Many of the REO listing agents and asset managers that I talk to mention the dreaded shadow inventory that has yet to hit the MLS. If you are not familiar with the term, shadow inventory is the inventory of all of the homes that are in foreclosure that have not yet been listed for sale by the banks. Since these properties theoretically will eventually end up being listed for sale on the multiple listing service (MLS) the inventory is considered shadow inventory because everyone knows that it is coming but yet you can’t see it since it is not yet listed. No one knows exactly how much shadow inventory there is but there is no doubt that there is a ton of shadow inventory out there. I have heard real estate listing agents and asset manager’s talk about shadow inventory since 2013 when more than 1 million homes were taken back by lenders through foreclosure. In 2014 there were as many as 1.2 million homes that were taken back by the banks. In Florida alone there are 250,000 foreclosure cases still pending and there will probably be another 1 million homes that will be given back to the banks.
If you read the mainstream media, the forecast for real estate seems bleak. This is especially so in hard hit states like Arizona, California, Florida and Nevada. In 2012 and 2013, one in every 17 households in Arizona received a foreclosure notice. In Florida one in every 18 houses went into foreclosure last year. Many experts are predicting that lenders will take back more homes in 2015 than in any other previous year since the foreclosure crisis began. All of this bad news in the media gives the average reader the impression that now is not a good time to be buying real estate. Negative news has a negative effect on buyers, forcing them to sit on the sidelines while they wait for better news. Over the past few years it has been very difficult for homebuyers to get approved for a mortgage which is yet another reason why potential home buyers might sit on the side lines and wait.
Real estate investors like myself that are actively involved in buying and selling bank owned properties see an entirely different picture to the one that the media portrays. What I see on the ground on a daily basis is that there are many more cash buyers today than there were in 2012 and 2013. I purchased quite a few houses in the first and second quarter of 2012 where there were virtually no other buyers to compete with me. By the end of 2012 and throughout 2013 more and more buyers had entered the market. Over the past year more than a third of our buyers have been foreign buyers and we have been fielding phone calls from European, South American and Russian investors. It seems that these foreign investors have figured out something that many local investors have not. Real estate is a screaming buy right now. Real estate is such an amazing bargain right now that I coined a phrase to characterize the current state of the real estate market. This is the quote: “This will be the best time in your lifetime to buy real estate”. Or expressed another way, between now and the day that you die, you will never get another opportunity to buy real estate at such cheap prices. Adjusted for inflation housing prices are cheaper than they have ever been in U.S History.
The prices that some of these bank owned properties are selling for is such an incredible opportunity for investors and many cash buyers are scooping them up as fast as the banks can list them. Most of the action is in the lower priced lower income homes which in South Florida is the homes that are priced at less than $100,000. Potential landlords are especially attracted to houses in the $40,000 to $70,000 price range in South Florida since the cash flow opportunities are tremendous. One recent example is a partner of mine that purchased a house for $37,000, spent $12,000 repairing the house and then rented the house to a section 8 tenant for $1,250 per month. We haven’t seen that kind of cash flow in real estate for at least 30 years if not longer.
Now Is A Great Time to Invest In Real Estate because Low priced homes will move first because these homes have the most buyers. Potential buyers for these homes are landlords, retirees and real estate investors looking to fix and flip properties for a profit. For the first time in many years homes are priced affordably and first time homebuyers can purchase a home with an FHA mortgage and have a monthly mortgage payment equivalent to what they were previously paying in rent. There is a tremendous opportunity to purchase bank owned properties in South Florida from the banks for $50,000 to $70,000. These homes need around $10,000 in repairs and after fixing them up can be sold for $90,000 to $110,000 to first time home buyers that qualify for a mortgage. This is the opportunity and this is the reason there are so many cash buyers out there looking for deals. There are also huge returns for landlords to buy fix and rent these same houses like in the example of my student above. The reason this market is so hot is because investors can make as much as $30,000 buying, fixing and flipping one of these houses. And that is exactly what investors are doing.
Houses that sell at higher prices still suffer challenges because so many buyers cannot get mortgages. As long as banks are reluctant to lend, it will be hard for this market to move significantly. However there is still opportunity for cash buyers to fix and flip these houses, although finding a buyer that can get approved for a mortgage is still challenging. Over time, as banks begin lending again this market too will improve.
In summary, now is a great time to be buying real estate. This is a good time to be investing in real estate regardless of whether you are a first time home buyer looking for a great buy, a real estate investor looking to fix and flip a property or a potential landlord looking to buy real estate and hold for the long term. Don’t wait for the media to start painting a rosy picture about the real estate market before you buy. 2015 might just be the year when the shadow inventory hits the market. This could be the year which in hindsight will turn out to be the unprecedented buying opportunity of your lifetime. You must take advantage of this and start buying real estate now while you can get great deals at great prices. After all, when there are no more sellers left to sell and when all of the banks are finally done dumping properties then prices can only go one way. And that way is up.