With a little time to go before tax day, you’ve still got time to fully fund – up to $5,500 or $6,500 if you’re at least 50 years old – your Individual Retirement Account (IRA). As a certain former Governor of California used to say in the movies: Do it.
Today’s lesson is a departure from the solid, sensible, (maybe boring?) advice I’d usually give you regarding IRAs, and instead is about a do-it-yourself (DIY) version of IRAs that you should know about. But you shouldn’t necessarily “do it.”
But first, the boring, correct thing you should do with your retirement money: Set up automatic regular contributions to a low-cost (probably indexed) 100 percent stock fund at a brokerage house, and never, ever, sell. Also, be sure to do this starting at age 22. That’s how you guarantee your wealthy retirement.
While most of my retirement money is sensibly invested as described above, a portion of my retirement money is in a self-directed IRA. What does that mean? That means I like to make things difficult for myself. For some good reasons, and some bad reasons, which I’ll explain.
A self-directed IRA greatly expands the category of things you can purchase into your IRA. With a self-directed IRA, You can buy real estate, like raw land, a commercial building, or even a house. (You can’t live in a house owned by your IRA, however, that’s a clear No-no.) With a self-directed IRA you can invest directly in a hedge fund, a venture capital fund, or simply shares in a privately-held business or limited partnership. (Although you can’t own a business that also pays you a salary, that’s also a clear No-no.) You can even buy physical commodities like gold, for example. (You shouldn’t, but you can.).
The folks at the self-directed IRA service provider I use offer further examples of odd but potentially interesting ways to invest that go beyond the bread-and-butter stocks-and-bonds of a traditional brokerage or bank IRA. Some clever real estate folks, for example, by options on real estate for small sums of money, and then line up real estate buyers above their option price. This form of real estate flipping is a difficult but cool trick that could turn a very small IRA into something meaningful. I don’t really recommend you try this at home, I’m just mentioning things that some folks do in their self-directed IRA.
There’s definitely nothing ‘guaranteed’ about self-directed IRAs. In fact, it’s probably safe to say that one of the main disadvantages of a self-directed IRA is that there’s (almost) nobody to sue when things go wrong. That’s your own self-inflicted wound when you lose money.
An analogy I like to use for a self-directed IRAs is that it’s a lot like building your own car in your own garage. It will take a lot more work than the alternative. You probably need specialized knowledge. It may cost you more money than buying your basic Hyundai at the dealership. You can install some cool tricked-out features if you have particular skills. Still, most people would be better off, with most of their money, if they just went to a professional brokerage instead of building their own investment vehicle.
But if you build it yourself and then the brakes fail going down hill, well then I don’t know what to tell you except you made some bad choices. And also, like, you should have gone to GEICO.
The best reason for opening a self-directed IRA – probably – is that you really derive a lot of satisfaction from the act of investing itself. Maybe you enjoy taking risks. Maybe you have a very particular expertise in real estate or private investing or high-interest lending. Possibly you have access to unusual deal flow because of your professional background. Those are the scenarios that lend themselves best to self-directed IRA investing.
Personally, I’ve done this now for seven years.
The service I use in Texas, Quest IRA out of Houston allows me to invest in some weird things, which I’ve found fun. My wife’s IRA, for example, receives regular monthly payments on a mobile home loan in Arkansas. Whenever a monthly payment comes in, I forward her a note saying “Yay Mobile Homes!” (True story.)
From my own IRA, I’m currently lending money to a friend here in San Antonio who needed to buy a piece of property and erect a structure for his business. It felt nice, beyond the annual interest rate I earn, to offer him an easier option than a bank for that purpose.
In my self-directed 401K, I acquired a fractional interest in an odd-ball piece of land in Bexar County that has at times enhanced my knowledge of real estate arcana and other times has frustrated the heck out of me. I plan to write about some of that arcana next week.
In investing via my self-directed IRA, I violate all sorts of investing rules that I urge on other people. Things like:
Don’t spend any more than the minimal time necessary on investing activities. Guilty as charged.
Have an expert analyze all the risks. Since I don’t know all the risks I’m taking, and since a professional money manager hasn’t looked into them for me, there are certainly more than the usual number of unknowns in these investments.
Don’t lend money to friends, as you risk losing both the money and the friend.
Don’t pay higher fees than necessary.
I know I pay higher fees for my self-directed IRA accounts than I do for my basic index stock fund at a major discount brokerage. I get charged an average of 0.15 percent management fee on assets with my basic stock index fund, or let’s say $150 per $100,000 per year. Although the self-directed accounts don’t have a management fee, I pay in the range of $1,000 per year, or let’s say 1 percent for a variety of account fees, on $100,000. In other words, this is more than six times more expensive than my basic stock index fund.
So again, this is as much about the fun of DIY than anything else. Have I convinced you not to do this yet? Heck, I’ve almost convinced myself. Just kidding, I enjoy it too much. And also, I probably need better hobbies.
Since I like to write about finance, all of real life is merely raw material for finance lessons, so I beg your pardon while I talk about tax liens in my life.
A while back I described my astonishment at how low property taxes were for ‘agricultural exemption’ property that I happened to be eyeing for investment purposes. Long story short, I ended up buying a one-fifth interest in raw land in a rural part of the County where I live (Bexar County, TX) agricultural exemption included.
My property investment
I mention my property investment to illustrate the role of tax liens. Bear with me for a bit as I explain a sort of complicated situation.
