December 5, 2010

How to Lose Ten Million Dollars by Investing in Real Estate

You know how to make a small fortune in real estate, right?  Start with a large fortune. 

This is a story of someone with a decent fortune who managed to lose it all, by buying can’t-lose inflation-proof real estate.  Let’s see how well that went.  Thanks to Burbed reader nomadic for sharing this modern morality play.

Family’s Fall From Affluence Is Swift and Hard

By GERALDINE FABRIKANT
Published: November 25, 2010

WAMEGO, Kan. — Grateful to have found work in this tough economy, Nick Martin teaches grape growing and winemaking each Saturday to a class of seven students in a simple metal building here at a satellite campus of Highland Community College.  (photo, right)

Then he drives 14 miles in an 11-year-old Ford Explorer to a sparsely furnished tract house that he rents for $900 a month on a dead-end street in McFarland, a smaller town. Just across the backyard is a shed that a neighbor uses to make cartridges for shooting the prairie dogs that infest the adjacent fields.  (photo, below)

It is a far cry from the life that Mr. Martin and his family enjoyed until recently at their Adirondacks waterfront camp at Tupper Lake, N.Y. Their garage held three stylish cars, including a yellow Aston Martin; they owned three horses, one that cost $173,000; and Mr. Martin treated his wife, Kate, to a birthday weekend at the Waldorf-Astoria, with dinner at the “21” Club and a $7,000 mink coat.

That luxurious world was fueled by a check Mr. Martin received in 1998 for $14 million, his share of the $600 million sale of Martin Media, an outdoor advertising business begun by his father in California in the 1950s. After taxes, he kept about $10 million.

Photos: Steve Hebert, New York Times

In some ways, this story is similar to many sympathetic treatments of less wealthy people losing their homes due to not understanding the basics of finance.  If you owe more than you own, you’re not moving in the right direction.  And if you sign papers you don’t understand, you’re setting yourself up for a world of hurt.

What’s amazing is how Nick Martin still seems to think what happened to him is somehow somebody else’s fault, maybe multiple somebody elses.  Unlike the numerous victims of manufactured documents and hard-sell subprime Pay Option ARMs, Martin seems to have sought out what became his undoing.

I do recommend you read the article, but here’s the shorter Nick Martin: He bought a bunch of crap he couldn’t afford, so now he’s broke.  That’s a fairly common story, it’s just most of them don’t start with getting a phone call asking where you want your $14 million deposited.

Please share your advice for Nick Martin, or for anyone about to enter the exciting world of buying and selling real estate.  How would he have fared if he’d bought in the Real Bay Area instead? 

Comments (17) -- Posted by: madhaus @ 5:09 am

17 Responses to “How to Lose Ten Million Dollars by Investing in Real Estate”

  1. SEA Says:

    After reading this over, I’m surprise to find that he started with $10M and only lost about $10M, and not $100M in Other People’s Money. It sounds like the wave crested over when, “Mr. Martin faced a series of margin calls. He needed more cash in his brokerage accounts because he had been tapping into a credit line with his investments as collateral.”

    I was a bit surprised, however, about his age and family situation. First was the bit about his age:

    “While many millions of Americans have suffered through this recession with only unemployment benefits to sustain them, Mr. Martin has reason to give thanks — he has landed a job at 59, however far away. He also had assets to sell to help tide his family over.”

    And then his family situation:

    “We spent too much,” he conceded. “I have a fourth grader, an eighth grader and a girl who just finished high school. I should have kept working and put the money in bonds.”

    “Mr. Martin, who moved to Kansas last April, brought the couple’s 13-year-old son, Edward, to join him in the fall. He has been counting the days until his wife and Sophia, 9, come permanently. The older daughter, Mrs. Martin’s from a previous marriage, has found work in Florida after finishing high school.”

    He’s 59 years old with a 9 year old daughter, 13 year old son, and the oldest girl is about 18 years old.

    “Though he faulted the conventional wisdom of investing in stocks and real estate for some of his woes, along with poor financial advice, he accepted much of the blame himself.”

    Obviously he didn’t understand that conventional wisdom suggests only buy what can be sold in the RBA.

    Note that he still does not understand the power of the RBA. Anyone who actually understands the RBA would never move to Kansas, the heart of flyover land.

  2. waiting_for_the_fall Says:

    The same thing happens to some people who win the lottery. They end up worse off than before getting the money.

  3. Real Estater Says:

    I don’t agree expenses is what killed this person’s fortune. A few cars and hotel stays are just drops in the bucket in the overall scheme of things. The real estate he bought are not the primary factor either, as those properties are in the $600K range. You can barely get a modest home in Santa Clara county for that.

