April 23, 2006

Palm Springs Flippers Discuss ‘Plan B’

The LA Times has this tale of a group of flippers. “A group of friends who set out to buy, fix up and ‘flip’ a Palm Springs tract house haven’t found the riches they were seeking. But the four Newport Beach residents, all experienced remodelers, learned some lessons about themselves, about working with others and about real estate investing.”

“In August, the four bought a three-bedroom, two-bathroom, 1,900-square-foot home that seemed like a good-enough deal at $425,000. Houses in Palm Springs had been appreciating consistently, and other homes on the same street were listed for considerably more.”

“For the purchase and all subsequent expenses, the costs were divided equally. All four names went onto the 5.5% 30-year adjustable-rate mortgage. For the deposit, each contributed $2,500. And at the end of escrow, each wired their share: $10,500. The plan was to spend $60,000 fixing up the house, then sell it in two months for about $650,000. According to Ron Haughey’s calculations, the profit would be $60,000 after all expenses, taxes and commissions, or $15,000 for each partner.”

“Spirits were high when the project began. The friends worked full time during the week and then spent weekends in Palm Springs on their project. After the house was finished in late October, it was listed. Until the talk turned to setting the sales price, there had been no major disagreements on financial issues. But at this point, the partners disagreed.”

“Eventually, they compromised on $695,000 and had dreams of pocketing about $22,000 each. The house went on the market in early November. They held open houses each weekend. In early January, the group agreed to lower the price to $669,000. When the house still did not sell, the foursome decided to stage it, and to sign up with a major real estate company in the area.”

“Their new agents, Brian and Diane Walker, suggested lowering the asking price to $649,000, and the foursome agreed. The monthly carrying cost was $2,800, or $700 each. According to Brian Walker, the market had ’softened’a lot between the time the house was purchased in August and it was listed with him in late January.”

“The house is now listed for $629,000, and if it sells for that, each partner will pocket just $5,000. ‘It’s not risk-free,’ Nina Smith said of her first foray into speculative remodeling. ‘I need to better educate myself on finding a better property.’”

“And if the house doesn’t sell for the current price? ‘We have all discussed Plan B,’ Jeanine Scalero said. ‘The possibility of turning it into a vacation rental. We’ve been told that weekly rentals go for around $1,500.’”




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87 Comments »

Comment by Ben Jones
2006-04-23 10:55:17

Thanks to the readers who sent this in. Even at the current price, these folks have a negative cash situation on their hands. Interesting that plan B doesn’t include selling at a loss. And why would anyone pay them $1,500 for a week in a 1964 house when there are so many resorts/hotels around?

Comment by TXchick57
2006-04-23 11:07:59

Ben, I think people have decided it’s un-American to sell at a loss or admit you did. The world has gone mad.

Comment by mrincomestream
2006-04-23 12:42:42

Yea truly mad when you expect an over 200k gain in appreciation just because you bought it. Spend 67k in cosmetics add no square footage and in 5 months expect that type of gain truly mad indeed

Comment by seattle price drop
2006-04-23 13:37:59

Actually, if they’d bought 7-2 years ago, it would not have been crazy to expect wild appreciation.

The only mistake they made was buying at the top of the market. Just one mistake, but a really BIG mistake.

It’s interesting to see how Americans perceptions have changed about how they define a LARGE sum of money. Eight years ago I think a lot of Americans would have considered 425K to be a huge amount of $$$$ and done some research before signing on.

Now $425K is peanuts as long as it’s attached to RE.

So there’ll be a few more silly shoppers out there.

I’m thinking in a couple of years there could be a whole lot of people waking up to the fact that 425K is a LOT of money and wondering what the heck they were thinking when they re-defined 425K as a “good deal” and “do-able”.

I wonder if we’ve ever gone through a period when Americans were throwing so much money around without even wondering if it’s wise to do so.

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Comment by optionedunarmed
2006-04-23 14:34:44

A huge segment of the population has no conceptual framework for these types of numbers. People who have never accumulated significant assets through saving do not know the difference in value between 200K and 400K, etc.

Anyone who has saved money the old fashioned way has a much greater understanding about what these different amounts really mean.

 
 
Comment by Pazzo
2006-04-23 20:24:13

Didn’t you know it was written in the Constitution that:
1) Flippers are automatically granted 50% appreciation in only 6 months time
2) Buyers can not put in an offer less than asking. In fact, it must be at least 5% above.

