Financial Awakenings

Home Ownership--The American Dream for Everyone?

Listen to Rick's Column Here or Watch Rick's Column Here

Owning your own home is an integral part of the American Dream. Like every dream, however, it isn't necessarily the right decision for everyone. Let's take a look at two examples of people who chose to rent rather than own.

Tony is a middle-aged man who has never married. For the past 15 years he has lived in the same small, inexpensive apartment. It is comfortable enough and certainly adequate, but that's about all that can be said for it. Tony doesn't care. He prefers to spend his discretionary funds on boating, snowmobiling, skiing, and travel. He also spends his free time on those activities instead of having to maintain a house and yard.

The Thompson family lived in a small rented house for nearly 20 years. The rent was low, which allowed the husband to do modestly-paid work he loved and allowed the wife to stay home when the couple's two children were young. Eventually, however, the marriage ended in divorce. Mrs. Thompson stayed for a time in the rental house, then decided she wanted a place of her own. Even though she was working and earning enough to live comfortably, she had a terrible time finding a house she could afford to buy.

In these two examples, renting was clearly the right choice for Tony. To me, at least, it was the wrong choice for the Thompsons. One important difference? Net worth.

Tony spent his money on things that brought value to his life, which included securing his financial future. While living in his modest apartment, Tony was investing. The money he didn't need to spend on housing went into mutual funds. Today, he has a substantial portfolio. If he chooses, he can quit work in another ten years, with enough income to travel, ski, and go boating as much as he wishes.

The Thompsons, on the other hand, saw renting instead of buying as a way to live on one income and raise their children in the way that was important to them. This was certainly admirable and worked well for them. However, the couple never managed to invest anything substantial for their retirement. Even when Mrs. Thompson took a job after the children were teenagers, her earnings went to help put them through college.

When the Thompsons divorced, they had no debt. Neither did they have any substantial assets. With no equity in a house, no investments, and little savings, to call their net worth "modest" would have been an exaggeration. Buying a house some 20 years earlier would possibly have been difficult and involved some sacrifice for the first few years. As their earnings increased over the years, however, the payments would have stayed the same and therefore taken a smaller percentage of their income. By the time the marriage ended, the house would have been nearly paid for. The shared equity would have given each of them something with which to start their new lives.

The second mistake the Thompsons made was to devote the wife's earnings to the children's education at the cost of their own future financial security.

Financial planners generally do not consider clients' homes as part of their assets. We consider home ownership as providing a place to live rather than as an investment. In most cases, however, it does also help build net worth.

Renting instead of buying can certainly work well for some. It is essential, however, to create net worth at the same time. Long-term renting can be a wise choice when renting costs substantially less than owning (think beaches and big cities), when you move frequently, or when you invest enough to assure your financial independence.

The "Best" Gifts

To Watch Rick's column:  Click Here or To Listen to Rick's column:  Click Here

One of the concerns parents of young children have around Christmas is teaching the kids to value giving as well as receiving. Many of us have difficulty with our own contradictory impulses. We don't want to turn our kids into greedy little monsters, but at the same time we want to give them the best gifts and experiences we can.

This week I had a chance to think about this dilemma in a new way. I was talking with my daughter about our cancelled November family vacation. Due to last-minute chicken pox, we weren't able to go on our planned Athens/Istanbul/Egypt/Rome/Barcelona cruise. Instead, we're taking a shorter and, to me, less interesting cruise. As you read this, I may be on a beach somewhere in the Caribbean.

My daughter almost certainly will be on the beach. As we talked about the changed vacation plans, tears welled up in her eyes and she said, "Dad, the Caribbean cruise is my dream vacation."

"So you're really glad that Davin got the chicken pox and our European cruise was cancelled?" I asked.

"Yes. Dad, I've wanted to go to a beach for years now. I mean, you can only look at so many columns and crumbling rock."

