Shadow inventory: what is it and how to find it
Many investors have been asking me about how much shadow inventory is available and how to get their hands on it. Shadow inventory generally refers to the supply of homes that have not yet come on the market, but are “hiding” in the background. In Real Estate this refers to foreclosures (REO or bank properties) or those close to the process.
Banks and mortgage servicing companies often keep properties that have not received a mortgage payment for 90 days and, in some cases, even 2-3 years.
Why do they hold out for so long?
Banks hold out as it allows them to release their inventory over time to keep their books under control and also provide that easy liquidation to stimulate the real estate economy when needed. Banks will now get more money for those newly launched properties, say 2 years ago, due to the steady rise in home prices and low inventory levels. If they chose to release everything at once, it would flood the market with “distressed properties” and reduce property values.
How much “Shadow Inventory” is there still?
Foreclosures have been declining steadily 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 on the books and we may be able to see more soon.
More “Shadow Inventory”? Why? (HAMP) Affordable Home Modification Program
In 2017 and beyond, many homeowners may find it difficult to make their mortgage payments due to “restarts” with HAMP, pushing them into foreclosure. The government’s Affordable Housing Modification Program provided temporary relief to borrowers during the housing crisis. These reliefs ended after five years and now payments will “restart,” leading to increases in loan payments 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 the “Shadow Inventory”?
Forget calling your 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 greater discounts.
But my favorite way to locate “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 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 are ready to make a deal!
The NEW type of “Shadow Inventory”!
There is a new type of shadow inventory on the market these days and I am not talking about the REO type. Many successful agents have their own shadow inventory. If you’ve been in business for an extended period and built up a clientele, these clients typically contact you long before the property goes on the market. It informs them of the steps required to get the house ready to show, which usually means doing repairs like painting, carpet, landscaping, staging, etc. Therefore, there is a period of time before the property hits the market by 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 home hunting!