I only bought one fifth of the property, while the other four-fifths remain owned by four siblings (not mine) who inherited the property. While the family dynamic is opaque to me (they were strangers to me before my investment), I understand that some siblings have sufficient money and some don’t, and some siblings care to pay attention to details like property taxes, and some don’t. Meanwhile, taxes on the parcel of land have gone unpaid for a few years.
This makes me extremely nervous for my investment.
Fail to pay property taxes, and you eventually run the risk of losing your property to the foreclosure power of the taxing authority, typically a city or town. Needless to say, I don’t want to lose this property, and if we leave taxes unpaid for too long, eventually Bexar County will take the land.
Tax lien lenders
Now, you may or may not have ever heard of ‘tax lien’ lenders and investors, so if not, let me be the first to illuminate for you a fascinating little section of the real estate finance world.
Ever since I registered my name on the property deed as partial owner last Spring, I have been inundated with solicitations from tax lien lenders. My name – along with the siblings – shows up publically as owners of a parcel with delinquent taxes owed. Hence, the solicitations.
The tax lien lenders offer to pay our property taxes now owed on the property. Meanwhile, if we did the deal, the lenders would use the real estate as collateral for the loan in the event I (and the sibling heirs) fail to pay back the loan in the future. Tax lien buyers (or in Texas, tax lien lenders) have the power to act like the municipality, and eventually take over the property for themselves in the event of non-payment.
In my complicated situation, with some of us owners unable to pay the taxes or possibly unwilling to put up money for the others for an indefinite amount of time, these lenders make some sense.
Partly I mention this whole anecdote because tax lien investing/lending is an obscure but important part of real estate and municipal finance.
Partly I mention this because tax lien investing may inspire a natural aversion. On the face of it, any lender who has the power to take away your property seems, I don’t know, scary? I mean, regular bankers seem unlikable enough. From a PR standpoint, however, the specific combined function of ‘tax collector’ and ‘money lender’ has an even tougher time getting a fair hearing. Those labels have served for thousands of years as biblical shorthand for enemies of the common people.
Personally, I have no problem with the solicitations to pay my taxes in exchange for an eight to twelve percent loan. We might need that solution.
The ironic thing here is that – in my old investing life – I was on the other side of this situation.
My tax-lien buying
I discovered tax lien investing in 2005 after buying a book called The 16 Percent Solution, in which the author explained a high-return and low-risk path to wealth through tax lien investing. Through my investment company I first started purchasing liens in New Jersey and New York, eventually branching out into Connecticut, Vermont, Rhode Island and even Mississippi.
Incidentally, I was a very unwelcome (meaning: Yankee) participant in my one Mississippi tax lien auction. I’m just happy to have gotten out of there in one piece. Bless your hearts, people of Wilkinson, Mississippi!
Tax lien investing and lending happens around the country, with state and local variations adding to the complexity. On the positive side, the interest rates earned seem very attractive, while the risk seems low. On the negative side – as I learned over the course of a few years of tax lien investing – it’s quite easy to lose money through tax lien investing as well.
As I purchased liens, I sometimes wondered about the complex situations that led people to become delinquent on their real estate taxes. Now I’m in one of these complex situations, and I sort of get it.
My situation
I don’t know when we will all be able to agree on paying the taxes. It may be a better idea to borrow the tax money – even if we have to pay eight to twelve percent on the loan – than to risk losing the property outright to the county via foreclosure. A loan may give us enough time to figure out an eventual solution – either by paying the taxes or selling the property.
A central idea, the idée fixe of Bankers Anonymous, is that as a society we do a poor job of teaching about finance, a consequently poor job as individuals of learning about finance, and therefore we all suffer an inevitable tendency to make bad decisions, both personal and political, about finance.
Sometime this Spring I realized why: We played Monopoly all wrong as kids.
This explains everything that I’m trying to do with Bankers Anonymous.
Two ‘house rules’ prevailed when I used to play,[1] and both are absolutely terrible.[2]
1. Free Parking – We collected all taxes – luxury tax, income tax, and taxes accumulated from Chance and Community Chest cards – in the middle of the board.In addition, we frequently ‘seeded’ Free Parking with an orange $500 bill.When a player landed on Free Parking he collected all the accumulated taxes, plus the $500, in a lottery windfall.None of this exists in the real rules on Monopoly.
2. No Property Auctions – When we played, the player who landed on an available property got the exclusive option to purchase it, at the listed price only.In the real rules, if the initial player declines to pay the listed price, any player may bid on the property, at any price – starting if necessary at $1, with no upper limit to the final auction price.
These house rules turn an interesting game about capitalism into a boring monstrosity.A monstrosity responsible for societal poverty, government debt, runaway inflation and the Crisis of 2008.[3]
Real rules Monopoly is so much better for society
Let me explain why real rules Monopoly is far better.
Free Parking – Free Parking is stupid.Growing up, my friend Brendan always, always, ALWAYS landed on Free Parking, collecting the taxes and the $500.How did he do that?I have no idea.
Although he may have always won the game, I can be smug in my knowledge that Brendan learned bad lessons from Free Parking.Free Parking never happens in real life.Nobody actually wins the lottery. Clearly, Free Parking is a gateway drug for kids to learn about lotteries, casinos, and all the other terrible ways in which poor people pay taxes.
