December 11, 2010

How to Lose All Your Money in Investment Property

Last week we covered the sad tale of Nick Martin, who lost ten million dollars on real estate and high-style living.  This story is very different.

San Diego House Is Burned Down, for Safety’s Sake

Published: December 9, 2010, New York Times

The authorities in San Diego County burned down a house filled with explosives on Thursday after determining that removal of the volatile clutter of chemicals, detonators and grenades would be too dangerous.

Officials discovered the hazardous house in Escondido last month after a gardener stepped on a homemade bomb in the yard. When county sheriffs and F.B.I. agents tried to enter, they found so many explosive materials lying about, in containers and loose piles, that they abandoned their search.

Later, a bomb squad collected samples including PETN, which was used in 2001 when a man on an airplane tried to ignite a bomb in his shoe, and HMBT, which can explode when stepped on.

The house was rented by George D. Jakubec, 54, an unemployed software consultant. He has pleaded not guilty to federal charges of making explosives and robbing three banks with firearms. Prosecutors have declined to say why they think Mr. Jakubec assembled the jumbled arsenal, saying on Thursday that “the investigation is ongoing.”

Photos by Sandy Huffaker

But the most important quote above wasn’t in the early part of the story.  It was the caption under the photo at left:

Officials did not plan to compensate the owner of the house for the loss.

That’s amazing, isn’t it?  You save up your money to buy an investment property, you rent it out to some unemployed software consultant who turns the place into a terrorist bomb factory, then the Feds decide it’s too dangerous to clean the explosives out so the local Sheriff sets fire to the place.

This article goes into all the ways Jakubec’s landlady is seriously screwed.  While governments have to compensate owners when their property is seized via eminent domain, police action is a different issue.  And forget about homeowner insurance (unemployed software consultant bomb factory riders notwithstanding); governmental action isn’t covered.

The county’s declaration gives officials authority to destroy private property in the interest of public health and safety —- without compensating the owner, [county spokesman Michael] Workman said.

Did you remember to buy unemployed software consultant bomb factory insurance on your rental property?  I suggest you take care of that because there are a lot of unemployed software consultants in the Real Bay Area.  Some of them might have lost their own homes. While most will rob a few banks to get even, a few may not feel too kindly towards blood-sucking landlords and will blow up the gardener as proof of concept.

Here’s the house.  It was bought five and a half years ago for $479K, with a $383,200 first mortgage and a $85,800 second mortgage, both variable.  98% financing, sounds about right for Southern California.  The following year the house was refinanced for a $436,000 fixed first and a $54,500 fixed second, which means another $20,000 borrowed.

Now the owner is going to find out that a zero down purchase means infinite loss.

image

The owner also has the house as her address of record for property taxes, despite currently residing in Oakland.  And she isn’t talking to the press.  The Los Angeles Times reports that Jakubec has lived at the house for three years.  This is great, not only will she lose the house while still owing on two mortgages, she’s going to lose her $7,000 homeowners exemption.

image

Zillow seems to have some trouble with their home estimate algorithm; look at the wild swings between three and five hundred thousand over the last two years.  If we can believe that the house’s value is up again, it’s not worth much more ($496,000) than the owner “paid” for it in 2005.  However, nearby recent sales show values in the $300,000 range; exurban San Diego prices were hit hard when the real estate bubble collapsed.  Looks like this underwater property will be done in by fire.

Now, the value is all in the 3/4 acre of land.  And while Jakubec wants to apologize to all the neighbors for the difficulties, there’s no word what he has to say to the person who owned the house.  Since he is under arrest in lieu of $5 million bail, and currently charged with 28 felonies, including possession and manufacturing of destructive devices as well as bank robbery, it may be a while before he has to disclose this incident to a future landlord.

Comments (44) -- Posted by: madhaus @ 5:04 am

44 Responses to “How to Lose All Your Money in Investment Property”

  1. Real Estater Says:

    I saw it coming. Madhaus worked all night to create an article dissing investment properties after finding out last night that her dream of moving to 94306 became another person’s investment reality.

