How to Buy a Racehorse (or Part of One)
from September/October 2008
by Brian O'Reilly
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It’s not hard to become a racehorse owner. Ask attorney Jerold L. Zaro, a former director of Commerce Bank and a member of the board of commissioners of the New Jersey Sports and Exposition Authority, which operates Giants Stadium and the Meadowlands and Monmouth Park racetracks. Six years ago he was having dinner with a friend who mentioned that he was going to buy some horses. Zaro, who lives in Ocean, New Jersey, had never been to a racetrack, but in the warmth of the evening having a horse sounded like fun. “Count me in,” he said. A few days later, “the friend called me up and told me to send him a check [for more than $50,000]. I could barely remember what for. I found out I was now part owner of three racehorses,” says Zaro, 57. “I was smitten as soon as I saw them. A day hasn’t gone by since that I don’t spend some time dealing with horses.”
Dealing with horses doesn’t necessarily mean making money off them, of course. Of Zaro’s original three, two won races but the third didn’t. So don’t count on getting your face plastered all over the Lexington (Kentucky) Herald-Leader as a regular in the winner’s circle; that, sadly, is almost impossible. “First of all, owning racehorses is a horrible investment,” says Bill Finley, a longtime racing writer for the New York Daily News and now a freelancer. “The rule of thumb is that 90% of the people who go into this lose money. Anybody who’s going to do this should do it for fun.”
Of course there’s always the chance that you’ll get lucky and your inexpensive nag with the limp will wake up healthy, break the record at your local track, excel at Saratoga, make a bundle at Churchill Downs, and spend his golden years at stud earning $250,000 a pop. Getting hit by a meteorite is about as likely, but outcomes like that are the exhilarating fantasy of every racehorse owner and prompt thousands of people each year to take up the sport. Interested? Do some homework. There are several ways to get into the game, some experts to retain, a dozen theories on how to pick a winning horse, and a couple of basic financial and tax decisions to be made. Then get out your checkbook. Finally, as Dan Metzger, president of the Thoroughbred Owners and Breeders Association (TOBA) in Lexington, suggests, “Don’t leave your brains at the door.”
There are three basic ways to purchase a racehorse. First, buy one privately. Second, if you’re interested in a young, untested horse, show up at one of the dozen big auctions held around the country each year, such as those put on all across the U.S. by Fasig-Tipton Co. or the Keeneland Association. Third, to find a trained and experienced racehorse, go to a so-called claiming race at virtually any racetrack. These are races where any of the competing horses can be bought for a predetermined price just by putting a notice in a claim box before the race. The amounts vary from $5,000 to $100,000. When the race is over, you own the horse and take it away, even if it ran backward. If two or more people claim the same horse, they submit themselves to a “shake,” which works somewhat like a throw of dice.
About two-thirds of horse races—34,000 out of 51,000 last year—are claiming races. They’re the used-car lot of the biz. You might find an underpriced gem, or you might get a horse that’s about to set forth on its final furlong. Conversely, an owner with a good horse may want to pick up some easy prize money by putting it in a claiming race against some tired plugs, but not actually want to sell it, at least not for a measly $25,000. To scare off possible buyers, such folk may spread rumors that the glue factory is the horse’s next stop. Says a horse-buying guide by a California racing group: “Secrecy is part of the game, like bluffing at poker.”
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Horse owner Jerold Zaro: “Count me in.” |
Or you can breed your own horse. This means you buy a mare with a good track record (average price of a broodmare in 2007: $70,000), mate her with a talented stallion that can add to her strengths or correct her flaws, and cross your fingers. More on this later.
There are also different ways to own a horse. You can buy it outright all by yourself, go in with a couple of friends, or join a syndicate that may have scores of participants. Syndicates are growing in popularity. Investors might pony up $2 million among them to buy and maintain nine or 10 horses, thus spreading the risk and getting camaraderie too. Syndicates are typically made up of a general manager, some staff, and the investors. Usually the investors divide all the winnings up to a certain point, and then the manager and other staff get a piece of the action. Here’s how it works at the BK Thoroughbreds syndicate in Fair Haven, New Jersey. Once the investors have gotten back 120% of their investment, syndicate founders Kevin Scatuorchio and Bryan Sullivan will each get a 10% share in the horses and their winnings.
