This morning at the health club, I ran into one of my long time friends, and I asked him if what I read in the newspaper was true. The paper reported that the bank where he is chairman was sold to a much larger institution. He confirmed that it’s true, and needless to say, a bunch of his cash is going to be made available to him in the near future. I asked him what he planned to do with some of that cash, and he told me he was planning to get into the short-sale game and start finding houses that he could buy, fix, and flip – or hold – depending on the circumstances.
I immediately cautioned him, the same way I caution the readers of this column, that the short-sale game is not for the faint of heart, and if you’re not a professional investor, there’s a good chance it’s not going to work out exactly the way you planned. I explained to him that sometimes it’s difficult to see the value in a property if you don’t have a carefully trained eye and if you’re not in the business of looking at these properties every day.
He acknowledged that he’s not in that business and asked how I would proceed instead. I told him my strategy. I explained that a “special situation funds,” which by definition is a vulture fund, has a team of professionals which find these properties and then professional crews (that are already in place) rehabilitate them. The finished product is then moved out onto the market through the channels that the fund built. I told him that because of the economies of scale, and because of the expert property picking skills the team has, funds like these returning substantial returns to investors. Projected returns turn out to be higher than the numbers he had projected if he did all of the work by himself.
Some people prefer to take an active role in their real estate. If you’re one of those people and you’re involved on a regular basis at looking at real property, evaluating markets and assessing prices, then this is a good market for you and you can do well. But if you’re not someone who’s actively involved on a regular basis, consider making a passive investment in a fund that makes the kinds of investments that you want to make.
There are many of these funds around, although several of them have minimums that are very high because they are designed for the ultra-wealthy. If you want to buy distressed properties, then you would be looking to invest in a vulture fund. A vulture fund is one where the buyers of the assets are thought of like scavengers, much like vultures that circle the skies and prey on highly distressed assets. Per Wikipedia, a vulture fund is “a private equity or hedge fund that invests in assets owned by an entity that is considered to be very weak or dying. The name is a metaphor comparing these investors to vultures patiently circling, waiting to pick over the remains of rapidly weakening assets. Market practitioners sometimes prefer to refer to them special situations funds.”
This may seem like a cruel game but it’s not cruel at all. In fact, the vultures are providers of a much needed service to the owners of distressed properties, whether banks, individuals, or other parties. Vulture funds tend to be flush with cash, ready to buy on a moment’s notice. Property owners who are desperately under water, who may be going through a divorce, or might be in the middle of some other financial crisis, crave the cash the funds have to help them put out the fire that’s consuming their lives. The equity in their property is probably gone anyway, and getting out without destroying their credit and their pride is usually very welcome.
Vulture funds specialize in finding distressed assets, evaluating them, fixing them, adding value to them, and creating opportunities. You can usually identify a vulture fund because the word opportunity tends to be in the name of the fund.
If you are interested in learning more about private equity funds that specialize in distressed assets, I am happy to discuss this with you in more detail. But if you’re going to go at it alone and find your own properties to buy, please be careful. Although this is a great time to buy real estate, it tends to be a better time if you are a real estate professional.