  2. Pralay Says:

    her dream of moving to 94306 became another person’s investment reality.
    —-

    How do you know it is a dream? The last news I know she also bought investment property in 94306. In fact she bought five investment properties in 94306. See, realty and reality are better than dream.

  3. Real Estater Says:

    Pralay,

    How do you about her dream so much? :-)

  4. Pralay Says:

    Didn’t I “tell” you it is “news”? Comprehension problem, again?

  5. waiting_for_the_fall Says:

    Isn’t it fraud to claim a tax excemption when you’re not really living in an investment home?

  6. Real Estater Says:

    Pralay,

    Don’t get so agitated. Just asking on behalf of your wife.

  7. Real Estater Says:

    >>Isn’t it fraud to claim a tax excemption when you’re not really living in an investment home?

    There is no such thing as a tax excemption.

  8. SEA Says:

    If I wanted to learn about tax evasion, I’d definitely take that advice to collect rent and not report the income. Now who was it that suggested this great strategy?

  9. Pralay Says:

    Just asking on behalf of your wife.
    —-

    Damn! You failed that too. You couldn’t even ask with a proper English sentence. :(

  10. Pralay Says:

    Now who was it that suggested this great strategy?
    —-

    That’s the perfect example of “2 investment homes”. Let’s assume you bought a property in Tracy and renting one to Bovine family and another to Ovis family. Do you think IRS will ever be able to find it out? Never.

  11. SEA Says:

    Was the low point in interest rates about a year ago or more recently.

    Possibly he’s recently been discussing his so-called low-rate refinance that happened about a year ago?

  12. Pralay Says:

    Of course he was talking about his primary home. When he said “caught the low with my refinance”, do you think he “knew” he had two investment properties?

  13. Real Estater Says:

    >>Was the low point in interest rates about a year ago or more recently.

    You can stop guessing. Like most homeowners, I have done multiple refinances. As I’ve stated before, the cost of owning has been going down.

  14. SEA Says:

    Maybe one should refinance at a lower rate, and pay less in interest, and then claim the old interest rate? We all know you don’t want to give up any tax advantage, and actually having income? CRAZY!

  15. Real Estater Says:

    For those who caught the refinancing wave, it’s inevitable the low will be caught, since you can keep doing it as long as you find a lower rate.

  16. SEA Says:

    “since you can keep doing it as long as you find a lower rate.”

    And the end is now?

  17. madhaus Says:

    Statement #15 is a tautology. It states, essentially, for every case X there exists case X. By definition, those who refinanced low got to refinance low.

    However, “low” is undefined. Since refinancing has costs, which can be paid up front or incorporated into a higher interest rate, many will miss the absolute lowest rate, as the cost is higher than the savings.

    Refinancing is not an option to most who bought near or after the bubble peak, unless they had a hefty down payment. Lending standards have tightened, in a classic case of shutting the barn door after the stampede.

    As you know, I am “here to help.”

  18. Real Estater Says:

    Depending on timing, one should be somewhere in the low to mid 4% range for a 30 year fixed no-point no-fee refinance.

  19. Real Estater Says:

    Madhaus,

    Lending standards have tightened, but most RBA homeowners shouldn’t have an issue, because the competitive process already pre-qualified them to live in the RBA. You keep talking about the bubble peak, but the vast majority of people who own homes today did not buy right at or near the peak.

  20. SEA Says:

    “Since refinancing has costs, which can be paid up front or incorporated into a higher interest rate, many will miss the absolute lowest rate, as the cost is higher than the savings.”

    We all know that when someone refinances at a lower rate, there are no costs–just ask the person who claims “no-point no-fee refinance.”

    And besides, what owner knows how to compute Present Value?

  21. madhaus Says:

    Now let’s discuss all the crazy sh*t renters can do to rental property. Anyone see Pacific Heights? Too bad they didn’t anticipate the terrorist bomb factory.

