Housing demand slowed. Production decreased to a level that exceeded demand while housing inventory swelled. Interest rates jumped to curb inflation. This high-riding speculator was now about to ride the roller coaster down into a financial trough, which even now has not reached bottom.
Larry and his wife were the proud owners of $3.6 million in new real estate. Their portfolio included new subdivision lots, new homes, and two spec homes that his company had signed contracts to build, but as yet had not broken ground on. Those buyers were part of the assembly suing LT Custom Homes in hopes of retrieving their substantial down payments. Worse yet, LT had leveraged the lots they had sold to the two home buyers to other speculators. This was to satisfy the construction loans, mortgage payments, and financing fees that were currently due on its other speculative properties.
One of the direct ironies in the situation of the two home buyers was the size of down payments that LT Custom Homes required. This payment was necessary in order for Larry to buy and secure the land, pay for the design, and fund the initial construction costs. LT had required those buyers to consummate their purchase with a 30% cash down payment. Does that old saying, “What’s good for the goose … ” come to mind?
History Lesson. Now Larry faced his personal Armageddon. The IRS placed liens on his assets and implemented seizures. His savings, credit cards, and even a substantial portion of his 401K were appropriated. LT was behind on 941 withholdings. Employees had been issued rubber checks for the past three weeks. No tax had been paid on the gross real estate earnings because at the time of the final investments, the taxes were not quite due. He had been working on the assumption that the tax situation would be resolved with some 1031 real estate exchanges. This erroneous tax advice was only one of many failed structural supports in Larry’s financial house of cards.
Larry lost everything: his house, cars, the business assets, and all of the real estate. His corporate “shield” was easily plundered and then pillaged by the IRS. The government had first claim on any and all assets. The army of attorneys representing creditors was essentially left out of the game. Larry filed bankruptcy and the pittance of assets that remained was distributed as directed by the court.
All of these troubles were caused by greed, opportunity, and availability of easy credit. The sad part about this story is twofold: One, this same story has happened repeatedly all over the country. Two, history repeats itself. These same circumstances were happening again in 2007, although this specific story occurred in the early ’90s—another version of the Savings & Loan “easy financing and equity funding” disaster.
Dennis A. Dixon is an author, contractor, and speaker with 23 years of experience in the building industry. He can be reached at dixven@aol.com.
