Episode #126 – Decisions Vs. Games in Real Estate

You're listening to the “REI Marketing Nerds” podcast, the leading resource for real estate investors who want to dominate their market online. Dan Barrett is the founder of AdWords Nerds, a high-tech digital agency, focusing exclusively on helping real estate investors like you get more leads and deals online, outsmart your competition, and live a freer, more awesome life. And, now, your host, Dan Barrett.

Dan: All right, hello everyone, and welcome to this week's episode of the REI Marketing Nerds podcast. As always, this is Daniel Barrett here from AdWordsNerds.com. How are you? I hope you are doing well, and, look, as always, if you ever want to talk to my team about building out an online marketing strategy specifically for your market to help you find more motivated sellers online, then you know where to go. That's AdWordsNerds.com/Strategy. We will hook you up. [01:14.8]

But this week I wanted to get a little bit theoretical with you for a moment and I hope you're going to kind of hang in there. I'm going to make this one a relatively short one, but I'm hoping that this mental model that I'm going to give you is going to be something that you can use multiple times, not just in your marketing for motivated sellers, which you are going to be able to do, but just kind of in understanding, better understanding, better getting a grip on this weird world of ours, because there are a lot of things in the world that don't seem to make a whole lot of sense, a lot of things in the world that are confusing and seem to conflict with what we might expect. [01:59.3]

I find this mental model will be useful in understanding those things and, specifically, in understanding the current marketing landscape for motivated sellers, and I'm going to tie this in with where we are right now in 2021 and what's going on online and all that good stuff.

Here's the basic model that I want you to understand. There is a very big difference between things that are decisions and things that are games. Okay, there's a very big difference between things that are decisions and things that are games.

Okay, now here's what I mean. It is a decision to decide, for example, what you want to have for dinner tonight. Do I want to have macaroni and cheese or do I want to have fish? Do I want to have steak or do I want to have spaghetti? Right? That's a decision. You make that decision based purely on what is best for you. Macaroni and cheese, my favorite food, that's what I'm going to have, or maybe I decide, Hey, you know what? I'm trying to watch my calories and I'm going, I'm trying to eat a little bit healthier this year. I'm going to go with the fish. Either way, it's a decision I'm making purely based on my own preferences. That is a decision. Simple enough, right? [03:15.7]

And you might say in your business, for example, I want to do direct mail or I want to do online advertising, wherever, right? What's best for me? What’s best for my cash flow? What does my budget look like? And so on.

Now, a game is different. A game is what occurs when you make your decision after taking into account the decisions of others. For example, let's say we're not deciding what we want to have for dinner. We are deciding what restaurant we want to go to, and let's say there's some kind of external time limit. We've only got an hour. All right, I've got to be somewhere. I've only got an hour to go out to dinner. [04:05.3]

Now, that decision I'm going to make not purely based on my own preferences. I'm going to factor in my preferences, but what else do I have to think about? I have to think about how busy those restaurants are going to be at the time I need to go out. Let's say it's 6:00 p.m. I really want to go to the Italian restaurant down the street. That's my favorite restaurant, but it's really popular and it's Friday night at 6:00, which means it's going to be packed, and because everyone else is going to go there and it's going to be packed, there's going to be a wait and I'm not going to be able to get out in an hour. So, you know what? I'm going to go to the Mexican place that's on the other side of town that's less popular.

That is an example of a game. Again, I'm not ignoring my own preferences, but my own preferences are not the only thing that matters because the actions of other people change my potential outcome and I have to take them into account. [05:09.0]

When we move from the realm of decision-making into the realm of games, in terms of academic disciplines, we move away from decision theory into game theory and personally—you’ve probably heard it about me or you've heard me talk about game theory or maybe reference game theory on this podcast—I'm fascinated by game theory and what game theory explains about some of the weirder ways that our world and culture tend to work things out.