    I guess I’m lucky; worst thing that happened to me was a bounced check. My tenant brought in a roommate who was a bit of a princess / liar type. The one time the roommate paid the rent, bouncy bouncy. I did collect on it, plus interest and fees, and told them the roommate’s checks were no longer acceptable payment.

    And in the interests of fairness, landlord excesses welcome too.

  22. madhaus Says:

    Shorter #19: If it didn’t hurt me, so what?

  23. nomadic Says:

    Too bad the software consultant was too passive in his job search and put all of his energies into bomb building instead.

    .
    madhaus, I’d disagree that the landlord has an “infinite” loss. She can walk away now and let the bank take the loss. She’s only out her payments over the last 5-1/2 years minus the $20k in equity she sucked out. I hope the city goes for the icing on the cake relating to the $7k exemption.

  24. Real Estater Says:

    >>We all know that when someone refinances at a lower rate, there are no costs–just ask the person who claims “no-point no-fee refinance.”

    Go do some elementary homework. The rate table shows different rates depending on whether you pay points or fees. The rate I’m talking about is where points and fees are already built into the rate.

  25. SEA Says:

    That infinite loss is rooted in ROE. You know the game, one puts very near zero down, but lost $$$$$, in a rather short time.

    It’s supposed to go the other way, where that same person puts very near zero down, and makes $$$$$$$$$, in a shorter period of time.

  26. SEA Says:

    Real Estater- “The rate I’m talking about is where points and fees are already built into the rate.”

    Yes, and as madhaus pointed out, that’s not the lowest possible rate.

  27. madhaus Says:

    #23, not so! He managed to pull off three bank robberies as well! Now that’s initiative!

  28. Real Estater Says:

    Would someone intelligent please help SEA with his comprehension issues?

  29. nomadic Says:

    #25, good point. I wasn’t thinking in terms of ROE.

  30. SEA Says:

    We all know those loan originators all love to work for free lending money away at ‘low’ rates.

  31. anon Says:

    That’s correct, SEA. Remember:

    Bankers are just helping people afford homes out of the goodness of their hearts.

    Further, realtors just want to help buyers find a home that the buyers can enjoy. They don’t care whether or not they extract a commission.

    And, most importantly, buyers just want a home that they can enjoy and live in.

  32. Real Estater Says:

    SEA,

    Where did I say it’s free? I already told you the fees are built into the rate I quoted. You’re nothing but a troll wasting people’s time.

  33. SEA Says:

    So it’s not really a low rate?

  34. Real Estater Says:

    A rate in the low 4′s without points or fees is a historically low rate. WTF don’t you get?

  35. anon Says:

    people with no money take loans that build the points and fees into the interest rate.

  36. Real Estater Says:

    People with no money can’t get a loan, and rent.

  37. SEA Says:

    What’s the lowest possible rate?

  38. SEA Says:

    #36- This is great… So often it’s been said, “It’s cheaper to buy than rent.” Yet if one has little to no money, then it’d seem like such person would seek the cheapest possible product: buying.

    At the same time, if you actually have money, then it seems like you should have more options, choices: rent or buy.

    Yet according to your claim, “no money => rent,” those with no money always rent, which is the most expensive option.

    I would have expected it to work the other way around. Since renting is more expensive than buying, people with money rent.

  39. nomadic Says:

    C’mon SEA, everyone knows it takes money to make money. ;-)

  40. SEA Says:

    How much do landlords make renting to people with no money?

    Oh, that’s right, landlords are supposed to be “cash flow neutral.” And don’t forget that no income means no income taxes are due.

  41. anon Says:

    #38 looks like sound logic.

  42. anon Says:

    “People with no money can’t get a loan, and rent.”

    Wrong. People with no money need to borrow money in order to buy.

  43. sonarrat Says:

    SEA: People with no money also have to rely on credit card interest rates or even payday lenders to manage their cash flow. That’s more expensive for everything than paying cash, but if you don’t have money and you need it, what else can you do?

  44. madhaus Says:

    Sell your children into slavery?


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