Explore your mortgage options
If you’re embarking on the search for a new home or considering buying soon, there’s a little-known option for finding homes beside what’s publicly listed – it’s called shadow inventory.
Shadow inventory consists of houses that are unlisted and either bank-owned or in pre-foreclosure. For homebuyers, this “secret” inventory can mean excellent opportunities to snag a home or investment property at a lower price point – especially as a first-time home buyer!
Let’s take a deep dive into what shadow inventory is, its implications on the real estate market and how to find a shadow property.
What Is Shadow Inventory?
Shadow inventory refers to unoccupied (or soon-to-be unoccupied) real estate not yet put on the market and owned by lenders or local governments (after a property tax foreclosure). A single property referred to as a shadow listing is generally understood to be a foreclosure. Depending on the housing market, lenders may hold on to these properties for years before putting them up for sale.
These types of properties can include:
- Real estate owned properties (REO)
- Foreclosed properties
- Distressed properties
REO property listings tend to sell “as-is” and at a deep discount so they can be sold as quickly as possible, which is great for buyers! Even a home that needs extensive repairs or renovations can be a much better deal if you’re willing to put in the time and resources to rehab the property.
Seller-owned shadow inventory
Shadow listings can also describe homes that sellers intend to put up for sale but are waiting for the right market conditions (regardless of foreclosure status). For example, if you’re casually looking to sell your home and have no time constraints, you could hold onto your property until demand and prices get higher.
What Are Shadow Inventory’s Effects on the Market?
Lenders and homeowners may hold onto shadow inventory depending on the current climate of the real estate market. After all, who doesn’t want top dollar for their sale? The amount of inventory available can shed light on current housing market conditions.
Buyer’s vs. Seller’s market
Periods of low shadow inventory tend to correlate with a seller’s market because homes are in high demand, on the market for less time and sell for higher prices. Banks know that if they release properties during a hot market, they’ll make a better profit.
A buyer’s market tends to reveal a higher volume of available shadow inventory because lenders and sellers will wait until there’s more economic growth as they can sell their properties for a higher price. Plus, the longer a home is on the market, the less it will sell for (hence the advantage to buyers).
Banks and lenders have to be careful – releasing too many of these lower-priced shadow properties onto the market can drive prices down overall. Obviously, these institutions have a lot to gain from higher prices when a potential buyer applies for a mortgage. The more a house sells for, the more money they make over the life of the loan.
Shadow inventory in the 2007 subprime mortgage crisis
There’s probably not a millennial alive that doesn’t remember the mortgage crisis in the late 2000s. Many people lost their homes and suffered financially in the resulting recession that followed.
In the aftermath of the infamous mortgage meltdown of 2007 – 2008, lenders acquired an unprecedented number of foreclosures from the economic collapse. This event led to a steep rise in shadow inventory. Because so many distressed properties were released onto the market, prices remained low for years. Eventually, shadow inventory thinned out, the housing market recovered and home values stabilized and eventually boomed.
Why Does Shadow Inventory Appeal to Real Estate Investors?
Real estate investors benefit greatly from finding properties to buy under market value, which is why shadow inventory can be so appealing. By working closely with banks and lenders to buy foreclosures at a reduced price, they can massively increase their return on investment (ROI).
Investors seek good real estate investment opportunities for:
- Fix and flips
- Wholesale properties
- Long-term rentals
- Vacation rentals
How Can You Find Shadow Inventory Real Estate?
Finding the perfect shadow property may take a little more work than the traditional way of buying real estate (reviewing active listings), but the potential benefits are well worth it! After all, who doesn’t want a killer deal on their new home? Here are a couple of ways you can look for shadow inventory:
- Work with an experienced real estate agent
- Contact bank and credit union REO departments
These real estate professionals have the connections and expertise to assist you in exploring available inventory and finding the right deal. Even though this process can take longer, the payoff is substantial if you find the right home.
Remember: You won’t be able to find shadow inventory on the Multiple Listing Service (MLS) or any other public listing site.
The Down Low on Shadow Inventory
Buying a shadow listing as a primary residence or real estate investment is one of our favorite #HomeBuyingHacks. Not only could you save a lot more money than you would if you chose from a traditional active listing, but you may be able to get more house for your budget.
The Short Version
- Shadow inventory refers to unoccupied (or soon-to-be unoccupied) real estate not yet put on the market and owned by lenders or local governments
- Shadow listings can also describe homes that sellers intend to put up for sale but are waiting for the right market conditions
- Real estate investors benefit greatly from finding properties to buy under market value, which is why shadow inventory can be so appealing