Twenty years ago, I am positive my reaction would have been, "Oh, no! Am I raising a spoiled little brat?" At the ripe old age of ten, London has been to Europe at least four times. At that same age, I was pretty much resigned to the fact I would probably never have enough money to travel abroad.

Instead of responding in that manner, however, I was intrigued by her thoughts. Actually, quite pleased. While I do my best to find great values in cruises, it still costs about 50% more to take the kids to Europe than to the Caribbean. Before London had finished her sentence, I had calculated that Marcia and I could hire a babysitter for two weeks of "Parents Only Time," plus take the kids on a separate Caribbean cruise, for the same money it would cost to take them on the European cruise. It would be a win-win for all of us—a beach and kids club vacation for the kids, plus time for Marcia and me to pursue our passion of seeing the world.

This conversation reminded me that choosing "the best" for our kids doesn't necessarily mean getting the gift or experience that is the most expensive or that seems the most attractive to us as adults. A good example of this might be the traditional family dream vacation to Disney World. For toddlers, who need naptime and who are too little for most of the exhibits, a place like Disney World is too big and overwhelming. They'd be happier with a couple hours at a local attraction like Rapid City's Storybook Island.

So if you weren't able this Christmas to get your kids "the best" gifts, don't feel you've failed them. They may well be just as happy with something less lavish. Remember, too, that today's must-have toy often ends up as tomorrow's disregarded clutter.

A case in point. My son, with enough toys in his room to fill a flea market booth, has spent hours this week playing in the dirt of a planted pot. He assembled the volcanic rocks into a manger for the baby Jesus from our nativity set. Today the only other actors are a few sheep. Mary and Joseph were there yesterday, but I guess today they are out shopping. Maybe they are looking for the perfect gift for their special child.

Conscious Giving

To Listen to Rick's Column:  Click Here or to Watch Rick's Column:  Click Here

It seems almost obligatory this time of year to write a column about giving. Pressure to give, give, give is everywhere. Ads urge us to buy everything from sweaters to screwdrivers to SUVs on the grounds that they will be perfect gifts to delight our loved ones. Charities send out solicitation letters. "Angel tree" displays in malls and bell-ringers in front of stores hope we'll share some of our shopping dollars with those less fortunate. All of it can be overwhelming.

We all have our own unconscious beliefs, or money scripts, when it comes to giving. In addition, we're surrounded by beliefs our society and religions have about giving. Both the personal and the societal beliefs can range across a broad spectrum:

"It's better to give than to receive."

"At this time of year, good people help the needy."

"You have so much that you have an obligation to share."

"Giving takes away people's initiative to take care of themselves."

"If poor people weren't so lazy, they'd provide for their own kids at Christmas."

"There are plenty of agencies to take care of those who need help."

Like all money scripts, all of these contain partial truths. Giving, whether to family members or to charity, is not a simple black and white issue. Some of the questions it raises might include: How do you know whether you are helping people or enabling them to avoid helping themselves? How do you give to children without encouraging them to be greedy or feel entitled to the latest and greatest of everything? How do you balance helping others and taking care of yourself?

One often overlooked factor is whether the giving is done more to help the recipient or to help the donor feel better. For example, I remember being in a church group one evening when people were discussing giving. Two of the women there, years earlier when they were struggling single moms with young children, had experienced people from a charity coming to their doors with gift boxes of presents and food for Christmas dinner. Both of them had been humiliated and mortified rather than pleased and grateful. The well-intentioned gifts had felt like a judgment that they weren't capable of taking care of their own families. No one had asked first whether they wanted or needed any help.

Giving can sometimes be an attempt to hold onto people, to make up to them for one's past failings, or to be loved by them. One common example of this is divorced parents who overspend on gifts for their children. Public giving may be a way to look good or to gain acceptance or recognition in the community.