This just keeps getting better every day…

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Comment by waaahoo
2006-04-23 17:27:49

The thing that jumps out at me is that the lack of risk /reward awareness. These guys are signing on for 100K of risk for a lousy 15K return.

Comment by lainvestorgirl
2006-04-24 05:44:25

I think part of the problem here is that the US $ really has lost value, which contributes to people playing with it like monopoly money.

 
 
 
Comment by arroyogrande
2006-04-23 10:57:20

>The possibility of turning it into a vacation rental
>We’ve been told that weekly rentals go for around $1,500.

Summer’s coming. Nearby Palm Desert hit 122 degrees F when I visited last summer. How’s that working for ya?

Comment by Doug_home
2006-04-23 11:23:14

Vacant 3/4 of the year, plan B sucks

Comment by ajh
2006-04-23 19:06:07

Plan C = Cat Fight, big time. The 4 won’t be friends this time next year if they can’t sell soon.

 
 
 
Comment by Mo Money
2006-04-23 10:59:54

did they take into account travel and lodging costs while the did the renovation ? doesn’t sound like it. 1st rule of RE investment. You NEVER invest more than an hour away from your own home.

Comment by Gene
2006-04-23 13:47:21

Hmmm my #1 rule for investing is “Buy low…sell high”

They broke that one too.

 
 
Comment by TXchick57
2006-04-23 11:05:12

This is Nina at Sitting Pretty, ya’ll know. That print hungry b**tch is probably loving this!

Comment by arroyogrande
2006-04-23 11:27:32

Heh, I didn’t make the connection!

 
Comment by pop_pop_oc
2006-04-23 11:54:52

“Nina at Sitting Pretty”? Where have we seen her before?

Comment by Lou Minatti
2006-04-23 12:44:54

From here:
http://sittingprettyfinancially.blogspot.com/
She likes to pretend that she is savvy when it comes to money, and dispenses advice that she reads in Money and Business 2.0. Months ago she was bragging about a “fixer” she and her friends “invested” in in Palm Springs.

To be fair, recently she’s had a post about this “fixer” and she admits to being humbled.

Comment by bairen
2006-04-23 15:48:47

I laughed when I read her blog. I hope she posts financials on her investment properties.

She is so impressed that her agent brings a library book to their open houses. How about because he’s not making any commisions so he can’t afford to buy a book. Plus it would be unprofessional to show up with a pillow and a fresh PJ.

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Comment by greenlander
2006-04-23 12:46:18

She has a blog.

The subtitle of her blog is “Straight Financial Advice from a Well-Heeled Lesbian”

Comment by death_spiral
2006-04-23 14:03:08

This ho is gonna get corn-hoed!!

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Comment by deb
2006-04-23 11:05:33

According to my step mom, who is one of the top realtors in the desert, the market out there died just about when the would be RE mougels in the article listed their place.

My step mom never believed me when I said that this housing boom was going to end badly. She said that prices would never go down in the desert! Well, she got my step sister and her husband to buy another home in the area before selling their present one right about October (nice timing!). They listed their present home for $849k, no takers, $799, nope, $749, still none, dropped it to $709 around Feb, still no offers, presently $685k. Plus, they are offering a 5% commission to the selling broker (a huge bribe in other words).

I didn’t even need to say “I told you so”. It was written on her face. I don’t know what it might finally sell for, but I’m sure it has already created a serious financial bite for my step sister and her family. My step mom said she doesn’t even know what to price it at. The reductions don’t really do much because there are simply NO BUYERS!

Comment by Ben Jones
2006-04-23 11:18:03

Right, the Desert Sun used to report on inventory often. Then as the news got worse last fall, they quit covering it, except in passing.

Comment by Michael Anderson
2006-04-23 11:25:36

Reminds me how people stopped talking about the Nasdaq.

 
 
Comment by stjoe
2006-04-23 11:45:37

There is always a buyer if the price is low enough. The difficulty is determining what is the appropriate price.

Comment by Moopheus
2006-04-23 12:22:44

There would appear to be at least some places in the country where that is not true. Or at least some properties for which it is not true. Unless the “price” goes into the negative range (”I will pay you to own this”)

Comment by mkc
2006-04-23 18:30:59

Sometimes the correct price *is* negative. A property can certainly be worth less than nothing. Why would you assume otherwise?

