In commercial real estate, what you see in front of you only gives you a glimpse of the full story. It’s enough to keep even the most seasoned investors on their toes. And while there are plenty of unpleasant surprises that a commercial real estate agent can help you avoid, you can also occasionally find a beneficial one. Shadow inventory could fit snugly into either category. On the one hand, it gives investors a valuable, although clandestine, opportunity, often with less competition than an officially listed property. On the other hand, it creates an uncertain portrait of the real estate market. But is shadow inventory right for you as an investor? Here’s what to keep in mind.
What Defines Shadow Inventory?
As a term, shadow inventory isn’t exactly broad, but it does encompass a number of loosely related scenarios. The common denominator? Properties that are strategically held from the market for heightened control and, in many cases, improved offers. In most cases, shadow inventory involves a foreclosed property, typically held by a bank to be relinquished to the market at a more opportune time. However, off-market listings could also be regarded as a form of shadow inventory.
How Shadow Inventory Skews Market Assessments
Because shadow inventory takes a potential portion of the market and effectively hides it, it can create a distorted impression that harms accurate market assessment. And banks aren’t often the most forthcoming institutions when it comes to publicly disclosing their amassed shadow inventory. It’s more difficult to ascertain a strategic selling point in a secretly skewed market, so these hidden caches of properties contribute to a distinct uncertainty in the market.
The Relation Between Hidden Inventory and Market Health
It’s a bit of an oversimplification, but you can generally expect a struggling housing market to feed shadow inventory. Likewise, a rebounding economy frequently depletes shadow inventory. Therefore, if you manage to keep an eye on shadow inventory, you can use it as a factor for predicting economic conditions. When banks begin to release their shadow inventory, it’s a strong indicator that a market has hit its lowest point and is beginning its steady climb out of the mire.
But this isn’t necessarily great news for everyone. Most of the foreclosed properties held by banks would be classified as distressed. And when these distressed properties begin to flood the market from the shadows, home prices are frequently driven downward. It can be great for prospective property owners. But for someone trying to sell an investment, it’s obviously an unwelcome turn of events.
Using Hidden Inventory to Drive the Market
By purposely manipulating the market with shadow inventory, banks have the ability to promote heightened interest in these hidden properties. It’s a practice that has reliably led to higher sales prices on dilapidated listings once they finally do hit the market. But banks are reticent to drop too much of their shadow properties at once. This backlog is released very strategically.
Yet, banks also recognize that a mass influx of dilapidated property could recklessly crash a housing market. All of this has led to greater uncertainty in market assessments. For example, leading into the COVID-19 pandemic, the National Association of Realtors estimated that banks owned a backlog of shadow properties that dated back a minimum of four years.
An Obscure Opportunity for Savvy Investors
Shadow inventory also presents an often overlooked opportunity for investors. It’s a largely untapped reservoir of properties devoid of the market’s at-times brutal competition. But the reward is frequently commensurate with the risk. We’re considering a clandestine inventory; one that often requires diligent research, painstaking perusal of public records, and a mind for fix-and-flip dynamics. If handled properly, it can net a savvy investor a nice return. But mishandling can lead to a costly disaster.
Your First Steps in Accessing Shadow Inventory
Not thrilled at the prospect of combing through public records in the hopes of finding a golden needle in the proverbial haystack? Then your best bet may be to connect with portfolio lenders, asset managers for specific banks, or real estate professionals with access to off-market properties (like a JohnHart commercial real estate agent). Though shadow inventory is a well-known term, you may want to start out by seeking an agent specializing in foreclosed properties. An agent with foreclosure experience can help investors pinpoint the most promising shadow inventory properties.
