For Newbies

Dealing With the Effect of COVID-19 Policies on REI Markets

Dealing With the Effect of COVID-19 Policies on REI Markets

Back in the spring of 2020, most of us were surprised by the outbreak and rapid transmission of the new virus. Not only that, but we also didn’t know what to expect. How long will this crisis last? Will people stop buying and selling houses, effectively bringing real estate markets to a standstill? What can real estate investors do, if anything, to weather the crisis?

REI businesses were forced to react to the new market conditions, and now we even have relevant data that can help us make certain conclusions. But before we share these valuable insights, let us first consider the options available to REIs as a response to these changes on the market.

Decisions vs. Games

It was hard to predict what would happen to real estate markets. In many ways, it still is. So, how did you choose the next course of action for your REI business during this crisis? Did you make a strategic decision, or did you simply do what every other real estate investor was doing?

In the 126th episode of our REI marketing nerds podcast, Dan made a distinction between decisions and games that is very relevant to this discussion. In essence, it has to do with the influence that other real estate market actors have on your freedom to choose the path forward for your business.

Decisions

You make a decision when your choices are based on your own plan. You arrive at decisions by following your preferences or by choosing what’s best for you. The process doesn’t involve anyone else and you are in full control.

A typical example of this type of decision-making is when you choose what to do with your free time when you don’t have any responsibilities. You want to have a nice weekend getaway and you do it.

Games

You are in the realm of games when other people’s actions affect your outcome. Your choices are limited by outside factors and you go with the course of action that’s available, not with the one that you prefer. You have to react to the actions of others – and you don’t have control over a critical aspect of the situation.

Games are limited by rules and by the actions of opponents. Following on the example from above, it would mean that instead of heading straight to that weekend getaway, you also need to pick up your partner’s dry cleaning from across town, you need to drop your car off at the mechanic, and then you need to catch a flight, provided there is no traffic jam on the highway. You get the point – other people influence your plans for the weekend.

We, at AdwordsNerds, like to openly talk about the limiting factors of REI businesses. If you take a systems view of the industry, the theory of constraints can help you navigate through the things you are bound by and find the space to affect the things you can change. Pointing out the difference between decision theory and game theory does the same thing in the context of surviving the Covid crisis. Since we always favor practical talk over academic rambling, let’s get into the specifics.

Decisions and Games in Real Estate

In real estate investing, there is no lack of limiting factors that are out of your control. Things like:

Additionally, the COVID situation adds another level of uncertainty, because during 2020 (and for most of 2021), real estate professionals didn’t know whether measures like forbearance on mortgages or eviction moratoriums are going to be extended or not.

Eviction Moratorium

Real estate investors who manage rental properties would prefer to switch renters who are behind on payments with renters that can keep their payments current. It’s basic business logic, especially since as much as 70% of renters are still able to pay rent on time. But the CARES act introduced eviction moratorium and tied the hands of REIs with passive rental income. This doesn’t only affect big companies, but also mom-and-pop investors who can’t do anything against delinquent tenants.

Who would have thought that landlords would have to challenge the authority of the CDC (Centers for Disease Control and Prevention) to impose a nationwide eviction moratorium all the way to the supreme court? On the back end of August 2021, the moratorium was lifted, but some states are still looking for ways to extend it, at least until January of 2022. Which REI could have prepared for 18 months without rental income in their business plan, even though their units are full of tenants?

There you have it. An example of a “game” in the real estate markets where a group of REIs band together to fight the Federal government and protect their own interest. If this was a decision, instead of a game, we know how easy it would have been resolved. But that’s the big picture. How about taking a look at what we know best?

Online Marketing for REIs in the Midst of the COVID Crisis

We deal with marketing and since we talk to a lot of REIs from states and markets across the nation, we are in a position where we have an overview of the effects. To be precise: how the COVID crisis affected online marketing for real estate investors? Well, first the refrain – everyone reported that the inventory is low and the demand is high. We all know that that translates into a sellers’ market.

However, it’s much more than that. Our books show that we started the year (January 2020) with a conversion rate of 5%-6% for our clients, but at the end of that year (December 2020), this figure dropped down to 1.5%. This is the result of all the lockdowns and everything that came along with them.

Game Theory and Marketing Budgets of REIs

For a moment, everything came to a stop, including real estate markets. But as we all moved forward, investors realized that there are deals to be made out there, if they can just get their hands on them. So, many REIs decided to ramp up their marketing campaigns (be it direct mail, paid ads, pay-per-click or other) to make up for lost time and deals at the beginning of the crisis. House sellers who were already in a market that favors them got more postcards and mailers and they were exposed to more REI ads. And the effect? We already reported it, lower conversion rate.

How did REIs contribute to this situation? They forgot that there are other REIs on the market and that their collective action can affect the market. They are in a game, because the choice to go for a bigger investment in a marketing campaign is not a decision that is made unilaterally. The actions of other REIs affect your market and you don’t have total control over everything that’s happening in your environment.

What Did Adwords Nerds Do During This Period?

We deal with online marketing, so we managed our bids – meaning, even if we could place an offer for holding the top position, we opted to keep position number 3 or number 5. We simply concluded that, for the time being, going for the top position is not cost-effective. Over time, those REIs who invested in bids which don’t bring results (remember, conversion rates are low) were burned out. There is a finite amount of money you can throw at a problem, and the market showed that it’s not worth keeping your ads in front of homeowners who are in a sellers’ market.

For the record, conversion rates have begun to increase, and after a long period of time, it seems like the second half of 2021 might be a good time to invest in online marketing if you are an REI.

Takeaway

It’s sort of like the moral of a story: those who went ahead with their decision as if they are alone on the market wasted their marketing budgets on campaigns that didn’t bring results. At the same time, the very few REIs who were aware that their options depend upon the actions of others and restrained their investments in marketing, have secured better chances to come on top as the markets recover.

You are not alone on the market, so treat the market as if it’s a game. It applies to online marketing for REIs and it probably applies to other aspects of your business, too.

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