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 housing supply 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 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 receive more money for those newly released properties then let’s 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 on a steady decline since 2013 with the highest shadow inventory at that time at 2.2 million. According to the National Association of Realtors, there’s still about 4 years left on the books and we may be seeing more soon.
More “shadow inventory”? Why? (HAMP) Affordable Housing 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 “restored,” 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 the teller at your Big Bank. 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 to locate “Shadow Inventory” is what I call “Driving for Dollars.” Simply drive through areas that have high foreclosure activity and look for the white decal posted on the front window or door of the home. It usually contains the property’s bank or asset manager information and their phone number. Give them a call and see where they are in the foreclosure process and if they’re ready to make a deal!
The NEW type of “Shadow Inventory”!
There’s a new type of hidden inventory on the market these days and I’m not talking about the REO type. Many successful agents have their own shadow inventory. If you have been in business for a long period and have built up a clientele, these clients usually contact you long before the property goes on the market. You brief them on the steps necessary to get the house ready for showing, which usually means doing repairs like painting, carpeting, landscaping, staging, etc. Therefore, 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!