(MONEY Magazine) – AT FIRST GLANCE, IT SEEMS DIFFICULT to feel sorry for Sam and Jody Malhas of La Jolla, Calif. They own a house with an ocean view that could inspire a mature adult to take up boogie boarding. The year-round climate in their exclusive community -- San Diego's answer to Beverly Hills -- is so enticing that the natives boast of having 365 days of spring. And they live in the kind of neighborhood where people have personal trainers, cellular faxes and candy- apple-red Ferraris. The truth is, though, on this balmy day in February 1992, Sam, 50, and Jody, 32, would happily trade their stake in Shangri-la for a cracker box in snow country. After spending five years during the '80s buying, fixing up and selling single-family homes for profit, the couple rolled all of their winnings into remodeling this 4,100-square-foot spec house they are temporarily calling home. The trouble is, no one wants to pay the $1.5 million that they've been asking for it. Now, with carrying costs totaling a staggering $10,000 a month, the Malhases are desperate to unload the house, even if that means sacrificing their five years' worth of sweat equity and profits. Says Jody: ''Our timing was terrible, and now we're stuck.''

Deluded by boom psychology and dreams of turning houses into piggy banks, the Malhases succumbed to conventional wisdom. They followed the logic that originated with the post-Vietnam housing boom, when house prices grew faster than incomes and home buyers relied on inflation to bail them out. Rising prices and depreciating dollars dictated that savvy buyers could stretch to buy a home, flip it for a nice profit, stretch to buy again, flip again, and so on. From 1986 to 1990 the Malhases made more than $250,000 in real estate, flipping houses the way short-order cooks flip hamburgers. Since 1990, however, when a debilitating real estate recession hit Southern California, flipping has been a flop. And since they find themselves in a situation where buyers are scarce, the Malhases have dropped the asking price for their luxuriously appointed palazzo by $510,000, to $1,465,000. But the only serious bid that they have received since doing that was $1,125,000. ''If prices had stayed stable, we would have made half a million dollars,'' moans Sam. The Malhases have to make a choice facing many homeowners today: whether to cut their losses and accept a lowball offer or to hunker down, refinance and pray for the return of yesterday's prices. After agonizing for months, they think they see a way to escape with some cash. But the plan will require a lot of luck, a strong marriage and some toes-over-the-ledge negotiations. Whatever happens, the Malhas saga provides a cautionary tale about the perils of trying to time the housing market and the dangers of rolling your nest egg into one basket. It points up the need to rein in the instincts of the past two decades of inflation, when it made sense to buy now and pay later because the dollars would be worth less tomorrow. It also serves as an object lesson for people who are mistakenly relying on yesterday's rules of home ownership and shows what can happen when real estate takes over your life.

