Information Arbitrage: Leveraging Your Way to Increased REI Earnings

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Information Arbitrage: Leveraging Your Way to Increased REI Earnings

Many if not most people in the real estate investment business (be they investors or service providers to same) associate the term leverage in pretty much financial terms. And that is true, as far as it goes. Actually, if you look it up in a dictionary, there are several definitions for the word leverage. For the purposes of this article, here is one that resonates: Using information to maximum advantage.

One way that information can be used to best advantage in investing is through what is known as “arbitrage”. In this scenario, you buy and sell assets using what can be referred to as “information arbitrage”. For example, in the stock market, short selling can be done by people who are arbitraging between the bond and the equity market. Arbitrage works best when you are able to gain a knowledge advantage over the marketplace in general or certain segments of the economy or players, in particular.

For instance in 1815, most of Europe was at war with France. The French forces were rumored to be getting ready to invade Great Britain. This depressed the British bond market. Instead though, the combined forces of Britain and Prussia defeated Napoleon’s army at the Battle of Waterloo. It so happened, there was a financier at the time by the name of Nathan Rothschild who was able to leverage that information and made a financial killing in the process, by buying British government bonds. He accomplished this feat, as the story goes, by having one of his people in France release a carrier pigeon belonging to the House of Rothschild, sending the bird on its way across the Channel to London with news (tied to its little leg) that the French had lost. Rothschild got that information ahead of other bond and stock traders and the Rothschild family fortune was secured for generations to come. Rothschild was able to arbitrage very key and timely information into a vast fortune in finance and real estate.

Another example of successful information arbitrage is billionaire George Soros. Based on extensive research he had previously undertaken, Soros “shorted” the British pound in 1992 and made more than $1 billion in profit for his efforts. He used information arbitrage to his great advantage. He made it his business to find information that others dismissed or overlooked.

Leveraging Information Arbitrage to Maximize Real Estate Wholesaler Profits

Wholesaling requires that you be able to find/buy properties for a deep discount compared to the current Fair Market Value. If you are able to buy properties at the right price, you will almost always be able to find cash buyers to take them off your hands. Here some tried and true ways to find distressed, motivated and flexible home owners who need to sell ASAP, based on a cash-for-keys, deed-in-lieu basis.

1. Target unhappy landlords who are experiencing problems, might be thinking about making a change or want to retire. Attend apartment owner meetings; review their websites. Look for those wanting to sell out.

2. Cruise neighborhoods looking for rundown houses, yard and estate sale signs. These are often indicators the owner may be getting ready to put their home on the market. Also look for vacant, fire damaged, condemned, or abandoned properties. Consistently drive the same areas, say once a month. Keep a log of each house you see that needs work. Reach out to the distressed homeowner and offer your help.

3. Review Craigslist & newspaper classifieds on a daily basis, Look for key “distress” wording such as: FSBO (For Sale By Owner), fixer upper, must sell, etc. Contact them. Also review obituary notices: wait a couple of months, then reach out to the surviving spouse to see if they may want to sell their house.

4. Enlist the support of investor-friendly realtors. They get a commission for helping you find/close deals. They may know about investment properties that have not hit the market yet, back pocket listings, etc.

5. Identify and retain bird dogs (property scouts). Offer them a sizeable referral fee, based on deals that close, for any leads about distressed homeowners that they provide to you.

6. Reach out to local REI (Real Estate Investor) clubs (online or in person). There you will be exposed to others who are cash buyers, property scouts/bird dogs as well other investors who you might be able to co-wholesale properties to, assuming the math works out OK for all parties.

7. Reach out to local service providers for leads: landscaper, letter carrier, plumber, lawncare person, electrician, roofer, pest control technician, etc. Pay them a referral fee for directing leads to you for houses they see that are run down, newspapers piling up, mail box overflowing, un-mowed lawn, etc.

In summary, use information arbitrage to create a knowledge advantage for yourself; make personal connections and garner critical market-related information from others to leverage yourself into more closed deals.

What We Do: Quickly provide short-term, first position, private capital funding, to real estate wholesalers, among others. Contact info: Tod Snodgrass, emdfunding1@gmail.com, 310-408-7015

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