Saturday, November 26, 2022

Struck By Lightning! - Revisited

Being lucky isn't the same as being brilliant.

I wrote over a decade ago about people who confuse luck with skill.  Over the years, I have read, again and again, about people who seem to fall from grace.  And pundits and prognosticators make sage comments as to where the former superstar went wrong.  How did they screw up such a good thing?  The answer is, not knowing when to stop.

On Wall Street, the pattern is familiar.  A young hot-shot hedge fund manager or trader makes a lot of money by making the right stock picks.  It seems he can do no wrong!  The guy is brilliant and people ask for stock tips and advice from him.  But then one day, he makes the wrong pick and the scribes wonder whether he has "lost his touch" when in fact, he was just on a lucky streak and it eventually broke.

Now, in some instances, this sort of hubris amplifies itself.  The "golden boy" who can do no wrong, makes some "bad" decisions, which is to say, the law of probability finally caught up with him.  So rather than call it a day and walk away from the table with his remaining chips (which is still a fortune) he "doubles down" his bet to try to win it all back - and loses spectacularly.

From his perspective, it was a "smart move" - after all, he was the "golden boy" and surely his stock-picking skills would turn things around, right?  Of course, we always have a surplus of "golden boys" when there is a bull market.  You can pick almost any stock then, and it goes up in value.  Genius!

I recounted before reading in the Virginia Bar Journal (disciplinary committee section) about a young hot-shot attorney who had a real estate practice.  It was the 1980's and real estate just went up and up and up.  So he invested in a number of commercial properties and they increased in value.  Genius!   Actually not, of course, it was just another real estate bubble and everyone who bought real estate was a "Genius!" for a while - until the bubble burst.

The problem for a lot of these geniuses was that they had to keep rolling over properties into new properties, to avoid capital gains tax.  So they went out and bid against other people to buy another property, and that, in part, drove up prices.   When the bubble burst, this attorney fellow decided that he couldn't just walk away - after all, he was a golden boy, right?

So he decided to "borrow" some money to "tide him over" until "things got better."  It is the same song told by hapless fools who borrow from loan sharks.  Or the kind of people who whine about banks not giving them unsecured loans to "tide them over" until "things get better" - you can't borrow your way to wealth!

Problem is, he "borrowed" from his clients without them knowing.  He was doing real estate closings in his law practice.  So when someone bought a house, he would handle all the money at closing.  The bank would wire him $500,000 to his escrow account to pay for the house his client was buying.  The client now owed the bank a half-million dollars.  Meanwhile, the seller of the house had a mortgage of $400,000 to pay off.  The attorney would wire $100,000 to the seller (their profit in the sale) and then not pay off the $400,000 mortgage.

The house was now mortgaged for $900,000.  Ouch.  The attorney in question kept up this ruse by making payments on the old mortgage - using some of the "borrowed" money.  The rest he used to prop up his failing commercial real estate empire - which had a staggering negative cash-flow.  Of course, in order to do this, he had to "borrow" yet more money from the next real estate closing.  And so on and so forth, until he was tens of millions in debt.   Or more precisely, his clients were.

The whole thing came unraveled when he missed some mortgage payments on those old mortgages which were supposed to be paid off.  People started asking questions, the District Attorney got involved, as well as the State Bar. The "errors and omissions" insurance of the attorney covered some of the damage - title insurance covered some more.  Some banks took a hit.  The attorney was sued.  He lost his license to practice law - revoked forever.

He went from "golden boy" real estate investor to bankrupt and out of a job - and a career - in a very short period of time.

It is a tale as old as time.  And you've heard about the big players that fall from grace - Enron and Madoff, for example.  They started out, perhaps, thinking they were golden boys and offered  obscene rates of return.  When that didn't pan out, they resorted to fraud, hoping maybe to turn things around.  When things didn't turn around, maybe they figured no one would notice the fraud until after they were long dead.  They lived in denial, but eventually the golden boys were brought back to Earth.  I think drugs may have been involved, particularly cocaine - which makes people do weird shit like this.

The most recent example of this is, of course, Elon Mudk has taken Twitter from 0 to insolvent in less than four weeks - faster than even a Tesla Model S.  But if you look at his history and the pattern I outlined above, you can see his downfall is inevitable.  He was struck by lightning at birth - being born to a fairly wealthy family.  He invested in a company that would eventually become PayPal and was forced out before it did.  When PayPal went ballistic, he made a fortune, not from his own hard work, but because he still owned shares in the company.  That, and the stock was way overpriced.