SAM AND JODY DEVELOPED their passion for home improvement while living temporarily in London back in 1982. He was a structural engineer -- born in Jordan and trained in the U.S., where he became a citizen -- who had supervised the construction of hospitals, schools and office buildings in Saudi Arabia during the petrodollar boom of the '70s. She was a former technical assistant at a Boston architecture firm who had an eye for decorating. Sam owned a few London properties that he had bought in the early '80s, and the newly wedded couple began sprucing them up. Since Sam had refurbished several palaces in Riyadh for the Saudi royal family, he figured he knew what the local Euro-hopping Arab expatriates wanted in a flat. Thanks to a mid-'80s price explosion in the London housing market, the Malhas properties sold for two and three times what Sam had paid for them. He and Jody figured they could probably earn more by fixing and flipping than he could as a $50,000-a-year engineer. They also thought they knew where to make the greatest profits of all: the United States. The couple moved to La Jolla in September 1986 with two of Sam's children from his previous two marriages, Amber, 17, and Laith, 16, eager to catch what they thought would be the next great wave of housing appreciation on the West Coast. Using their profits from London, Sam and Jody quickly launched the first of their La Jolla renovation projects by purchasing a three-bedroom house that cost $365,000. It turned out to be a no-brainer. The couple slapped on some paint, added landscaping and cosmetic improvements such as french doors and sold the place seven months later for $525,000. Allowing for renovation costs, their net profit was $75,250, or about $7,000 a month -- a 188% return on the $40,000 they had laid out. ''It was our easiest and quickest job,'' recalls Jody. ''If we had stuck with that simple way of doing things we would have been heroes.'' But, instead, the easy money made them think big. Deal No. 2 involved a larger investment and a smaller profit. This time, in May 1987, the Malhases purchased a $685,000 house and an adjacent $375,000 lot in the fashionable Lower Hermosa section of La Jolla. By the time they sold the house, built another on the vacant lot and then sold that property in July 1988, they realized a $27,400 profit for a still respectable 26% return on their $105,000 cash investment. They soon realized, however, that they had sold too soon. ''If we had waited another six months to sell the place, we would have gotten another $500,000,'' says Jody. The mistake they made was this: They hadn't learned that real estate markets tend to move in spurts. For example, in New England, 75% of the appreciation in the previous 20 years took place between 1984 and 1987. In California, the spurt was occurring in 1988 and 1989, when some homes in communities like Santa Barbara and Newport Beach were shooting up as much as 90%. The Malhases had sold the house right at the beginning of La Jolla's surge. During that run-up, in August of 1988, the Malhases invested $225,000 to buy a $1,625,000 six-bedroom, 6 1/2-bath home on the La Jolla beach and then spent six months renovating it. In January 1990, they sold the house to a local broker-developer for $2,825,000, netting them $122,250 -- a fat 54% return. The following week, in a test of the ''greater fool'' theory, the buyer put the house on the market for $4 million. Marvels Sam: ''People were making more money on real estate in 40 weeks than their fathers had made in 40 years. It was crazy.'' And the end was near. But the go-go fever was hard to resist. Even the Malhases went gaga. Their next project, a fast flip with another fixer-upper, netted a mind-boggling $300,000 for them and some partners in March 1990. Emboldened, they turned their full attention to deal No. 5. In March 1987 they had bought a house with an ocean view for $490,000, planning to remodel it eventually. In July 1988, before they'd begun any renovation, a developer . offered to take the house off their hands for $900,000, a full $410,000 more than they had paid 16 months earlier and an incredible $815,500 more than it had sold for six years before that. Sam and Jody turned him down. How come? ''Greed,'' says Jody. ''We thought, 'Gee, if they're offering us that much money before we've even started, imagine what we'll get when we're finished.' '' The remodeling began in September 1989. The Malhases moved into the house four months later and began living amid the construction. Within weeks, however, the situation was wearing heavily on them. Even in the best of times, the Malhases say, the flipping lifestyle was not fun. They and their kids had often lived in their half-completed houses surrounded by rubble. This time the experience was truly the pits. Their plans called for gutting the house and adding 2,000 square feet of space at a cost of $120 a square foot, including a new second story, two decks, a 28-foot pool, four bathrooms, four fireplaces and a state-of-the-art kitchen complete with granite countertops. To save money, the Malhases acted as their own contractors. They wound up working on the project 14 hours a day. ''It was a nightmare!'' blurts Jody. ''We were dealing with flaky subcontractors and eating sawdust sandwiches.'' She and Sam had to take up scuba diving just so they could relax. After the job was completed in August 1990, ''everyone figured we had it made since we were living in this big house,'' says Sam. Then California's real estate crash hit. In La Jolla alone, 43% fewer condominiums were sold during 1990 than in 1989. ''We thought that La Jolla would be immune to any downturn,'' muses Sam. ''We were wrong.''

SO HERE IT IS, TWO YEARS later, February 1992, and the Malhases are getting desperate. Prices have sunk by 10% during the 12 months since an appraiser said the property was worth $1.8 million, so the couple are facing a $180,000 evaporation of equity. The nearby beachfront is chockablock with unsold houses produced by speculators -- castles built on sand. There are 153 houses in La Jolla listed for more than $1 million, including the $4 million ''greater fool'' house. Even if Sam and Jody rent out the property for $4,000 to $6,000 a month (depending on the season), they'll still have an annual negative cash flow of $50,000. At this rate, the longer they hold on, the more they stand to lose. They do have a plan. But it is a risky one based on the assumption that in a . buyer's market, the smartest move is to become buyers. The Malhases want to reverse their bad luck with a good investment, figuring there are other markets where they can flip properties -- areas so depressed they are overdue for recovery. Like New Hampshire.

