My Financial Position



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My Financial Position Dear All, This is a statement that is born out of necessity because of precipitating circumstances regarding my financial position. I have tried to keep it as brief as possible but have had to explain various points for what will be hopefully obvious reasons. For the last year I have been faced with trying to create an income to match the outgoings I had during the period of time before the credit crunch. I have not been able to create an income large enough to cover those costs and as a result one of my creditors has decided that they think they will have more chance of getting their money back by making me bankrupt. I am at the moment looking into if there is any just cause to stop these proceedings but I do not think that there is and as such I am likely to be made bankrupt within the next few months. I have many reasons for writing this but my first reason is to confirm to you that this does not mean that the system which I described in the book is flawed. In fact the system still works well even today and I wanted to try and reassure as many people as possible that this has all been caused by almost 100% unrelated business problems - and even those problems have been caused by several elements of really bad timing. I will cover in detail below The problem I had with timing on a large remortgage and therefore not being able to roll over my loans How none of this downfall is anything to do with the investment model itself My personally guaranteed borrowings and how one of those will cause the end of my efforts to respect my debts The attempted sale of Passive and how this was supposed to have solved our current problem way before it occurred Why Passive Investments has gone into liquidation and what Passive are trying to do to honour the services Why my personal cash flow did not handle the problem regarding my equity release How my other business interests suffered thanks to the credit crunch and how they were caught out by spectacularly bad timing My conclusions as to why this is happening, and how others can learn from my mistakes ********************************************************************* Remortgage & Equity Release Problems So I ll just jump in. Firstly, I had to delay the remortgage of around 50% of my portfolio because of an unrelated business concern. Equity release had always been my principle source of income and funds to roll over my loans. Basically, I had to complete another business transaction before I commenced the remortgage of my portfolio. I identified a significant amount of equity I could release in January 2007. However, the business transaction didn t finish until Sep/Oct 2007 and I commenced the refinance of the portfolio in October 2007, with the anticipation of withdrawing between £2.4 & £2.8 million in the period from Nov 2007 to July 2008. The success of this would have meant that my financial position was secure and I would have been in the fortunate position of being able to start investing again. However, in February 2008 I had around ten mortgage offers retracted almost overnight, two of which were on the day of drawdown. In total this was approximately £280k that was withdrawn from my immediate cash flow without notice. Now I could recover from a £280k loss but this was just 10% of the full remortgage. Up until this point I had withdrawn approximately £350k of equity and was on schedule (12.5% of the total expected). We all thought these mortgage product withdrawals were just another phase of the market. I think I joked a few times early on that the only way for this strategy to be flawed was if all the banks stopped lending. Well, a lesson learned there! Anyway, our opinion changed when that started to happen and in fact I had received my last equity withdrawal. Obviously if the unrelated business problem hadn t been there then these remortgages would have all been done and dusted by October 2007. I persisted for several months trying to release equity form other lenders but all of which came to nothing and it was clear that equity release was no longer available, but I did have to try all options before closing off this avenue. This was at a time when I still had equity in my portfolio. However, during the winter property prices continued to fall and even though I was only on average 67% borrowed at the start of the credit crunch it now looked from an actual sell all perspective that the whole portfolio was in negative equity and that was without the personal loans given by people who were looking for a fixed return. ********************************************************************* Personally Guaranteed Borrowings No remortgages and no equity now presented a real problem, so we shut off all loan payments and told our creditors that we would look to find ways of starting to make interest payments to them, but that capital payments were not possible as we could not roll over our loans. We asked for their help and understanding whilst apologising for our part in the situation we were in. Most understood, no one was happy about it of course, some were angry and some were very angry, but I said that my ability to make money was not gone, just my ability to roll over my loans. All but two creditors understood and didn t take any action. I explained that if they did take action then they would be unlikely to get any money at all and would almost certainly lose all of their money but that more importantly there were people I had borrowed from that were in a far worse situation than them and that if they proceeded with this then they would certainly cause the loss of all of their money as well. Whereas, one day the property market would recover in a way that would allow me to repay their capital and in the meantime, I would trade and pay over all profits made above reasonable living costs. Nearly all my creditors thought was very fair