The market created a lot of challenges for real estate investors in 2021. More than half of the offers on houses got a competing offer, and some of these offers escalated into full-blown bidding wars over properties that aren’t great. Millennials were interested in buying a home like never before. Supply chain disruptions moved deadlines in the construction industry, and finding contractors for rehab projects was harder than usual.
You might be aware of all this and you can see a breakdown of the best real estate markets for investors as we’ve already covered this topic., In this article, however, we will focus on the changes in the real estate investing industry. Everyone is aware that the industry is slowing down. Many investors attribute this to the fact that we are in a seller’s market and expect everything to fall back to pre-recession conditions soon. But what if such a return to business as usual is not a given?
We posit that the industry is facing a fundamental shift, one that has been a long time coming, and 2021 was just the straw that broke the camel’s back. Let’s explore this.
It used to be so easy for real estate investors to provide a service that was important to homeowners who need to get rid of a property on short notice. You simply let them know that you can place an offer to buy a house fast for cash – and that was it. You take care of the difficult steps in the selling process and the house seller allows you to get the property at a discount.
Prolonged exposure of homeowners to seller market, however, threatens the traditional business model of real estate investing. I mean, if homeowners know that they can sell their home above its market price within a couple of days – then, why would they go to investors?
Of course, there will always be motivated sellers who simply have to go to real estate investors because no one else out there would accept certain types of risks (code violation properties, distressed properties, etc.). However, investors are losing the not-so-motivated leads, or homeowners who would sell to investors if they get an offer that is close to the market value of the house. This happens because regular buyers engage in bidding wars.
In and of itself, the concept of having a specific market share is nothing new to real estate investors. For decades, investors have shared a piece of the market with realtors. What is new is the fact that this portion has decreased like never before. The volume of motivated seller leads is down, the supply is short, and the competition is high.
What follows from that is clear to anyone who has a grasp of basic economic principles. In economy 101, this issue can be summarized in the following question: How do supply, demand, and competition affect prices and markets? Well, Dan put this in relatable terms during the last episode of REI Marketing Nerds podcast for 2021:
..When you have supply going down, so there are less motivated sellers, and by the way, I also said the appeal of the core value proposition of a real estate investor declined, because, again, I could sell my house real fast for cash, at least for a while there, on the market. I could get a ton of money, so why sell to the investor for 70 cents on the dollar, right? So, the value proposition of an investor declined. The total supply of motivated sellers declined. The total amount of investors in the market increased, and the total amount of price competition increased.
And in terms of online marketing for real estate investors:
What this did was make it, if you were running, let’s say, Google Ads—because that’s my baby and it’s the thing I know the best—what you saw this year was a decline in total volume, a decline in the conversion rate of the people you’ve got on your website, an increase in your cost per lead, and most likely a decline in your close rate.
You want your conversion rate to be high, your cost per lead low, and your close rate to be high. It’s a disaster: every metric goes the other way. So, obviously, this is a point at which it comes natural to reevaluate the market and your place in it. Should you be alarmed by these indicators? And what can be done?
Well, our estimate is that waiting for the market to bounce back into a buyers market is the worst thing you can do, because no one really guarantees that this will happen. We are not talking about the economy with it’s boom and bust cycles here, we are discussing a shift in the way the real estate investing industry works.
It’s a change that comes from “outside” – the homeowners have changed their perspective when they view our industry. Let’s delve deeper into this.
At its core, this is a consequence of the change in awareness in homeowners about selling a house fast. Both marketing plans and business plans are tailored to the level of awareness in the target audience. Are these people (the people you try to reach) familiar with the product or service you offer? Or are they simply trying to fix a problem, and any offer would do?
The major distinguishing factor in your audience is whether they are aware of the problem or they are aware of the solution to their problem. It applies to house seller leads for real estate investing, especially at this moment.
A problem aware market is one in which the customer is aware they have a problem, but they don’t know how to solve it. Real estate investors operated in a problem-aware market for decades. Motivated sellers used to know that they have a problem (how to sell a house quickly) and there was no solution to this problem. These house sellers didn’t know there are investors who offer a fast and convenient selling process as a service for motivated sellers. Even if they’ve heard something about it, the bulk of them rarely had an insight into specifics about the selling process.
