one half of one per cent. Retired people, who counted on the interest earned by their lifetime savings, were being forced to bear the brunt of the immediate bail out costs.

By 2009, I was no longer worried about giving away my coin collection. Instead, I was worrying about how long I would have to keep providing financial help to many of my family members. All the children had run through the tax free million that they'd been given.

Jake, in particular, had needed our financial help. In 2007, Jake had used all of his million in the trust to purchase ownership of the home building company he'd worked at since leaving my employ. Unfortunately, the company failed three months after the purchase, leaving Jake stuck with huge debts, and several law suit judgments against him.

When Sonia went to him, a few months after this happened, to offer him our support, I think he was surprised that we'd be willing to offer any. He and I had spoken very little since our big blow up, and that little had been when we found ourselves seated at the same table for either some Holiday dinners or other family celebrations, like for Frank's wedding in 2006.

I had been the most surprised at Zinat blowing through her money so quickly. She and Ernesto had gone a bit crazy when I had first turned her money over to her. The two were soft touches whenever any of Ernesto's family came by asking for a loan. They bought a bigger house, two new cars, and then started taking long family vacations. Long before the economy headed South, Ernesto and Zinat were out of funds, and loaded up with household debt.

Eric and his family had similar stories, except Eric hadn't loaned out any of his money to relatives. Instead, he spent every penny on himself and Helen, his wife. New cars, a boat for Eric, jewelry for Helen, as well as a series of not very well thought out investments in fly by night propositions. By 2007, Eric and his wife were facing a money crunch too.

Buzz was in a little better shape than either Eric or Zinat. He'd run through less than half of his money, until Eric and Zinat had borrowed most of the rest from him. By the time he began telling them no, Buzz only had about $200,000.00 left. He told everyone that he was saving the rest of his money to buy a house, as soon as the real estate market finally started to pick up again.

Frank had already gone through the bulk of his money, by the time he got married in 2006. The down payment on his new house, and a new car for Trisha, his bride, pretty much ate up the rest of it.

Even my sister, Nancy, ended up in need of some financial help. She hadn't gotten anything from me, but both her and Kevin had each gotten a third of the money from my parent's estate. Kevin was in good shape, but Nancy and John had run through the estate money, and had taken out a new mortgage when they refinanced their house during the housing price boom back in 2007.

I wasn't clear on what they did with all the money they borrowed on their house, but I still had them coming to me every six months or so, wanting to borrow anywhere from three to five thousand dollars at a time. John had retired in 2005, and Nancy had just started collecting her Social Security in 2007, when she turned sixty five.

Dorothy's parents were both dead, but her brothers and sisters were very much alive. The two older sisters now owned the dry cleaners, and still seemed to be doing fine on their own with it. The three brothers were a different story.

After their rich uncle had died, all three men were left to their own devices. They hadn't fared very well, mostly still working in the dry cleaning business, but no longer propped up by their uncle. Their pay had been lowered by the new owners, and their jobs became more demanding, as they were now being held accountable for the output from their efforts.

Dorothy and I were always getting phone calls from our three children, asking for financial help. Sonia got calls from Frank, not necessarily asking for help, but letting her know that he was having money troubles.

We ended up giving Jake almost another million dollars, to get everything with his failed business settled.

As soon as the others found out about how much help we'd given Jake, they felt entitled to getting bailed out as well. I sat each one down and tried to explain why it was different for Jake. He was a victim of the economic uncertainty of the times, while the other three of them had simply pissed their own money away.

I didn't include Buzz in this, because his problem had been being unable, or unwilling, to say no to his siblings, back when they both first came around clamoring for some of his money.

Eric, Zinat, Frank and Nancy all had their houses foreclosed on. Each of them, with the exception of Frank, owed far more than their houses were worth. Frank's house was worth right about what he still owed on it, but housing prices hadn't yet fallen as much as everyone thought they would.

I helped all of them find rental units to live in. Nancy and John almost refused my help, being very angry that I hadn't stepped in, yet again, and rescued them from foreclosure. I probably would have done that, but I was still upset with them for taking out a half million dollar mortgage on the house I'd sold to them, for less than market value, and then financed for them.

Zinat and Ernesto, along with their two adult children, had moved into our house for awhile. They were the first to lose their home. I waited until Ernesto had found a new job for himself before renting a three bedroom house for them, over in Tustin. Dorothy wrote out some checks to pay off all their credit card debt, then told them to stop borrowing money they couldn't pay back, and, to stop loaning to, or borrowing from, their relatives.