He repeated the same pattern with Tesla.  Only this time around, the stock price was hyped by Musk himself.  He was able to use bots and trolls to groom his image - and that of Tesla - to the point where the share price  was ridiculous.  Tesla is "the most profitable car company on the planet" (on a profit per car basis) exceeding Mercedes and BMW for the first time - but in terms of P/E ratio, the stock was wildly overpriced, particularly in what is a commodity business, manufacturing.

So lightning strikes twice - helped along by a little stock manipulation.  Surely, he can do the same thing with money-losing Twitter!  Fire all the employees, make the rest work a staggering 80 hours a week (why would anyone go along with that?) and charge $8 a month for the service - more than some streaming services are asking for real content.   Oh, and his shenanigans have caused advertisers to flee the site at a time when many advertisers are starting to realize that online advertising is over-rated.

What do I mean by that?  Well, it is not by accident that when you go on any site these days, particularly on your phone, you try to close out the many pop-ups asking you to subscribe, or close that pesky auto-playing video (who the fuck actually watches those?) that when you just are about to hit that "X" the entire page shifts and suddenly an ad appears and you just clicked on it.  Of course, you quickly close out of the ad using he back-button or whatever, but the site owner just got click-though credit and now the Internet thinks you are keen on women's pantyhose or whatever the fuck the ad was for.

Advertisers are figuring out that these bogus clicks are not real, and that their ads are far less effective than they thought they were - or what the site owners were telling them they were.  And odious content?  That was what sank Glenn Beck.  He had good ratings, but his fan base was broke and wasn't in the market for anything but guns and survival food.  Kind of hard to sell $50,000 pickup trucks to that crowd.  By embracing the "basket of deplorables" Twitter risks going down that same road.  Racists generally are not wealthy people - or at least the type that go online and type the N-word over and over again for a reaction.  In fact, most of those folks are teenagers.  I guess you could sell them zit cream.

The other problem with Twitter is hardly anyone uses it - relatively speaking. There is a core group of people who are literally addicted to it and cannot stop tweeting all day long.  Politicians, celebrities, and media types - they all love Twitter as it gives them a megaphone to shout out to the masses.  But most ordinary people read "Tweets" that are republished on other platforms - on Facebook, Reddit, or on news sites.  Everyone has heard about Trump's Tweets, not from Twitter itself, but because every news outlet felt that "covfefe" was worthy of ten minutes of airtime.

So now, Twitter is saddled with debt, including a billion dollars a year in interest payments, in addition to the billion dollars a year they were losing before Musk bought it.  And people wonder, has he lost the golden touch?  Or maybe it never existed - he was just getting lucky on a massive scale.  Eventually, luck runs out.

The above chart illustrates Tesla share price, earnings per share (EPS), and Price-to-Earnings (P/E) ratio.  A you can see, the stock price got way ahead of itself at one point, when the P/E ratio went over 1,000.   Even in the hundreds, it was wildly overvalued.  GM has a P/E ratio of 25 or so, Ford, a bargain-basement 9. Most car companies have ratios in the low double-digits and they pay dividends which Tesla doesn't do and has pledged never to do.  Which stock is a better investment?  Which car companies are making millions of cars a year and paying dividends - and introducing new models yearly?  It ain't Tesla, that's for sure.

The chart is interesting, as at the beginning, Tesla was making a small amount of money.  Then Musk plowed money into expansion - in China and Germany - and then bought-out his cousins in their Solar City venture, using Tesla sharehoders' money.  So for a long time, the profit was negative and the P/E ratio undefined.  It is only since the pandemic (and the so-called car shortage) that Tesla has made any money.

But at the same time, the P/E ratio has declined from its dizzying heights to a somewhat more rational 60 or so - which would imply Tesla is still overpriced by a factor of three (at the time of this writing - in recent days, the stock has taken a further hit).  What has changed is that Musk has had to sell off a lot of his stock to cover the loans he took out, pledging half of his shares. And no doubt the rest are pledged to other loans he took out to buy Twitter - as well as money he needed to make that transaction.  When the major shareholder of a company starts selling huge chunks of it, the share price plummets.