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Comment by Chip
2006-04-23 18:04:56

Dutch auction will do it, though very few have the stomach for that.

 
 
Comment by azSun
2006-04-23 18:19:34

Price reductions after some point are counter-productive. If you can afford the carrying costs then you come out further ahead by losing $1000/mo for a few years than eating 300k in losses. Simply do the math. Something very few people have done correctly in the last few years.

 
Comment by zipost
2006-04-23 21:14:55

I look at Palm Spring the same way I look at Texas. Land can stretch as far as the eyes can see. It’s a freaking desert! There you have two types of buyers: retirees and the locals. Retirees will simply not pay anywhere near $500k for a home since the tax burden is too high. As for the locals, there are no high paying jobs that can support a $500k house. The best jobs that they can find are perhaps in the Morongo casino. Even then, they will be lucky to get a $30k/yr job. That market is the first to collapse and then San Bernarndino and Riverside county will just tag along.

Comment by lainvestorgirl
2006-04-24 05:48:02

There are also a LOT of very wealthy gays and retirees who move to Palm Springs after cashing out of their LA real estate.

 
 
 
Comment by stanleyjohnson
2006-04-23 11:13:31

would anyone how there in Palm Springs area have last years electric bill for cooling their home 24 hours if it is of course necessary to cool your home 24 hours a day when it is over 100 degrees in shade except for maybe 3 to 5am.

Comment by Pazzo
2006-04-23 20:38:29

Actually it is quite expensive, even if it is with IID. An apartment about $250 a month (May-September) and about twice that for a house.

 
 
Comment by Karen
2006-04-23 11:14:06

They have a plan B? I’m impressed!

 
Comment by Judicious1
2006-04-23 11:18:38

We’re returning to a time in which people only buy houses to live in them. Ahhh…this changes everything.

Comment by seattle price drop
2006-04-23 13:44:48

Yes, house as home rather than house as money-maker will be what decides this.
It’s gonna be glorious. i can just feel it coming…!

 
 
Comment by auger-inn
2006-04-23 11:24:59

Plan C, their next step after they realize no one is going to pay them $1500/wk for their sh*tbox, is a financial ass-pounding for the next year until foreclosure and indentured servitude.

Comment by Ben Jones
2006-04-23 11:35:22

And don’t forget they probably borrowed against their current home for the downpayment, etc.

 
Comment by passthebubbly
2006-04-23 18:16:49

She’ll get such an ass-pounding, she’ll think she’s straight.

 
 
Comment by Rainman18
2006-04-23 11:27:31

I can’t wait to see what these knucklehead come up with for “Plan C”.

 
Comment by dreaming 07
Comment by CA renter
2006-04-23 11:54:01

I do believe you’re right. I think I recognize it from Nina’s site.

‘It’s not risk-free,’ Nina Smith said of her first foray into speculative remodeling. ‘I need to better educate myself on finding a better property.’

I think it’s interesting how “not flipping houses” isn’t considered an even better idea. Still too much optimism in this market. We’ve got a way to go.

Deb,
Love the news from your stepmom. I know you’ve been on top of this bubble, and glad that you’re starting to see a shift.

 
 
Comment by waiting_for_the_fall
2006-04-23 11:41:43

Why didn’t they get a 5.5 fixed instead of an ARM? In October, rates were close to that for a 30 year fixed.
I guess they have bad credit scores.

Comment by TXchick57
2006-04-23 11:54:40

LOL! Nina runs a financial advice site!

 
Comment by mrincomestream
2006-04-23 12:38:05

It’s probably an option arm

Comment by arroyogrande
2006-04-23 16:09:23

What were ARMs at last fall (it seems so long ago)? They were probably only hoping to hold the house a month or two, so I’d assume they were trying to get the loan with the lowest monthly out-of-pocket…not thinking that they’d hold the house longer than that.

