EP: 24 Using market inefficiencies to create arbitrage

When I tell people that I make hundreds to thousands percent ROI on my land deals, their jaws hit the ground. In any other business 100% ROI seems like a moonshot. How are we able to get those kinds of returns over and over again? One word: arbitrage. As land investors, we know how to leverage asymmetries that give us an advantage when negotiating with sellers and buyers. While we often do this intuitively, there's actually science behind it. And today's episode of The Land.MBA Podcast, we're going to go deep on four different inefficiencies that you can take advantage of, to pay less and charge more for your properties.

I am the kind of guy who has a reputation for negotiating at Walmart. I do like a deal. But when it comes to investing you need much more detail to be successful. There are many analytical models to arrive at your pricing. The first thing I typically look at is activity. There has to be some good activity around raw land. Because if there's not, nothing we're not going to do anything to change that. You need buyers! No matter how cheap you buy it, it doesn't matter if there's no demand.

When you do find an area with buyers you need to find out who those buyers are. If all of those buyers are locals, that's not a good scenario for us as land investors because they're going to understand the value of the land better than we will. And our business is predicated upon having an information advantage over both buyers and sellers with regards to price.

An arbitrage is where we can get something cheaper than the true value of it. And that usually happens for a short duration because the market eventually figures it out and closes the gap. But as long as that arbitrage is maintained, we can make a spread. So what drives an arbitrage? I’ve boiled it down to four inefficiencies.

Behavioral inefficiencies
The first one may be the most prevalent out there. But behavioral inefficiencies are not necessarily the easiest to convert into advantage, but they're always there. Because even though the world changes and circumstances change, human nature doesn't change very much. People always have biases that result in bad decision making.

Analytical inefficiencies
This inefficiency arises when all the participants have access to the same information, but one person has a much better ability to analyze that data

Informational inefficiencies
Wouldn't it be better if we just had better information? There are many counties where you're not getting that great data from the assessor. So, you have to find other ways to get the data. So maybe we're getting it from Data Tree or from Lands of America or Zillow. It helps to have a good tool so you can get all this information and easily process it.

Situational inefficiencies
If somebody is distressed that is a situational inefficiency. For them price is less important to them than speed. Anytime somebody needs to sell because they're under the gun to do it for reasons that have nothing to do with the underlying value of the property. They might be distressed because they've got a huge tax bill. And if they don't pay it, they're gonna go to jail. Or they have hit hard times and they just need the money. Any situation like that is a situational inefficiency.

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