and reasonable. For those that don't fully understand the ramifications of bankruptcy, if I am made bankrupt then the person who is making me bankrupt is effectively taking away all of the assets that would let me respect my debts, i.e. my property portfolio which would allow me to refinance or sell when the market timing is better. In effect they are making me sell at a time like the early nineties which was clearly the worst time to sell, as it is now. Anyone who sold property at that time lost money, whereas all that were able to hang on were able to sell or refinance when the market recovered. The other main point about bankruptcy is that if one person does it then everyone is bound by it. There are no individual deals, everything gets handed over to a receiver and they decide who gets what and whether there has been any wrong doing or not. There is a reason why the law allows someone a fresh start after bankruptcy, as to take on too much it becomes unreasonable to expect an individual to respect their debts if you have taken away all of their assets. ********************************************************************* Selling Passive Equity release was only one of my sources of money and I had been spending my time during 2005, 06 & 07 creating multiple large streams of income with which to reduce my reliance on equity release. One of these was to sell off part of the business, Passive Investments. In December 2007 we had Passive valued at £13.5 to £17.5 million after an in-depth study and evaluation of this new business model. This price was exceptionally good for a company that was only formed three years before. So to lower outgoings on our private borrowings and release the need to refinance as well as to secure the company for the long term we decided to sell off 50%+. Passive was owned at the time by three people, myself and Greg owning 95% between us and our ex-business partner owning the remaining 5%. Our intention was to raise at least £5 million from the sale and after tax have enough to settle all outstanding personal borrowings and to increase our cash buffer. However, of course, Passive was valued at a time just as the credit crunch started to bite and the risk appetite for anything property had fallen off the edge of the planet. We still had a strong income stream for Passive and were still busy servicing the VAST majority of clients successfully as well as pouring the profits into developing a constantly improving system. I won t say there was never a problem but when I still worked there in December 07 there were just a few disgruntled people. Two from memory had legitimate complaints and received acceptable compensation and the others did not as we did not feel their complaints were justified. Since then the company grew and there have obviously been a few more clients with legitimate complaints but from what I have heard the legitimate problems are still a very, very small percentage of Passive's 250 plus clients. The truth of the matter is that Passive had a lot of very happy clients and the system works. Passive s sales dropped severely in 2008 and initially fell by 50% at the start of the year. By the end of the year they had fallen by 75% and I do not know the exact level they are at now as I have not had a bean from Passive since 2008, let alone received any financial information. The valuation of Passive was based on its income stream and as that had been dissipated then so was the valuation. This first dropped to £10m, then to £5m, then to £3m and eventually to someone picking it up for the debts it had. So the beautiful sale we had planned for which would have secured the company for good and again would have more than put us into a favourable position didn t happen either. So that was the second fix all solution that failed to deliver a bean. ********************************************************************* Passive's Liquidation It is my understanding that Passive had to be liquidated because of a deal falling through with the HMRC. Passive owed VAT and a deal was done with the HMRC in July to repay this over either 24 or 36 months. Then about ten days ago the HMRC sent a letter confirming that they had just withdrawn that deal and wanted full payment immediately or they would put the company into administration. Greg of course sought legal advice and put the company into administration immediately. I received an email on the day before saying, Passive is probably going to have to liquidate and I am going to take legal advice. The legal advice was to liquidate Passive immediately. This was an almost identical occurrence to one that happened to us in 2004, we had a company that we were ceasing trading and there was a debt outstanding to the HMRC for approximately £50k. We agreed 24 months with them to settle the debt and then 3 months into the payments they wrote to us calling in the full debt. Of course, when we spoke with them we told them if they did that then we would be forced to liquidate the company as they knew we were personally stumping up the payments each month. They said they wanted their money now. Well, of course when we told our advisers this they were shocked but advised us to liquidate the company. This was a debt which we were honouring and they still pulled the plug with zero chance of obtaining any money. Sometimes I think that this sort of company is wound up just so that a civil servant can get the case off their desk and with no thought to the people who will be affected by their decision. Again for Passive, the timing really did suck here, as it was flying in 2007 and we spent the majority of the year resolving a business issue and so could not proceed to get the company valued and look for a buyer. Our failure to resolve the Passive sale before the market turned really did lose us a huge amount of money. ********************************************************************* How The Credit Crunch Hurt The Cyprus