Whether you buy solo, with pals, or through a syndicate, you will want at least one expert, and possibly several, to guide every purchase. selection of a trainer is quite possibly the most important decision you will make, screams a headline on the website operated by TOBA. To the uninitiated, the trainer seems part baseball coach and part auto mechanic. He or she usually works with several owners and scores of horses at a time. Ideally the trainer has spent a lifetime with horses, knows how to spot talent at an auction or claiming race, and can work around or correct a horse’s flaws, pick the right vet to attend to its health, choose the proper workouts, find the most suitable races, and get along with the cranky, demanding, and overwrought owner (you). Generally the trainer also helps pick the jockey who’ll ride your horse, usually working with an agent who represents a number of riders. In addition to his fee, a winning jockey gets 10% of the owner’s winnings; reluctance to ride your horse is not a good sign.
Former amateur rugby player George Dittmar, 59, wound up owning more than 20 horses and a farm in central New Jersey’s horse country. He bought his first horse in the mid-’80s, for 5,000—without expert assistance, a common mistake among novices. He had been a talented athlete in prep school and college, and played highly competitive rugby well into his thirties. As he got older and his own competitive abilities began to flag, he became attracted to the athleticism of many racehorses. He caught the bug. “I just had to have this horse. His owner convinced me to buy it,” says Dittmar, who now owns an insurance firm in Freehold. He didn’t think he needed any advice. “I’d just met a trainer I liked, but he was telling me not to trust the guy who was selling it. I ignored him. The trainer was right: The horse had four bad legs.” As it happened, the trainer, Dan Dufford, was able to heal the horse with training and veterinary care, and about six months later it won a race—a claiming race. Dittmar was ready to say goodbye. Somebody else, fortunately, liked the look of the horse and thought the $5,000 “claim” was just fine, and, says Dittmar, “we got our hat back.”
Just how important a trainer can be became apparent when Dufford spotted a great young horse a short time later. “We saw a yearling [a one-year-old], and both of us agreed we had to have it,” says Dittmar. “But I couldn’t afford it at the time, and it sold for $30,000. A year later the horse was having problems, but I was feeling more confident and prosperous, so we pursued it. Dan felt he could deal with the problems. We tried to buy it, but the owner’s trainer knew it had potential. We ended up paying $70,000. Rumptious turned into a very nice racehorse.” Nice indeed. The third time it ran for them, it won by 10 lengths. “Somebody offered me $250,000. Dan said, ‘Don’t listen—we’ve worked so hard.’ So we didn’t. Rumptious won an enormous race at Aqueduct, and set a track record at Monmouth Park.”
There is no end to the theories about how to pick a horse that has never raced, but they generally involve three basic ingredients: the horse’s lineage, the way its body parts are put together (its conformation, in the parlance), and some ineffable will to win. Some trainers aren’t good at spotting any of that, and so will bring in a pedigree expert, a “bloodstock agent,” and perhaps a conformation specialist to help. Bloodstock agents typically get a 5% commission on the price of any horse they buy or sell.
For some buyers, pedigree is everything. A horse with winning parents and grandparents and cousins will have the right stuff, the theory goes. Big horse-auction houses publish a catalog with a page on each horse up for sale, showing its ancestry several generations back. If, say, the mother’s father won a fairly challenging type of race known as a stakes race, that forebear’s name will appear in bold type and capital letters in the auction book. If the parent won a national “graded” race like the Kentucky Derby or the more obscure but still significant Shakertown Stakes, there will also be a “G” and a number by its name. (Winning the Derby gets a G1, Shakertown a G3.) Virtually every foal is the product of an effort to pick a mare and a sire that will produce a certain outcome. A mare with speed but low endurance might be bred with a muscular stallion in the hope that Junior will inherit the best attributes of both.