This is a real-world, real-time illustration of why Market Cap is Bullshit.  If Bill Gates sold all his Microsoft stock, the result would be the same - or Bezos his Amazon shares or Zuckerberg his "Meta" - or whatever.   First, you are dumping a lot of stock into a market than can't absorb it - the law of supply and demand.  A lot of shares for sale, and not enough instantaneous buyers.  Second, buyers would be nervous that the insiders are cashing out - do they know something the rest of us don't?

For example, that maybe Tesla's aging products are going to get creamed in the marketplace by lower-cost competitors?  For EVs to succeed, the prices have to come way down.  I noted before that doing the math on even a hybrid, it often makes no sense.  The thousands extra you pay for an EV or a Hybrid would buy a lifetime's supply of gasoline.  Sure, I could buy a $100,000 EV and "save on gas."  Then again, the $60,000 I would pay for the vehicle would buy 115,000 gallons of gasoline at $4 a gallon. That's well over 200,000 miles of travel, even towing a trailer.

And let's face it, people who buy $100,000 cars aren't worried about the price of gas.  Or if they are, they are being penny-wise and pound-foolish.

Musk is making noises about building a "more affordable" Tesla, which means they have to plow more money into R&D to design such a vehicle - and update their already dated designs.  Speaking of which, where is the "Cybertruck?" anyway?  Ford and GM have beat Tesla to market here.  And they (and others) are beating Tesla to market in the low-price field.  Low-price cars mean low-margins.  No more making $9000 per car!  You'd be lucky to make a grand apiece!  GM and Ford actually lost money on their low-price cars, which is why they stopped making them in favor of high-margin SUVs.

But maybe Musk is trying to get out of that game, entirely.  A new CEO of Tesla has been appointed, and Musk is selling off shares and taking less of a role in Tesla due to his obsession with Twitter.

Besides, I am sure that now he is part of the GOP and the "Club for Growth" his new peeps are not happy that he is selling electric cars - an anathema to the far-right.  "Welcome to the Club for Growth, Elon!  We're happy to have you as a member!  But hey, that whole electric car thing?  Not cool, dude!"

So maybe he is throwing Tesla under the bus, so to speak, to appease his new friends, who are giving him a love-bomb for making Twitter a "free speech" (read: hate speech) platform.

The golden boy has really lost his touch, hasn't he?  Of course, he never really had it in the first place.

Friday, November 25, 2022

Merry Artists, or How We Spent Thanksgiving

Holidays get a bit predictable after a while. Try something new!

I noted before that I am not a big fan of holidays for a number of reasons.  My childhood was marred by unhappy holidays - they were viewed by my Mother as a test of her homemaking skills, and no matter how "perfect" the holiday was, she always felt she came up short. Drinking and arguments would ensue.

They're also boring as all get out.  Thanksgiving in particular is so predictable - the same foods, year after year, including the incredibly difficult-to-cook turkey (which takes hours and makes a huge mess) and the football games, parades, and then the hanging out with relatives.  Most people secretly wish they could do something else.  And they could, too - they just see it no other way.

That is why, I think, in part, why "Black Friday" became so popular.  People were like, "Oh, God, I will do anything to get away from my family!" - so they go shopping.

Throw in the second-busiest travel time of the year, with crowded roads, airports, hotels, restaurants, and what's not to like?  The model of "Hey everyone!  Let's all do the same thing at the same time, so commercial interests can make big profits!" is just dumb.  Time-shift.  Go off-season.  Pick a different day.  There is nothing magical or special about the last Thursday in November.

And what are we celebrating in particular?  The Puritans?  We euphemistically call them "Pilgrims" but they were not making any sort of pilgrimage - they came to a new country to practice their backward form of strict fundamentalism.  They screwed over the Indians who tried to help them, and then once they got established, started hanging people for witchcraft.

You know what?  Screw the "Pilgrims" - they are not really even a major part of the American story, but rather a tiny footnote of a settlement in Massachusetts.  If you really wanted to honor European invaders of the New World, there were plenty of other settlements up and down the East Coast of the US that would probably better qualify.  We don't celebrate the Dutch settling in "New Amsterdam" - what is now New York City - do we?  The whole "Thanksgiving" holiday smacks of being made-up, and indeed, it was - by Abraham Lincoln.

