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.


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.


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