 
 
 
Comment by TXchick57
2006-04-23 11:58:43

Okay. You can spend 900K on a 1400 square foot shitbox in SD or you can buy this

http://greenhomesforsale.com/listing.php?id=17728

I’m caving . . . . lol

Comment by otis wildflower
2006-04-24 07:51:37

is that USD or NZD? $1500/yr in NZD it’d be worth it to move, if I could find work and speak the language there ;)

 
Comment by OutofSanDiego
2006-04-24 07:55:39

I’ve researched New Zealand immigration policies. It looks very difficult unless you are either in a specific occupation that they have a shortage in, or if you are loaded with $$$ to invest in their economy ( I’m talking several million). It surprised me since I will be financially independent and have cash for a house, yet I didn’t meet the requirements to move into New Zealand. Very surprising considering the influx of poor immigrants into the U.S.

 
 
Comment by dukes
2006-04-23 12:13:35

Here are Nina’s very own words from her blog on the subject of this house:

Many readers only care about my gamble in Palm Springs and continue to ask for an update about the house that is for sale there. I haven’t written much because there hasn’t been anything to report. We have lowered our price twice… currently the house is listed for $629,000. At this point we would break-even or lose money. We’re all prepared for this scenario. Of course, it is disappointing but there aren’t any other options.

In February we re-listed the property with a Prudential agent. The decision to re-list had nothing to do with trying to camouflage the “days on market” since many homes have been on the market for 90 - 180 plus days… our house isn’t the only one that isn’t selling. Back in November, we originally listed it with Jeanine’s father (an independent broker) but after three months decided we needed to be with a large office and agent that could spend money on advertising.

We had one offer last week. It was within a few thousand of our asking price but was contingent on the buyer selling their San Francisco-area home. We were willing to accept the contingency but our counter-offer required a 10% deposit and removal of the financing contingency within 14 days. They decided to wait until their house was in escrow before coming back and making a new offer. All this information is twice removed because we’re working through agents. However, Jeanine and I were staying at the house when the couple came back to see it for a third time that weekend. They seemed to love the place but you never know for sure what is driving someone’s decision to buy or not to buy.

Anyway, we think our price is in now in line with the market. Many of the comparables that readers mention are homes that really don’t compare… we are in tune with the neighborhood and there have been one or two (redone fixers) that sold in the mid to high sixes in the last few months. There are just fewer buyers these days.

In all reality, the house might not sell. The seasonal window for Palm Springs is usually through the end of May. If it doesn’t sell, then of course, we have to decide as a group what we want to do with the property. A long-term renter would not cover our monthly costs. We would have better numbers with short-term (meaning weekly or weekend) renters. The house is furnished now so this is probably the path we would take. We would then get to use the house when it wasn’t rented… which is what we do now anyway and nobody seems to complain about having a “second home” in Palm Springs.

My learnings to date: real estate, like any investment, carries risk. If we couldn’t afford the risk then we would be in trouble, but this is why we did the project with four people. Worse case scenario… the house doesn’t sell (even at a loss) and we can’t get it rented… then we write a check each month and enjoy our weekends in Palm Springs… end of story.

Comment by dukes
2006-04-23 12:14:37

Here’s the link: http://sittingprettyfinancially.blogspot.com/
then scroll down for a ways to find it…

Comment by TXchick57
2006-04-23 13:12:59

Oh, BTW, this is not Nina’s only money pit. She’s got two “investment” houses in Phoenix too! LOL!

What’s next, an hacienda on Love Canal?

Comment by Pazzo
2006-04-23 21:41:12

This house is in South Phoenix (Laveen). This area is a ghetto-rehabbed area full California investors plagued with for sale signs and beautiful graffiti. This is one of the top area areas in Phoenix headed for declining value. It would be like dropping a brand new sub divison in East LA.

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Comment by lainvestorgirl
2006-04-24 06:16:13

“Cheatham Farms” - that’s just too funny

 
 
 
 
Comment by passthebubbly
2006-04-23 15:31:01

“My learnings to date: real estate, like any investment, carries risk. If we couldn’t afford the risk then we would be in trouble”

Guess what! You couldn’t and you are! What did you used to think, that RE wasn’t like every other investment?

Comment by ajh
2006-04-23 19:14:12

To be fair, she does seem to accept the possibility of the “worse (sic) case scenario”. But do the other 3 parties? If not, there might be a chance to recoup some losses via Vince McMahon at WWF :D.

Comment by Stock_regulator
2006-04-24 15:44:09

She is not accepting how leveraged her party may be. She thinks she can afford to hold the property. We will see. Either way why lose $700+ per month on a declining asset.