One way to respond to the complicated issue of giving is to avoid it. You can close your wallet completely, out of fear that you'll be taken advantage of, fear that you'll offend, or simple frustration. Another response is to try to give to every charity that asks and to spend yourself into debt buying lavish gifts for everyone you care about.

Neither of these makes a lot of sense. Like many other of life's decisions, the question of how to give, how much to give, and to whom is a personal, individual matter. There isn't a formula for doing it right.

The only suggestion I have is that you give as consciously as possible. Consider the beliefs behind your giving. Discuss giving and receiving with your spouse and your kids. Stop and think before you decide to give or not to give. Then you're more likely to give wisely and with thoughtful compassion.

Tips for More Conscious Holiday Shopping

Once again, 'tis the season. To be jolly? No, to be shopping. One recent news report included the extraordinary statement that "holiday shopping is no longer discretionary spending." No wonder the month of December can be a source of stress rather than joy for so many of us.

Here are a few suggestions that might help you do your holiday shopping more consciously.

1. Examine your own beliefs about Christmas spending. One way to begin this is to quickly write down answers to the following questions: What do I believe about money and each of the following? Christmas? Presents? Giving? Spending? Receiving? You may uncover some "money scripts" that aren't necessarily true but that govern your spending. Examples might be "The more money I spend, the more I am showing love" or "I have to buy gifts for everyone in my extended family." This exercise can help you consider whether you might benefit from changing some of your holiday shopping patterns.

2. Take a deliberate look at your expenses and your available income, and then set a spending limit. For couples, it's a good idea to do this together.

3. If, after examining your budget, you need to cut back on Christmas spending, communicate that to your family members as early as possible.

4. Consider creative ways to limit holiday spending. These might include drawing names instead of getting gifts for everyone, giving homemade gifts, or giving gift certificates for services such as babysitting, snow removal, lawn care, cooking, or housecleaning.

5. Once you've decided on your spending limit, do your shopping with cash. Studies show you will probably spend 15% to 30% less than if you use a credit card, and you'll save yourself that miserable January "credit card hangover."

6. If you must use credit, do so consciously. Use only one card, check the balance often, and keep a running total of your purchases to help you stay within your spending limit.

7. Make a list before you go to the store to reduce impulse buying. If you need gift ideas, browse ads, sale flyers, catalogs, and the Internet before you go shopping.

8. Don't wait till the last minute. For some people, shopping early means buying gifts in August; for others it means getting to the stores before December 15. However you define it, shop earlier rather than later. Waiting until a few days for Christmas means you have fewer choices, less time, and more stress.

9. Use a system that fits your style, but get organized. Some people plan ahead far enough to pick up gifts throughout the year. Others get everything done in one well-planned shopping trip.

10. As much as possible, avoid "black Friday" and other busy shopping times. Fighting your way through crowds of other shoppers is stressful, and it's too easy to get caught up in a "gotta have it" frenzy.

11. Look for sales and comparison shop. Do as much of this as possible through phone calls and reading ads instead of running from store to store. A couple of places to consider checking online include www.wow-coupons.com and www.gottadeal.com.

12. Consider planning now for next year. As you do your shopping, keep track of what doesn't work well. Then think of ways you can do something different next year. Many people buy next year's ornaments, gift wrap, and cards the week after Christmas when they are bargain priced.

Doing your holiday shopping more consciously can make this time of year truly a season to be jolly instead of stressed. I hope these suggestions help you enjoy giving, receiving, and spending time with those you care about.

Surgical Investing

Listen to Rick's column here: Download surgical_investing.mp3

I learned a few months ago that I needed shoulder surgery to repair a torn rotator cuff. My best guess is that I injured my shoulder over two years ago doing "power yoga." So much for the idea that yoga is a gentle, passive activity.

In preparation for the surgery, I spent a lot of time researching on the Internet, talking with people who had undergone the procedure, and asking questions of several physicians and a physical therapist.

Amid all this research, there was one question I never asked. How much would it cost?