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Going, going, gone in Kentucky
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The names given to horses may seem meaningless to outsiders but often carry obvious messages to the knowing. An offspring of champion Seattle Slew was named Slew o’ Gold. Other monickers are more whimsical. Big Brown, the winner of this year’s Kentucky Derby, was named by one of his owners, the proprietor of a trucking company, who wanted to celebrate the renewal of a contract with UPS. Jerry Zaro had a horse sired by Lion Heart, and being a lawyer, he called it Lion Under Oath. “Part of the fun is naming a horse,” he says.
Buying a young thoroughbred with an impressive pedigree is expensive. The stud fees vary, starting at $10,000 or less and running as high as $300,000. As a result, many trainers prefer to rely heavily on the appearance and gait of a young horse with more ordinary parents.
If you’re tempted by appearance alone, arm yourself with a useful handbook put out by TOBA that’s rich in tips on what to look for. It points to 1973 Triple Crown winner Secretariat as “near perfect” in conformation. The latest handbook includes 18 drawings illustrating what to seek out as well as what to avoid, such as buck knees, cow hocks, and badly slanted pasterns. “The pastern [the area above the hoof] should be at a 45-degree angle,” the text explains. “Too long a pastern could indicate weakness and tendon strain, while too short may absorb too much concussion, thus stressing the bone structure.” But you knew that.
Interestingly, speed on the track is not all-important in determining the potential of an unraced young horse. Bad gait, however, is a serious flaw. A horse’s hoofs should move in a straight line when it runs. This isn’t easy for an amateur to spot. Peter Vegso, author and publisher of the Chicken Soup for the Soul books, owns 135 horses and says, “I’ve been around horses for 20 years. If a horse ran past and you asked me if it was a great runner, I couldn’t tell you.” That’s why you need the expert input of a good trainer or a bloodstock agent before you sign a check. If a horse is already in training, your representative can also evaluate videotapes of the horse running, time it during workouts, and bring in a vet to examine its lungs, heart, and legs. Forget about commissioning a veterinary exam before a claiming race, however. You’re not entitled to have it done.
A good trainer can spot a horse’s will to win, as can a bloodstock agent. Gary Biszantz, 73, who sold his shares in golf-club maker Cobra Golf to American Brands in 1996 for about $65 million, figures he’s owned 2,000 horses in his lifetime. He calls that will to win “the wow factor,” and says, “The best agents have an eye for it. In fact, it’s the first thing many look for.” Vegso agrees. “Only a few horses have it,” he says. “The good horses try hard. They like to run. Maybe 3% to 7% say, ‘I won’t let this guy pass me.’ The rest are just horses that get put into racing.”
All this pedigree and conformation effort can’t overcome the basic fact that, unlike the children of Lake Wobegon, not all horses are above average. In fact, between 1990 and 1999 only 71% of the average 35,000 racehorses born each year ever ran in a race, according to an analysis of 10 years of data by the Thoroughbred Times. Of those, 48% won one race in their lifetime and 37% were repeat winners. That’s less impressive than it sounds, though. Many races are designed to give even mediocre horses a chance to win, with conditions like “for three-year-old mares that have never won a race” or “for horses born and raised in Pennsylvania.” Only 5.7% of the horses surveyed won a stakes race, and only two in 1,000 won one of the 100 or so prestigious graded races like the Derby or Preakness.
Good breeding does help a little. The same Thoroughbred Times analysis says the odds of winning rose if a horse was fathered by a sire in the top 1%. While only 85% of those babies grew up to race, 53% of them were repeat winners. But top-earning racehorses are sired by inexpensive stallions far more often than by ones costing a quarter of a million dollars per coupling. Of the 42 top American earners last year, only three were produced from a stallion costing over $250,000 per visit. Twenty-nine of the big earners came from stallions that cost under $50,000, and 12 from stallions costing $10,000 or less. The Royal Society, a prestigious British scientific association, studied how some 4,000 horses had performed over the decades (the subjects went back to 1922) and, in a report released in December, concluded that genes account for only 10% of a horse’s racing success. The rest is attributable to how it was reared, trained, and ridden. Bob Curran, vice president of corporate communications at the Jockey Club in New York City, has a somewhat philosophical approach to the vagaries of breeding: “I tell people, ‘Breed the best to the best, and hope for the best.’”
