Financial

The Audacity Of Vulture Investing: Making Money Off Misfortune

One of the peculiar things about being an investor is that in order to make money, the other side needs to lose money or not make as much money. Over time, the results of your decision to buy or sell get amplified for better or worse.

Unless you have a ton of capital, it’s hard to be a vulture investor in public equities. The stock market is incredibly efficient and retail investors don’t have much sway over a particular stock’s performance.

Of course, you can gang up on hedge funds to create short squeezes like Redditors have done with Melvin Capital and Gamestop and others. However, for the most part, you and I are more like minnow investors with no influence.

Where you can really be a vulture investor is in real estate, my favorite asset class to build wealth. Due to a much more inefficient market, you have a much greater ability to take advantage of mispricing, inopportune timing, and ignorance.

As a result, since I graduated college in 1999, I’ve focused more of my capital towards real estate versus stocks. And so far, the plan has for the most part worked.

What Is Vulture Investing?

Vulture investing is when you take advantage of a mistake or a misfortune to get a great deal below the perceived market value. The vulture investor likes to patiently wait for opportunity with their sizable amounts of cash.

You could say a vulture investor is a heartless super-capitalist who only cares about profits without regard to other people’s livelihoods. Or you could say a vulture investor is simply someone who recognizes opportunity and takes advantage.

In a capitalistic society, the shrewdest investors are often the wealthiest. Of course, vulture investors get things wrong as well. That’s just the price we all pay for putting our capital at risk for potential profit.

Examples Of Vulture Investing

  • Apple potentially buying Netflix after a 75%+ collapse in its stock price in one year and fires half its workforce. This seems like a possibility given Apple has over $100 billion in cash and is building out its streaming platform with Apple+.
  • Silverlake & Sixth Street Partners lent Airbnb $1 billion in April 2020 at an 8.5% interest rate with warrants to convert at under a $20 billion valuation. This valuation was at least 50% lower than its previous private round of funding. Then Airbnb went public within 12 months at a $100+ billion valuation.
  • Elon buying Twitter for only $44 billion partly because it was mismanaged. Pretty impressive Twitter only appreciated by ~15% since it IPOed until it was privatized nine years later.
  • Buying a home in foreclosure because the owner could no longer afford his mortgage and taxes because his tenant hasn’t paid rent for over 24 months and can’t get evicted.
  • Purchasing personal memorabilia from a professional athlete who went bankrupt due to bad spending habits or found himself in deep legal trouble.
  • Buying a family heirloom from a couple who went through a nasty divorce and just wanted to get rid of all things that remind them of each other.

What’s interesting is that when large companies and institutional investors vulture invest, it doesn’t seem so bad, even if you are a limited partner. As a limited partner in a private fund, you want the general partners to be as aggressive as possible. That’s what you’re paying them for.

However, if you as an individual decide to become a vulture investor, then you may be faced with a moral dilemma. You’re making the decision not someone else.

It’s also worth asking yourself whether calling someone a vulture investor is simply sour grapes because you missed out on the opportunity to profit.

A Vulture Investing Opportunity

I write this post because I have an opportunity to vulture invest. Because the hurdle of becoming a real estate agent isn’t high, there are a lot of bad real estate agents out there who misprice deals.

In the linked article above, I highlight how a real estate agent who specializes in downtown condominiums had over-priced a single-family home on the west side of San Francisco. I checked out the 2,300-square-foot house and it was an absolute fixer upper. Some would say it is a complete dump.

The closets were falling off, the kitchen and bathrooms were old, the wiring was knob and tube, and even the garage floor just consisted of dirt instead of cement. It needed to be gutted badly.

However, the real estate agent priced the property at $2.9 million or $1,245 per square foot. It was absurd. Only remodeled homes with panoramic ocean views would sell for $1,250+ per square foot in this neighborhood. This home needs at least $500,000 worth of work, bringing up the all-in price close to $3.4 million if it got asking.