I wasn't totally ignorant about the possible cost. I knew I had insurance, I knew the deductible was $2,500, and I knew I would pay 20% of the cost over that amount. Yet cost didn't even factor into my decision to have the operation.

I find this interesting, especially for a financially conscious guy like myself whose work is helping people assess the financial costs of decisions. It's also interesting that not once did my surgeon offer to tell me the cost of the operation, ask me how I was going to pay for it, or indicate that he even considered the cost of the procedure and its effect on my pocketbook. By the way, my surgery, MRI, and physical therapy ended up costing around $15,000.

My mindset was that I needed the operation, regardless of the cost. I had been told that the tear would only get worse, it would never heal on its own, and my pain would continue to increase. Eventually, the physical and emotional cost of putting off the operation would exceed the cost of having it done now. My response was to hire the best surgeon in the region and get the operation done. Even with only a vague idea of what it would cost, I assumed the results would be worth that cost.

So far, I have no reason to question my assumption. With the help of time and physical therapy, my shoulder is healing well. I'm even back doing yoga—minus the "power" part for now.

It recently occurred to me that part of my work with clients is similar to the whole process of my surgery. One of several specialties of my practice is doing intensive work to help high-income overspenders change their destructive financial patterns. When such potential clients call me, they usually have two questions. Can I help them? And how much will it cost?

My answer to the first question is a comfortable "yes." I can't guarantee success, of course, any more than the surgeon could guarantee success with my shoulder. Yet, like him, I can assure them the process I use is clinically proven to work and has a high success rate.

It's the second question I have trouble with. I'm still uncomfortable asking clients to spend more money to help them stop overspending. Yet the process to help these clients involves three professionals working with them for one to four days. The cost, ranging from $10,000 to $30,000, is similar to the cost of a surgical procedure.

The benefits to the clients are also similar to the benefits of such surgery. Given the incredible transformations that I've seen in our work, I know logically that this process is worth every penny it costs. For example, if I can help someone reduce their spending by $20,000 a year, for a one-time cost of $10,000, the return on that investment is pretty darn good.

The value of such changes can't be measured only in terms of dollars and cents. To remind myself of that, all I need to do is raise my arm. A pain-free shoulder? Priceless.

The Latest from the IRS

Listen to Rick's column here: Download the_latest_from_the_irs.mp3

The election is over. It's time for a lighter topic—like taxes.

I recently attended a workshop to update tax preparers on changes to the tax code. As motivation to continue reading, let me quote the IRS agent who told us, "The IRS is back in business." Here are the areas they are taking a hard look at.

Unreported Income. The bulk of the 350 billion dollars in uncollected tax revenue comes from sole proprietors or single-member LLCs who use Schedule C to report business income and expenses. According to the agent, 80% of all Schedule C filers use tax preparers. He told the audience of tax preparers, "I know all of you are in the choir, but one of you is singing off key."

Hobby Losses. A business loss reported on Schedule C will be disallowed if the IRS deems your activities a hobby rather than a legitimate business.

Meals and Entertainment. This is a perennial issue, especially for Schedule C filers, if this expense appears too high in relation to your income.

Repairs and Maintenance. This is always on the IRS hot list, as well. Owners of rental property are often confused about what is a capital improvement, to be depreciated over a period of years, and what is a repair and 100% deductible. If your repairs are too high (the definition of "too high" is a tightly held secret) your return will merit a harder look.

Mixing Personal and Business Expenses. This is always a big "no-no," but it happens, especially with Schedule C filers.

Legal Fees. Non-business legal fees are deductible only if they are for the production of income, such as advice on investments, property, and tax issues.

My conclusion from this information—outside of the obvious fact that you should report all your income and not fudge on expenses—is that it probably isn't a good thing to be a Schedule C filer.

Now, here are the latest tax changes:

· The annual deduction limitation on equipment purchased for a business was increased to $108,000.