Hence all those campaigns along the line of: “We buy houses cash.” Real estate investors simply needed to let people know that there is someone who is willing to buy a house in as-is condition and that was enough. This approach was the go-to strategy for campaigns on all marketing channels – be it a bandit sign, direct mail, driving for dollars, or any of the other channels.
The central message in marketing to problem aware audience is “I have a solution for you.”
Solution aware market works in a totally different way. These people are aware that there is a solution for their problem out there. That some product or service available out there addresses their specific need.
In real estate investing, this means motivated sellers (or a homeowner) is aware that investors buy houses to make a profit. The homeowner is probably aware only about the house flips as an investing strategy (more on this below), but it’s enough: they know that someone out there is looking for houses like theirs.
Now, go and try to generate leads by marketing “We buy houses” to a solution aware motivated seller. It doesn’t cut it. Your audience is already aware that investors buy houses and need a reason to choose a particular investor over the other.
Real estate investors will have a new approach to marketing in the next decade. They’ll need to win over homeowners. They’ll need to explain why each motivated seller would benefit from choosing their real estate investing company over other offers available on the market. Because it’s not just real estate investors and realtors any more, there are also iBuyers out there.
But first, let’s check if motivated sellers really know what investors do.
You talk to seller leads on a regular basis, so you don’t need a proof about their level of awareness from us. However, let’s discuss their awareness of real estate investing businesses for a bit.
We are going to touch on TV shows, iBuyers, and real estate investing competitors to help put this process into perspective.
Homeowners didn’t learn about house flipping overnight – it’s a gradual process, and it happened thanks to TV shows. Some of these house flipping shows have run for ages (literally), starting way back with Bob Villa. There was no shortage of home renovation shows since the late seventies, though. Here’s just a short selection:
And, on top of this, we have HGTV shows and social media presence of rehabbers on YouTube, Facebook, Instagram, Pinterest, etc. This exposure to TV shows and house flipping content creates a cumulative effect. It has come to a point where everybody knows who investors are and what they do.
Even if homeowners don’t know who to contact right off the bat, they are aware that someone out there wants what they have to offer. When they search the internet for an answer (as we all do), they come across the iBuyer behemoths.
Don’t be fooled by the recent fiasco with Zillow – they are still standing strong as a competition to real estate investors. And if Zillow falls to the wayside, the concept of instant buyers isn’t going away, as there’s a whole host of iBuyers ready to take their place: Opendoor, Trulia, Knock, RedfinNow, HouseBuyFast, and Offerpad.
We’ve pointed this out since the emergence of iBuyers – it’s a development that has the potential to disrupt the business model of traditional real estate investors. Back then, it was just a prospect, and now it becomes a factor that can shift real estate investing as we know it (in real time).
Solopreneurs or mom-and-pop investors in real estate investing intimately know their market – this is their forte. As a result of this, they were able to compete on:
When iBuyers started giving cash offers on houses they transformed real estate investing. Since these companies are backed by venture capital, they can afford to place offers in a manner that is totally revolutionary:
As if this is not enough, iBuyers invested everything they had in brand building. Dan has talked about this many times – Zillow was willing to let users access their house evaluation resources for free. The end goal being to identify real estate investing with their platform in the mind of homeowners. Sort of like how we identify Google with search engines: banking on users to start “zillowing a home.”
And then there are all of the other real estate investors in your market.
The sheer number of active real estate investors is at a record breaking level for some time now. We can vouch for this because there is a boom in real estate investor services as well. One of the reasons for this (I guess there are many) is the fact people can easily educate themselves about real estate investing processes online. They don’t need to listen to tapes recorded by a REI guru. A lot of real estate coaching materials are available for free across platforms.
This results in tough competition within real estate markets. Since all of them are schooled on the same lead generation methods that brought deals in the past decades – homeowners are flooded by real estate investor marketing, particularly on traditional channels like direct mail. These days, when you go to talk to a motivated seller, you simply have to assume they’ve talked to half a dozen other investors before or after they’ve talked with you.
If the homeowners’ names can be pulled on those motivated seller lists, they’ve received marketing and offers from other real estate investors. So, they are aware that a bunch of people are ready to buy their house, if and when they decide to sell.
