Monday, March 03, 2008

Jimmy's house

One of the oft-stated "facts" about Jimmy Wales is that he made himself financially secure as an options trader. I'm a little curious about this because I don't think it's true.

So I did some digging. Jimmy sold his house last December for $230,000; he had bought it back in 2002 for $180,000 so that's a pretty decent capital gain. We'll get to that in a bit.

The more interesting thing is that when he bought it, he took out a 30 year fixed note for $171,000. Now, I'd expect even someone with substantial wealth to take out a mortgage. But that's a note for 95% of value—the maximum that most lenders will write a plain 30-year fixed note for. Anything less and you end up in creative financing territory. Most lenders require private mortgage insurance on notes for more than 80% of value, and the conventional financial wisdom is to avoid PMI if you can. Either Jimmy has some special pull with IndyMac Bank (thereby avoiding PMI), didn't care about paying PMI, or simply didn't have $27,000 in additional cash to make a 20% down payment.

Here's where it gets more interesting. In 2006, Jimmy took out a $120,000 home equity line of credit against his house. Now, at this point, if he's been paying a 30 year fixed mortgage at the normal amortization rate, he's built between $7000 and $10,000 in additional equity, on top of the $9000 he put down. So that home equity line of credit is relying on an increase in value of the house of about $100,000 since he bought it in 2002. This is within the realms of possibility, but what it tells me is that he took the maximum he could when he drew this line of credit. The house subsequently sold for $230,000, which is less than the total indebtedness on the two mortgages if the line of credit were fully extended, but of course Jimmy might not have used the entire line of credit or may have paid it down more than the minimum required. Both banks released their liens so it appears that Jimmy either did not utilize the entire $120,000, or came up with the $50,000 he needed to satisfy the difference from somewhere else. Quite frankly, I don't expect someone who is "comfortably wealthy" to have his house mortgaged to the hilt; that's just not fiscally prudent.

Now, there's the issue of where he and his (soon-to-be-ex) wife are living. There's no record of Jimmy or Christine recording a deed in Pinellas County. That means one of several things: they no longer live in Pinellas County; they're leasing; or they're living in a house that is registered in the name of some other entity (admittedly, I didn't check to see if there's a deed registered in Kira's name). In any case, as I understand tax law that means that Jimmy and Christine cannot roll that capital gain into the basis of their new house (since there is no new house) and instead have to pay capital gains tax. That's at least $50,000 and could be more if they've carried forward capital gains from prior sales; the tax on $50,000 would be nearly $20,000. (Update: It seems I missed an exemption for cap gains that would protect them from having to pay tax. I'm a network administrator, not a tax accountant.) I hope they have that, especially after going $50,000 under water on the sale of their home. I know Jimmy makes a bunch of money every time he speaks, but from the sounds of it he spends it at least as fast as he makes it.

My point is that Jimmy's finances, or at least this bit of the picture, is not entirely consistent, in my mind at least, with Jimmy's portrayed image of "comfortably wealthy former option trader". None of the above proves that he's lying, but it certainly gives me pause. If he's lying about this, one has to wonder what other statements in his supposedly "neutral" biography on Wikipedia are also lies. Oh well. The divorce papers ought to make for a clearer image of this; if nothing else there will be the issue of child support which generally requires evaluating assets and income; Florida law prohibits putting these on the web so someone is going to actually have to go to the courthouse and obtain the actual file to find out what's up here. Maybe they'll turn up on the Smoking Gun....