The Audacity Of Vulture Investing: Taking Advantage Of 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 fair 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% over nine years since it IPOed until it was privatized.
  • 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 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 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.

price cuts in real estate and vulture investing

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! When you are young and fully of energy, you often don't have the money. And when you’re old and with lots of money, you tend not to have the energy.

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 today 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!

Investing In Real Estate Again

With mortgage rates so high, I'm aggressively investing in real estate again. There are great deals to be had as competition fades and prices get cut. You can buy physical property or you can dollar-cost average into private real estate funds, like the ones offered by Fundrise.

Fundrise manages over $3.5 billion for over 400,000 investors. It predominantly invests in residential and industrial real estate in the Sunbelt region, where valuations are lower and yields are higher.

In addition, one of the most interesting new funds is the Innovation Fund. The Innovation fund invests in:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. The investment minimum is also only $10, as Fundrise has democratized access to venture capital as well. Most venture capital funds have a $200,000+ minimum. 

Private company valuations have come way down since early 2022. As a result, I'm taking advantage.

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?

20 thoughts on “The Audacity Of Vulture Investing: Taking Advantage Of Misfortune”

  1. Ms. Conviviality

    I’m seeing so many opportunities for making more money doing exactly the same thing I’m doing for my current organization. I should be vulture investing in my career! BUT, I like where I work and don’t look forward to acclimating to a new work environment (would need to be fully remote since there aren’t equivalent opportunities where I live) or potential office politics.

  2. Very thought provoking post.

    In my opinion, the vast majority of time what you term vulture investing is not immoral.

    Like if you get a great deal on a house, and the seller welcomes the deal and the money you are offering, I don’t see that as immoral. They may be relieved at the quick sale and maybe they could not have done better, at least without further delay which may have been painful for them if a quick sale was important.

    Now of course I would not say every legal transaction is moral and it’s hard to make an exact distinction of where the line is.

    To give an extreme example let’s say your awesome neighbor who dedicated life to public service is a war veteran needing cash. You offer to buy his house at 50% of its actual value and rent it back to him at market rent. Since you’re buddies he trusts you and you have the documents drawn up and signed. That would be despicable.

    But I think the vast majority of time making a deal is providing liquidity and there is nothing wrong with it even if earning a healthy profit.

  3. That’s late-stage capitalism. Make money no matter how. That’s part of the reason why rent is going up so much. If you don’t, someone else will.

  4. Hi Sam,

    Interesting topic as always! I appreciate how you draw from your everyday experiences evaluating property listings. Including an example like this alongside your ethical take really helps to understand your perspective.

    One topic you touch on lightly at the end is the efficient market hypothesis. Even though I managed to score over $100k in instant equity in my last real estate purchase, I couldn’t help but feel as if I had missed some piece of information that everyone else had. It was a powerful pull to doubt the deal that had been gift wrapped right in front of me. I imagine some of my hesitation was due to the magnitude of the deal relative to my income (a stretch at about 4x) and speed with which the Bay Area market operates today relative to my previous (and only) purchase in 2018 in a Midwest college town. Do you have any thoughts or advice you can share about differentiating between a scenario when there really is a deal versus a scenario where you are likely to suffer the winner’s curse?

    1. It always feels weird to get a great deal. You will naturally wonder “what am I missing that others are not seeing.”

      But with proper research, analysis, and effort, good things do come true!

  5. My cousin purchased tax liens…..made a killing doing this….always thought he was a jerk though.

  6. Subscribing to newsletter.

    Vulture investing is not immoral. The difference in value between what it’s worth and what it’s paid equals the value of the lesson learned by the losing party.

  7. Manuel Campbell

    I don’t think vulture investing is bad. I think it’s just a way of doing business, and it has some advantages, the main one being that it provide liquidity to the seller. However bad it is to sell at a bad price, not selling at all is even worse. So, when you really think about it, both parties are still winning, even if it doesn’t look like it in the first place.

    I try to do that in my investing. But it’s much harder, because I don’t have a lot of capital.

    Since I can’t take advantage of a specific person or situation, I look for grossly mispriced assets / investments in the overall market. The most recent transaction I did was when the oil price was -$40/barrel. Obviously, I could have been wrong and nodoby could have used oil anymore. But I thought that was rather improbable. So, I bought as much oil as I could (ie. share of oil producers).

    The current market will probably bring new opportunities, with some prices falling this much. It may be the time to look for new deals.

    1. Manuel Campbell

      Here, got some help this morning from a fellow vulture investor, Elliott Management, for my investment in Suncor :

      Maybe, if we are enough small shareholders, we can help this company improve their operations and financial performance …

  8. I’m not an active enough investor to have a shot at vulture or opportunistic investing. But I certainly do love getting a good deal. I was very surprised to hear the news of Elon and Twitter. I haven’t read much about it but am curious to see how it pans out. And yeah that would be an interesting move if Apple were to buy Netflix. They sure have the cash to do so.

    I think you were smart to pass on that real estate opportunity. Having to take on another remodeling project does not sound enjoyable at all. Too much hassle and stress especially if you are just finishing a long drawn out project. I love to watch home remodeling projects but not actually go through the project management process. I did one before and it ran me into the ground. Happy to have that done and dusted.

  9. Momofthreema

    We’ve been waiting to buy a beach house in a particular place for a long time. By the time we were ready, this crazy up market had started. We are now continuing to save and hoping to jump if the market corrects in the next couple of years.

      1. I think so, too. The imbalance in pricing is going to catch up with many recent buyers, imo. Next year should be interesting, after a few more rate hikes.

        1. Denial the market is cooling takes time to overcome. Sometimes, prices swing too far to the negative, which presents the opportunity.

          You see this phenomenon happen with stocks often. Super bullish to super bearish. One of the reasons why I prefer real estate to stocks. Much less volatility.

    1. I would be licking my chops if I worked at Apple’s and Google’s M&A department!

      Just wondering about anti-trust. But if a company is going to blow itself up with mismanagement, then better run companies should have the right to acquire at a discount.

      Let free markets reign!

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