Shadow inventory: What it is and where you can find it

If you’re looking to get into real estate investing or you want to buy a house, you may come across a few unfamiliar words or phrases. Shadow inventory, for example, is a real estate term used to describe properties that are not yet on the market, and are instead being held by mortgage lenders, banks, or homeowners to be released to the public at a later date.

So, what does shadow inventory mean for your home search, and are there consequences of shadow inventories on the housing market? Read on to learn more about shadow inventories.

What is shadow inventory?

To understand what shadow inventory is, it’s first important to understand real estate owned (REO) properties. REO properties are houses owned by a mortgage lender, bank, or real estate investor because they failed to sell during the foreclosure process. REO properties are typically sold “as is” or at a discounted price so they can sell as quickly as possible.

Shadow inventory is the term given to real estate owned properties that are unoccupied but not yet on the market. This can refer to homes still in the foreclosure process or homes owned by residents or banks who are waiting for better selling conditions.

Shadow inventory may also include distressed properties, or homes that are about to foreclose or are already owned by a bank. Like REO properties, distressed houses are often sold at a discount and are popular among real estate investors looking to make a quick home purchase. 

Implications of shadow inventory

Shadow inventory is an uncommon term, but the impact of shadow inventory can be dramatic. Understanding what shadow inventory is and how shadow inventory works is important when evaluating the health of the real estate market. Here are some of the most significant impacts of the phenomenon.

Impact on the housing market

Shadow inventory can reflect conditions in the housing market. If lenders and homeowners choose to hold off on selling their properties, that can indicate a poor housing market. After all, these sellers want to get top dollar for their properties. The choice to hold onto the home for longer can indicate that the market is slow. The seller may decide to release the property for sale once the market begins to grow again.

With that, a slow market often means more shadow inventory. On the other hand, a strong market often leads to a small shadow inventory. If the market is growing, sellers are less likely to hold onto the property for a better deal.

Why banks hold onto shadow inventory

When a bank or lender is in possession of a property after a foreclosure, the goal is to sell the property for the best possible price. If the market is slow, then a lender may choose to hang on to the property until the market begins to grow.

A growing market can lead to higher property values and more profit for the lender’s bottom line. For example, when buyers are experiencing a seller’s market, it’s likely that there is minimal shadow inventory available because the home prices and property values are higher.

How to find shadow inventory real estate

If you want to find shadow inventory, a good place to start is speaking with the REO departments of small banks and credit unions. Another tactic is to work with a real estate agent who may have the right connections. Shadow properties are not yet on the open market, so you’ll likely need to work through the bank directly or a real estate agent.

Shadow inventory in real estate can serve as a useful investment opportunity. After all, there’s plenty of room for negotiation on the price of an investment property before the property even hits the open market. If you buy a house directly from a bank, you may have additional paperwork, and the process may take a longer time compared to buying from a private seller.

Can you find shadow inventory on real estate listing sites?

The multiple listing service (MLS) is the term for a collection of regional databases of homes for sale, generally organized by the local association of real estate agents. Generally, you won’t be able to find shadow inventory on listing sites like Redfin, or on the MLS. However, a connected real estate agent may be able to point you to shadow inventory that may be coming on the market soon.

The bottom line: Affordable housing may be hiding in the shadows

Shadow inventory is a term that refers to homes that are not yet on the open market but may still be available for purchase. Shadow inventory presents a potentially lucrative opportunity for savvy home buyers or real estate investors. However, the impact of shadow inventory can have broader implications throughout the housing market.

If you’re ready to move forward with a home purchase, apply for financing today with Rocket Mortgage^®.