Now, here's where this applies to your real estate investing business and, specifically, let's tie this back into marketing and specifically where we are at in 2021 as I record this. [05:55.5]

Now, the other day I was talking to an investor and I talk to my clients all the time. I talk to dozens of investors a week, essentially. I was talking to this investor and they were saying nationally where people are in terms of how responsive their markets are. Because I don't know about you, you know what? But, right now, when I talk to investors, a storyline, a sort of narrative that I hear a lot is, okay, inventory is really low and demand is really high. That makes this a really aggressive sellers’ market and that's tough on investors in general. Okay?

All right, so he said, “Hey, what kind of happened last year?” and I said, “You know what? I have a sense of that, but I haven't actually pulled the data, really looked at it lately, so let me go and do that.” I went to my team and I said, “Hey, can you guys pull for me the conversion rate of all of our clients, month over month from 2020 up till now,” and conversion rate, just so you know, it's the percentage of people that land on one of our clients’ websites and then call them or email them, or text them or whatever. Let's say, 100 people landed on my website. I’ve got 10 leads. My conversion rate would be 10%. [07:10.8]

All right, so I said, “Hey, give me the conversion rate of all of our clients, month over month from 2020 to now,” and they pulled it out and I was kind of blown away. Here's what happened in 2020 in real estate investing, net nationwide—because, by the way, at AdWords Nerds, we work with hundreds of investors in pretty much every market in the United States, big and small. We are all over the place, and so we have a pretty wide-ranging data set on what investors are doing and what's working, and who's closing and yada-yada-yada, right?

They gave me the conversion rate. Here's what I saw. In January 2020, pre-Coronavirus, January 2020, the average national conversion rate was around 6% and that's pretty much what I tell people on most calls. I say nationally investor-type websites, you think of it, the average website that you see for a real estate investor, form at the top, “we buy houses”, yada-yada, that's around a 5% to 6% conversion rate. That has been relatively stable for a really long time and, in January 2020, that's where we were, 6%. [08:15.7]

At the end of 2020, so December 2020, one year later, nationally on average, we were at a 1.5% conversion rate. We started at 6% as an industry and we ended at 1.5%. That was the impact of COVID-19, Coronavirus, the quarantines, the lockdowns, the various changes in governmental leadership policies, eviction bans, foreclosure bans, etc. That is a massive drop-off.

In many ways, that had been hidden from me because part of why people come to work with us at AdWords Nerds is they want someone to handle that kind of stuff, and so we are constantly mitigating those factors. We change our strategies. We adapt. We test new landing pages, yada-yada-yada. We're always changing things up. [09:10.2]

In so many ways, our clientele was kind of doing better than the national average, and so I kind of didn't realize what was happening, but that is a massive drop, and that basically continued into January and February 2021, a very low conversion rate.

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Now let's bring this to game theory, okay? Let's imagine just you. Let's say, you are an investor. Of course, probably are, if you listen to this podcast. You are an investor. Let's say, you use Facebook ads, Google Ads, Bing ads, whatever, or even direct mail. In fact, let's do direct mail because I feel like it's easier to understand. [10:15.7]

You use direct mail as a real estate investor to find off-market deals, okay? Pretty common business model. Now, over the course of 2020, what happened? The response rates of pretty much every type of marketing dropped. Why? People didn't want to sell their houses because they didn't want people to come over. People weren't sure what was going to happen to the housing market, right? Companies like Zillow and Trulia stopped making as many offers.

A whole variety of reasons. There was an eviction ban and foreclosure ban, so people were under less pressure to move out or sell. For a variety of reasons, people are holding onto their properties and not selling. The response rates to real estate investor marketing went down over 2020. I think that's pretty safe. It’s not true for everybody, of course. We're talking about averages, but as a national average, pretty safe assessment. [11:01.7]

Now, when that happens, let's say, you as this real estate investor, you primarily use direct mail to get your leads, get your deals. You’ve still got to eat. You’ve still got to make your living, right? You’ve got to pay your mortgage. What do you do?

