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Shadow Inventory: What is It and How can it Benefit Real Estate Investors?

Shadow Inventory: Many investors have been asking me about shadow inventory, what it means for real estate investors, and how it’s affecting the recovery.

What is shadow inventory?

“Shadow inventory” in real estate refers to properties that are already foreclosed on and bank owned (REO.) Basically, any property that is foreclosed that will be on the market in the future, but not yet, is shadow inventory. The reason it’s called shadow inventory is because the properties are parked in the darkness of banks’ balance sheets waiting to be put on the market and sold.

When is shadow inventory released on the market?

The National Association of Realtors recently stated that there is about 4 years of shadow inventory accumulated on the lenders’ books – that means that even if the lenders steadily released their inventory on the market, there is a back log of 4 years.

It is interesting to know that real estate investors aren’t the only ones watching the shadow inventory closely. Economists are also keeping an eye of shadow inventory for a few reasons. They know that when the banks begin to release the properties in large numbers, the banks are signaling their prediction that the housing market has already hit the bottom and is on its way up. Also, because housing is such an important factor of the economy as a whole, shrinking shadow inventory means an expanding economy.

Why don’t the banks sell the properties now?

The shadow inventory is so large now for 2 main reasons.

1. Many states have enacted laws that slow the foreclosure process;

2. Lenders know that holding the properties will allow home prices to rise and therefore they can get a higher return when they do sell. Basically, they don’t want to flood the market with “distressed” properties, which are going to bring the values in general down.

How can “shadow inventory” benefit a real estate investor?

If a real estate investor knows how to approach REO departments, especially of smaller banks, portfolio lenders and credit unions, they have a good chance to beat the competition and purchase properties at a great discount.

Larger banks usually have property assets managers and designated real estate agents, who will list properties for them as they become available. In those cases, if the real estate investor can establish a relationship, which is mutually beneficial, with these assets managers and real estate agents, they can get to “insiders’ information” about when REO properties are available, before they even hit the market.

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