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Applying Game Principles to Real Estate

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Nathaniel Shull

on 26 March 2016

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Transcript of Applying Game Principles to Real Estate

Applying Game Principles to Real Estate
Humble Origins
Monopoly's historic roots date back to the year 1902, when Elizabeth Magie created a game called the
Landlord's Game

Patented in 1904, published in 1906
Intent: To explain the economic consequences of
Ricardo's Law of Economic Rent
and the
Georgist concept of a single tax on land value
Economic Rent
:
‘The rent of land is determined by the excess of its product over that which the same application (labor/tools/resources) can secure from the least productive land in use.’
Meaning, more productive land yields higher rent!
Single Tax:
Economic rent of land should be shared equally by the people of a society rather than being owned privately. Thus, a single tax on land should be charged that is equitable to all.

She wanted to illustrate how Capitalism was unfairly distributing resources (money and property)
In the end, the game celebrated this Capitalist ideology
One person wins, bankrupts the others and is crowned champion
Adaptation and Evolution
In 1913, Scott Nearing, a professor in what was then known as the Wharton School of Finance and Commerce at the University of Pennsylvania, began using the game as a teaching tool in his classes.

Spread by word of mouth to other US Universities
Columbia University
Smith College
Princeton
MIT

A new patented version was created in 1924 by Elizabeth Magie
Included named streets Chicago’s “Loop” and “Lakeshore Drive”
Included a special "monopoly" rule and card that allowed higher rents to be charged when all three railroads and utilities were owned.
Included "chips" to indicate improvements on properties.




Enter Parker Bros
Rejected three previous offers to sell the game by both Elizabeth Magie and Charles Darrow
Finally, in 1935, Parker Bros learned of the successful sales Monopoly was having at FAO Schwartz in NYC during that Christmas
Bought Darrow’s version on March 18
Soon discovered that he was not the sole inventor
Parker Bros decided to buy out Magie's 1924 patent and the copyrights of other commercial variants of the game to claim that it had legitimate undisputed rights to the game.
Included copyrights to Finance and The Landlord’s Game

Monopoly was first marketed by Parker Bros in 1935
Their sets were the first to include metal tokens for playing pieces (as described before)
Soon introduced "Rich Uncle Pennybags", the game’s mascot, in 1936
His character is believed to be influenced by the stature and dress of financier and banker J. P. Morgan

The Perfect Game at the Perfect Time
Took off immediately in the next 2 years. Very appealing for those living in the great depression era

At a time where people were homeless, jobless and the economy was in the tank, along came a game that modeled successful capitalism, where people received salaries, where properties were bought and sold, where taxes were levied, money made and lost. In the end, there was a definitive winner and loser.

There was also a sense of
control, manipulation and management
that came with the game. This appealed greatly to depression-ridden America who was able to feel the true effects of capitalistic society in the company of family and friends.

Quotes:
"The appeal of some games are as fantasy. They set up a world apart from our own. The appeal of MONOPOLY, however, is not as a world apart, rather as a microcosm, a miniature of the business world that, in varying degrees, is familiar to all of us”

"Monopoly is just complicated enough to be both realistic and fun”
Play begins with the person who rolls the highest total amount to start
The sum of the two dice indicates the number a spaces a player moves
Depending on where the player lands, he/she is entitled to…
Purchase property (when it is available)
Pay Taxes
Pay Rent (on previously purchased property)
Pick up a chance/community card
Go to Jail
Player who rolls doubles (two ones, two twos) goes again. If doubles are rolled three times, the person is sent to jail
Players collect $200 each time he/she passes GO
Once a person owns two/three properties of the same color (a monopoly), he/she is entitled to build houses on them.
5 houses = hotel
The player who is able to bankrupt all other players in the game is deemed the winner.

Property Origins and Distribution
Names come from streets and locations in
Atlantic City, NJ

Reasons for why property values were distributed in the order they were
Proximity:
Like the bid-rent model indicates, the streets on the board are each in various proximity to desired activities and resources of the time, giving variation to property and rent values
Ex: Boardwalk = The most expensive property and rent. Why? Because it was the “central business district” of the time, containing industries and jobs of the city’s economic base (tourism and trade) and the most dense/intense uses of land
Density/Intensity:
As property gets closer in proximity to valuable activities and resources, it creates opportunity for density/intensity of land uses. This was the case in the game, where higher valued properties were able to accommodate larger, vertical buildings and thus charge higher rents.
Linkages:
Like cities that gained power by establishing themselves at intersections of multiple transportation routes, properties gain power (value) by locating at cross sections of transportation. Monopoly properties followed this pattern, with higher valued properties have more access to multiple transportation options.

Monopoly Properties Today
Real Estate vs Monopoly
Similarities and Differences
Real Estate Development and Investment: Lesson #2
Know the Market Cycle (the "when" factor)

Like being in Jail, it is sometimes smart to “jump right into” development/investment while other times it is smart to “wait it out”. Much depends on property demand and supply within the existing market.

Real World Tips:

In a downturn, when properties are cheap/available (supply is up), try to “jump in” and acquire property so that when market conditions are hot, you will be the first to profit
In a boom, when properties are still available but selling quickly (demand is up), be cautious about acquiring property, because things could turn sour at any moment
In a saturated market, tread with caution or “wait it out”. Try looking elsewhere for more profitable options.

