Wednesday, July 16, 2008

House Flipping In The Real World--Part 3-Fast Freddy

(This blog is turning into another mini-series, this one on the joys(?) and perils of real estate investing. I repeat, that anyone can make money at real estate BUT it is not painless and not easy. To go to the beginning, scroll down.)

Went to the closing, signed a bunch of forms, and wrote very large checks to the realtor and for last years taxes. But told myself I had followed the rules--fixed the house, interviewed realtors, put the house on the market, found a qualified(?) buyer, and paid a bunch of money at closing. And was helping a young couple get a start in life. As a friend put it, let no good deed go unpunished.

But I was feeling pretty good about myself and sat back and waited for that first payment...and waited. One problem surfaced immediately--Freddy and Celia didn't have a phone, or at least not one they told me about. Called the realtor. He would try Freddy's dad. Gave me the number as well and the number for Celia's parents. Called both and got Spanish only speakers or so they said. (Phone tricks are something I've dealt with for years. I was in international finance and we had a controller in Brazil that often got phone problems when asked difficult questions. It was only after we had become friends that he admitted to crumbling typing paper next to the phone when things got too hot for him. Try it, it sounds exactly like a cell phone breaking up.) Celia finally called and said could I come by and they would have the money for the first payment. Didn't like it but ok.

This happened a couple of times and finally said, no more nice guy, mail the money order. Worked a couple of times, then more phone calls, then nothing, then a summons from the city to clean up the backyard. Called the city, said I didn't own the property but, just out of curiousity, what was in the backyard? A junkyard, the city said. Oh, great.

Then payments on schedule for a couple of months and then nothing. I started to dread the first of the month--would they or wouldn't they? Called the realtor and he called around and found out that Freddy was having cash flow problems because Freddy was in jail. Wonderful. Seems Freddy was having a mid-life crisis early, brought down by the burden of the wive and two kids. Fooling around with some buddies he got busted for something and discovered it's hard to paint houses when you are locked up.

By now about a year has gone by and I'm getting a little curious about whether they had paid property taxes. Stupid me, of course not. And they were in arrears and incurring late charges of about $100 a month. Note: The city is not a friendly creditor, don't get late on your tax payments.

I hit the ceiling and then cooled off and then did the smart thing--I abdicated. Called a lawyer I knew casually, how much to foreclose? $400 plus fees of around $100. Go for it. He said the process would take about three months. What? That's the way it goes. Ok, get cutting.

And I thought of Bill Smithburg. Smithburg was chairman and CEO of the Quaker Oats Company when I worked there early in my career. Bill was a hero for having the 'vision' to buy Gatorade and turn it into a powerhouse. A few years later he was vilified and canned for buying a tea company that I can't even remember the name of right now.

I remember Bill for sending out a memo to finance saying, roughly, don't bring me small projects or acquisitions. Bill figured out that you spend the same amount of time on a little project as a big project, sometimes more. I finally figured out that Freddy and Celia were a small problem that was taking up way too much management time and effort so I flipped it to the lawyer and said, call me when this mess is over.

Sound cruel? Perhaps. But I would soon find out that Freddy was really a nasty little person.

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