Distinguishing Data-Driven From Gut-Driven Investing

This is episode number 2245. Jill and I are talking about data-driven versus gut-driven investing. Do you want to make decisions based on empirical data or feelings? Which one do you think Land Academy is all about? Is there anything I have to ask you? This is a personal question.

Yeah.

Is there anything that you use your gut or pure emotion, and then make decisions about it?

Yeah.

Go ahead.

We still do in our business. When it comes down to due diligence, there is a step in due diligence where there’s a gut involved. It’s like, “Everything looks great. I’m not feeling it. They’re selling faster than when they bought it. I wonder why. That doesn’t track. I think I’ve got the access.” These are all things that could pop up. That’s where my gut comes in more than anything. It’s that and hiring. I use my gut a lot for that. For picking a deal, I sit back and go, “Is this too easy? Should it be too easy, or am I missing something? Let’s make sure I’m not missing something.” I have to solve for that.

I may get to a point where I solve it and be like, “Why am I uncomfortable?” I have to get to the bottom of it, and then I’m not uncomfortable. If I can’t get to the bottom of it, then I step back and go, “What’s the worst that can happen? What would be the biggest financial thing here?” Based on that, then I’ll either move forward or not. I’ll say, “This is so flipping cheap. I’m going to go for it because it’s still going to work out okay. Something’s going to work out.” It may not buy for $1,000 and sell it for $40,000. I might buy for $1,000 and sell for $2,000. Those are crazy numbers, but you know what I’m getting at. It’s either going to work out no matter what, or I’m going to pass because I trust my gut more.

That’s not what I do at all in my part of the partnership. More on that in a minute. Each day on the show, we answer a question from our Land Academy Member Discord Forum and take a deep dive into land-related topics by your request.

Mr. Yank wrote, “As I troll through with Zillow, it seems fairly easy to find areas with a positive 2:1 ratio of sold to active.”

The Importance Of Market Data For Mailers (Sold-To-Active Ratio)

I’m going to define what that is. One of the first stages that we teach in Land Academy is to choose a place to send mail. It’s like the foundation of a house. If you choose a place to send mail that doesn’t have an immediate and obvious history of property selling and selling for X price, and there are a lot of properties moving into the market and a lot of properties moving out, those are the kinds of playgrounds that you want to play in. You don’t necessarily want to go to someplace like North Dakota, where, in an entire county through an entire summer season, 2 or 3 properties sell. I have nothing against any state or any of that, but the data doesn’t work.

I chose this question specifically for the topic. The answer to the question is pertinent to the topic. This person’s asking if the ratio of sold to active is 2:1 during the same period. Meaning, during the same period, 2 times the number of properties sold are being active. What that means is that more properties are selling that are coming into the market or being listed. That’s what you want.

You send a bunch of mail out theoretically. You buy a couple of properties at a good price. You know what’s going to happen. You know that based on the data, there’s a good chance you’re going to sell it because more properties sell than are active. Go ahead.

He goes, “What’s a good quantity?” He meant the minimum number of sold versus active. I assume 5:1 is a good ratio, but the traffic is way too low on those numbers.

He likes 5:1, and so do I, and so does everybody. Five properties sold to every one property that’s listed is awesome. The traffic, meaning the volume of the number of properties that are going through whatever you’re analyzing, is too low. Meaning, in 1 month, a total of 5 properties got sold, and 1 was active. That could mean anything. What we want to see is fifty, eighty, or one hundred properties sold for every 100. One hundred properties got sold within two months. Twenty percent of that number was the number that got listed, so you got a lot of high volume.

You absolutely cannot rely on a dartboard to decide where to send mail next month. Share on X

One hundred sold, twenty coming in.

Exactly. Thank you. High volume and also a great ratio.

Do you want me to read Dan’s answer?

Yes.

One of our members wrote his thoughts. I love this. Dan wrote, “Here’s the answer that is the worst. It depends. As you get more rural and into a smaller county, you’ll understandably get a smaller quantity of active and sold properties. This is part of the art of it that may be harder for someone who’s extremely data-driven. You need enough data to do your pricing and run your Red, Yellow, Green Test, but you don’t want to go too far the other way, where there’s so much competition that you would have 1 of 5,000 like-kind properties for sale unless you’re the absolute cheapest.