Business Then there is the fact that the mortgage market all but died for us in Cyprus as well. We conceived an excellent model of generating tourists through our marketing and filling ours and our clients villas with tourists. We would be paid handsomely for this and at the same time build a business that would create great returns for our clients. We tested our market and had devised exactly how to process and construct the business. In our tests we had sold a lot of property and were preparing to turn up the volume in the following year to generate significant income as well as company profits, with which to build the business. The timing again was spectacularly bad and in the end we were getting people turned down for mortgages who had £500k in the bank! The market had changed and this business became unviable. So the efforts put into that venture did not bear any of the expected fruit for all concerned, again my share of that would have been substantial and could have been enough to fix the current problem if the credit crunch had not happened. So this was a third fix all solution that failed to deliver. ********************************************************************* The Membership Site, DVD Sales & Other Information Services My other income stream comes from commissions from DVD s, membership sales and of course, book sales. We had spent around 15 months testing the market and ensuring our conversions were superb. We were gathering this marketing data and creating our control funnel before we proceeded to go to the mass market. Up until that time we had been spending around £30k a month generating over 100,000 visitors a month to our website. We had positioned ourselves so that we knew exactly how much it cost us to generate new customers and we were in fact able to run our marketing with it being covered from our front end book sales alone. During this test phase of our marketing, we had achieved the position of being the best selling UK property investment book. We were in the process of going to the mass market networks and were intending to start in the late Autumn of last year. To give you an idea, this would have given us massive exposure instantly across a wide spectrum of online marketing sources. This is a very dangerous place to be playing in if you do not do your homework. However, we had done all of that so were ready to really turn the traffic on. However, during August our conversions dropped. We thought it was seasonal, but it wasn t and they fell off a cliff in October at the height of the credit crunch when everyone s appetite for property investing disappeared overnight. So we pulled our marketing. I do not know what revenue we would have generated had we not been beaten by the clock but it would have been substantial and could have been the fourth fix all solution. Either way, the income would have been enough to certainly convince creditors that it was worth waiting and giving me a chance. ********************************************************************* My Conclusions & How To Avoid This Happening To You If You Get Rich So in all we had the worst timing I have ever encountered. Any one of those events occurring would have made the situation comfortably bearable but to suffer a near 100% loss on all put too much strain on my own personal cash flow and meant that I could no longer honour my liabilities. From my personal perspective the relief from the pressure of spending 90% of my time focusing on placating creditors instead of focusing my energy on solving the problem came to a head a month or so ago when I drew the line in the sand and said no more, either let me go to work and try and repay you or bankrupt me. Most of my creditors saw the logic in it straight away and could see that I have been able to create money before and still have a skill set ready to do so again. Or they at least saw it from the give him a chance point of view. However, two didn t and one went ahead and served papers. I again re-explained the situation and said they would be hurting all concerned, but Monday morning received notification of a bankruptcy hearing. I have various reasons for stating this openly, but the main one is that I can show people that none of the above bore any relationship to the property investing techniques that I used to make myself very wealthy in the first place. It was my/our personal investment of money into creating a new business model in Passive Investments that originally drained our resources and this was the money we were looking to replace by a sale of Passive. What we did was effectively create a new industry that a professional valuer loved as he looked in depth into all of Passive s transactions, including property purchases, valuations, customer complaints and all the bits that a purchaser would want to know about and he still valued it at up to £17.5 million. So I want to reassure you all that the methods work today as they did when I first applied them, my choices in business have brought about my demise. And I do not want to see my business mistakes and timing errors bring into question for people the amount of money that can be made from using these investment techniques. Hundreds if not thousands of people have applied them and most importantly maintained the cash flow rule I laid out in the book. This was a rule I broke myself in order that I could build a business that was worth a small fortune. If you like I gambled on our ability to create a business of value. We did that but we got caught out by bad timing. In closing, please do not feel sorry or pity for me in anyway. I am a businessman who accepts his responsibilities and recognises his limitations and abilities. This was my fault and I pushed the line too far, yes the timing was bad but I had the choice of what to do, so it is fully my fault. I am a firm believer in the Henry Ford saying, that failure is merely an opportunity to begin again more intelligently. I