Shadow Inventory: What It Is And Where You Can Find It
Victoria Araj3-minute read
February 23, 2023
When you’re looking to buy a house, you may come across a few unfamiliar terms. 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?
Shadow inventory is the term given to real estate owned (REO) 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.
An REO property listing is a house that is now owned by a mortgage lender, bank or real estate investor because it failed to sell during the foreclosure process. REO properties are typically sold “as-is” or at a discounted price so they can be sold as quickly as possible before they’re put on the market.
If you’re interested in buying an REO property, you’ll likely have to seek out an REO-specific real estate agent or purchase it at an auction.
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.
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Implications Of Shadow Inventory
Shadow inventory is an uncommon term, but the consequences of shadow inventory can be dramatic. 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 on to the property for a better deal.
Why Banks Hold Onto Shadow Inventory
When a bank or lender is in possession of a property, 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 is likely that there is minimal shadow inventory available because the home prices and property values are higher.
How Real Estate Investors Can Benefit From Shadow Inventory
Real estate investors stand to gain a lot from shadow inventory. With one real estate investing strategy, investors can work with lenders and banks to buy foreclosed homes from the shadow inventory at a discount before they’re put on the market. That means there are lots of deals to be had for real estate investors, and potential profits to make.
How To Find Shadow Inventory Real Estate
Shadow inventory in real estate can serve as a useful investment opportunity. After all, there is plenty of room for negotiation on the price of an investment property before the property even hits the market at large.
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.
Although it may take more time to find shadow inventory, it could be worth the effort.
Can You Find Shadow Inventory On Real Estate Listing Sites?
You won’t be able to find shadow inventory on any listing site or the Multiple Listing Service (MLS). However, a connected real estate agent may be able to point you in the right direction.
The Bottom Line: Affordable Housing May Be Hiding In The Shadows
Shadow inventory presents a potentially lucrative opportunity to real estate investors. However, the impact of the currently available shadow inventory can have implications throughout the housing market.
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