Money

The Values of a Dollar: Too Good to Be True

Aaron Kipnis learned a hard lesson when his trusted father figure left him broke in a bad real estate deal

Aaron Kipnis and his family.

Aaron Kipnis, PhD, 65, is a psychology professor at Pacifica Graduate Institute in Santa Barbara County and author of "The Midas Complex: How Money Drives Us Crazy and What We Can Do About It." He shares is story here with Emma Johnson, who has been reporting on how the lessons we learned about wealth, debt and budgeting in childhood play out in our adult lives.

When I was a young man in college I met a man 20 years older who took me under his wing and taught me business. We met through a nonprofit where he was on the board, and he became my friend and mentor, teaching me how to buy, rehab and flip houses, invest and save money.

It was a great opportunity. I was training to be a therapist, and I really needed the money. But more than that he was a much-needed father figure. My parents divorced when I was very young and there was a lot of instability. My mother was a secretary and my father was a gambler. I always dreamed of having a father who knew something about money who could help me out. In my friend I found that. I had a deep sense of gratitude towards him.

I never made a lot of money from those real estate deals — but when I moved away and started my teaching and psychotherapy career, I had enough to buy a house in Santa Barbara, Calif., in foreclosure using the real estate skills he taught me. It was a large Spanish colonial surrounded by orange and lemon trees with views of the coastline. I was so happy there.

Some years later, my old friend came for a visit. I was so glad to see him again. “Aaron, I think the California real estate market is set to fall again,” he said. “You should sell this house and invest the equity in a deal I’m working on in Denver. I’m buying up apartments for pennies on the dollar. I can make you a wealthy man.”

If anyone else had said that to me, I would have run for the hills. But I trusted him. He was my friend. That equity was all the money I had — it was not enough to retire on, but represented 20 years of hard work, making my way up from a childhood of poverty to middle class.

I sold the house for about what I paid for it, moved into a smaller condo and invested the rest in his company. We signed a tax-deferred arrangement that dictated that I was a silent partner and would get monthly cuts of the rent revenue, and then when I turned 60 he would sell the buildings and split the profits. I felt so lucky to have a wealthy friend who wanted to help me. Every year he updated me on the status of the deal and I would think, "Boy-oh-boy! I’m going to retire rich!"

My accountant was increasingly nervous about the deal, raising flags about the annual statements and urging me to get out. When I pressed my friend, he said my accountant was an idiot — not sophisticated enough to understand the complex deals they were doing. He urged me not get out too early and take a hit. Every time I expressed concern, he insisted that no matter what, I would be at least whole at the end of the deal, that the investment was backed by huge assets.

The monthly checks came for a few years, until suddenly stopping in 2007. After two years of no rental checks, the economic downturn was in full swing and I was very, very anxious. Then I turned 60 and, per our contract, I said I wanted to unwind what was left.

And what did my friend say was left? Bupkis.

“What do you mean, 'bupkis'?” I screamed at him. “You said you were worth millions! That there was no risk of losing capital!”

He told me to stop complaining — he was now broke, living in a small apartment with nothing. At least I had my career and volunteer work I loved, he said.

It turns out what they were doing was indeed sophisticated — when vacancies were up, they refinanced, over-leveraged and ultimately lost everything.

And I lost more than everything. After I recovered from the initial shock of the lost investment, I received a tax bill for 50 percent of the sum I initially invested. As the silent partner, my friend and his fellow investors structured the bad deals in my name.

I consulted a number of tax experts and lawyers and they all said the same thing: I had no recourse. To fight the matter in court would take more money than I’d invested, and more time than my life and sanity are worth. I paid the bill out of my savings.

Needless to say, that ended our friendship, which was at least as great of a heartache as losing the money. I was vulnerable to that kind of person — that strong father figure with financial assets who could help me, just like I always wanted.

I don’t think my friend was malicious, but he was grandiose. There was so much money flowing around, the numbers were so big, he became careless.

When I got over the trauma, I had a different perspective. At first, I felt like my life was over. But it wasn’t. I still had a loving wife and two children. I had my same successful career and colleagues and my mental and physical health. I still had my beautiful life. I was still whole — I just lost all my money.

In the past five years, I have worked really hard to build up my psychotherapy business and sought out new opportunities at work. I’m building up my savings and feel confident I can retire by 70. But I will never trust anyone else to manage my money.

Emma Johnson blogs at WealthySingleMommy.com. She is a freelance business and personal finance journalist and mom of two. Send her your questions at emma@emma-johnson.net.