· The 15% rate on capital gains and dividends was extended through 2010.

· The alternative minimum tax exemption was increased to $62,550 for a married couple, but reverts to $45,000 in 2007.

· Regardless of your income, you can convert a traditional IRA to a Roth IRA in 2010 and pay the tax in two installments, half in 2011 and half in 2012.

· Retroactive to January 1, 2006, the age limit was raised from 14 to 18 for a child's passive income over $1700 to be taxed at the parents' rate.

· For the first time ever, you will receive a 1099-INT for tax exempt interest paid on municipal bonds.

· There is a new tax credit available for certain hybrid vehicles. That's the good news. The bad news is that the full credit is only available on the first 60,000 cars, and Toyota and Lexus have hit that limit.

· If you improve your personal residence with insulation, windows, doors, a metal roof, or an HVAC makeover, you may qualify for a credit.

· LLCs can avoid having all income subject to FICA tax and be taxed as an S-Corp by taking the election to be taxed as a corporation and filing the S-election.

· 401(k)s can now have a ROTH option, if your employer elects to amend the plan to allow it, and it is available to employees without regard to income limitations.

That's my scintillating tax update news. If you struggled to stay awake to get this far, it could be worse. I sat through eight hours of presentations on this stuff.

"Investing" in a College Education

Listen to Rick's column here: Download investing_in_education.mp3

Recently, I heard someone say he was "investing" in his kids' college educations. I've heard that phrase before, but for some reason it caught my attention in a new way.

I work with investments on a daily basis. For me, "investing" has a specific meaning. It is committing money or something else of value in expectation of making a profit. It assumes some type of benefit will be forthcoming in the future.

A college education can certainly be considered an investment. It can be a necessary step toward success in a career and offer tangible benefits in the form of higher lifetime earnings. There's a catch, though. Those benefits accrue to the person who receives the education, not the person who pays for it.

When parents talk about paying tuition for their kids as an "investment," what benefits are they expecting to receive? The obvious implication is that, when they reach old age, their college-educated kids will be successful enough to take care of them financially.

At the same time, I see few middle-aged adults who assume it is their responsibility to pay the bills for their own elderly parents. This is not intended as a criticism or an implication that my contemporaries are unwilling to help their parents. It's just that we don't assume such help to be necessary in most cases. It isn't the way our society works. We count on Social Security, retirement plans, and the like to help seniors live independently as long as they can.

Why, then, are so many of us still stuck in the antiquated notion that paying for our kids now will translate into them paying for us later? Such an idea goes back to a time when having big families meant having more help on the farm or more potential wage-earners. In past centuries, it was reality in most cultures that having children meant having someone capable of supporting you in your old age. This was important, because investing for retirement was out of reach for the vast majority.

In today's world, investing for retirement is within reach for the majority. We also assume, rather vaguely, that it is each person's responsibility to do so. We no longer expect that an "investment" in education for the kids will be returned by those kids paying the parents' bills in old age.

Yet many—indeed, most—parents still put paying for their kids' educations ahead of saving for their own retirement. Over the years, I have dealt with many baby boomer clients who were failing to fund their own retirement because they were paying college tuition.

This seems to be an increasing expectation in our society. I would even describe it as a societal "money script"—an unexamined belief that is assumed to be true even though it is only a partial truth. Not once have I had parents tell me they weren’t about to pay for their kid’s schooling until their own retirement was fully funded. The notion that the children’s education should come first is one more responsibility laid on parents, many of whom seem to accept it without question even if they cannot afford it without considerable sacrifice.

Regardless of the parents' ability to pay for education, there are many benefits to requiring the kids to bear part of the responsibility. If you do choose to help your kids pay for college, it's probably wiser to think of it as a gift rather than investment. Helping them get a start in life might be a wonderful thing to do. Just be clear in your own mind that any "investment" involved is in their future, not yours.

