Episode #80 – The Shift, Part 2: What’s Disrupting The Real Estate Investing Industry?

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. [00:33.4]

Dan: All right everybody, welcome to this week's episode of the “REI Marketing Nerds” podcast. As always, this is Daniel Barrett here from adwords nerds.com. In this week we are continuing a discussion from last week. So last week you heard me talking about the importance of SEO, how SEO is kind of fitting into the marketing landscape, the competitive landscape for real estate investors right now. And I mentioned something that I called the shift and this episode and the next episode of this podcast are going to be digging into the shift and what it means for you. This is a very real transition that our industry is going through right now. [01:33.0]

And I firmly believe that every investor needs to be aware of it and you need to be altering your marketing strategy and your marketing stack as it were to account for it. So in the next episode I'm going to talk about specifically what you can do about it. And in the first episode I talked about kind of how things have changed. I want to talk about now about why things are changing and why this is all coming to a head right now. And there are a few kind of factors that are all happening at once. Actually Charlie Munger's, one of my favorite people in the world, you know, stock investor value investor, partner with Warren buffet at Berkshire Hathaway. Charlie Munnger has this thing, he calls it a Lollapalooza and it says a Lollapalooza is basically what you get when you combine a whole bunch of different factors like elements of human psychology and trends in the marketplace and you know, all sorts of things. You combine all these different things at once and you get a massive change that can happen very quickly. [02:40.0]

In oftentimes this is kind of like what people would call a black Swan event, right? So you know, there's this kind of like one in a million sort of things. It seems like it's never going to happen. It's hard to imagine a change like that can be happening and then all of a sudden bam, it happens. Right? And it's just reality. I don't think we're in a situation like that in terms of real estate investing, but we are in a situation where a lot of different factors are having an influence and they're all kind of happening at once and it makes the current situation kind of hard to appreciate and to see. So what I'm going to do is kind of take a step back and think about some of these elements kind of over just by themselves and then we can kind of step back and, and put them all together. All right. The first thing I want you to think about and probably cause it's easiest one to understand and I think a lot of people are worried about it right now, is the entry into the real estate investing marketplace of the eye buyers. [03:34.6]

The eye buyers would be a company like Zillow, instant offers or open door or Knock or Trulia for that matter. These are these big kind of venture capital backed primarily technology companies that are entering into the real estate investing space. The same space that would be occupied by mom-and-pop real estate investor, you know, buying distressed properties, buying vacation properties, you know, buying whatever and flipping them, reselling them on the market. These tech companies are entering into that space and whereas real estate investors have traditionally competed primarily on offer price and on service quality, right? So they've said like, look, I'm going to make you a better offer. Or Hey, I'm the best investor in my, you know, my market. I'm gonna do things like you know, the moving truck and I'm going to make this super easy for you to manage all your paperwork that kind of stuff. [04:34.9]

The investors primarily can be with each other on offer and service quality. And I would include speed in that, right? Like, Hey, I can get there today. Hey, I got to make you an offer and in 24 hours, right? Whatever it is. And really that's the competition that we've seen. And what the tech companies are doing is they are competing on a completely different plane. One, they are bringing in data, so they are using a ton of data to make a lot of offers at scale. And so their offers may not always be the best, but they are doing them at scale to such a level that they are going to equal out and sort of be sort of better across the board. Two they are competing on a technological level, so they are saying, Hey, we're gonna make this so easy, you can do the entire thing online. You never have to talk to somebody. No one's ever going to come to your house. You know, you can get an instant offer. So that's kind of all technology based database. And then the other thing that they're competing on is brand recognition. [05:30.6]

The Zillow is a recognizable brand to the extent to which the people who are interested in home prices, they go and they type in like Zillow, my home. Zillow is kind of trying not to occupy the space in our brains that Google occupies, right? Like, when you want to know a fact, you go on Google and you Google the fact and Zillow wants to be the equivalent of that where you say, when you want to know something about a home, like the price of a home or what homes are available, you go on Zillow and you search in Zillow for that information. That is what they're trying to do. And because of that brand name recognition, because of their top of mind share, whatever you want to call it, they don't have to compete in the same way for the business of a motivated seller because the motivated seller just goes to them first. [06:22.5]