Property Auctions – This would have been the ideal way to teach millions of children about valuable concepts like savings, real estate, competitive auctions, distressed investing and slum-lording.Information, in other words, we can all use.
Instead, by eliminating the auction, we learned in Monopoly house rules that there’s just one price for property, take it or leave it, and that chance – rather than skill – determines whether you accumulate valuable properties.But that’s never how it works in life.
In real life, sometimes you can nab the property nobody else wants on the cheap.[4]In real life, sometimes you pay twice what the property is really worth and end up mortally wounded financially.
Bidding wars can break out in real rules Monopoly, which lead the ‘winner’ of the auction to actually be the ‘loser’ in the long run.This is a valuable financial lesson.It explains much of the real estate boom 2001 to 2007.
According to the feature, to play the odds, in sum:
1. Buy the orange properties,
2. Build 3 houses per property at one time (i.e. 9 houses, for most colors) for the fastest return on investment,
3. Take into account the likely dice rolls of your opponents.(5, 6, 7, 8, and 9s happen more frequently, build accordingly), and
4. Note that “Jail” acts as a ‘sink,’ attracting more than your typical proportion of landings.Other properties also have higher probabilities as landing spots, so invest accordingly.
All sound advice.
My advice is to play by the real rules, which turns Monopoly from an endless bore of a game to an interesting lesson in real financial skills.
I’m not saying Monopoly will become as interesting as The Settlers of Catan, Dominion, or my own nerdy group’s favorite, Cosmic Encounter.But it’s worthwhile, especially with kids.
Epilogue – The bad news: I played real rules Monopoly for the first time in my life this Spring with Brendan, as well as with my 7 year-old.
My 7 year-old, with some coaching, won.At least Brendan didn’t win.I hate Monopoly.
[1] I’ve linked here to a site that explains the origin of the typical house rules for Monopoly.It turns out the rules were probably designed to keep kids from getting upset with Dad during the game.As a Dad, that makes sense.But as an ex-banker, I’m livid since this encapsulates everything that’s wrong with Western Civilization.
[2] In my 100% invented-out-of-whole-cloth fake poll, 93% of American households adopted these same house rules.I’ve rounded down to be conservative, because that’s just good science.
[3] Not to mention Obamacare, the designated hitter, and Renee Zellweger after Jerry Maguire.
[4] When we played real rules Monopoly recently, Brendan and I cleverly avoided the railroads.Because: No houses!Meanwhile my 7 year-old picked them up on the cheap.Guess who won?
I hear recurring criticism of the current SAISD Board; that it focuses on real estate contracts and business opportunities – via new construction, bond deals, acquisition of property, and sub-contracting – rather than on the real business of the school district, educating children.
I’ve heard so much about Ed Garza’s interest in real estate that I decided to do some independent research on his real estate track record. Say what you like about his term as mayor, or his term as SAISD Board President, Ed Garza has clearly succeeded with real estate.
Through my investment business I’ve bought and sold a few dozen properties in the past decade, so I have experience looking at real estate transactions, and a few tools for doing a dive into his results.
I have to say, his track record on a number of real estate deals is incredible.
By that I’m using the literal meaning of the word: Not credible.
In the following posts I review some of the details that I find incredible, or at best highly unlikely.
I believe the results would need ‘help,’ possibly via political patronage or influence peddling.
I describe the transactions in detail so others can decide for themselves.
Two other thoughts, by way of preamble
a) I did not find an illegal real estate deal. I can only point to a pattern which, as an experienced real estate investor, I don’t think could be reproduced by others. If any reader can use this information to find a ‘smoking gun,’ I’m happy to serve as a nexus of crowd-sourced information.
b) I don’t know Ed Garza. I’ve never met him. Garza has a right to earn a living in real estate investing. Many people I’ve spoken with in recent years, however, share the uneasy feeling that real estate and business deals drive his leadership of the SAISD Board.
What’s at stake with the SAISD? Why do I care?
My oldest child is subject to the leadership of the school district every day, as she attends a public school in SAISD. Decisions of the school board affect my child’s life, and therefore my life, in a deep, visceral way. When the board focuses on the wrong things, then I, as a parent, feel a threat to my child’s future.
For the City of San Antonio the stakes are even higher.
The leadership of the SAISD knows that their success rate – as defined by graduating seniors considered “College Ready” via a minimal standardized test score – is 7%. That deserves restating: 7% of the kids in the SAISD system are ready to go to college by the time they graduate from the SAISD system. At the present rate, just 3,780 of the 54,000 children in SAISD can expect to go on to succeed in college.
This is horrible news.
That 7% success rate mirrors another statistic almost the inverse of the 7% college readiness. 93% of children attending schools in the SAISD come from disadvantaged backgrounds. 50,220 of the 54,000 kids in SAISD are economically disadvantaged.
We know that attending college – and most importantly, graduating from college – provides the key to getting ahead economically.
Putting those two statistics side-by-side, therefore, we can extrapolate the following: If we don’t change the 7% college-readiness statistic at SAISD, right now, today, we lock in the next generation of poverty for San Antonio.
We’re playing for high stakes.
College-readiness, as a way to address inter-generational poverty, needs the laser-like focus of the SAISD Board. Garza appears to lead the board with a focus on business and real-estate opportunities.