When you’re new at this, make sure there’s enough homogeneous data to feel confident about the pricing. You can group together multiple zip codes that are adjacent, and then price and perform equally to produce more data points. However, I would recommend keeping it simple when you’re starting and adding more judgment calls and educated guessing when you feel comfortable and confident to do so.”

Dan’s a longtime member. Jill and I know him very well. We talk personally every once in a while. This entire question-and-answer session on this episode is very indicative of what happens on a regular day in Land Academy. There’s a lot of analysis that goes on, especially on the front end on my part, where you’re making an incredibly well-educated guess at everything that you do. Guess isn’t even the right word, but an educated decision. This either appeals to you or it repulses you, or something in between. I happen to find this fascinating and challenging. It clearly has worked for us. It works for Jill, Dan, and the guy who’s asking the question. I hope it works for you, too.

Our topic is data-driven versus gut-driven investing. Jill gave a pretty good synopsis at the beginning of the episode. Dan’s answer was picture-perfect. Data is the reason. The lack of data, when I started in the very early ‘90s in the commercial real estate industry in Michigan, was frustrating as heck for me. I knew it was out there. Computers were starting to get some serious traction, which I was into. I was into computers then.

Data As The Nucleus Of Land Academy

Without going into an incredible amount of detail, I found a way to meld existing data and then utilize it by contacting people to see if they wanted to sell their property. It worked out. Data is at the very nucleus of the entire Land Academy effort in buying and selling land, in general, houses, and all of it. We don’t even talk about it anymore. We collect so much data pretty quickly to make a decision about whether we should buy a property. I collect a ton of data. Jill has a knack for taking the data and then turning it into something that’s feelings-driven.

I see this topic one way. Data-driven versus gut-driven decisions and why guessing will sink you. You cannot use a dartboard to decide where you’re sending mail next month. There we go. We’re done. I’m sure everybody’s going, “Duh,” but people do that. For me, a dartboard might be, “My brother-in-law’s an agent, and he said this area is hot.” That, to me, might as well be a dartboard. Do your own math. Do your own numbers. Run the data.

If you’re in the real estate industry and have been for a while, every once in a while, somebody comes up to you and says, “My mother-in-law has a property in Northern Wisconsin. Here’s the deal. Is that a good deal? Should we buy it? Should we sell it?” That drives me nuts because what that is is all emotion. What we do is send out 10,000 to 20,000 offers, let’s say, in Northern Wisconsin, if that’s what we decide to do, based on data, and then we let all those properties come back. We let the mail work for us. We let the ten, twenty, or eighty deals that come out of the mailer, and then we start to decide and drill it down from there. I hate this one-off thing. This one-off thing is guessing.

This is before the mail goes out. The mail is not going out until we solve this. The data’s got to work. If it doesn’t work, we move on to another county. Why might the data not work? We talked about one of the reasons, which is, “I don’t have enough properties to work with.” Two to one is great, but when it’s a county that’s so small, then it’s 2 sold and 1 got listed. When it’s 200:100, I can work with that. There’s one reason why it would depend. It’s maybe incomplete data. It’s so rural. I don’t have all the answers. There are counties that are not on the MLS because it’s so small. I’m trying to think of an example. Not everywhere is listed the same way. Does that make sense?

“Should I send mail to XYZ county in Wisconsin or XYZ county in Minnesota? My mother-in-law lives in Wisconsin. I’m going to send it to Minnesota.” That makes no sense at all. That’s a gut-driven decision. It’s ridiculous. It’s not based on anything. Every March, March Madness happens. College basketball goes on, and everybody proceeds to fill out a bracket. By everybody, meaning everyone in my house except me. Do you make decisions based on how many players are injured? Is the coach doing well? How well did they do in the regular season and all that data-driven stuff? Do you make a decision based on the color of their uniforms?

If it’s, “I say bulldogs over whatever all the time,” that’s not going to work.

It’s data-driven. Join us in the next episode where Jill and I discuss why we don’t negotiate land or house deals. We let the mail do it for us. You are not alone in your real estate ambition. We are Jack and Jill, information and inspiration to buy undervalued property.