From the Thanksgiving issue of the Mammoth Real Estate Times. Happy Thanksgiving!
Q: On your blog someone started discussing a “vulture” fund to use in Mammoth. Funny, because that is what some friends and I have been talking about. Obviously, other people are thinking it is a good idea or at least something to consider. What do you think?
A: Look up, and yes the vultures are beginning to circle over Mammoth. They appear to be very high in the sky. Some are flying alone and others are gathering together. Some are hungrier than others and some are impatient. And most are in front of their laptops. And some read (and believe) the silly stuff real estate agents write.
More than a year ago I was approached for the first time in this decade to form a “vulture fund” to invest in properties here in Mammoth. The market had just begun to soften and some folks were already thinking along these lines. Good idea, proper vision, and maybe premature. So I’ve had some time to think about the prospects.
First, let’s define what a vulture fund is or might be. Without a history lesson or getting overly complicated, a fund may be a group of vultures pooling their resources to acquire distressed properties. The “resources” could be anything from access to cash, borrowing capacity (credit), opportunity insight, creative deal making skills, good risk assessment, or even the ability to move quickly. The “acquire” part would be to get an ownership interest––outright ownership, an option to purchase including a lease option, getting control of title by taking on liabilities, etc. (The “fun” has just changed structure.) When there are highly stressed situations, anything can happen. And don’t forget that the sharks are circling too. But the really big question is: How (di)stressed will Mammoth real estate become?
All of this relies on some assumptions. Vulture thinkers must believe that Mammoth real estate values are going to drop dramatically, and conversely will be going go back up significantly. Essentially they are short-term bears and long-term bulls. Those are two interesting assumptions. What will drive the market down so far and how long will it take? And what will bring the market back so significantly and how long will that take? (Those dynamics are discussed almost ad nauseam in my forums so we’ll leave that to past and future writings.)
Like most investments, timing the lowest lows and the highest highs is left only to luck. But it is capitalizing on the general trend or trends that is important––and finding quality opportunities. Right now many just wannabe Mammoth property owners have a vulture mentality. But I’m sure there are plenty of individuals who are thinking beyond their own personal desires and thinking about it from an investment opportunity viewpoint. And from what I can tell there are people also looking to pool their resources to take advantage of this perceived future trend in the market.
From a pure investment position, the vultures better gain some focus on what the predominant strategy is going to be––or what segment of the market is going to be targeted. Vultures better have goals. Like I often say, Mammoth is full of nooks and crannies (and peaks and valleys.) For instance, I don’t think I would want a portfolio mixed with residential income properties, condo/hotel units, and some single-family homes thrown in too. Perhaps a fund (and goals) for each segment makes more sense to me. Each segment will perform differently in timing, and generating maximum cash flow (to cover expenses or pay interest to cash investors) during the holding period will be different.
My frequent readers know that the single-family home segment of the market is my favorite. Scarcity in this market segment and continued demand makes it, quite possibly, the least opportunistic segment. Maybe. But for the individual vulture looking for a permanent Mammoth property, a 10-30% decrease in value on a quality property could be an excellent opportunity. On the other hand, even though the values might not drop to what appears to be “vulture” status, the potential upswing could be greater than any other segment.
There might even become opportunities for “flipping vultures.” Many Mammoth real estate buyers like to buy turnkey properties. The opportunity may appear to purchase a property in dated or really bad shape for a great price. Just bringing these properties back to a good and marketable condition could generate a handsome profit. But I haven’t seen anything like that yet.
For a true vulture fund––a pooled group of investors with a clear focus––the condo hotel inventory might provide an opportunity. Values in certain projects are dropping. Meanwhile, owners are successfully skirting the on-site “front desk” rental agencies (and their large fees) and renting through by-owner Internet based websites. A pooling of resources could include an at-home mom who could field calls from potential nightly renters, just like many owners are currently doing. Again if values drop, and good cash flow can be generated, and the value trend can reverse, then the vultures may win. Or maybe this scenario plays out in the older condominium market.
There are many potential scenarios based on where this market goes. It may or may not end up being vulture territory. Or there may be vulture territory in one segment and not the other. In the meantime, set out your goals, get your LLC’s formed, watch the market (preferably between ski days), and patiently wait for opportunity. And guaranteed you’ll be competing against other vultures. Meanwhile, I’ll stay entertained by the crows outside my office window peering over the dumpsters. They make very good teachers.