But I digress.

This time of year is a busy one for Mark - 12-hour days volunteering at Goodyear Cottage for the annual "Merry Artists" show and sale.  It started a few years ago when an artist cancelled their show for December at the last minute.  Mark and others pitched the idea of having a show and sale for all of the Arts Association members.   We do get a lot of tourists this time of year, and they are often looking for inexpensive items ($5 to $500) to give as gifts or for themselves.   Well, the first year was a big hit, so they decided to make it an annual deal.

Problem is, there are literally hundreds - even over 1000 - items for sale.  Every item has to be logged into the system and a bar-code price tag attached.  And then it all has to be displayed so it looks good and not like a "garage sale" as some would say.  An army of volunteers helps with everything, and Mark uses his retail skills to make it look appealing.

So, for several days he has been working.  First, the old show (the weaver's guild) has to be taken down and then everything removed from the "shop" (where member's wares are sold year-round) and the entire building reorganized as one giant store.   He is fortunate to have a lot of good volunteers to work with, who work like dogs for days at a time and still keep their good humor.

Well, it's all done.  And it looks great.  My job was mostly to stay out of the way.  I went after-hours and installed some track lighting and I went one day and brought Mark some lunch.  But it's his deal and it's best if I stay out of it for the most part.  Besides, I'd probably piss someone off.  I'm pretty good at that!

The show and sale starts tomorrow, so the place is closed today.  We went over and had tuna salad sandwiches and I cut down some old bar stools that we salvaged from a restaurant here on the island.  They wanted them for the pottery shop (studio) but they were 6" too tall.  An easy fix with a battery-powered circular saw!  It was quiet, just the two of us, and the occasional curious tourist on a bicycle, cruising by.  It really is a low-stress way to spend the holiday.

We did get invited to someone's house to spend the day eating turkey and whatnot, and it was kind of them to ask.  But after several days of backbreaking work, Mark just wanted to relax and chill out.  It's more our speed.  Maybe it is closer to the real meaning of Thanksgiving than turkey, football, and shopping.

And no, he wasn't in the mood to spend hours cooking a turkey.

It's funny, but we have friends who are doing the traditional bit, and they don't seem happy with it.  One friend had their stove die the day before Thanksgiving!  Talk about stress!  But a kindly appliance repairman fixed not only that, but their dryer as well - for cheap, too!  Another friend has an out-of-town in-law coming to visit who, without fail, will complain about everything from the food to the decor to how lumpy their mattress is - and start some sort of argument with a sibling or parent.  Without fail.  Every damn year.  Why do people torture themselves like that?

Family.  I get it.  Most of ours are dead, thank God.

The funny thing, I think, is that I meet so many people who feel they have to do certain things at certain times of the year.  They let society and tradition lead them around by the nose.  "I have to do this!  Everyone else does!" and they get very scared when you suggest there are other possibilities.  Some folks go so far as to marry someone their parents picked for them or follow the career path their parents selected.   They concept of "free will" seems alien to them.  I guess most people are sheep.

Maybe some year we will do the traditional Thanksgiving thing again.  We have in the past, and it can be a lot of fun.  But then again, it can also be a pain-in-the-ass and if you aren't having fun, why do it?

One year, Mark invited some friends over and served turkey tacos with stuffing and gravy and a little cranberry as well.  Actually, they are pretty good.  Some of our friends were not amused - they wanted Big Tom Turkey and "all the fixin's" laid out on the table.  It was like we had renounced God or something.  It is funny how orthodox some folks can be.

The holidays are what you make of them.  There is no rule saying you have to do this or you must do that.  It is all up to you.  And if you are busy doing other things, why stress yourself?

Anyway, the sale starts tomorrow.  Tonight we're having hamburgers with bleu cheese.

Sacrilege!  I know!

P.S. - We found hundreds of feet of lighted garland (LED no less!) in a dumpster behind the club.  We cleaned it up and threw away the broken (unlit) strands and ran it all around the house.  So before anyone accused me of "Bah! Humbug!" I did decorate the house for our "festival of lights."  So there!

Thursday, November 24, 2022

Firing the Right People

In any organization, 50% of the people do 90% of the work.  Fire the other 50% and your organization will prosper.  Problem is, usually the wrong 50% get fired.