They don't need to click on an ad, they don't need to Google around, they don't need to do their research. They just know Zillow and they go there much the same way, they like, you know, I like coffee and I know where or where I'm at. Hey, I can get a decent cup of coffee at Starbucks. Like Starbucks is a sure thing. Well for most home sellers, Zillow seems like a sure thing and that may be the reality may not be, but the fact remains that in people's heads that's the case. Okay. And if you look at what the other ibuyers are doing, they are spending just gobs of money, gobs and gobs of money on marketing and they are marketing for brand name recognition. [07:03.0]

All these companies know then if they become in everybody's head, the place to do the thing that the other businesses will essentially fall by the wayside and they'll be able to buy them all up and they will be the King of the mountains. Kind of like Netflix. Was this for streaming for very long times. Less the case now, but do you know Netflix was to place it when she goes stream things, it's like where do you go online to watch videos? You go to YouTube, there's no real second YouTube there just as YouTube. Where do you go online to find facts? Again, it's Google. Yeah, there's big and there's ask.com but like when was the last time you used those things? [07:40.0]

Those kind of top of mind share companies eat the marketplace. This is a reality of the internet as an economic sort of world and economic marketplace, a place where businesses exist. There are humongous economies of scale and what ends up happening is that the company that owns the Mindshare that owns the brand name recognition ends up owning the marketplace. So this is something that all these companies understand. This is something that's been a Silicon Valley truism forever and they are all competing knives out, tooth and claw to get to that top of mind share position and the company that's going to do that is going to fundamentally destabilize that market and pretty much eat all these other technology companies. Now it's not necessarily the case that it will for whichever ibuyer like comes out on top is going to eat all the mom –and- pop investors. [08:38.0]

I don't think that's the case. You can have Starbucks in your area and still have a mom- and- pop coffee shop. Like mom- and- pop coffee shops didn't go away, but it's a very different world Pre Starbucks and post Starbucks. Just like it's going to be a very different world Pre ibuyers and post ibuyers. Now ibuyer's got ways to go and it's not a hundred percent certain that that's what's going to happen, but I'm telling you right now, that's what all the smart money is betting on what's going to happen. One of these companies is going to come out on top. They're going to primarily eat the market share. They're going to primarily eat the top of mind share and that's who's going to be the dominant player in the market. They're going to buy everybody else out. Some people are going to get rich and some people aren’t . So that's element number one.

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Element number two that's sort of combining into this Lollapalooza that I'm calling the shift is the massive change in a popular adoption of real estate investing as a business model. What do I mean by this? What I mean by this is if you look at things like for example, HGTV, you tune into HGTV pretty much at any time during the day you're going to see a TV show about real estate investing. Some form of real estate investing is basically popular entertainment. On top of that, you have more investors entering the marketplace than ever before. Now, why is this, right? When you think about the way that people used to learn about real estate investing, you used to learn about real estate investing by getting a book or by paying for a seminar or by paying for a 22 cassette, right? [10:49.1]

Like set, you know like a, I was recently on like Ron Legrand's podcast and Ron Legrand's like just exactly used to learn real estate investing, but going to a guy named like Ron Legrand who had tapes and courses and you studied and you got into it. Now it's just a fact that the old methods of distribution, of knowledge of how to invest in real estate, were much lower volume than they are today. If you are learning through the mail or you got to know somebody or you got to see somebody on a stage, there are just less people who can do that, than people who can watch a YouTube video. So the dissemination of information about real estate investing is 10 times, 10 times, 10 times greater than it ever was. The amount of people that know they're real estate investing even exists is a factor of 10 higher than it ever was. [11:47.7]

What that means is that if there's some percentage of everybody that hears about real estate investing that to go into real estate investing, there's just going to be way more real estate investors. And if you look at the coaching companies, if you look at the people that are out there educating real estate investors or teaching real estate investing, those people are doing bigger business now than at any point since the invention of real estate. Nobody in the, in this coaching space has done better than they are doing right now. There are more coaches, there are more coaches selling more types of training, they are charging more, they are having way more students. And the result of that is that in pretty much any market you go into, you have competition as a real estate investor. If you don't right now you will and if you've always had competition, you have way more competition than you had before and on top of that your competition tends to be less experience. [12:48.6]

They tend to be less risk averse. So you get this situation that I hear about all the time, which is I'm a real estate investor. I go to do the deal and I have this person who's like never done a deal before they made an offer on this property that I know they're going to lose money on, but they don't know that.