For most investors, there was a period at the beginning of the pandemic where people held on to their marketing money because they weren't sure what was happening. But when people realized that the world was an ending, they put their money back into the market, but now they were behind. Response rates were low. They'd missed part of the year. So, if that were you, what would you do?

For most investors, what they did was they spent on marketing more aggressively. Maybe you bought a bigger list. Maybe you mailed that list more often. Maybe you invested in some fancier mailers. Most people invested more heavily because they needed to make up the difference. [12:04.4]

In economics, we call this the marginal utility. The marginal utility of every single deal in the market was higher because there were less of those deals to go around. If supply is low and demand is high, what does Econ 101 tell us is going to happen? Costs go up. You invest more heavily in your direct mail and that's great. It's totally rational, a totally rational decision to make. But remember, this isn't a decision. It's a game.

So, if you made that decision, what was everybody else's decision in that same instance? It was to do exactly the same thing. They needed to pay their mortgage. They needed to pay their bills. The marginal utility of every deal was higher for them, too, and so your competitors also spent more heavily on marketing in order to make up the difference. [13:05.0]

So, now, if you're a seller in this aggressive sellers’ market, not only are you less inclined to sell to an investor overall, but now you are being marketed to more heavily than before, meaning that instead of three postcards a week, you're getting 10, meaning that instead of seeing four ads online, you're seeing 20.

Every single marketing channel saw this dynamic over 2020 and in the beginning of 2021. Inventory is down. Supply is high. In a game, that means the prices that the competitors are willing to pay goes up and up and up. Really fascinating.

What then given the reality of this game that everyone is playing that is resulting in less deals for everyone and higher costs for everyone, what is the rational result of this game? What does game theory, for example, say we should do? [14:07.0]

At AdWords Nerds, I'll tell you what we did, because we are primarily online. What did we do? We managed our bids. We managed our positions. Every single ad for every single keyword for every single client. We might say, Hey, the advantage of being No. 1 is not quite worth it anymore, so we're going to back off to No. 3, and maybe we'll get slightly less deals overall, but the cost per deal acquisition is still going to be profitable and we're going to let everybody else burn out. That was what we did. What everybody else did was to mostly ignore it and continue to spend and continue to spend and continue to spend.

Now, what ends up happening in that kind of situation is that, over time, people tend to punch themselves out and there is some inkling right now that that might be starting to happen. Costs are starting to decline ever so slightly for the first time in a long time. Conversion rates are tending to come up ever so slightly for the first time in a long time. So, there's some indication that the ice is beginning to thaw. [15:11.5]

Now, do I know that for sure? No. Look, if there's anything I've learned over 2020 is that making predictions is kind of a fool's game. Instead, what you’ve got to do is you’ve got to be ready for whatever happens. You've got to cap your downsides. You’ve got to invest where you think the odds are in your favor, but you’ve got to be careful, right? And you don't want to put all your chips on any one prediction because who knows? That's what I learned in 2020.

But I think, more importantly than anything, it's this understanding that when you go into, for example, direct mail, online marketing, any kind of market, it isn't a decision. It's a game. It's a game you are playing with investors everywhere and, specifically, investors in your market. And what is right for you? Should I do cold calling or online marketing? Should I do ads or SEO? Should I do direct mail or should I do text marketing? [16:03.0]

Whatever the thing is, the right decision for you, it's not simply a matter of picking the right strategy from the book of permanently right strategies, right? It's a matter of understanding that you are playing a game and understanding that the best decision for you depends a lot on what the other players in that game are up to.

Look, as always, I hope you find this episode interesting. I hope you found it useful. Leave me a comment and leave me a review. I would love to hear what you think of the show. You can go anywhere you get podcasts and leave me a review. It helps other people find the show. I very much appreciate it.

And, look, as always, if you ever want our help building out an online marketing strategy for your market, AdWordsNerds.com/Strategy is the place to do it.

This is Daniel Barrett signing off. Have a wonderful week and I will talk to you very soon. Cheers. [16:56.0]

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