Real Estate Deal – #1 – 139 North Street, San Antonio 78201
Ed Garza and real estate partner Sam Wayne purchased – via their real estate joint venture known as Urban One 30 Group LLC – a property at 139 North Street, a 3 Bed 2 Bath 1,976 square foot stone construction house built in 1930. The property is in the neighborhood of Monticello Park, adjacent to and just North of Garza’s own neighborhood. Monticello Park features attractive single-story and 1.5 story houses built in the 1920s and 1930s.
Urban One 30 LLC obtained a Deed of Trust[1] through Sterling Bank for $125,800, interest only, that matured nine months later, in December 2008. They probably intended to ‘flip’ the property quickly, hence the nine-month loan and interest-only provision.
Here’s how the property looked at acquisition:
Unfortunately, March 2008 was a tough time to acquire real estate for flipping – as a nation we’d be in full-on financial crisis mode by the Summer of 2008 – so Garza and Wayne refinanced the loan when it matured in December 2008.
They refinanced and extended the loan – then for $125,785 – for an additional five years to December 2013, interest-only for the first 6 months, followed by a 4.5-year amortization schedule.
Here’s where it gets weird
And then the first suspicious thing happened.
Two years after they extended the loan, and around the time they unsuccessfully listed it for sale for $145,000 in 2011, first with realty company Vflyer and next with Keller Williams, a massive fire gutted the property.
Hmm. Ok. Was the contractor using explosives? Because this isn’t the work of a casual cigarette butt tossed next to an open aerosol can. I’ve looked at the property up close and it’s a catastrophe.
And here it is from the front, in which you can see the burned roof.
then there’s the side angle:
another side angle:
And an interior shot:
Now, in the real estate world, let’s just say there’s a weird correlation between unsold buildings with mortgages and insurance that tend to catch fire in economic downturns.[2]
I know the property had insurance because there was a mortgage from Sterling Bank, and all mortgage lenders insist on insurance, including for fires.
Why do properties in economic downturns mysteriously catch fire, and inevitably the fire is large and catastrophic rather than contained? A fire insurance payout for the whole property can be a way for a financially distressed developer to collect insurance proceeds. That money then allows the developer to stay current on the mortgage, or to rehab the building. I’ve even seen situations in which the insurance proceeds can be offered to a new buyer, as an incentive to purchase a burned property, lowering the cost of acquisition.
Among the curious aspects of the 139 North Street situation is that, following the fire, the property never got rebuilt.
Does that mean the insurance company refused to pay because the fire appeared too suspicious? That in itself would be very interesting information, and would explain why the property lay burned and unimproved for so long.
I don’t know what caused the fire 139 North Street, but I’d really love to read the fire inspector’s report, or the insurance company’s investigation. I’d also be curious about the result of litigation Garza said he pursued against the contractor.
So then what happened?
Ok, let’s jump to the Spring of 2013. The Express-News’ Brian Chasnoff features this Monticello Park eyesore in a column. Chasnoff interviewed Neighborhood Association President Rob Sipes, who admits his Association is afraid to complain to the City about Garza’s burned out hulk because it may compromise ongoing neighborhood discussions about lighting and fencing at Jefferson High School.[3]
It seems reasonable from Chasnoff’s article to assume that the City and neighborhood treatment of Garza and his eyesore reflect his political clout.
Meanwhile, the Bexar County tax assessed value dropped from $131,900 to $57,660 in 2013, as makes sense for an empty, burned-out husk of a house.[4]
Another odd detail of Ed Garza’s real estate businesses
Two of Garza’s seemingly primary real estate businesses were ‘involuntarily terminated’ by the Texas Secretary of State in August 2011.
Ed Garza and partner Sam Wayne formed Urban One 30 Group LLC in November 2007, and they later formed Zane Garway Consulting LLC in October 2009. A few years later, In March 2011, the ‘Registered Agent’ for both LLCs[5] filed a notification of ‘resignation,’ sending them a certified letter to let them know. The certified letter was to ensure Garza and Wayne couldn’t claim later to have not been notified, because of a letter lost in the mail, for example, or an incorrect address.
As you can see from the document, no reason is given in the resignation, although the most obvious reason would be for non-payment, most likely of just a few hundred dollars.
What happens next is that in August 2011, the Texas Secretary of State ‘involuntarily terminates’ Urban One 30 Group LLC and Zane Garway Consulting LLC – essentially making it improper for them to do any business in the State of Texas. The termination is for not keeping a registered agent. The effect is that nether entity then maintains required state filings, such as an annual ownership registration, an affiliated-entity registrations, or annual franchise tax registration. From my perspective, this may either be a result of neglect, a financial choice, or it may be a strategic choice.
There’s nothing necessarily shocking about the registered agent resignation and the subsequent termination. It does not mean necessarily they found something improper. It does mean, however, that Garza and Wayne a) Through neglect or for strategic reasons, failed to pay for a basic requirement of doing business and b) Through neglect or for strategic reasons, allowed their businesses to go ‘dark’ in the state of Texas from the perspective of reporting contact information, ownership information, or filing franchise tax information.
I do think there’s something unusual about a real estate investor and self-designated professional urban planner who lets his businesses, in this case two active legal entities, Urban One 30 Group LLC and Zane Garway Consulting LLC – both of which he shares with Sam Wayne – get ‘involuntarily terminated.’
Imagine my surprise to learn that Urban One 30 Group LLC sold 139 North last month for $156,250. That’s exactly $1,000 less than Garza and Wayne paid in 2008, before the house was a burned-out shell.
That got me thinking – and curious about – who would buy such a house, at such a price?