Adaptation and Evolution Continued
Daniel W. Layman, a student at William’s college in 1926, took the game back to his hometown of Indianapolis, IN and produced hand-made versions of his own
Commercially produced and sold his game under the name
Finance
,
eventually having it licensed and marketed by Knapp Electric
Featured four railroads (one per side), Chance and Community Chest cards and spaces, and properties grouped by symbol, rather than color

Ruth Hoskins discovered game and brought it to Atlantic City
Game eventually traveled to
Charles Darrow
by word of mouth
Refurbished the game by hand crafting many of the symbols used on the property spaces today, which include the black locomotive, the faucet and the lightbulb.
Also recommended playing pieces based on household objects such as

Thimbles
Leather Shoes
Iron
Rocking Horse


Top Hat
Wheelbarrow
Soap Box Car
Scottie Dog
Monopoly Fun Facts
Since Charles Darrow patented the game in 1935, approximately 750 million people have played the game, making it "the most played board game in the world."

More than 275 million games have been sold worldwide and it’s available in 111 countries, in 43 languages.

The longest MONOPOLY game in history lasted for 70 straight days.

The Game was used in WWII to help prisoners of war escape from Axis Camps in Germany and Italy
The Red Cross sent packaged board games to the prisoners. Hidden inside these games were maps, compasses, real money, and other objects useful for escaping.
Basic Game Rules
Object:
To become the wealthiest player through buying, renting and selling property

Preparation:
Each player chooses a token to represent his position on the board
Each player is given $1500 total to start
2xs $500, $100 and $50
6xs $20
5xs $10, $5 and $1
A banker is assigned to be the distributor of funds ($)
Also is responsible for
Auctioning off un-purchased property
Distributing title deed cards for future conveyance and houses/hotels for future purchase
Collecting taxes, fines and interest
Basic Game Rules Continued
Atlantic City Boardwalk, 1935
Real Estate Development and Investment: Lesson #1
Monopoly is a game of statistics. Chances for success and failure are based in property position on the board and the number of houses/hotels (income producing improvements) on those properties. Being cognizant of these statistics and learning to control them can lead to winning or losing the game.

Real World Tips:

Prior to acquiring properties, have an understanding of…
Personal profit (what is in your bank account)
Existing market conditions
Supply of resources/demand for properties
Market segments (customers, competitors)
Property and rent values (comparable properties by transaction and physical features)
NOI, CAP rates and eventual cash flow
Determine if you can have success in that market based on these statistics, and if not, try and find another location to invest/develop

Real Estate Development and Investment: Lesson #3
Find places or neighborhoods that receive the most foot traffic, and invest in those properties. In the game, these are typically the orange (St. James Ave, Tennessee Ave and New York Ave) or the red (Kentucky, Indiana and Illinois). In real life, this may be property in proximity to resources, that have good linkages, and that are surrounded by dense land uses.

Real World Tips:

Analyze the market determinants of value in your city. These include the supply of labor force, economic base jobs/businesses, infrastructure and land use distribution patterns and the demand for land based on these factors
Analyze market conditions based on the availability of supply (of factors above) and level of demand (for property around them)
For development, look at market segment of potential tenants
Acquire property that fulfills the prerequisites listed above
Best income profits margins usually come from investments in non-risky, stable, mid-valued properties

Real Estate Development and Investment: Lesson #4
Try to acquire property that may not appear profitable but may help you in the long run. Investing and developing in these properties when the market is down (high supply) will give you the ROI ($) when the market goes up and values follow suit, allowing you greater flexibility in acquiring more expensive property.

Real World Tips:

Less expensive property typically has lower mortgage interest rates and thus is a good (long-term) investment
Maintenance is less costly, resulting in a higher Net Operating Income and appreciated market value.

Real Estate Development and Investment: Lesson #5
Know which of the properties you own is best to invest in or develop. This can be a game changer in your ROI. Over-improving certain properties can deplete your cash and put you at risk for debt and bankruptcy

Real World Tips:

Be sure the location you are investing in has a high potential for accruing profit before making improvements (I.E. don’t over-develop “poor value” properties unless you have the financial capability to do so)
Make improvements that are attractive enough to increase values but that allow you to maintain enough money for future purchases.

Real Estate Development and Investment: Lesson #6
Once you have a steady portfolio of properties either developed or invested, do not just sit on them. Markets will change and prices will fluctuate, so take advantage of available resources.

Real World Tips:

Start acquiring property that is outside your typical market range or by investing a little more in those properties you already own.
Begin to negotiate with others willing to sell property that you want. To find a bargain price, explain how the purchase can be of value to THEM.
Real Estate Development and Investment: Lesson #7
As in the real estate world, it is sometimes beneficial to acquire a mortgage so that you can leverage other $ resources (to be put to creating assets rather than liabilities) and spend more wisely. Being smart with when to mortgage and what properties to mortgage can lead to long term success.

Real World Tips:

o Mortgage those properties that are cheaper, independent acquisitions, and not part of a larger expensive cluster purchase, or monopoly. This reduces risk of default and its marginal effects on those other properties.
Search for trade-offs (cost comparisons) and interests rates by mortgage type that will contribute to positive long-term asset growth. By doing this, you can avoid unnecessary expenses that could put you underwater, and then require you to rely on rent from other properties

Know the Numbers (The "what" factor)
Location, Location, Location! (the "where" factor)
Inflation-adjusted property values
Start Slow (or low) and Build Up
Don't Over-develop your Property
Take Calculated Risks to Increase Profit
Apply for Mortgages that Leverage Opportunities
Real Estate vs Monopoly
Similarities and Differences
Full transcript