I helped Eric move into his new apartment with Helen, his wife. Every time I'd loaned him money, he'd spent it, without doing anything to reduce the debts he owed. I finally reached a point where I advised him to file for bankruptcy, refusing to give him any more of my money to waste.

Except for Buzz, none of the rest of our children were working. Ernesto had his new mechanic's job, and John and Kevin were both old and retired, like me. I didn't understand what was preventing Jake, Eric and Frank from going out, getting jobs, and supporting themselves.

In 2009, when housing was still a glut on the market, the three boys came to me, wanting me to finance them in a business where they would buy up cheap foreclosures, do any re-hab work they needed, then rent them out, until the market finally turned around again.

This wasn't a bad plan, but it was certainly premature for them to attempt it, while the housing market was still so weak. I was happy that Jake had brought himself and the boys to talk to me, but knew his timing was a bit off. The time to do what he was planning, would be after prices had stabilized.

Median Orange County home prices in June of 2009, were still around $535,000.00. I believed prices might go down another $100,000.00. For all the President's talk about things getting better in the country, what I mostly was seeing was new low paying entry level jobs replacing the higher paying service and financial services jobs.

People were less worried about the economic collapse of the country, but, on a personal level, I was hearing more and more about working families having a harder time putting food on their tables. Prices for meat and basic foodstuffs had definitely increased, and almost no one I heard from had gotten any pay raises to make up for any of these higher living costs.

I definitely would have held off from investing in real estate, if I hadn't gotten a phone call from Daniel Kaplan, within days of the boys coming to me with their business idea.

"Jim, its Dan Kaplan. Have you got a minute for me to pick your brain?"

"I doubt if I even have enough brain left, that it would take you a whole minute to pick it, but go ahead, Daniel."

"I've got a client who wants to buy a company that is currently in receivership. One of this company's subsidiary's has over sixty repossessed houses, all in fairly rough shape. My client needs to get an idea about what they might be worth, at a distress sale auction. I told them that I might be able to get you to take a look at them, and then advise us about what they could reasonably expect for them. We're willing to pay you a reasonable consulting fee for doing it, and I'd personally appreciate it if you would help me with this."

Of course, I agreed to take a look at these houses, but, from what Daniel had told me, I wasn't expecting much. The current property owner's hadn't taken any steps to safeguard their investments. The homes had been sitting vacant for anywhere between eighteen and thirty two months. Daniel knew that some of them had been vandalized and cannibalized, with thefts of some of the wiring, appliances and windows.

There were sixty-seven houses, but only about twenty of them could be easily fixed up to be habitable. A lot of the others could be brought into rentable condition again, but it wouldn't be inexpensive for someone to do it. There were about fifteen houses that should be bulldozed over, where the only thing of value was the land the house was sitting on.

It took me about three weeks to see all the properties, and to write up a detailed analysis of what each property would need. The houses were spread out over a twenty mile radius too, so it would be difficult to provide security for them as long as they were empty.

After I gave Daniel my assessment of what I thought the houses might bring, as is, he didn't seem disappointed with my figure. Daniel paid for our lunch, and I told him we'd call it square for the time I'd spent. I was seventy two years old, and Daniel had to have been at least eighty five, if not ninety. He looked older than his father had looked to me, right before he passed away.

It was over two months later when I heard from Daniel again. He called to invite me to have lunch with him again at the deli his father had taken me to more than thirty years before.

"Jim, how would you like to get those sixty seven properties for half of what you estimated their value to be?"

"I'd have to say I'd like it, if I was still active in the business, but why would anyone want to let them go for so little?"

"They have what they wanted, and they don't want to spend their time or energy shopping those properties around. They said they'd sell them to you for 6.5 million. They just want them off their books. They don't want the liability, if something happens at one of those houses, like a fire."

"I'm retired, Daniel. What the hell would I do with them?"

"There has to be a price point where you'd agree to make this deal, Jim. Make me a low ball offer. Give me something that I can take back to them."

My mind was racing. I knew, at these prices, I would have everything I needed to set the boys up in a profitable situation. With this much inventory, we could afford to fix them up, rent them out, and wait for the housing market to come back. It had already been showing some signs of life these past few months.

I laughed, and told Daniel I'd offer five million for the houses, but would be hoping my offer got refused. I was surprised when he stuck out his hand, telling me that we had a deal. That was when I learned that Daniel was the managing partner for the syndicate that made the acquisition of that company that had been in bankruptcy.

 
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