The Buyer
The buyer of 139 North is Nuvista LLC, a newly formed LLC, which first registered with a San Antonio PO Box in November 2012. Nuvista also acquired two other distressed properties in the nearby neighborhood, in December 2012 and March 2013, and a fourth distressed property last month.
Nuvista LLC is an unusual buyer, and the financing is odd as well.
The lender to Nuvista on the property at 139 North is called “Steadfast Funding LLC,” but that group does not appear to exist in Texas. Two private individuals in Allen TX are also listed as the principal backers of the construction loan to Nuvista, which matures in 6 months.
The owner and founder of Nuvista LLC and his wife declared bankruptcy a year ago in Arizona, in April 2012.
The owner of the LLC is listed as the founder of 20 different LLCs over the years.
The owner of the LLC has Arizona bank judgments against him for $538,497 and $42,729 from two different banks, a California State Tax Lien against him for $2,348, and a California judgment for $1,518.
I know it’s just a coincidence, but do you know who else had California State Tax Liens, and Arizona bank judgments?
Manuel Isquierdo did! Isquierdo is the Superintendent finalist that Ed Garza’s SAISD board nominated last month. In my article about Isquierdo’s nomination, I implied that board members might find a financially distressed Superintendent an advantage, rather than a disadvantage, and stated that I don’t believe in coincidences.
Let me clarify: I have no reason to think that Isquierdo and the owner of Nuvista LLC are actually linked.
But a recently bankrupt, financially desperate real estate investor paying 3 times too much for Garza’s burned-out property seems funny to me. How does the financially insolvent purchaser get a private mortgage anyway? Lenders aren’t stupid, in my experience.
It’s not illegal to pay too much for a property, but it strikes me as unlikely without a particular reason.
How did Urban One 30 find a buyer like Nuvista? Why would Nuvista pay the same amount for the property in its present, burnt-out, condition, when the tax assessed value is nearly 1/3 of its earlier value?
The fire at the location two years ago. The de-listed LLCs. The sale in April 2013. It’s incredible.
Real Estate Deal #2 – 2006 W. Magnolia Ave, San Antonio TX 78201
Ed Garza and Urban One 30 LLC partner Sam Wayne purchased 2006 W. Magnolia in March, 2008 for $150,000, with a $120,000 9 month interest-only construction loan from Sterling Bank. The 3-bedroom 1-bath house, built in 1928, boasts 1,386 square feet, with an attractive stone exterior.
Along with the 139 North Street property also purchased in March 2008, the economic downturn probably upturned their plan for a quick flip within the term of the 9-month loan.
In December 2009 Urban One 30 Group refinanced the full $120,000 loan for an additional 5-year term, again interest-only for 6 months, followed by a 4.5-year amortization.
We learn from the article that then-State Representative, future Congressman, and most importantly First Twin of San Antonio, Joaquin Castro had co-invested in the property with Garza.
Castro mentions to the Express-News that he’s only seen the property once, had no input into the renovation, and following a sale will just keep his money with Garza.
As the Express-News quotes Garza: “I guess he’s a silent partner. He’s only been out to the house once. That’s the kind of investor we like.”
Um, yeah. I’d agree that’s the kind of investor Garza likes.
I mean, what could go wrong? You’ve got the Mayor’s brother and future Congressman’s money co-invested with you. And he’s never seen the property but once. And by his own admission Castro has no input into the situation.
It’s not a knock on Castro that he trusts Garza to make money for him in real estate. But it does seem to be the kind of relationship-based real estate investing that Garza would seek out, to his own personal advantage. At the very least, Garza has arranged a cozy financial relationship with the Mayor’s family.
But the story of this property gets better because, like I said, he’s incredible.
The Property Value
Figuring out the value for this property at 2006 W. Magnolia is really a puzzle.
Between the purchase in 2008 and the sale in 2010, the Bexar County tax assessed value of 2006 W. Magnolia dropped steadily from $130,230, to $121,960 in 2009, to settle at $111,320 in 2010, at the time of the sale.
And then following the sale, tax assessed value stayed steady, at $122,770, $114,620, and $116,070 in years 2011, 2012, and 2013. So we’ve got a range over the past 6 years between $114K and $130K.
It’s possible the Bexar County assessor does not know about the renovations, or has declined to update the values on the house.
What about other sources for figuring out value?
The online real estate value site Zillow charts 2006 W. Magnolia steadily in the $105K to $130K range over the past 5 years.
I’ve been using online real estate value estimator Zillow.com steadily since 2004, and I can’t recall an outlier value like the one that we see with 2006 W. Magnolia. The property sold for twice the value that would be expected using either Bexar County tax assessment or independent sales data for determining expected value in the neighborhood.
In the Zillow commentary on this property, you can read a real estate agent shilling for 2006 W Magnolia: “Urban One 30, Mayor Ed Garza and Sam Wayne did it again guys.”
Like I said, Garza is incredible at real estate. Castro’s faith in him was rewarded.
Who bought this for twice its expected value? How did he get a mortgage?
Another puzzle.
The individual purchaser bought 2006 W. Magnolia in November 2010, paying $230,348.68 – an outlier price, far above any indicated independent value for this property.
Stranger-still, the purchaser obtained a 30 year mortgage for $228,068.
For those of you doing the math at home, that not a 20%-down-payment mortgage, and that’s not a 5%-down-payment mortgage. That’s a 1%-down-payment mortgage.