Elon Musk is getting a lot of flack for being a bull in the China shop - firing everyone and then realizing he needs them to keep Twitter from imploding.  Yet, there is a certain logic to what he is attempting to do.  When I worked at GM and UTC, as well as the government and private law firms, it always amazed me that there was a core group of people doing most of the real work - and an awful lot of slackers doing little or nothing.

Go on one of these "antiwork" discussion groups and you will hear tales from people whose job description was forgotten - they had little to do but show up for work every day and do the crossword puzzle.  Sometimes this goes on for years before someone figures it out and lays them off.

This is why, I guess, when an organization exceeds the size of Dunbar's Number, it becomes increasingly more inefficient.   People spend more and more time on social grooming and for each additional person hired, an incrementally smaller amount of work gets done - like a differential equation.  Eventually, you get to the point where the last person hired does no work at all.

The problem, of course, is that if you want to prune the tree, you have to cut off the right branches so as to not kill the tree entirely.  And sadly, some "managers" go all lumberjack and just cut the tree down, as we seem to be seeing with Twitter.  Often, the people doing the pruning are from "corporate" and make decisions based on spreadsheets, not on boots-on-the-ground data.

I recounted before at one company, we had two test room Engineers who were charged with designing and maintaining test rooms.  One would carefully document every detail in big binders and schematics, with all the wiring color-coded.  His test rooms never needed repairs, always worked properly, and worked efficiently.  The other "Engineer" (who had no degree) never documented a thing, and wired everything in a rat's nest of yellow wiring.  He would periodically unplug one wire when everyone was at lunch, so as to cause the whole test room to crash.  Everyone would be looking for him (he was sleeping the ductwork) and when they finally found him in the restroom, he would come back and plug that one wire back in, and thus be a "hero" for a day.  Managers marveled at how "indispensable" he was.

Meanwhile, back at corporate, a Vice President is puzzling as to why we have two test room engineers and then fires the one with the highest labor cost.  The guy who actually did his job and documented everything was let go.  He had some health issues and was older, so he cost the company more money.  The remaining guy was useless, of course - and couldn't even read a schematic.  They laid off the wrong guy.

But I get it, what they were trying to do.  The company was losing money on certain products and they needed to cut back on overhead.  Today, that whole factory is shut down, gone, and the building bulldozed to the ground.  And everyone there I knew is either retired or long-dead.  Life goes on, and a new factory will be built somewhere else, making new products.   You can't live in the past forever.

Cutting the fat from an organization is damn difficult to do.  So I appreciate the struggle Mr. Musk is going through.  What makes it so hard is that the people who do the least amount of real work spend most of their time trying to make themselves look important and indispensable - taking credit for the work of others (which Musk himself, does) and basically brown-nosing and gladhanding management to the point where mangers say, "That fellow is a real go-getter!"  Meanwhile, their opinion of the guy in the back room, doing all the real coding, is poor.  "I never see that guy!  Does he even work here?  What does he really contribute to the bottom line, anyway?"

It is a pattern we see in companies all the time - they lay off the workers and keep the slackers.  Or worse, the real workers see the writing on the wall and get jobs elsewhere, until the whole company is nothing but coke-snorting bullshit artists.  And you can't keep going on bullshit and cocaine forever.  Problem is, you can't convince a coke-head of that.   It goes without saying that if you try to point this folly out to senior management, you've basically put a target on your back.

I am so glad to be retired.  It amazes me that any organization gets anything done at all, considering how everyone works at cross-purposes or doesn't work at all.  Henry Ford was a genius in using the assembly line - a mechanism that forces you to focus on one job, done on a certain time scale.  If you don't do that job, it becomes readily apparent to everyone.  Of course, this has the effect of dehumanizing people and turning them into machines.  Seems you can't win at this game!  Besides, while an assembly line may work for putting "bolts on cars" (as one of my professors at GMI phrased it) it doesn't function for more esoteric and creative work.

Firing people based on how many lines of code they wrote doesn't take into account that some simple tasks use repetitive lines of code, while some more difficult tasks use far fewer.  In fact, in programming, the hardest thing to do is make compact code.  Sure, I could solve an iterative equation by simply writing out each iteration - and using thousands of lines of code in the process.  It is a little harder to create a loop that solves each iteration.  According to Musk, the former gets you promoted, the latter gets you fired - and then he whines about how the code is bloated and slow to load.

