Many Investors have been asking me about shadow inventory how much is out there and how to get their hands on it. Shadow inventory usually refers to the supply of homes that has not yet hit the market, but “hiding” in the background. In Real Estate this refers to foreclosures (REO or bank owned properties) or those close to the process.
Banks and mortgage loan servicing companies typically hold onto properties that haven’t seen a mortgage payment for 90 days and in some cases even 2-3 years.
Why do they hold on so long?
Banks hold on since 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 necessary. Banks will now be getting more money for those newly released properties, then say 2 years ago, due to the steady increase in home prices and low inventory levels. If they chose to release all at once, it would flood the market with “distressed properties” and bring down property values.
How much “Shadow Inventory” is still out there?
Foreclosures have been steadily declining since 2013 with the highest shadow inventory then at 2.2MM. According to the National Association of Realtors, there is still about 4 years still on the books and it is possible that we could soon see more!
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 thus pushing them into foreclosure. The government’s Home Affordable Modification Program provided temporary relief to borrowers during the housing crisis. These reliefs ended after five years and now payments will be “reset” thus causing loan payment increases for nearly 900,000 homeowners. Some of those are likely to find it difficult to keep up with the payments in our current economy.
Where do Investors find “Shadow Inventory”?
Forget about calling the loss mitigation department or asking the cashier 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 could be “lurking” in the shadows. This presents an opportunity to beat out the competition and purchase at greater 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 sticker posted on the front window or door of the house. This typically contains the information of the bank or asset manager of the property 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 kind of “Shadow Inventory”!
There is a new kind of shadow 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 the business for an extended period and built up a clientele, these clients typically contact you well in advance of the property going on the market. You advise them of the steps needed to get the house ready to show which typically means doing repairs such as paint, carpet, 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 realtor about this type of inventory can definitely increase your chances of finding that Dream home.
Happy House Hunting!