    What killed him are 2 things:
    1) The drop in stock assets.
    2) Over-spending on constructing something that doesn’t yield a return.

    If he is renting out his various properties, even if prices dropped, it doesn’t affect cash flow.

    Getting that job is useless. Instead of wasting his time on a low paying job, his time would be better spent on managing his investments. 10 years is a long time for a train wreck to happen. He should’ve seen it coming, and reacted long before things went out of control.

  4. SEA Says:

    Of course his cash flow isn’t affected by the economic conditions, he only rented to RBA owners.

  5. madhaus Says:

    What killed him was spending his principal on pipe dreams. His idea of building a huge family compound that ended up costing $5.3 million, when his windfall was ten, defies belief. This isn’t some loser who grew up among financial illiterates like the lottery blowers. He grew up amidst at least two family businesses and should have known a lot better. His not being involved in running the billboard biz might have been for a good reason. An Aston-Martin here and an Arabian there, when he blew half his principal on construction, did indeed sink him… as did borrowing against a stock portfolio.

  6. SEA Says:

    “His idea of building a huge family compound that ended up costing $5.3 million, when his windfall was ten, defies belief.”

    We all know that low income is of no consequence when considering home ownership (excluding insurance), but does the ratio of real estate assets to total assets have any significance?

    If we assume total assets of $10M (capital preservation), $5.3M is 53%, but since total assets were going down, toward the end, that $5.3M was nearly 100% of his total assets, and after being marked to market, the $5.3M was suddenly cut in half, but still near 100% of total assets.

    Excluding the RBA, is it smart to have 53% of your total assets in one piece of real estate?

    Did he think that he was buying in the RBA?

  7. Real Estater Says:

    The more real estate the better, but definitely not on one piece of real estate.

  8. nomadic Says:

    The bottom line is if he bought RBA real estate he’d be worth over $20M today… ;-)

  9. SEA Says:

    Wonder what kind of education those three kids are going to get?

    My guess is an excellent one, and here is my reasoning:

    He cut the asking price in about half, probably in hopes to get enough over-bidding to pay for their education.

  10. madhaus Says:

    He cut the asking price in about half, probably in hopes to get enough over-bidding to pay for their education.

    Too bad the only offer he got was for half his already halved asking price.

    As for the kids’ education, the oldest girl has a job in Florida now that she finished high school, and it didn’t say anything about going to college.

    I sure hope the family business set up a trust for those kids, because otherwise due to their parents’ brilliant investment decisions, their future doesn’t look too bright.

  11. SEA Says:

    Maybe the daughter makes more than the father?

  12. A. Lewis Says:

    TFA is annoying because it leaves out the key details. Your average person can understand this guy lost some money in the stock market crash – but why exactly does that make him broke? They mention margin calls – the fool had a leveraged portfolio, then. They could talk about the dangers of that kind of risky investing. They could get more specific on the costs of the two properties’ upkeep – and why can’t he sell them, and all his remaining investments for some fraction of the $10M? Why can’t he rent them? Is the price/rent ratio too high? Talk about that and be informative to prospective home buyers. Is he or is he not bankrupt?

    There are answers to these questions, but the NYT doesn’t delve very deep…

  13. madhaus Says:

    #12, I got the impression that he was underwater on both properties (guess they sold the house in England). There was something about $1.1M of mortgages. He also had to cash in the retirement account to meet the margin calls.

    What’s TFA?

    So you didn’t get that he was leveraged on both his property and his stock portfolio and the drops in both the stock and real estate markets wiped him out? And the reason he was leveraged was all the toys he bought?

    Basically this guy inherited ten million after taxes and thought to himself, you know what would be cool? A billion dollars!

  14. nomadic Says:

    A., is it necessary for the NYT to make this guy into a textbook example used to educate their readers? How many in their readership could expect a substantial (multi-million dollar) windfall? And of those, how many are so naive about money?

    On second thought, don’t answer the last question. ;-)

  15. kristy Says:

    Actually what truly broke them was a greedy builder who took them for everything – and even redid his own house on the supplies. Everytime the Martins turned around, they were charged enormous amounts for building materials and some things were done and redone several times. It is impossible to truly know where your money goes when you are building or remodeling from a distance.

  16. Ria Wise Says:

    It’s always unfortunate when a family falls down on their original post. But like past stories, we should look at what happened to them, and let it serve as a reminder on how to better manage our money.

  17. Real Estater Says:

    On Aston Martins, I can’t fault the guy for wanting one. It doesn’t have to cost an arm and a leg. There are low mileage examples out there for under 6 figures. If I had the garage space, I’d consider getting one.


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