So they got the deal, right? They made an unrealistic offer and they got the deal because why wouldn't you as a seller, of course you're going to sell to the idiot, let's go, you know, give you two times your property value or whatever it is. So not only do you have more competition from other investors as a real estate investor, and not only is that competition behaving “irrationally”, you also have competition from these ibuyer companies that are spending a bunch of money on marketing for the exact same leads. And then on top of that, you have ibuyers, you have investors, you also have hedge funds. Hedge funds have started entering this market in a way that is absolutely unseen since I can't even think of a period I had not since I've been doing this for sure or somebody who's been in real estate investing longer than I have will know this, but we have these hedge funds just buying up everything they possibly can. [13:58.5]

So you have competition for ibuyers. You've got competition from investors and you've got competition from hedge funds. That adds up to a massive amount of demand for a pool of leads that is not really going up. I mean really like realistically there are not more motivated sellers this year than there were last year than there were the year before that, right? There's some kind of fluctuation in the housing market that's always going to be the case, but really like the amount of housing is not exploding in most people's real estate and in markets, so this is a set resource within increased amount of competition. Now on top of that, that's all happening in the real estate investing space. On top of that, you have massive changes happening in the marketing spaces that investors use to go after deals. [14:45.6]

If you look at Google ads, what did Google labs do three or four years ago? They got rid of the hand side ads. Essentially what that did was shrink the realistically available amount of ads for real estate investor to about four. The four at the top of the Google search results. There are ads down at the bottom, very few people click on them. So realistically if you want to get leads you really gotta be on the top. So really the total number of ads visible on a given Google search went from like six to eight to full. So they slashed the amount of supply of ad space. Same thing on Facebook. Facebook has been drastically limiting the ability for real estate investors to target. There was a lawsuit with the ACLU and they basically said look, the ability to target by zip code in Facebook when you're doing real estate transactions, essentially the same as red lining where you know there's old real estate practices where people used to try to keep minorities out of specific neighborhoods and that you know specifically the fair housing act was drafted as a law to address that issue.

And that issue is just showing up in Facebook in a different form and you can agree or disagree with whether that argument is accurate or not or whatever. [15:57.7]

But Facebook settled that lawsuit and part of that settlement was Facebook saying we are going to dramatically limit the ways that people can target real estate transactions on Facebook because by limiting the focus, like they are limiting the way that you target it, we limit the away the ways that people can abuse that target and so on Facebook it's suddenly much, much harder to find motivated seller leads. On Google it's suddenly much, much harder to find motivated seller leads. If you look at the way that SEO is, search engine optimization is shaking out because we have so many more competitors, so many more investors, so many more hedge funds, so many more ibuyers. All of a sudden there's way more SEO competition for the exact same keywords people have always gone after. So what you suddenly get is a world where you have tons of competition and you have decreasing supply and in a world with high competition and decreasing supply prices go up. [16:56.0]

And so what's happening right now is that the price of doing business, the price of marketing, and this is true in direct mails, true in cold calling its true in text messaging it's true of everything. Everything. The more that you need motivated seller leads, the more it's going to cost you. And so what's happening right now is that for the average real estate investor, the mom- and- pop real estate investor, right? Or even a real estate investor, it's got like a small team they are seeing the cost of doing business in their traditional business model go up and up and up year after year after year. And I got to tell you, I do not think this trend line is declining. [16:56.0]

I do not think we are going to hit a point where things are suddenly going to go back to the way that they were. It just isn't realistic. This is a reality about the way that real estate investing is going to have to be done in the next five or 10 years. [17:58.0]

Now, I wouldn't be talking about this if I didn't think there was anything you could do about it. Right? I wouldn't bring it up if I just thought it was like, Hey, this is an economic certainty. There's nothing we can do about it. We're all going to go out of business. I don't think that's the case. And in fact, I think by looking at industries that have had these elements for a long time, specifically the real estate agent industry, the sort of like, you know, the market price industry by looking at how they have adapted to these pressures, which hit them much earlier, we can actually see a roadmap for moving forward for the next five or 10 years and being an incredibly successful real estate investor at the local level or the state level or the area level whatever you want to do. [18:39.3]

So my next episode we're going to dig into specifically how we adapt and change and evolve and grow and improve in the environment that we're currently in now. So I hope that makes sense. We got some value out of this episode. As always, you can go to AdWordsnerds.com/group to join our free Facebook group. I've been posting about this there for a while now and getting some really good feedback. So if you want to be a part of this conversation, that's the place to do it. AdWords nerds.com/group and I will see you next week. Bye everybody. [19:11.7]

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