Shadow Inventory... Only the shadow knows!

Real Estate Broker/Owner with Turn-Key Properties LLC, Missouri and Kansas Real Estate

You've heard the speculation, you've read the blogs, how large is the looming shadow inventory?

As a broker and property manager, who has recently become one of the go to guys for REO, I can tell you the looming threat is ominous!

I am managing hundreds of REO investment properties for lenders who are reluctant to put them on the market, I am doing BPO's for lenders who are moving toward foreclosure on multiple commercial properties.

Lenders are holding back inventory because the market is soft and they do not want to flood the market with more toxic assets. From my experience these toxic shadow assets are mostly inner city investment property. Investors who went belly-up trying to buy and flip, got caught with an inventory that outweighed their net worth.

While I am seeing an increase in suburban foreclosure rates, the vast majority of REO's are in working class neighborhoods and neighborhoods with higher non-owner occupied properties.

The increasing rate of commercial foreclosure is a real concern, as the residential market is already in the toilet, the commercial real estate market is just beginning to dump.

Areas of affluence are now seeing vacancy increases and major anchor stores are leaving the big malls. Where will all this end?

Only the shadow knows!


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Lynda Eisenmann
Preferred Home Brokers - Brea, CA
Broker-Owner,CRS,CDPE,GRI,SRES, Brea,CA, Orange Co

Hi Ben,

"Shadow inventory" interesting concept.

As for a soft market, our REO's are bombarded with offers. Too many of our REO sellers are pricing them far below market price and then we wind up with 33-40+ offers within a few days.

Since you're a REO agent, do you see others held off the market as a result of the moratorium? Or do you think that lenders are trying to time the market to satisfy their books?

Love to hear your thoughts, this subject was a topic of dicussion today at my mastermind group.

May 12, 2009 04:16 PM #1
Eilean Foster
Keller Williams Realty Atlantic Shore - Egg Harbor City, NJ
Real Estate Agent

But just how long will the lenders hold back the inventory Ben?  With the Bank of America "thing" happening; and the poor-mouthing of the banking industry, just how long can they afford to hold onto unredeemable mortgages?

Oh how that *Shadow* can be very scary!

May 12, 2009 04:23 PM #2
Vickie Nagy
Coldwell Banker Residential Real Estate - Palm Springs, CA
Vickie Jean the Palm Springs Condo Queen

Our inventory is tight and buyers are competing on the "good" properties. We'll have to wait and see what the future brings.

May 12, 2009 04:53 PM #3
Robert T. Boyer
FHA Loan, VA Loan, Jumbo Loan,FHA Loans,VA Loans,Jumbo Loans - La Jolla, CA
San Diego Real Estate & Mortgage Loans, Ph.D. | VA Home Loan

In San Diego, we have the same challenge as Lynda, multiple offers on well priced properties (not necessarily below market, but simply well priced), because our inventory is less than 3-months in the lower price ranges.  Yes, you heard that right, less than three (3) months - technically making it a seller's market.

However, I suspect the asset managers, like most of the rest of America, are getting one national "temperature" and believing it applies everywhere.  I also suspect when the moratoriums are over here in CA that we will be glutted with foreclosures and that 3-month inventory will be a thing of the past.

May 12, 2009 06:34 PM #4
Tim Bradley
Contour Investment Properties - Jackson Hole, WY
Commercial Real Estate Expert in Jackson Hole, WY

Great post, Ben. Do the lenders have any regulatory constraints that would limit how long they can own the REO before placing it on the market?

May 13, 2009 01:48 AM #5
Justin Ukaoma
Vizion KC - Kansas City, MO
Kansas City Real Estate Investments

Very good post Ben.  Nobody is talking about the shadow inventory.  Commercial tends to follow Residential.

May 13, 2009 03:01 PM #6
Ben Edsall
Turn-Key Properties LLC, Missouri and Kansas Real Estate - Kansas City, MO

Very true, I am working on BPO's for some very prominent commercial real estate in the Kansas City market. The lenders are just now starting to take on a lot of commercial REO.

If you knew which ones, you might be very surprised. It is a sad time and it is not getting any better soon. Still a great time to buy SFR if you want to be a landlord. The rental market in some areas is fantastic!

Kansas City Commercial REO Broker


May 13, 2009 03:49 PM #7
Glen Drake

I'm one of those people in the San Diego area trying to purchase a r property as my first home and the entire situation here is just hopeless.  I have pre approval, the highest fico score my lender said she has ever seen yet offers I submit at 10k to 15k over  the list price fall short of being accepted. If you wait even a day after a house is listed 15 or 20 offers will already have been submitted.   if your lucky you might get a call asking if you want to increase you offer but this makes it nothing more than a bidding war.  If the property is already priced "   (not necessarily below market, but simply well priced)" as Mr Boyer suggested, why would a lender approve a loan 25k or more above the marked value anyway.  The future equity in a home I purchase is important to me due to the fact that I have to carry mortgage insurance until I have enough equity to drop it.  If i buy a 300k home for 325k when nobody seems to know where the real estate bottom actually is that 25k could really add up to much more in future insurance costs.

  I know, everybody knows these banks are for one reason or another holding back properties and I have watched prices rise over the last 60 days but its a game i'm tired of.


Tim bradlt asked a very good question I'd like an answer to "Do the lenders have any regulatory constraints that would limit how long they can own the REO before placing it on the market?"

if there isn't regulation in place on these lenders the goverment has been bailing out there needs to be, and fast.




g. Drake

Jun 02, 2009 06:15 PM #8
Aida Pinto
Independent Real Estate Broker - Los Angeles, CA
Real Estate Broker (562) 884-6196

Tim:  you said: Do the lenders have any regulatory constraints that would limit how long they can own the REO before placing it on the market?  Great questions, never thought to ask! Might good to find the answer.

Jul 21, 2009 08:44 AM #9
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