A Question of Trust

To listen to Rick's column, click here:  Download Thief.mp3  

Having a nameless and unknown thief break into your house or office and steal would be a frightening experience. I've heard people who have gone through it describe feeling violated. It takes time to regain a sense of safety after your space has been invaded.

It is almost worse to learn that someone has been abusing a position of trust by systematic theft. In addition to having your security and comfort violated, there is a sense of betrayal. That's what my wife and I felt when we learned that the babysitter we liked and trusted had been cold-bloodedly stealing from us for months. Her recent sentencing has once again brought those feelings to the forefront.

As I’ve talked with friends and colleagues about this experience, several of them shared similar stories. All of our discussions had a common thread. We all had been left pondering two questions. The first was, "How can I keep this from happening again?" The second was, "How do you know when you can trust someone?"

The first question was in some ways the easier one. I had to ask myself what I might do differently in the future. How might I protect myself, yet not become paranoid and unreasonably mistrustful?

Some aspects of preventing this particular type of theft in the future were embarrassingly simple. First of all, I needed to stop keeping cash too easily accessible. In addition, it was my failure to review Jill's timesheets regularly that had allowed her to get by with overstating her hours. As the person who signs the checks, verifying a statement or invoice is ultimately my responsibility, one I need to do more carefully.

Several friends also said that such an experience had led them to review their systems for handling payments, invoices, and cash in their businesses. All too often, there was no systematic method designed to guard against dishonesty. A way of handling money had been developed, sometimes quite haphazardly, based on the undoubted integrity of one or more employees.

What needs to be in place instead is a system that is independent of the character of individual employees. It isn't a matter of trusting or not trusting specific people, but of having a reliable and neutral method of tracking what comes in and what goes out. This actually serves to protect employees as well as the employer.

The problem of how much and whom to trust is more difficult. My wife and I have been severely shaken by this betrayal, and so have other long-time and trusted employees. I also am questioning my ability to judge someone’s character. It was amazing to watch Jill's behavior once we knew she had been stealing. She was as friendly and apparently open as she had ever been. It was as if she were able to completely dissociate her act of stealing from her relationship with us. That is perhaps the scariest issue about her theft.

I now am assessing all my relationships. Who else might be stealing from me? Who else is in my life that I should not trust? I am wondering whether I have been too naïve when it comes to trusting employees. My style of management requires a high level of responsibility and trust from my employees. I don’t want to give up that style and that attitude. I don’t want to believe that most people cannot be trusted.

My conclusion is that I should not give up trusting, but should offer my trust more consciously and responsibly. Perhaps I need to follow the old Muslim proverb: “Trust in Allah, but tie your camel.”

The Case of the Nefarious Nanny

To listen to Rick's column, click here:  Download NefariousNanny.mp3

About a year ago, I filed felony theft charges against one of the last people I ever thought would steal from us—our children’s primary babysitter. Jill (not her real name), a college student, worked for us for three years. She stayed with the children several times when my wife and I were out of town. She was a trusted employee who became a family friend.

Everything was fine until we began missing cash from my wife's purse and from the spending money I kept hidden in the house. We weren't leaving cash around in plain sight; someone had to be searching systematically for it. We started an investigation, including setting up a surveillance camera, and before long we caught our thief in the act. My wife and I were dumbfounded that the culprit was Jill.

We were even more shocked when we reviewed Jill's time sheets. She submitted them to one of my staff members who made out checks, and we hadn't been checking them because we trusted Jill. We learned she had been overstating her hours by four times.

At first we were tempted to just confront Jill, get as much money back as possible, and let her go. Because we had known and trusted her for several years, it was hard to consider turning her over to the police. Maybe just being caught, we rationalized, would teach her a lesson.

Finally, though, we decided we needed to press charges. This was no impulsive, petty theft, but systematic robbery of significant amounts from people who trusted her implicitly.

