Many investors have been asking me about shadow inventory, how much is available, and how to get their hands on it. Shadow inventory generally refers to the supply of homes that has not yet hit the market, but is “hiding” in the background. In Real Estate it refers to foreclosures (REO or bank owned) or those close to the process.
Banks and mortgage loan servicing companies typically hold properties that have not seen a mortgage payment for 90 days, and in some cases, even 2-3 years.
Why do they last so long?
Banks hold up as it allows them to release their inventory over time to keep their books in check and also to provide that easy liquidation to stimulate the real estate economy when needed. Banks will now be getting more money for those newly released properties then say 2 years ago due to the steady rise in home prices and low inventory levels. If they plan to launch all at once, it would flood the market with “distressed properties” and drive down property values.
How much “Shadow Inventory” is still out there?
Foreclosures have been steadily declining since 2013 with the highest shadow inventory at that time at 2.2 million. According to the National Association of Realtors, there are still about 4 years left on the books and we may be able to see more soon.
More “shadow inventory”? Why? (HAMP) Home Affordable Modification Program
In 2017 and beyond, many homeowners may find it difficult to make their mortgage payments due to “resets” with HAMP, pushing them into foreclosure. The government’s Affordable Home Modification Program provided temporary relief to borrowers during the housing crisis. These reliefs ended after five years and payments will now be “reset,” causing loan payment increases for nearly 900,000 homeowners. Some of them may find it difficult to keep up with payments in our current economy.
Where do investors find “Shadow Inventory”?
Forget about calling the loss mitigation department or asking your Big Bank teller. They won’t be able to help you. Instead, savvy real estate investors can approach the REO departments of smaller regional banks, credit unions, and portfolio lenders to find out what might be “lurking” in the shadows. This presents an opportunity to beat the competition and shop at deeper discounts.
But my favorite way of locating “Shadow Inventory” is what I call “Drive for Dollars.” Just drive through areas that have high foreclosure activity and look for the white sticker on the front window or door of the house. It usually contains the information of the property’s bank or asset manager and their phone number. Give them a call and see where they are in the foreclosure process and if they are ready to make a deal!
The NEW type of “Shadow Inventory”!
There’s a new kind of hidden inventory on the market these days and I’m not talking about the REO kind. Many successful agents have their own shadow inventory. If you’ve been in business for an extended period and have built up a clientele, these clients typically contact you well before the property comes on the market. You tell them about the steps needed to get the house ready for showing, which usually means making repairs like painting, carpeting, landscaping, scenery, etc. So there is a period of time before the property actually hits the market creating a different type of shadow inventory. Contacting your favorite real estate agent about this type of inventory can definitely increase your chances of finding your dream home.
Happy house hunting!
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