When You Are the Banker, You Always Win

What Monopoly Teaches Us

Most kids in my generation grew up playing the game of Monopoly. On the surface this game seems to reward those who are lucky enough to land on the right game squares and then make the right decisions to acquire the most property so they can charge rent every time another player lands there. In reality, even if one tries very hard, the player most able to capitalize on the opportunities each turn presents is not determined by their luck or skill, it is predetermined from the beginning of the game by the role each chooses to play. The degree to which a player is able to survive and thrive in the game of monopoly is set up from the beginning by whether the person is the Banker.

Why? The Banker in this game is able to capitalize when other players have to sell off their assets to continue to play; and when money is paid out in the good times, the banker is always there to collect their portion. In fact, the intrinsic advantages of the Banker role make it impossible to fail just by having that role.

In the game of life, as in Monopoly, our financial success can be pre-determined by what role we choose to play at the beginning. Are we content to fight it out with the other players, struggling to find an advantage in a non-advantaged position? Or are we wise enough to choose the most advantageous role in the financial game of life so that when opportunities are presented we are destined to win?

I was reminded of the inherent profit centers available to a Banker in a recent transaction that came to me as a result of my marketing.

How to Be the Bank in a Land Deal

A seller of some build-able land in California had inherited the neighboring property from her mother. Mom had sold the land to a local developer right before the real estate market crashed in 2007. As a result, the hapless developer never paid her a dime on this seller financed loan on this free and clear property. When mom died, the heirs inherited this promissory note and trust deed for which nothing had been paid. Not having the money or stomach to foreclose on the defaulted buyer, the holder of this note called me to help her foreclose and get the land back so she could resell it.

At first, I was interested in buying the note on the property so I could foreclose and sell the property. The seller wanted $300,000 for the note while the land was worth $400,000. But I was not interested in shelling out such a large sum for a parcel that might turn into a complicated process with a long turn- around time for my investment.

Again, the seller wanted me to foreclose on the property. But how could I foreclose on the property if I didn’t yet own the note?

After much thinking outside the box, I proposed:

1) Have the note assigned over to me;

2) Have my attorney substituted as the new trustee who would conduct the trustee sale;

3) Have a quit claim deed in escrow for their protection in case I do not sell the property to pay them;

4) Sell the property on either seller financing or for cash and then pay them for the note as agreed.

As you can tell, this required a high degree of trust on the part of the seller. Why? I would own the property BEFORE I paid them for the note. I never considered this solution until I looked at the benefits that each person in the transaction wanted. But if each person got the benefits they wanted, it did not really matter what order the events occurred. I had the seller craft and sign a “letter of understanding” that she knew the details, risks, and potential rewards of the transaction.

Why was the seller willing to do this? This seller did not have two nickels to rub together to pay for the foreclosure. And I was taking the risk that the land was worth less than what the seller said. I did visit the property and knew its intrinsic value. But with land, there can be many twists and turns to a transaction, e.g. zoning restrictions, city easements, permits, soil tests, etc.

What I have not yet told you is that I also had a built-in buyer for the property. A neighbor who lived up on the hill behind this 2+ acre, flat and choice parcel had been looking down from his home admiring this land for 20 years, hoping he could someday own it so he could re-locate his business office. As soon as this seller called me on this potential note purchase, I was on the phone calling this potential buyer to see if he would be interested if it ever came up for sale. In fact, he was very interested. In this case though, it was very important not to promise him anything because at that point I DID NOT EVEN OWN IT! But now I had a built-in buyer if I could get the seller to agree to my terms. Which she did.

So after the seller assigned the mortgage to me, and we substituted my attorney as trustee, we could foreclose on the previous free-loader buyer, and the deed would be in my name so we could sell it to….guess who: the buyer I had talked to months before.

In order not to make it sound too easy, and to show that as the banker we always win, I want to ask for a moment more of your time to share a few wrinkles to give the story some reality. I never appreciate when investors share their best “whopper” stories that make it seem like those are the norm. So I’ll share a few details that could have jeopardized the deal but instead created even better profit potential.

When we called the potential buyer, he told us that he was the only person who would ever be interested in this land. While I didn’t agree with this, the seller had expressed her wishes that this buyer be chosen to buy the land because she was comfortable with how he would choose to use it. (Her house was right next door.) I wanted to comply with her wishes so I knew I had to try to make a deal with him.

Adjust the Terms of the Deal to Fit All Parties...and Still Win

He told me that he had to improve the land before he could cash us out with a bank loan. In fact, we ascertained he would have to pay $80,000 to get the property ready for his use. This was a risk he was willing to take and I was satisfied that this would make him committed to the transaction, the monthly payments, and the balloon payment. To account for his initial investment into the land’s improvement, he demanded the seller financed loan be no interest for two years. So, I drafted a loan schedule with him paying me $1500 a month for two years at no interest with interest accruing at 5% starting with the third year until the balloon payment was due no later than month 36. He needed time to get permits, secure electricity and water, install a septic system, and move his mobile office onto the property. He would pay $30,000 down to initiate the transaction. Sure, I wanted more of a down payment. And I wanted to get interest for those first two years. But from his perspective he would be paying out $80,000 to make the land useable. And if I ever had to take the property back, it would come improved and worth much more than before.

But what about the previous note owner? How would she get paid for the note that she assigned to me?

Since the buyer of the land demanded a 0% loan, and the note seller demanded some interest, here is what I did. I went back to the note seller and asked her if I could lower the price I was paying her. She was willing to accept $234,000 for the note, down from $300,000 as long as we made the long term 36 months. Done! I did this by using the “T-Value” software program and setting up two amortization schedules, one to the note seller, and one to the land buyer. By seeing the money coming in versus the money going out, and the term being 36 months, I was able to see that I would be receiving $500 per month for up to 36 months, and then I will receive a projected $75,000 balloon payment when the final payment is made. Each month when the payments come in, $1000 is automatically sent to the note seller and the remaining $500 is sent to my account.

As the Banker in this transaction, I receive: 1) payments each month and 2) the difference between the balloon payment due to the original owner and what I receive from the buyer.

Summary of the Deal

Here is a summary of the transaction:

· $1500 a month payments from buyer

· $1000 a month sent to pay the original seller of the note

· $500 a month to me for up to 36 months

· $234,000 note sale price due to original owner

· $360,000 seller-financed loan to new buyer

· *Balloon payment of at least $75,000 by month 36 (based on amount remaining)

*The earlier the buyer cashes me out, the bigger the balloon payment will be.

Lessons

What lessons does a transaction like this teach us?

1) It always pays to put together transactions as a Banker. We can structure the transaction to please all parties by adjusting price and terms so everyone sees it as a win-win while we get paid to put it together.

2) Each person of a transaction must see personal benefits to be willing to play.

3) Each transaction has lessons to be learned. Jump in. You will figure it out.

4) There are many people who need us to help them solve their real estate problems.

5) We are protected by foreclosure language in the trust deed, especially when it is a non-owner occupied loan.

May you find many opportunities that enable you to play the role of the Banker in your personal Monopoly game of life.

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Brian Netzel is a real estate and note investor who lives in San Jose, California. He teaches busy people how to invest like smart money insiders in today's market.