I also remembered the experience of a friend who had discovered a trusted employee was embezzling from his business. He found out later that she had done the same thing earlier in a previous job. That employer had chosen not to press charges, but had let her go after she reimbursed what she had stolen. Instead of learning from the first experience not to steal, she was merely released to go and steal from a new employer.

This story reinforced the position that it would be wrong to let Jill get by without serious consequences for her theft. It became clear that we would be doing no favors—either for her or for her possible future victims—by failing to hold her accountable for her actions.

When we confronted Jill, she admitted she had been stealing from us. She had no explanation for her behavior other than to say she realized she had a problem and had no clue why she stole. I gave her the name of the detective I had previously talked to, and she agreed to turn herself in. When she did, she confessed to stealing around $2,000 in cash. In actuality, it was many times more than that.

It took over a year for Jill to finally agree to a plea bargain and plead guilty to the felony charges. At a recent hearing, the judge sentenced her to 10 years in the penitentiary, suspended her incarceration and put her on probation for 10 years. She will serve 90 days in the county jail on work release, pay a $1000 fine plus court costs, go to counseling and do community service. She will also have to make restitution, in an amount to be set at an upcoming hearing.

My wife and I are relieved that the case has finally been heard. Yet it doesn't feel "over." This whole incident has left us feeling sad, angry, and confused. We still struggle with the reality that someone we regarded as a friend could betray us so badly.

Real Friends Don't Let Friends Make Oral Agreements

Click here to listen to Rick's column: Download doing_business_with_friends.mp3

Which is likely to be the wiser business deal—one with a friend or one with someone you don't like? All else being equal, you might be better off doing business with the person you dislike. Making business deals with friends can carry a high risk for both the transaction and the friendship.

A case in point. The son of one of my clients set out to buy a house from a couple who were friends of his. The deal was made informally, without the involvement of attorneys or real estate agents. The house needed some updating and repairs before the buyer could move in.

The buyer was assured by his bank that he would have no trouble obtaining a loan. However, the process was going to take longer than either he or the sellers expected. If he waited until after the closing to make repairs, he would have trouble getting the house into livable condition before he had to be out of his rented apartment. The sellers assured him that he could go ahead and do the repairs before the closing.

The buyer, despite his eagerness to get into the house, realized the inherent risk in spending money to update a house he did not own. He came up with a plan he thought would protect both parties. He drafted an amendment to the purchase agreement specifying that, should the purchase not go through, the sellers would reimburse him for the cost of any repairs he had made.

The sellers refused to sign the agreement. How, they asked, could the buyer not trust them? They were going out of their way to be helpful by letting him have access to the property before the closing—and he wanted them to sign a contract? They weren't willing to accept the risk of having to pay for the repairs if the deal failed, even though they would get their money back by increasing the price of the updated house if they had to put it back on the market.

The buyer wisely decided his best choice was to wait until after the closing before he so much as washed a window in the house. Yet his attempt to get an agreement in writing left all the parties angry. The transaction survived, but the friendship didn't.

In this case, the buyer's attempt to get a written agreement about the repairs was a good idea with bad timing. Had it been included in the original purchase agreement, the parties might have been able to negotiate a satisfactory arrangement.

The moral to this story isn't necessarily, "Don't ever do business with a friend." As someone with clients who become friends and friends who become clients, I know that business relationships among friends are common. I also know they can and do work well.

The moral is to proceed with caution and common sense. The wisest approach is to put the transaction on a businesslike basis from the beginning. This includes involving professional advisors as appropriate, just as you would with any transaction. It's far easier if both parties start out with the expectation that agreements will be put in writing and standard business procedures will be followed. Trying to switch from friendship to business in the middle of a transaction only creates mistrust and misunderstandings.

If you begin discussing a business deal with a friend, and that person is not willing to proceed in a businesslike manner, you know up front that this arrangement is not likely to work. Then you can change your mind before you jeopardize both your investment and your friendship.