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This past week I got notice that a past client of mine has filed Chapter 7 Bankruptcy, which is liquidation. They were a medium sized home builder that were until a year ago my biggest client. That changed when we decided to discontinue doing Code inspections for homebuilders (as I said before, it was a great decision).

The builder had been doing pretty good, but a few months before I quit doing work for them there were warning signs (hindsight being 20:20). The first was the high turnover of personnel, and the low quality of people they were hiring. It seemed there was a new superintendent on each job every two weeks. The other was how fast they were building in areas that were experiencing slowdowns. In late 2006 builders were putting up homes at a furious pace around here in Atlanta, but the inventory was growing. That made me nervous at the time, and I remember a gut level sinking feeling I got thinking about it. I had no idea things would turn out as bad as they did.

Anyway, I was lucky, I wasn't owed any money by this builder. A friend of mine who subcontracted for them (in the trades, he's not an engineer), is stiffed for $15,000. Another sub lost $700,000 and got pushed into bankruptcy too. The question all of us ask is "how did this sub let himself get 700K into one customer?" I suspect they weren't watching the accounts receivable, and by the time they caught it, it was too late. Lazy or stupid bookeeper? Inattentive management? Optimistic thinking about what they were owed, and not being willing to go after a "good" customer? Probably all above.

That sub hasn't paid his suppliers, so they liened projects this guy was on for what they weren't paid. So, another builder I know getting liens on her projects due to a bankruptcy of a builder she had never heard of running her sub bankrupt and him not paying for materials on her job. She had to pay the suppliers direct - again, effectively paying twice for the same work. So, you can see the damage from one builder going down has rippled through three other people in a chain.

Also, I did some research on Dun and Bradstreet on a company that owes me a couple thousand. They have UCC filings for loans they were taking throughout 2005, 2006, and 2007 from a number of places (8 different filings). One item that stood out are the number of loans from Dell Financial Corp. That company was making a LOT of money, and they shouldn't have been taking so much debt on during such a period. In my opinion, computers for them should have been something to pay for in cash. When the bust came, which was sudden and hard, they were faced with huge debt which destroys cash flow. I made a smaller scale error when I bought 3 new computers and a plotter on "6 months same as cash" financing. Business fell and I missed the 6 month deadine and got nailed with back interest at 25%. I just finished paying off that credit, and it HURT.

Last week my son and I went for a ride looking at subdivisions. I found one that looks like a western ghost town. It was probably a 50 lot subdivision, large houses overlooking a lake. Three houses were started, one is up but no doors, windows, or siding. One is halfway framed and abandoned. The other has the roof felt on, but no shingles, or siding, windows, or doors. The roof felt on that one is ripping up in the wind and is only held down by toe-boards that were put up by the roofers during construction so they wouldn't slide off. The vegetation is overgrown, and the place is covered with trash. It was to be a gated community, and one gate is closed, the other is halfway open, making it look even more abandoned. Reading the permits, the last work was done in September, but it looks like an ancient ruin. The wood in the halfway framed house is black with mold and rot.

Companies that competed with me for Code inspections for builders have told a contractor I know that they are down 50%. Knowing how people will understate how bad they are doing, I would guess they are down more like 75%. Residential permits are off 65% in Atlanta this year, and when builders are slow they don't pay engineering firms for inspections, they use the Counties, which include the inspection cost in the permit fee anyway. Some of the areas are prohibiting third party Code inspections because their own staffs are slow anyway. Why let someone take away your work? Funny, but I got a lot of snide comments when I quit third party inspections.

My company is hanging in there. I got some more commercial work in the past two weeks, some large design jobs (for us) and I got a call from the Veterans Administration - we are short listed for a design project wtih them. That doesn't mean I'll get it, but I have hope.

Early this year was painfully slow, and November was slow. However, this year we cut costs, paid down debts, and diversified business. My personal income is down painfully because I used money the business made to pay off high-interest debt. Other than November, the past few months have been busy, and December has been insanely busy. I hope we can keep up the trend. To survive this, I've had to think sideways and be creative to keep the business coming in.

Oddly, there are still builders putting up houses even though nothing is selling. Why? Well they need to keep the money flowing in. The only way they can pay subs on projects is to keep borrowing for new jobs, and the only way they can pay themselves is to keep borrowing money for new construction. Why are lenders providing them money? I have no idea.

How much percentage of a house under construction do you think the builders had to pay with their own money? 10%? 15%? 25%? According to a builder I spoke to last week, the answer is 0%. He said that the lenders probably loaned many of the builders I knew 80% of what they told the lender they could sell the house for. He also said lenders were lending 100% of construction and land cost on some projects PLUS an amount for overhead. The projects are foreclosing with the lenders owed more than the projects are worth.

Anyway, watching this housing bubble burst has been strangely entertaining, even though I'm right in the middle of it and it's hit me hard too. I guess it's the same morbid fascination we get when we drive by car accidents, or...see a train wreck. There is an evolutionary reason for this. Our ancestors probably got quite fascinated when they found Ooog the caveman got stomped by a mammoth, and in examining what remained of Ooog, they probably figured out how he got in trouble and may have avoided the same for themselves. I think the truth holds today when we see other businesses fail. May as well study what happened to them so it doesn't happen to us.

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