What is Shadow Inventory?
Shadow inventory is a term used to describe properties that are typically real estate owned (REO), which means they are in foreclosure, have been foreclosed on, and are being held by banks to be released back into the market at a later date. The “shadow” part of the term is used because banks often acquire the homes and park them for a number of years, far away from the eyes of the public. It is done in order to generate new interest and higher sale prices when they are finally put up for sale.
Shadow inventory is released here and there. However, as of 2019, there is a minimum of a four-year backlog of bank-owned homes still waiting to be put on the market, according to the National Association of Realtors.
- Shadow inventory is the store of homes that are generally owned by banks and being stockpiled in order to keep housing prices at optimal levels.
- Sometimes, clearing out shadow inventory can become a burden for banks, particularly with properties that aren’t as valuable as the others.
- Working with an agent that specializes in foreclosures is a great way for investors to get the insight they need to get the best of shadow inventory, allowing them to sell it for a good profit.
Handling the Shadow Inventory Issue
Banks often hope to sell off shadow inventory homes for a profit later on. However, they tend to hold onto the homes not simply for that purpose. In many cases, there are simply too many homes stockpiled to release. Putting them all on the market at once can ultimately tank the market and steer home prices down, which is great for buyers but not for the banks.
Sometimes, banks attempt to sell pools of REOs, even leasing or selling the homes back to delinquent owners in an attempt to clear out some of the inventory. The practice, of course, isn’t always beneficial for investors in such pools. They may find themselves saddled with properties that they can’t move. The bank passes the responsibility, and the investor is left with the fallout.
The Attraction for Investors
Shadow inventory is, however, not something for investors to shy away from. Provided the investor is rational enough, understands the ups and downs of real estate, and is financially capable of purchasing a house at a decent price, he can stand to make a decent profit.
The best way for an investor to tackle the shadow inventory is to start working directly with a real estate agent who will almost always know of at least a few properties that will be available in the near future.
As long as the investor holds enough funding to put money back into the property, he can then turn around and sell it for a profit. The goal is to get information from someone on the inside, preferably from an agent that specializes in foreclosures. Banks are likely to be secretive about their shadow inventory. An agent that knows about and understands foreclosures can provide key insights about potential properties and guide an investor to the smartest buys.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: