Of Backroom Deals and Poker
Photo: © iStockphoto.com/double_pI set up the new DFWREIN forum about 4 or 5 years ago as an alternative to the anonymous posting that was allowed on the aireo.com web site. At that time, aireo.com was the most popular web site in the DFW real estate investor market.
Because everyone who reads a post on the forum can easily see who is writing the post, many people do not post. It’s not just the sneaky, conniving or underhanded people, it’s old real estate investor. I think there is still a romantic feeling to doing a deal in the backroom, thick with cigar smoke, dim lights and a game of poker.
I think a lot of older real estate investors are not used to the idea of everyone knowing their cards. They have been playing close to the vest their entire lives and disclosing their actual position on any subject or any deal is as foreign to them as revealing their hole cards to other players.
I bring this up because when I see a post without comments I think, there is no interest here. Perhaps I shouldn’t post more on this topic. But it turns out that there is a lot of excitement about this article. It’s just backroom excitement.
People call up others they trust and discuss everything without revealing their positions to everyone. They treat posts written here the same way they do their backroom deals. Close to the vest. No one reveals his hand until its been paid for.
My first reaction to hearing about it (and I do hear about it) is that these people are cowards who realize their positions have no merit and can’t stand the light of day. But that’s not it. I think that for all their preaching about win-win solutions these guys are still playing poker. And poker is always a win-loss solution. Always!
I used the poker metaphor on purpose. At the end of the night, poker results in an equal amount of winnings and losses. If you add all the winnings and subtract all the losses then the result will be zero. There is no other possible outcome. It will always be zero.
In economics, that’s called a zero-sum trade. If the winnings are all positive and if the losses are negative then the sum of all the winnings and losses is equal to zero. This is very important to economists because they have discovered that most people make non-zero-sum trades.
Those trades are almost always positive-sum trades. It makes sense. Why trade with others if you always feel like you are losing in the trade? Except for forced trades you tend to support more trades where you feel you came out ahead.
I used to buy and sell used mobile homes. Someone once asked how I keep my buyer from finding out how little I paid for the house I’m selling. My answer was simple. I tell them how much I paid for the home and when I bought it up front.
I purchased one home for $3,500 and sold it to a nice couple a week later for $5,900 with a single cleaning, a lot rent payment and mowing the lawn twice. I explained that the previous owner couldn’t wait 3 months to sell and was willing to discount it and that I was willing to wait for the right price. I sold it with financing on their first visit.
It was a win-win solution on the purchase and on the sale. When I bought it, the seller asked me how much I thought I would get for it and I told him I would sell it for $1,000 down and $4,900 on financing. When he asked me why I was only offering him $3,500, I told him that I needed to make a profit. He sold it to me on our first meeting. It was a win-win for us. He wanted a quick sale for cash and I wanted more inventory to show.
In both situations I wasn’t playing poker. I was making a win-win trades. I didn’t have to keep my cards secret. Everyone knew what I was doing. I didn’t have to keep the address a secret or not advise them to seek out competent legal advice. Heck, I encouraged it. Not because I secretly hoped they wouldn’t but because I wanted people to feel comfortable with their purchase next week and next year. I wanted them to tell their friends and family about the deal they got.
This does not mean you should not take proper precautions. If it is possible for a buyer to close you out of a deal for a bigger profit then it is up to you to structure the deal so that you can’t be closed out. Don’t depend on the kindness of strangers.
A positive sum trade is still a positive sum if all the winnings are on other side and a small loss is on your side of the trade. Your best bet is still your legal and real estate investment counselors.
If you find yourself playing poker, consider stepping back and reconsider the deal. There is probably something you are missing.
