What is a Vulture Fund?

J Philip Faranda August 21, 2010

The term “Vulture Fund” is used sometimes in real estate and other investments, and, as the metaphor suggests, is money earmarked for the purchase of a distressed asset. Often the instrument purchased is debt; if you have a loan or credit card you go south on, after it is charged off by the creditor it goes on the secondary market, and there are entities like collection agencies and lawyers who buy the debt for pennies on the dollar and then go after YOU for the full amount, plus interest and fees. 

A Vulture Fund in real estate is not exactly the same. Simply put, a vulture fund in real estate is money used to buy a distressed property. It could be a foreclosure, a home with a defaulting mortgage, divorce situation, or other seller who needs to sell so badly that they will trade off time and certainty instead of holding out for top dollar or “market value.” With the property values in Westchester County, the reward can be high, but the risk is considerable. Two years ago, former New York governor Elliot Spitzer made the news when he considered starting a real estate vulture fund

While the name is rather pejorative given the form it takes in other assets such as debt instruments and stock buyouts, in real estate a vulture fund venture is often preferable to the cycle of receivership, where the lender takes over the property and the area gets another vacant foreclosure. Often, real estate investors who operate so-called vulture funds here in Westchester and the surrounding area are getting a distressed seller out of hot water, preventing a foreclosure, saving the credit of the seller and sparing the neighborhood from another blighted property. Are all operators like that? No, some are indeed opportunistic to a fault. However, the investors we are fortunate to work with have a heart. 

If you hear the term “vulture fund,” ask about the context. One of my investors is very different from a debt collector. Often they are at opposite ends of the spectrum. 

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