The purchaser appears to work at a local coffee shop on North St. Mary Street.
What I find puzzling is the following items:
1. Like the purchaser of 2006 W. Magnolia, I got a mortgage in 2010 myself. I also obtained mortgages in 1999 and 2004. Compared to back then, I can attest that the 2010 mortgage environment was very tough.
2. Banks, since 2008, are reluctant to lend without a substantial down payment, a high property assessed value, reliable income, and great credit.
3. At the very least, on the assessed value and down payment side of things, this transaction is unusual. If the purchaser has anything less than high income and perfect credit, then this 1% mortgage is even odder.
When you can sell a property for $100,000 more than others think it’s worth, and your buyer can get a 1% money-down mortgage in the tough 2010 lending environment, I’d say you’ve got some real estate chops.
When you can sell like that and also generate some cash for the City’s First Twin and future Congressman, you’re really doing well.
The Zillow Value of 1919 W. Magnolia at the time of purchase was $159K in October 2006. Garza took out a loan at that time for $85,880 from San Antonio Federal Credit Union.
Just 7 months later, in May 2007, he sold the property to an individual for $250,040!
How good is Garza? Very good.
Garza bought it for $114,220, or 39% lower than the Zillow valuation, and 65% lower than the Bexar County 2008 value.
Garza sold it for $250,040, or 57% higher than Zillow indicated, and 32% higher than Bexar County 2008 assessed value.
All in just 7 months, for a 119% increase in price. It more than doubled.
No wonder he got the real estate bug after that flip.
Is there anything wrong here?
The only two nearby comparable houses for sale, on the 2100 block of Magnolia, as of this writing, are both listed for less than $200,000.
Of the 26 properties that share the same city block as 1919 W. Magnolia, none have a Zillow value above $157,000, or roughly $100,000 less than what Garza flipped this for in 2007. The average Zillow value of the 26 houses is $123,153.
Was it just frothy real estate times? Maybe. In late 2006 to early 2007, this kind of price action is possible, so this may be nothing more than what it seems: A good buy and a good sale.
But how does he acquire the property for $114,220 just 7 months earlier?
In the end I can’t find anything circumstantially fishy – like a massive fire or a financially distressed buyer – about the 1919 W. Magnolia transaction, other than the amazing price appreciation in 7 months.
The transaction may help explain why Ed Garza got the idea that real estate should be his focus.
Like many of us in the school district, I want his focus at SAISD on the kids’ education, not the real estate contracts.
[2] If you’re a fan of Michael Lewis’ books you may recall the chapter in Boomerang about mysterious explosions all around Iceland when their financial crisis started. That was the sound of SUVs exploding like fireworks throughout the capital, all the better to collect insurance and relieve the owners of paying their suddenly unaffordable car loans.
[3] Folks closer to Garza frequently mention his adoption of his alma mater Jefferson as his own private Superintendent-ship.
[4] In 2011, tax-assessed value was $115,250, but then it dropped post-fire in 2012 to $58,500. Which makes sense.
[5] A quick note on a ‘registered agent’ if that’s not a familiar term for readers: Every corporation, LLC, or partnership – at the time of the company’s birth – informs their home state of a designated contact person and address known as a registered agent. Most businesses choose a professional ‘registered agent’ that can receive official notices such as lawsuits or government actions. It costs a few hundred dollars a year, and you have to tell your state who it is.
Real Estate Deal – #1 – 139 North Street, San Antonio 78201
Ed Garza and real estate partner Sam Wayne purchased – via their real estate joint venture known as Urban One 30 Group LLC – a property at 139 North Street, a 3 Bed 2 Bath 1,976 square foot stone construction house built in 1930.The property is in the neighborhood of Monticello Park, adjacent to and just North of Garza’s own neighborhood.Monticello Park features attractive single-story and 1.5 story houses built in the 1920s and 1930s.
Urban One 30 LLC obtained a Deed of Trust[1] through Sterling Bank for $125,800, interest only, that matured nine months later, in December 2008.They probably intended to ‘flip’ the property quickly, hence the nine-month loan and interest-only provision.
Here’s how the property looked at acquisition:
Unfortunately, March 2008 was a tough time to acquire real estate for flipping – as a nation we’d be in full-on financial crisis mode by the Summer of 2008 – so Garza and Wayne refinanced the loan when it matured in December 2008.
They refinanced and extended the loan – then for $125,785 – for an additional five years to December 2013, interest-only for the first 6 months, followed by a 4.5-year amortization schedule.
Here’s where it gets weird
And then the first suspicious thing happened.
Two years after they extended the loan, and around the time they unsuccessfully listed it for sale for $145,000 in 2011, first with realty company Vflyer and next with Keller Williams, a massive fire gutted the property.
Hmm.Ok.Was the contractor using explosives?Because this isn’t the work of a casual cigarette butt tossed next to an open aerosol can.I looked at the property up close last month, and it’s a catastrophe.Here it is inside:
And here it is from the front, in which you can see the burned roof.
then there’s the side angle:
Another side angle:
And an interior shot:
Now, in the real estate world, let’s just say there’s a weird correlation between unsold buildings with mortgages and insurance that tend to catch fire in economic downturns.[2]
I know that property had insurance because there was a mortgage from Sterling Bank, and all mortgage lenders insist on insurance, including for fires.