A horse that doesn’t win races is expensive. The rule of thumb says it costs about $35,000 a year to stable and train a horse. If the horse is sick or injured, vet bills can run another $1,000 a month. Racehorses need new horseshoes monthly (maybe $150 a set) and may have to be hauled to out-of-state races. Suppose you paid $75,000 for a yearling. You’ve got to wait at least a year before it can race, more likely two years. So you can easily have $150,000 to $200,000 tied up in the horse before it ever hears the cry “They’re off!” Alas, the average lifetime earnings of the horses in the Thoroughbred Times analysis came to just $41,475. (Males earned about $49,200 and females $33,400.) Gary Biszantz, the golf-club millionaire, who’s a former chairman of TOBA, concedes that the economics of horse racing are poor. “The industry is difficult in the sense that the expenses of all the racehorses out there come to $2 billion a year, and there’s $1 billion a year in purses,” he says. “If you’re a genius, you’ll break even. You need to love it.”
Industry officials fret that horse racing is losing fans to everything from NASCAR to Internet poker. Indeed, the total amount wagered on horses in the U.S. has declined from a high of $15.2 billion in 2003 to $14.7 billion last year. However, several states, including Florida, Minnesota, and Pennsylvania, now allow racetracks to offer alternatives to pari-mutuel betting, such as slot machines and poker, that put some of the proceeds toward race prizes. That helped boost the total purse nationwide to $1.18 billion last year, according to the Jockey Club, up from $1.03 billion in 2000.
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“I had to be crazy,” says Bob Hutt of his first investment in a horse. |
There’s a syndicate out there for just about every budget. They include the very high end, like IEAH Stables Inc. in Garden City, New York, with 85 horses, one of them Big Brown. This outfit is so expensive that the price of membership is undisclosed (“If you have to ask…”). At Fantasy Lane Stable in Manalapan, New Jersey, $5,000 gets you 3% of a horse, or you can buy proportionately smaller pieces down to $1,250. “We want all who wish to participate to be able to afford to do so,” says Fantasy Lane owner Bob Hutt. He knows the feeling. A Cigna Insurance executive for many years, he started an insurance-services business with a colleague, and they shared the same wish—if not the budget to make it come true. They vowed they’d buy a horse when they’d earned $1 million. “We went to the ‘broken bone’ sale at Aqueduct, where you could pick up a horse at the end of its career,” Hutt says. That was in 1985. “In retrospect, I had to be crazy, but I did it. And it turned out okay.” Nearly 15 years later Hutt started the Fantasy Lane syndicate. It now owns 14 horses and has more than 150 investors, including corporate executives, airline pilots, police captains, accountants, entertainers, and, he says, “just your average everyday people.”
Typically, Hutt gets a 10% commission on any horse Fantasy Lane buys, and a 10% share of both the horse and its prize money. “If the horse doesn’t win, I don’t either,” he says. Hutt makes no claim that his investors are getting back more than they put in, but says their excitement seems to be reward enough. “They get to go back to the stables and see their horses whenever they want. When we won a while ago, we had so many owners in the winner’s circle I was afraid the horse would get spooked.” Hutt says the excitement is the same whether you own a fraction of a horse or the entire thing. Jerold Zaro, the attorney, agrees that sharing ownership is more fun than going it alone: “If you’re by yourself, who do you high-five when the horse wins?”
Chances are good that you’ll fall in love with your horse, and the rest won’t matter. George Dittmar, you will recall, was offered $250,000 for his prize, Rumptious, after it had won a few races, and refused. The horse ran for six more years and won more than $300,000 in its lifetime. Yes, he concedes, he could have sold Rumptious early on, saved himself a lot of expenses, and made more money. “I could have. But think of all the fun and anticipation and excitement I would have missed. Money? It’s not why you do it.”
