Sandpapering the Vultures to Death
By Tom Dyson
October 22, 2007

The vultures are circling Miami...

Matthew Martinez is the point man for a large private-equity fund from Connecticut. His mission: Fly to Miami with $200 million and buy cheap condos. "We're looking at purchases of $7 million and up, all-cash," he says.

Jack McCabe is the person you always see quoted in newspaper articles about the Miami condo meltdown. He has a vulture fund, too. It is eight figures in size. He calls it "the opportunity fund."

Peter Zalewski has found a profitable niche. He runs a real estate brokerage called "Condo Vultures." It's a registered trademark. He has a website and a blog. He's aiming to corner the market in Miami bottom feeding.

"Our group, for example, has been contacted by more than 40 different groups," says Zalewski. "Four are from abroad. As different as they are, all of the funds are ready, willing, and able to invest. All want to buy all-cash, and close quickly."

"[Last week] I was brought a 330-unit bulk deal out of a 750-unit project in West Palm Beach," said Zalewski. "I sent it out to 29 hedge funds and private-equity funds and, within 45 minutes, I had four responses."

My view: These condo vultures are going to lose all their money. Here's why...

Last year, Steve wrote about Bob Farrell's theory of the "guillotine and sandpaper."

When a bull market ends, first you get the guillotine. Prices plummet. It happens so fast, you don't know what hit you. The market blows right through stop losses. By the time you've come to your senses, you might be down 50% or 75%...

At this point, the bottom seekers pile into the market. We're getting close to this point in Miami.

The bounce is just as violent. Now the bottom feeders and the sellers are in a tug of war. They are debating... distributing... arguing... everyone wonders if the market has reached a bottom or not. It generates volatility. You'll see lots of debate in the press, too. The market stays in the limelight, even though it has collapsed.

Both groups are wrong. They forgot about the sandpaper.

Between the guillotine stage and the start of the new bull market, you get the sandpaper.

In the sandpaper stage, the market forms a range. The excitement of the crash slowly drains away. People get bored. It wears everyone down as the market drifts slowly lower. Inflation, taxes, interest payments, and fees erode investments. Eventually folks throw in the towel and find another market to gamble on.

This is the true contrarian buy point... when no one cares anymore.

Sandpaper can last a long time. Gold formed an incredible bubble in 1980. Then it burst, falling from $850 to $450 in just 10 weeks. That was the guillotine. Then, it traded between $300 and $500 for 20 years. That was the sandpaper. Yes... it took 20 years to wash all interest away. By 2000, gold was at $250 and most investors had forgotten gold ever existed. They were busy gambling on tech stocks.

Biscayne Boulevard: The Next Fifth Avenue Biscayne Boulevard Part II

That's when the new bull market in gold started.

So how will we know when it's time to buy Miami condos again? Homeless people will have invaded downtown. The place will look seedy and run down. Mention your interest in buying a condo at a dinner party and everyone will laugh at you... or quietly change the subject.

We're probably still 10 years away. Real estate moves at a glacial pace.

In sum, bull markets do not start after the guillotine. They start after the sandpaper. The condo vultures in Miami may think they're acting smart by buying distressed properties. I bet they get sandpapered to death.

Good investing,