To no surprise, 30 days later, the agent lowered the price to $2,499,000 from $2,900,000. If she had started at $2,399,000 or lower, she would have had a great chance to get $2,700,000. That’s how things go here in San Francisco. However, she screwed up the listing and now it’s stale.

In my opinion, the seller will now be lucky to get $2,400,000 or $1,030 per square foot. That is a $300,000 loss in value because the seller went with an inexperienced listing agent. One veteran agent I spoke to said he would have priced the property at $1,980,000 to get the bidding wars really going.

Time To Swoop In And Buy?

One long-standing problem I have is NOT being able to stand down when I see opportunity. As a result, I’m highly tempted to make a low-ball offer. Unfortunately, I don’t have endless amounts of capital.

Any savvy investor with the money should seize this opportunity and submit an offer for $2.2 million or less. That would be an amazing $700,000 below its original asking price (-24%). The potential buyer would then have to negotiate and probably end up taking the house down for $2.3 compared to a fair market value of about $2.5 – $2.6 million.

A $200,000 “instant equity” gain feels wonderful. Although the market is usually efficient, sometimes it’s not.

As proof of “instant equity,” here’s a real example of $400,000 in instant equity from someone who bought a home in 2019. What’s most interesting though is that at the time, the buyer thought he had “only” gotten a $150,000 – $200,000 deal. However, Redfin’s pricing algorithm has expanded the gap over time.

Unfortunately, despite my belief I could gain at least $200,000 in instant equity by buying this house, I’m going to pass. I don’t need another remodeling project. I just got done finalizing one that took two years to complete!

The $200,000 in potential profit is no longer worth the hassle for me today. If I was 25 and had the money, I would definitely proceed with an offer. But that is the irony of life!

Is Vulture Investing Immoral?

I’ve made vulture investing sound immoral due to the word “vulture.” I could have easily changed the term to “Opportunity Investing” or “Strategic Investing” to make being opportunistic sound better. However, in a free market, most of us have the ability to buy or sell anything we want.

In this home seller’s example, the seller and listing agent rolled the dice to see if they could get a crazy price and lost. They listed the house at $2.9 million because they thought they could get over $3 million in this market. Now they have to face the consequences.

Anyone who is looking for a single-family house in this part of San Francisco at this price point can make an offer. That doesn’t mean someone is a vulture investor looking to rip meat from a dead corpse! At the end of the day, all buyers try to get the lowest price possible.

Taking Advantage Of Opportunity Is Only Rational

It is up to us to educate ourselves about investing. Nobody is forcing us to buy or sell anything in a free market system. The more you can educate yourself, the more opportunities there will be.

If people want to subscribe to my free newsletter to learn about building more wealth, then great. If not, then it’s all good too. We’ll logically take action if we care enough about a situation, person, or thing.

However, those who’ve learned and taken action over the years have gotten so much richer over the decade. As a result, life is now much easier thanks to the resources money provides. At the most basic level, one of the good things about having money is that you stop worrying about survival.

Our first responsibility is to take care of our families. If we don’t make enough money to take care of our children, we are failing as parents.

Nobody is going to bail us out if we make a bad decision or face losses. (Well, sometimes the government does if we are really lucky.) Therefore, we’ve got to take advantage of opportunities when they arise. Eventually, we will all make investing mistakes that could use a buffer.

In the economics world, due to the efficient market hypothesis, you will never find a $100 bill lying on the ground. Someone will have taken the money before you ever will. However, sometimes, you are that lucky someone who happens upon free money. Therefore, you might as well pick it up when you see it or else!

Related post: How to Make Lots Of Money During The Next Downturn

Readers, what are your thoughts about vulture investing? Do you think it’s ethical or immoral to take advantage of a mistake or misfortune? What are some vulture investing you’re doing today?

Source
The Audacity Of Vulture Investing: Making Money Off Misfortune is written by Financial Samurai for www.financialsamurai.com

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