Go Figure.

Wednesday, November 23, 2022

Counterfeit Postage Stamps - DICUSPS SCAM!

I must be losing my touch not to see this as a scam right away.

A few weeks ago, I saw an ad online from the postal service (or so I thought) offering a "sale" on "forever" postage stamps for as much as half off!  It looked so legit at first glance that I bookmarked the link and e-mailed it to myself.

Weeks later cleaning out my inbox, I clicked on the link and got a warning that it was an unsecured site and not USPS.COM but something called "DICUSPS" which made me re-think this whole thing.

What was I thinking?  Responding to an internet ad - mistake number one!  No bargains are going to appear on Internet ads.  They are either outright scams, or they are "targeted ads" that are based on keywords you typed or even spoke.  They know you are thinking about buying a new orbital sander, so they show you ads for orbital sanders (none of them are particular bargains).

And yes, having said that, I will see, shortly, in the coming days, an ad for an orbital sander, on my computer or my phone.

The second mistake was disengaging my brain.  What was I thinking?  Why on earth would the post office have a sale on stamps - and not only that, for half off!  They would be insane to do this, particularly for "forever" stamps.  You could buy thousands of dollars of them and have a 100% gain right away, and an increased gain, over the years, as the postage rates went up.  It would be better than a government bond!  And yea, if you had a store, you could sell them - they would be snapped up by every independent postal service center in the country.

And the answer is, of course, the post office isn't selling stamps on-sale and certainly not for half-off.  You might get a few cents off, buying stamps at a "big box" store where they have an agreement with the USPS to buy stamps at a slight discount.  But half-off?  Get real!

So what are these DICUSPS people selling?  Counterfeit Stamps.   It is genius if you think about it - criminal genius.  Stamps are not very ornate or difficult to counterfeit.  For a while, the USPS was even allowing you to make your own stamps online, with your own images on them.   Sort of ripe for counterfeiting, if you ask me.

Look at a stamp sometime (yea, I know, no one uses stamps anymore!).  I bought a roll last year and it likely will be the last roll of stamps I ever buy.   No one mails anything anymore, other than packages, it seems.  Maybe a post card, maybe a holiday card.  Not much else.  But if you look at a typical "forever" stamp, it is not hard to copy.  It is just a printed image of an American flag that could be easily reproduced in a foreign print shop.

Of course, it is the end user who would get in trouble for using the stamp - if they bought these online.  Although one wonders how hard it would be to get caught.  Does the USPS have scanning equipment that can detect counterfeit stamps?  These are questions I cannot answer.

But it made me a little nervous that I didn't see this as a scam right away.  I bookmarked it for later investigation, but I should have just seen it as the scam it was, right away.

If it sounds too good to be true, it probably always is!

Tuesday, November 22, 2022

Do I Stay or Do I Go, Now?

When should you sell a property?  Maybe before now!

I recently got some correspondence from our condo association.  We bought this condo years ago so our cleaning lady would have a place to live.  She paid the condo fee and the insurance and it was a break-even deal, and quite a deal for her.  In retrospect, maybe too good a deal.  It was so cheap for her to live there that she delayed returning home to Mexico until she was almost invalid.  Hard to say, of course.  You try to do the right thing, but altruism is always suspect.

Anyway, once she left, we cleaned the place up, painted it, and rented it out.  Since we were not "on site" we hired a management company that wanted the first month's rent as a fee, plus about $100 a month to collect the rent and deposit it to our account.  They also handled maintenance and repairs, using their own selection of expensive plumbers and repairmen.   We made maybe a few thousand dollars one year and then lost as much the next.  At the end of each lease, the tenant would leave and they would suggest raising the rent, which meant the place was vacant for months at a time, leading to more losses.

Our last tenant had cats and smoked and the place was sort of a mess.  The manager guy wanted $5000 to clean it and spray-paint it (spray-and-wipe, I call it - they spray everything beige and then wipe off the overspray from light switches and whatnot - it looks like crap).  So we drove up there and two backbreaking weeks later, it was cleaned, repainted, and carpeted.  It looked crisp and new.  And we found a good tenant who wanted to rent for a year.

