The Most CREATIVE Real Estate Mind I Ever Knew

[Don Konipol]

Well, actually I knew TWO ultra creative real estate “minds”

Jimmy Napier is still legendary in the note investing world.  Get a copy of “Invest in Debt”.  You’ll never see “notes” as a stodgy fixed return investment with limited upside again. 
John Beck went “bad” 20 years ago - was sued and lost a Federal consumer fraud judgement in excess of $100 million.  He walked out of the courtroom after the verdict, went to his car, and has never been seen again.  The John Beck I knew was a honest, brilliant investment mind. It’s hard to reconcile that this was the same man. 

Both were actually even a lot more creative than the public knew.  Jimmy kept many of his strategies private because he believed that the strategies, techniques, and methods couldn’t be successfully used by anyone but the most experienced and knowledgable investors.  At the time I disagreed, now I know he was right. 

This is the story of a BRILLIANT creative investment technique that came about during a National Council of Exchangors meeting that Jimmy, John and I attended in or about 1981 or 1982.

I don’t recall the monetary values of the transactions, so I’ll create values more reflective of 2026 rather than 1980.

Previous to the exchangors meeting, Jimmy had purchased a small MHP for $1,050,000, trading a lot worth $50k as a down payment and the seller carrying back a note at 4% interest with interest only payments for 3 years and interest plus $2,000 per month for 7 years.  

Jimmy had negotiated a SUBSTITUTION OF COLLATERAL clause in the note, allowing him to “substitute” collateral of equal or greater value,, at HIS option. 

Numerous properties were “offered” for trade or exchange at the exchangors meeting.  One property was a retail center that had good operating income, but was heavily cash flow negative because the borrower had lousy credit and 3 mortgages with an average interest rate of 17%!.   The property was probably worth $2 million or so; had an operating income of $200,000; but debt service was $250,000 on debt of about $1,250,000.  The owner was at best operating in a cash flow deficit of $50k, before tenant improvements.   He was in the process of being foreclosed and behind in every loan. 

Jimmy negotiated to pay of the existing debt and provide financing at 6% interest.  The result would change a negative $50,000 cash outgo into a positive $125,000 cash INFLOW.  The borrower cost for this was 51% of his equity.  

After numerous negotiations a version (there was some buyout provisions added) of this was agreed to. 

Here’s what Jimmy did.  
1. He negotiated the 3 notes on the subject property to accept discounts for cash payoff - $1,250,000 debt was reduced to $1,000,000

2. He sold the MHP he had purchased for $1,050,000 for $1,000,000, taking a $50,000 loss.

3. Using the cash from the sale ($1,000,000) he paid off three notes on the retail property settling the $1,250,000 balance for $1,000,000 as agreed. 
4. Utilizing the substitution of collateral clause he “moved” the MHP note to the retail center, but did it in a “wrap around” whereas the moved note was “wrapped” by a $1,250,000 note Jimmy created.

Here is the results for Jimmy

1. $50,000 loss on MHP sale
2. $1,250,000 note less $1,000,000 wrapped - Net $250,000 equity in the note.   The underlying  note at 4% payout was $40,000 annual.  Jimmy collected 6% of $1,250,000 or $75,000 annual, for a net positive of $35,000 annually for 10 years. 
3. The property valued at $2,000,000 had $750,000 equity.  Jimmy received 51% valued at $382,500.  cash flow after debt service was $125,000.  Jimmys share was $63,750

In WEALTH BUILDING terms Jim Napier turned a $50,000 lot into $250,000 equity in a note and $382,500 equity in real property.  His positive cash flow was $35,000 from the note and $63,750from the property, or $98,750 annual. Not be for a $50,000 total investment! 

Tell me what your thoughts are about this