Between watching a house flipping show on HGTV, “zillowing” their house, and receiving the same piece of marketing materials from a number of real estate investors, homeowners are aware they can get a good offer on their home. It’s hard to assess how far along this process of dealing with aware homeowners are we, but, at this point, the move to a solution aware market seems like inevitability. And once that happens (if it’s not already a done deal), there’s no turning back – real estate investors will have to change their marketing message to differentiate themselves from other options available out there.
Now, let’s switch focus from the real estate industry and housing markets, and turn to aspects that concern online marketing.
Last year, Apple released a privacy update and this had a profound effect on online marketing in general (not exclusively for real estate investors). Now, if you aren’t a nerd like us, maybe you don’t know what iOS and privacy updates entail, but this was one of the big dominoes that fell in 2021 and changed social media campaigns forever, especially for Facebook Ads.
In a nutshell, the iOS is the operative system (the underlying program) of mobile devices and this privacy update allowed users to opt out of cookie-based tracking. It means that each user may choose to protect their privacy by limiting the amount of data collected from their online behavior.
This was the cornerstone of remarketing campaigns (through code like retartgeting pixels) which allowed business profiles on Facebook to reach an audience that might be interested in getting an offer on their house. It was the ultimate bread crumb trail, and Facebook users lost the ability to use it in their ad campaigns.
As a result of this, the success of Facebook Ad campaigns dwindled across the board. Our hands are tied on this one and there’s not much we can do in the short run. Dan believes that this marks a pivotal shift for online marketing professionals:
To me, this feels like, what’s happening is we are moving away from this era we’ve been in for a really long time, where online advertising was all about getting as specific as humanly possible on the front end, so targeting, I would say, only middle-aged women with brown hair who love wiener dogs and wear sweaters, only those people. That was what online marketing was like, get as narrow as possible.
In Google, it was pick the longest tail keyword with real buyer’s intent, target in exact-match format, get as narrow as possible, and that’s the way, and I think we’re getting away from that and I don’t think we’re ever going to go back.
So, how do we find deals when we operate in a solution aware market where you can’t unleash the retargeting pixel to get more leads from website visitors? There has to be a way for real estate investors to move past the issues we all witnessed in 2021.
We got two ideas for you: building brand awareness and adopting the algorithmic paradigm.
Of course, this is not the first time you hear someone recommend to you to invest in building brand awareness. You’ve probably done this already in one way or another. In essence, you provide value to the community, to your real estate market, to the people. What’s the catch? You might want to start to really offer something of value. We all did this to get an email address (or a follow or a subscription) from people only to send them a lead magnet later on. Well, people, as end users, are past that model now and they won’t open or respond to that email.
This has to do with using machine learning and AI to grow your real estate investing business. Our world is increasingly dependent on algorithms, and this is not going away any time soon. As Dan put it:
Advertising channels are moving to an algorithmic paradigm, and what that means is you are going to give them money and they are going to run with it. There are less buttons to push. There are less levers to pull. There is simply less control and we have to be okay with that. We have to have offers and business models that can adapt to that. We have to be willing to close in multiple ways. You have to have multiple exit strategies. You have to have a bigger target market. You have to put in a bigger budget.
Does that sound counterintuitive? Well, it really isn’t, because the more data you feed into the system, the better the algorithm performs. We saw the move toward predictive algorithms even before the pandemic. The framework for predictive lead scoring exists and although it doesn’t really increase the lead volume (it simply allows you to prioritize leads within your in-house processes), such algorithms can help you make your real estate investing business more efficient.
We’ve covered a lot of ground in this piece and it revolves around an analysis about the future of real estate investing, so take everything we said with a grain of salt. We are not looking into a crystal ball when we discuss this topic, we just note the trends that are apparent.
Real estate investors survived a tough market in 2021 and tough times are as good as any to reevaluate your business model and to consider an alternative way forward. Motivated sellers have learned that investors want their homes, whether it’s through a TV show, an iBuyer website, or because they’ve received heaps of marketing from real estate investors.
This is transforming the industry and we are in a solution-aware market. What you do to adapt to it, it’s ultimately up to you.
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