Why do properties in economic downturns mysteriously catch fire, and inevitably the fire is large and catastrophic rather than contained?A fire insurance payout for the whole property can be a way for a financially distressed developer to collect insurance proceeds.That money then allows the developer to stay current on the mortgage, or to rehab the building.I’ve even seen situations in which the insurance proceeds can be offered to a new buyer, as an incentive to purchase a burned property, lowering the cost of acquisition.
Among the curious aspects of the 139 North Street situation is that, following the fire, the property never got rebuilt.
Does that mean the insurance company refused to pay because the fire appeared too suspicious?That in itself would be very interesting information, and would explain why the property lay burned and unimproved for so long.
I don’t know what caused the fire 139 North Street, but I’d really love to read the fire inspector’s report, or the insurance company’s investigation.I’d also be curious about the result of litigation Garza said he pursued against the contractor.
So then what happened?
Ok, let’s jump to the Spring of 2013.The Express-News’ Brian Chasnoff features this Monticello Park eyesore in a column.Chasnoff interviewed Neighborhood Association President Rob Sipes, who admits his Association is afraid to complain to the City about Garza’s burned out hulk because it may compromise ongoing neighborhood discussions about lighting and fencing at Jefferson High School.[3]
It seems reasonable from Chasnoff’s article to assume that the City and neighborhood treatment of Garza and his eyesore reflect his political clout.
Meanwhile, the Bexar County tax assessed value dropped from $131,900 to $57,660 in 2013, as makes sense for an empty, burned-out husk of a house.[4]
Another odd detail of Ed Garza’s real estate businesses
Two of Garza’s seemingly primary real estate businesses were ‘involuntarily terminated’ by the Texas Secretary of State in August 2011.
Ed Garza and partner Sam Wayne formed Urban One 30 LLC in November 2007, and they later formed Zane Garway Consulting LLC in October 2009.A few years later, In March 2011, the ‘Registered Agent’ for both LLCs[5] filed a notification of ‘resignation,’ essentially firing Garza’s 2 companies as clients, and sending them a certified letter to let them know. The certified letter was to ensure Garza and Wayne couldn’t claim later to have not been notified, because of a letter lost in the mail, for example, or an incorrect address.
As you can see from the document, no reason is given in the resignation, although the most obvious reason would be for non-payment, most likely of just a few hundred dollars.
What happens next is that in August 2011, the Texas Secretary of State ‘involuntarily terminates’ Urban One 30 Group LLC and Zane Garway Consulting LLC – essentially making it improper for them to do any business in the State of Texas.The termination is for not keeping a registered agent.The effect is that nether entity then maintains required state filings, such as an annual ownership registration, an affiliated-entity registrations, or annual franchise tax registration.From my perspective, this may either a result of neglect, or it may be a strategic choice.
There’s nothing necessarily shocking about the registered agent resignation and the subsequent termination.It does not mean necessarily they found something improper.It does mean, however, that Garza and Wayne a) Through neglect or for strategic reasons, failed to pay for a basic requirement of doing business and b) Through neglect or for strategic reasons, allowed their businesses to go ‘dark’ in the state of Texas from the perspective of reporting contact information, ownership information, or filing franchise tax information.
I do think there’s something strange about a real estate investor and self-designated professional urban planner who lets his businesses, in this case two active legal entities, Urban One 30 LLC and Zane Garway Consulting LLC – both of which he shares with Sam Wayne – get ‘involuntarily terminated.’
Imagine my surprise to learn that Urban One 30 Group LLC sold 139 North last month for $156,250.That’s exactly $1,000 less than Garza and Wayne paid in 2008, before the house was a burned-out shell.
That got me thinking – and curious about – who would buy such a house, at such a price?
The Buyer
The buyer of 139 North is Nuvista LLC, a newly formed LLC, which first registered with a San Antonio PO Box in November 2012.Nuvista also acquired two other distressed properties in the nearby neighborhood, in December 2012 and March 2013, and a fourth distressed property last month.
Nuvista LLC is an unusual buyer, and the financing is odd as well.
The lender to Nuvista on the property at 139 North is called “Steadfast Funding LLC,” but that group does not appear to exist in Texas.Two private individuals in Allen TX are also listed as the principal backers of the construction loan to Nuvista, which matures in 6 months.
The owner and founder of Nuvista LLC and his wife declared bankruptcy a year ago in Arizona, in April 2012.
The owner of the LLC is listed as the founder of 20 different LLCs over the years.
The owner of the LLC has Arizona bank judgments against him for $538,497 and $42,729 from two different banks, a California State Tax Lien against him for $2,348, and a California judgment for $1,518.
I know it’s just a coincidence, but do you know who else had California State Tax Liens, and Arizona bank judgments?
Manuel Isquierdo did!Isquierdo is the Superintendent finalist that Ed Garza’s SAISD board nominated last month.In my article about Isquierdo’s nomination, I implied that board members might find a financially distressed Superintendent an advantage, rather than a disadvantage, and stated that I don’t believe in coincidences.
Let me clarify: I have no reason to think that Isquierdo and the owner of Nuvista LLC are actually linked.
But a recently bankrupt, financially desperate real estate investor paying 3 times too much for Garza’s burned-out property seems funny to me.How does the financially insolvent purchaser get a private mortgage anyway?Lenders aren’t stupid, in my experience.
It’s not illegal to pay too much for a property, but it strikes me as unlikely without a particular reason.