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Comment by hd74man
2006-04-23 15:57:25

Many of the comparables that readers mention are homes that really don’t compare… we are in tune with the neighborhood and there have been one or two (redone fixers)

No seller bias here…Homeowner’s always know more than the appraiser…

“we are in tune”…famous last worlds.

 
 
Comment by crispy&cole
2006-04-23 12:17:16

Plan C - Go back to McDonalds and hope to to get rich VERY VERY slowly!

 
Comment by stanleyjohnson
2006-04-23 12:20:45

very odd
http://www2.dre.ca.gov/PublicASP/pplinfo.asp?start=1
shows no agents name of diane or brian walker.

Comment by stanleyjohnson
2006-04-23 12:23:23

sorry my mistake
there is a brian a walker in rancho mirage

Walker, Brian Arthur

Mailing Address:
6 LORCA DR
RANCHO MIRAGE, CA 92270

 
 
Comment by miamirenter
2006-04-23 12:28:53

Gavecal’s beave new world etc.
————–http://www.iht.com/articles/2006/04/21/business/wbbubble22.php

 
Comment by Brad
2006-04-23 12:47:06

Nina might have to switch to tea until the house sells. From her site:

“Put that coffee down. Coffee is for closers.” – Glengarry Glen Ross

Comment by Pazzo
2006-04-23 21:00:27

LOL!!

 
 
Comment by BigDaddy63
2006-04-23 12:52:11

So let me get this right.. Each of them put at risk up front $13,000 and $700/ month for 8 months +$5600 for a total of $18600. IF they sell it now they will make $5000. At that burn rate they have 7 months until this investment goes negative.

This does not include the sweat equity, time, stress, and other costs not reimbursed or lost associated with this venture. They are entering the summer and hopes for renting are slim. Like most newbie investors, they refuse to simply sell the place at even break even and get out while they can- preferring to hold out for some sort of “miracle.”

Four people, each responsible when this thing goes ugly.

Comment by realestateblues
2006-04-23 15:54:07

Yes, if they sell today at that price they will get a 26% return.
They could have just bought gold instead and watched it rise, no work, no stress, no travelling.

 
 
Comment by Brad
2006-04-23 12:53:38

“they compromised on $695,000 and had dreams of pocketing about $22,000 each.”

My prediction: they will each end up losing more than $22K before it’s all over and done with. They will bicker and hold out for a higher price and ride it all the way down and end up enemies.

Comment by TXchick57
2006-04-23 13:06:20

But there’s always that turkey baster. . . . . oops. Couldn’t resist.

Comment by auger-inn
2006-04-23 15:53:41

Now that’s more like it! What kind of blog has this turned into when someone throws out some red meat like “well heeled lesbian” and not so much as a snicker from the gang? Then FINALLY, tx chic steps up to the plate? Come on guys, lets try to maintain our sense of humor here! Nice one Tx!

Comment by ajh
2006-04-23 19:17:42

Well I did note that it was Tx chick that stepped up :D.

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Comment by cereal
2006-04-23 13:12:16

reporting from 100 miles west of palm springs…

there was a noticable breakthrough here in culver city today. one condo complex by my house called summertime had 14 (counted ‘m twice) signs pointing into the complex. only a couple were dupes.

so i wandered in, and lo and behold, they must have a no-sign rule inside the place. i could only spot 2 units. furthermore each building is locked entry so you have to buzz the unit to get the realtor to come escort you. all and all, very much a hassle for prospective buyers.

from my vantage point the correction for west LA has found a beachhead here in the cc condo market. let’s watch this little fire spreads into the greater community

Comment by arroyogrande
2006-04-23 16:17:20

C, I’d be interested to hear when West LA/Santa Monica *finally* capitulates…and the SF Bay area as well. Those two are the seventh sign in my book.

 
 
Comment by need 2 leave ca
2006-04-23 13:39:13

Plan D would be to torch the PS house and hope to recover their costs from the insurance. It should be pretty easy to start a fire in the 120F heat. Oh, shoot - the electricity fried, or someone accidently dropped a cigarette next to that 5 gallon gasoline container that was for the lawn mower. These guys will NOT be friends by the time that their blood bath is over.