Back in October 1991, scouring the list of distressed properties owned by the Federal Deposit Insurance Corporation, Sam found what appeared to be a diamond in the slag heap: a partly completed condominium development in Concord, N.H. that had been owned by the insolvent First Service Bank for Savings in Leominster, Mass. The property's 86 completed units, all rented, yielded a cash flow of $500,000 a year. Assuming the condos could be purchased for about 20 cents on the dollar ($14,500 a unit), Sam figured, whoever bought them could sell them in three to five years for as much as $50,000 apiece while retaining the right to complete construction of the other 60 partly built units. So Sam bid $1.5 million, or $12 a square foot. In spite of his incredibly low offering price, he turned out to be the high bidder, and the FDIC accepted his application eight days later. Assuming that he and Jody can put together the financing, the Malhases will be getting 86 condominium units for the same amount as the asking price on their La Jolla house. But to capitalize on his opportunity, they will need a miracle -- or a buyer. A month later, in March 1992, a San Diego surgeon and his wife show up to look at the Malhas showplace, and the two of them fall in love with it. But they can't afford the $1,465,000 asking price. So they suggest a trade: They'll swap houses with the Malhases. The doctor will take over Sam and Jody's $1.1 million in loans while the Malhases will take his less desirable $620,000 home and his mortgage. That way, the Malhases will walk away with a lot less debt and the equity in the doctor's house, plus some cash. The exchange makes sense to Sam and Jody. It will relieve them of their murderous mortgage burden while freeing up about $50,000 in cash, after closing costs and commissions, for their move to New England's greener pastures. They plan to rent an apartment in Boston's North Shore while putting the surgeon's house on the market for $595,000. The doctor has a good meeting with Wells Fargo Bank about taking over their loans, and the Malhases refinance the mortgage on his house, quickly lining up a new loan at 7%. Just as the deal is about to close, however, the surgeon and his wife hear some bad news. Even though the couple have an income of $500,000 a year, Wells Fargo rejects their loan application. Because the doctor switched from private practice to hospital employment in 1991, in the bank's eyes he has ''changed jobs too often'' to qualify. The Malhases are beside themselves. They have already moved out of their house, rented a temporary $1,500 two-bedroom apartment in La Jolla and made $2,500 in improvements to the doctor's place. Now the whole deal is collapsing, and they are stuck in a month-to-month apartment decorated with packing boxes. And they're hemorrhaging money. The doctor, though, applies to another lender. This time, he and his wife qualify for a $1 million loan. The Malhases heave a sigh of relief. They are hardly rich, but they haven't compromised their credit rating. Flying east with 11-year-old Sam, baby Dina and their furnishings in March, they eagerly await closing the book on their La Jolla nightmare.

FOUR MONTHS LATER, THE Malhases pull off the final move in their cross-country comeback. But the on-again, off-again dealmaking rattles their nerves, and their FDIC ''deal of the century'' requires months of tricky negotiation. First, many banks refuse to finance Sam's purchase of the condos. He says they are just too spooked by the real estate crash to fork over any money, even for bargains. Then he has to clear up some title problems on the complex while prevailing on the feds to drop their asking price by $250,000. Finally, he puts together a group of limited partners to satisfy a Boston bank's request that the buyers have a bigger equity stake, and he gets a $1.3 million loan to purchase the 86 units and to finish the remaining 60. Sam and Jody put up $150,000, and in return they will get a third of the profits. Once the building is completed (target date: this winter), they expect their share of the rentals will pay them $100,000 a year. Sam further expects to sell the condos within three to five years. He says he can make a tidy profit even at the low price of $25,000 a unit by selling them to his tenants at monthly mortgage payments that will be less, after taxes, than their current rents. The security provided by the Malhases' hard-won condo cash cow means Jody no longer has to wonder about their future and ask, ''Why me?'' During her husband's marathon mortgage hunt, her patience was sorely tested by his stubborn optimism. ''With this deal,'' Sam assured her, ''we can recover , everything.'' Now, convinced they know how to get loans from skeptical bankers, they're talking about returning to Southern California in 1993 to bottom-fish for bargains.

After watching their $500,000 in home equity evaporate, however, and losing $250,000 more of the profits that they had made on previous real estate ventures, Sam and Jody no longer have any intention of being frequent flippers. The Malhases are still living in one of their newly purchased two- bedroom, 1,000-square-foot condominiums. The house they bought from the doctor still has not sold and may ultimately serve as the Malhases' home. Even today, though, the couple still believe that there was nothing basically wrong with their original real estate strategy. ''It wasn't what we did that cost so much,'' gripes Sam. ''It's what the market did to us.'' In other words, whether Sam appreciates the point or not, what the market gives, the market can take away. That's the No. 1 house rule of the '90s.

BOX: 3 KEY LESSONS FOR HOME BUYERS

The Malhas family's story offers several lessons for today's home buyers: -- Frequent house flipping doesn't make sense anymore. With housing appreciation running at only 4% or so a year in most places, you shouldn't buy a home unless you expect to live there for at least seven years. Nowadays, it generally takes that long to turn a profit when selling. -- Stricter enforcement of mortgage-qualification standards is making it harder for prospective buyers to get loans. Lenders are rigorously scrutinizing an applicant's credit history, and even one missed payment on a credit card, auto loan or mortgage, for example, will be noticed. Job stability is also an increasingly important factor. Banks now usually require a minimum of two years with one employer before they will approve a loan. In fact, in any gray areas, lenders will no longer overlook what they had been willing to only a few years ago. Tougher lending rules mean that couples can't stretch to get homes they could ''afford'' in the go-go years. -- Buyers need to find out what comparable houses have recently sold for before making bids. Otherwise, you might wind up offering to pay more than your lender's appraiser swears the property is worth. Then you will either be turned down for the loan or be forced to put up more cash to reduce the size of the mortgage.