How did Urban One 30 find a buyer like Nuvista?Why would Nuvista pay the same amount for the property in its present, burnt-out, condition, when the tax assessed value is nearly 1/3 of its earlier value?
The fire at the location two years ago.The de-listed LLCs. The sale this past month.It’s incredible.
[2] If you’re a fan of Michael Lewis’ books you may recall the chapter in Boomerangabout mysterious explosions all around Iceland when their financial crisis started.That was the sound of SUVs exploding like fireworks throughout the capital, all the better to collect insurance and relieve the owners of paying their suddenly unaffordable car loans.
[3] Folks closer to Garza frequently mention his adoption of his alma mater Jefferson as his own private Superintendent-ship.
[4] In 2011, tax-assessed value was $115,250, but then it dropped post-fire in 2012 to $58,500.Which makes sense.
[5] A quick note on a ‘registered agent’ if that’s not a familiar term for readers: Every corporation, LLC, or partnership – at the time of the company’s birth – informs their home state of a designated contact person and address known as a registered agent.Most businesses choose a professional ‘registered agent’ that can receive official notices such as lawsuits or government actions.It costs a few hundred dollars a year, and you have to tell your state who it is.
Real Estate Deal #2 – 2006 W. Magnolia Ave, San Antonio TX 78201
Ed Garza and Urban One 30 LLC partner Sam Wayne purchased 2006 W. Magnolia in March, 2008 for $150,000, with a $120,000 9 month interest-only construction loan from Sterling Bank.The 3-bedroom 1-bath house, built in 1928, boasts 1,386 square feet, with an attractive stone exterior.
Along with the 139 North Street property also purchased in March 2008, the economic downturn probably upturned their plan for a quick flip within the term of the 9-month loan.
In December 2009 Urban One 30 Group refinanced the full $120,000 loan for an additional 5-year term, again interest-only for 6 months, followed by a 4.5-year amortization.
We learn from the article that then-State Representative, future Congressman, and most importantly First Twin of San Antonio, Joaquin Castro had co-invested in the property with Garza.
Castro mentions to the Express-News that he’s only seen the property once, had no input into the renovation, and following a sale will just keep his money with Garza.
As the Express-News quotes Garza: “I guess he’s a silent partner.He’s only been out to the house once.That’s the kind of investor we like.”
Um, yeah.I’d agree that’s the kind of investor Garza likes.
I mean, what could go wrong?You’ve got the Mayor’s brother and future Congressman’s money co-invested with you.And he’s never seen the property but once.And by his own admission Castro has no input into the situation.
It’s not a knock on Castro that he trusts Garza to make money for him in real estate.But it does seem to be the kind of relationship-based real estate investing that Garza would seek out, to his own personal advantage.At the very least, Garza has arranged a cozy financial relationship with the Mayor’s family.
But the story of this property gets better because, like I said, he’s incredible.
The Property Value
Figuring out the value for this property at 2006 W. Magnolia is really a puzzle.
Between the purchase in 2008 and the sale in 2010, the Bexar County tax assessed value of 2006 W. Magnolia dropped steadily from $130,230, to $121,960 in 2009, to settle at $111,320 in 2010, at the time of the sale.
And then following the sale, tax assessed value stayed steady, at $122,770, $114,620, and $116,070 in years 2011, 2012, and 2013.So we’ve got a range over the past 6 years between $114K and $130K.
It’s possible the Bexar County assessor does not know about the renovations, or has declined to update the values on the house.
What about other sources for figuring out value?
The online real estate value site Zillow charts 2006 W. Magnolia steadily in the $105K to $130K range over the past 5 years.
I’ve been using online real estate value estimator Zillow.com steadily since 2004, and I can’t recall an outlier value like the one that we see with 2006 W. Magnolia.The property sold for twice the value that would be expected using either Bexar County tax assessment or independent sales data for determining expected value in the neighborhood.
In the Zillow commentary on this property, you can read a real estate agent shilling for 2006 W Magnolia: “Urban One 30, Mayor Ed Garza and Sam Wayne did it again guys.”
Like I said, Garza is incredible at real estate.Castro’s faith in him was rewarded.
Who bought this for twice its expected value?How did he get a mortgage?
Another puzzle.
The individual purchaser bought 2006 W. Magnolia in November 2010, paying $230,348.68 – an outlier price, far above any indicated independent value for this property.
Stranger-still, the purchaser obtained a 30 year mortgage for $228,068.
For those of you doing the math at home, that not a 20%-down-payment mortgage, and that’s not a 5%-down-payment mortgage.That’s a 1%-down-payment mortgage.
The purchaser appears to work at a local coffee shop on North St. Mary Street.
What I find puzzling is the following items:
1. Like the purchaser of 2006 W. Magnolia, I got a mortgage in 2010 myself.I also obtained mortgages in 1999 and 2004.Compared to back then, I can attest that the 2010 mortgage environment was very tough.
2. Banks, since 2008, are reluctant to lend without a substantial down payment, a high property assessed value, reliable income, and great credit.
3. At the very least, on the assessed value and down payment side of things, this transaction is unusual.If the purchaser has anything less than high income and perfect credit, then this 1% mortgage is even odder.
When you can sell a property for $100,000 more than others think it’s worth, and your buyer can get a 1% money-down mortgage in the tough 2010 lending environment, I’d say you’ve got some real estate chops.
When you can sell like that and also generate some cash for the City’s First Twin and future Congressman, you’re really doing well.