Hope Nina will lose several $100K before this is over for her, since she is so financially savvy and smug about it.

Comment by death_spiral
2006-04-23 14:13:22

yeah, that bull-dike bitch deserves an azz-whacking!

Comment by Pismobear
2006-04-23 17:49:13

They should have had a ‘buy-sell’ in their partnership,LLC,C Corp, agreement. You mean they didn’t? And, they didn’t have an agreement? Then when Nina held out for the 695k price the ones who initially wanted the 650k or lower price could say, “Buy me out !!” Solves alot of problems and gets the price to closer to where it will move. Personal experience as a small fry flipper partner in spring of ‘05.

 
 
Comment by foobeca
2006-04-23 14:38:59

Torching the place won’t help. Insurance only pays for the replacement cost of the structure. The structure is probably only worth 100-200k. It will not pay off the mortgage.

Comment by weinerdog43
2006-04-24 07:10:46

It’s even worse than that: the insurance will only pay Actual Cash Value until that time the building is actually rebuilt. In other words, they only get 2/3rds of the insured value. That won’t happen until the carrier completes it’s investigation. They most certainly will check the credit histories and cash flow. Even if they don’t deny the claim, it could take 5-6 months before they see a dime.

 
 
 
Comment by passthebubbly
2006-04-23 15:10:22

Plan B? More like Plan F.

 
Comment by bairen
2006-04-23 15:36:12

It’s not risk-free,’ Nina Smith said of her first foray into speculative remodeling. ‘I need to better educate myself on finding a better property.’”

You need to educate yourself on GREED. I predict lesson 1 of GREED 101 will cost more then a 4 year degree at a State U would cost. And you will have still learned nothing.

 
Comment by hd74man
2006-04-23 15:49:54

And if the house doesn’t sell for the current price? ‘We have all discussed Plan B,’ Jeanine Scalero said. ‘The possibility of turning it into a vacation rental. We’ve been told that weekly rentals go for around $1,500.’”

They have ocean frontage in Palm Springs?????????????

Comment by Pismobear
2006-04-23 17:56:15

What was Gene Hackman’s name in the first Superman movie when he was going to blow up an atom bomb on the San Andreas fault so that his Calif and AZ/NV desert property would be Ocean Front? Oh, I remember now, ‘Mr Luthor’, as only Ned Beatty could pronounce.

 
 
Comment by Auction Heaven in '07
2006-04-23 17:50:09

I’m going to see the greatest living rock band, TOOL, at Coachella on April 30th.

We’re staying in Palm Springs, after the show, at a very, very nice hotel.

Should I call these folks to see if I can rent their house for a day?

Just kidding.

There is a day coming when the beaten flippers of the world will come here, and proclaim TXchick57 to be the new guru of how to make money.

I’m going to find that hysterically funny.

By the way, TXchick57, what do you think of the upcoming Burger King IPO? Is that something of interest- or a turkey waiting to be roasted?

I can’t wait to see TOOL.

Their incredible new song is about hypocrisy.

I sure wish they’d write us one about housing.

I’ll wave to our phucked flippers if I see them…

…laughing.

Comment by passthebubbly
2006-04-23 18:14:29

“Should I call these folks to see if I can rent their house for a day?”

Imagine if they said yes. You wouldn’t just be seeing Tool. you’d be renting from one!

Comment by Auction Heaven in '07
2006-04-23 18:28:06

LOL.

“Why can’t we just admit it?”

LOL.

 
 
Comment by dreaming 07
2006-04-23 18:19:44

Renting out the place to 100+ Coachella concert-goers…now that’s the way to make some serious cash!

 
 
Comment by dr_digits
2006-04-23 18:23:48

Sounds like a bad “Leave it to Beaver” episode ;)

 
Comment by zipost
2006-04-23 21:02:36

At least they all got their 15 minutes of fame in the LA Times. To me, that picture of the 4 of them is just priceless. When I read their plan B, I was about to fall of my chair since these 4 have so many years of education among them and not one has an counce of common sense in him or her.

 
Comment by Stock_regulator
2006-04-24 15:42:06

1. I can’t wait until their ARM is reset.
2. I am sure they all have the extra monthly cash to carry the place.
3. Renting for $1,500 a week is pure BS.
4. People are going to get a fast lesson on leverage VERY soon.

 
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