One reason we hung on to the place was that they finally decided to tear it down and build new medium-rise condos there.  There were systemic problems with the place as the buildings were sliding down the hill, slowly, due to marine clay, and the infrastructure was over 50 years old and poorly maintained.  Yes, Never Own A Condo!  Condo associations will slash maintenance budgets to get short-term gains at the expense of long-term costs.  And this is a prime example.

At least the buildings didn't collapse killing hundreds.  Well, one balcony collapsed - good thing no one was on it - or under it!  Anyway, they have this horrifically complicated deal going on, tearing down units in stages, selling off land parcels to different developers (there are 22 acres in all!) and some people want to stay to the bitter end, others want to "early out"and leave ASAP.  If your unit is slated to be torn down early and you want to stay, they will relocate you to a unit that someone else wanted to "early out" from.

Well, we thought about it and decided to stay until the end.  That was a few years ago.  Anyway, the condo association dithered and dawdled and the original plan expired and we had to vote on a new plan - and have another opportunity to "early out" - so we did.  In August of 2023, they should pay us about $160,000 for the unit and we walk away.  The tenant's lease expires in June, so that should not be an issue.

Since there are no real estate agent's fees, closing costs should be minimal, if non-existent.  However, if we decided to keep the money, the capital gains taxes would be about $27,000 in Federal taxes and $7800 in State Taxes (!!).  Plus, this would cause us to lose our Obamacare subsidy for at least one year, or another $16,800.  So if we "walked away" and took the cash, we would end up with $106,400.  This is assuming miscellaneous closing and other costs of about $2000.

Why sell?  Well for an asset worth $160,000, we are earning maybe $5000 on a good year, losing money on a bad year (like this one).  Over the last ten years, cumulative, it has been a break-even kind of deal - with no depreciation deduction.  We should have sold it a long time ago!   That money in the bank could have made us a lot of money over time.  Not sure what we were thinking, other than once the redevelopment started, it was kind of hard to sell.

Today, the majority of units are held by investors and as such, regular mortgages are hard to come by - only VA and portfolio-backed loans are available if the unit is less than 1/2 owner-occupiers.  Units that are selling are going for $155,000 or so, minus a 6% real estate agent fee.  So, veterans or cash buyers, basically.

One alternative to paying all those taxes is to do a 1031 or so-called 'Starker" deferred exchange.  After selling the unit, you have 45 days to "identify" a property and 180 days to close.  Your basis in the property is transferred to the new property and no capital gains taxes are due.  If you eventually move to that property and then declare it as a personal residence for three years out of five, you can then sell it and walk away paying no taxes at all.  Nice work if you can get it.

Timing markets is difficult.  But it seems with rising interest rates, real estate prices may drop off in the coming months.  Like I said before, there is a lot of hysteresis in the system, so people are still paying prices that made sense in an era of 3% mortgages, at a time when they are pushing 7%.  Some folks will end up in trouble, no doubt.

Timing markets is difficult, to be sure.  But I am going to take a gamble here that in 2023, $160,000 in cash will buy a nice property more locally to us.  We can rent it out and make a little money and be able to manage it ourselves (which would eliminate about $2500 in management fees every year).  And if it was something we could "downsize" to later in life, it might work out as a tax-free deal.  We could sell our existing house, tax-free at that time.

Worst case scenario, we walk away with a hundred grand in cash, which invested might yield $7,000 to $10,000 a year in income, or spent, would keep us afloat for another three years without having to tap into our IRA.   Or the money could be used to buy a "big ticket" item down the road, like a new roof for the house, or maybe a car someday, when the hamster finally wears out.

First world problems, I know.  But it is funny, looking back at our ownership of this condo, we really didn't "make out like a bandit" on it, as we broke even over the years on the rental income (this does not account for our labor, however!).  Yes, we end up with a capital gain of $160,000 (as we depreciated the original purchase price of $38,000 down to zero).  But if you look at that in terms gain over the 25 years we owned the place, it comes to about $6400 a year.  For an initial "investment" of $38,000, compounded for 25 years at 6%, that works out to about.... $160,000.   Nice steady growth, yes.  Obscene profits?  No.   Of course, the first 18 years were rented out at-cost.   Being "nice" is expensive!

Anyway, we'll see how it works out.  Maybe things will turn around next year and prices will go even higher - and $160,000 will buy you a Big Mac.  Who knows?

It is good to have such problems.