have lost my monetary wealth here, but my understanding of wealth now is much more in depth than it was a few years ago. I now believe that wealth is really something you are, something you have whether it be £1 or £1 billion and cannot be taken away. I used to say to people that the most important thing you get when you become a millionaire is not the money, it is the knowledge of how to become a millionaire. My earning ability is very much intact and very keen to get going again. If you do want to feel sorry for someone then please feel sorry for all of the people who are about to have their loans crystallised down to zero and the Passive clients who may in fact lose all of their fees. These are the people I have been working to try and protect since our problems came to light and they are the ones who I care about, they trusted me and Passive with their money and I/we got it wrong and for my part in this I apologise. My understanding is that the managers are attempting to do a management buyout of the company and they are looking for the clients support in doing so. This is in fact the only way I can think that Passive s clients will not lose all of their fees. So I hope the right thing happens here. Now though, in my opinion, thanks to someone who is very selfishly looking out only for themselves this may mean crystallising a 100% loss for some of these people. Whilst speaking with my largest creditor yesterday (one I might add that I have a relationship with still yet I have a debt with him that is six times greater than the one that is being used to make me bankrupt) I asked him, Why is this other creditor doing this, what do they hope to gain? Do they not know that they will crystallise their loss and everyone else's loss including yours in one go? His answer was revealing as he said that this creditor is continuing with the action solely because they believe I have stashed the money away somewhere and 'there must be some left!' So in effect this person who has no proof whatsoever that this is true (as they can't have any proof because there isn t any!) is gambling his and everyone else's debt on a hunch without any proof other than his gut instinct! Well I was amazed at this and thought it even more surprising that someone would give away a long term safe bet for a short term gamble. I was then on the phone to another creditor and he said to me, Well, Andy, why haven t you ever tried to defend that position? Because you haven t they think it could be real! I answered with, Why would I think to try and defend something that is not there? Would you try to defend yourself on a subject that had not been brought up and you had never done anyway? Of course he said, No, why would I? So anyway, in about a year after they have trawled through my financial records and found out, guess what, that there wasn't any money stashed, I will of course be saying I told you so and reminding them that they crystallised the loss of not just their own, but everyone's money. I should also make it clear at this point that if I had been allowed to keep going then I would have probably spent the next 5 to 7 years trying to repay these debts and not getting money myself. As the property market recovered my creditors would have moved to make me sell off all of my assets to repay the debt. So even if I had of survived this bankruptcy then it is very unlikely that I would have ever seen any money from it myself. Whereas now thanks to this futile action I will get to start again at some point in the future, or take a few years off to learn more and spend time with my family. The sensible option from a business perspective was for me to make myself bankrupt about six months ago, but I decided that was not the right thing to do and so carried on. I feel I did so by offering products and services that I feel were and still are of value and most importantly still work. It is my full intent to honour the debts unless the bankruptcy takes my assets and therefore my ability to respect my debts. If I was in the position that this creditor was in then I do not think I could have pulled the plug knowing that so many other people would lose so much more than I because of it. In a lot of ways this creditors action is helping the one person it is supposed to hurt (me) and hurting all the people it is supposed to protect (my creditors). But there is a chance that this person thinks I am playing some sort of a game of brinksmanship and does not actually realise that they will get nothing. If they do figure that out then maybe the situation can be reversed, but at this stage I doubt it. As for me personally, I do not know what will happen. We are for the time being moving back from Cyprus, for several reasons. The first being that I think I can create more money from the UK and I will obviously need to be there to deal with the flak from this problem. The second main reason is a personal problem to do with my Dad s Alzheimer s and I want the children to be with him for time being. To finish, everyone knows that one day the property market will recover, if it is just through inflation only, then the debts will be paid off over time, so this action now really is a futile attempt to recover money at the worst possible time. I said in the book the only way you can really be caught out with this strategy is cash flow, so don t break the 67% rule. I did and it caught me, I broke my own rule and will get what I deserve for doing so, please don t let it happen to you :-) Best wishes Andy PS I am speaking with Phil now to try and figure out what we are going to do about the membership site. PPS There have been links going round that has been quite harsh to Passive. We have never told our side of the story as we are believers in not sending out negative energy, but it is clear that I really must explain our side of the allegations and in particular the Maria Davies story, so I will be doing that in another letter shortly.