Larry Timkens had just pulled into a roadside diner for lunch. The restaurant, about 25 miles away from his office, was not one of his normal eateries. He really wasn’t hungry; he was in a daze. Things had unfolded so quickly. His mobile phone had been ringing all morning, but Larry didn’t want to talk to anyone. He needed time to think—to think of a miracle.
The way things had been going lately, Larry was screening all of his calls and was selective about answering, returning few if any. That Tuesday was the pivot point of a fateful turn for Larry and his luxury home company. He mistakenly thought that ignoring the calls would buy him time … or maybe a miracle. It didn’t.
Larry owed money to at least 22 subs and suppliers. His biggest fear was the money he owed to the IRS. Some debts originated as far back as 18 months. Those were to vendors who had stepped forward to take legal action. Several of the attorneys representing those plaintiffs suspected that there were probably quite a few more who had not yet surfaced. The attorneys had experienced this situation before: People or businesses who are owed money, but cannot or will not pursue legal action against the debtor.
Over the last four years income had skyrocketed for Larry’s company, LT Custom Homes & Development. But the company had a historical disconnect between earning large sums of money and the responsibility that goes with it. Larry had not followed a traditional path into the custom home building business, where survival depends on adhering to high standards, where challenges teach business acumen, and where hardships generate character. The journey along that professional learning curve typically breeds business courtesy, value, and customer service. It also teaches respect for fluctuations in the marketplace.
Larry was a former construction laborer who had ascended the enterprise ladder and opened his own plumbing business. He was a successful tradesman who operated a reliable and quality-oriented business. His company had a long list of repeat contractor and remodeler clients who relied on his services, expertise, and pride.
At the turn of the decade, it appeared to Larry that many of his contractor clients were enjoying a financial boom. They seemed to be making truckloads of cash in real estate speculation, development, and construction. The formula looked easy: Any halfway decent lot or home placed on the market sold for seemingly more than it was worth. Real estate values were booming, and demand for housing was at an all-time high. There was a money machine to be tapped by buying subdivision lots and on select properties, building and re-selling semi-custom homes.
Larry decided he could ride this wave of prosperity as well as the builders for whom he worked. Hard work, sweat equity, and ambition had gotten him to where he was. Now it was time to take the next step and become a general contractor. How hard could it be? He’d been on the sidelines long enough. Now it was his turn to jump into the luxury home marketplace.
Easy Money. His plan was simple: Buy low, sell high, with little or no money down. The current loan standards made buyer qualifications easy. Financing was available on every street corner. Mortgage companies had sprung up out of thin air. Larry would find a new development, select several lots, and contract to have model homes built. He would sign the paperwork with a pittance of a down payment, wait a short time, and then sell the home at the current market price. Prices were escalating like crazy. Demand was at an all-time high. Buyers were nearly in a frenzy over some properties. With $30,000 a buyer could tie up $2 million worth of real estate and not have to make any payments until the home was completed! Is this a great country or what?
Larry’s first deal involved three garden homes in an upper-end development. The purchase prices varied slightly based on lot premiums and detailing, but the homes averaged $435,000 apiece. The developer required $5,000 down for each purchase. The homes could not even be started for another three months and would then require an additional eight months for construction. During the interim, the buyer had to qualify for, and lock into, a mortgage for each property. As it turned out, this purchase was Larry’s trifecta. He flipped all three homes before construction had been completed, netting an average of $141,000 over and above his purchase price for each house. Not bad for about 20 cumulative hours of his time and $15,000 in cash.
Larry used that $423,000 to purchase and tie up other properties. Before long he had accumulated another $755,000 in gains. Again, he reinvested that amount. Several months went by. And then … the music stopped.
