Many of the REO listing agents and asset managers that I talk to mention the dreaded shadow inventory that has yet to hit the market. 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 assumes that it is coming but yet you cannot see the inventory since it has not yet been listed on the market.
No one knows exactly how much shadow inventory there is, but there is no doubt that there is a lot of shadow inventory out there. I have heard real estate listing agents and asset manager’s talk about shadow inventory since 2010 when more than 1 million homes were taken back by lenders through foreclosure. In 2011 there were as many as 1.2 million homes that were taken back by the banks. In the State of Florida alone there are currently 368,000 foreclosure cases still pending according to the Florida Bar. And according to the Florida State Court Administrator there will be another 165,000 foreclosure filings for the period 2012 to 2013. That is a whopping half a million homes that are either in foreclosure or will be over the next year just in the State of Florida.
According to the most recent report released on October 11, 2012 by RealtyTrac, a California-based company that tracks foreclosures there are currently more than 1.5 million homes in foreclosure in the U.S. Florida has 307,000 foreclosure homes followed by California (231,000), Illinois (138,000), Ohio (79,000), New York (68,000) and New Jersey (63,000). According to RealtyTrac, in September 2012 there were almost 40,000 foreclosure filings just in the State of California. This means that 1 in every 361 homes in California received a foreclosure filing in September 2012. In the same month, Florida had over 28,000 foreclosure filings followed by Illinois (14,000), and Ohio (9,000). This year there may be another 1 million homes that will be taken back by the banks through foreclosure.
If you read the mainstream media, the forecast for real estate seems bleak. This is especially the case in hard hit states like California, Florida, Arizona, Nevada, Illinois, Ohio, Michigan and New York. In 2010 and 2011, 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 2012 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 great time to be buying real estate. After all, why would you invest in real estate if there is so much negative news?
Negative news has a negative effect on buyers, forcing them to sit on the sidelines while they wait for better news. Adding to the negative news is the fact that over the past few years it has been very difficult for home buyers to get approved for a mortgage. This is yet another reason why potential home buyers might sit on the side lines and wait for the situation to improve.
Real estate investors like myself that are actively involved in buying and selling bank owned properties on a daily basis 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 substantially more cash buyers today than there were in 2009 and 2010 and even 2011. I personally purchased quite a few houses in the first and second quarter of 2009 where there were virtually no other buyers to compete with. At that time I would submit an offer to the bank via an REO listing agent and my offer would be instantly approved even if it was quite a bit lower than the listing price. There were no other buyers competing with me to buy these houses which in hindsight turned out to be really great buys at the bottom of the market.
By the end of 2010 and throughout 2011 more and more cash buyers had entered the market looking for bargains. Over the past year many of our buyers have been foreign buyers and we have been fielding phone calls in our office from Canadian, European, South American, Russian and even Chinese investors. It seems that these foreign investors have figured out something that many local investors have not. These foreigners know just like I do that 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 that I use: “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 since the Great Depression.
The prices that some of these bank owned properties are selling for is such an incredible opportunity for cash investors (you cannot buy bank owned properties with a mortgage). Many cash buyers are scooping these properties up as fast as the banks can list them. The banks know this and very wisely are listing them slowly to maintain demand. Most of the action that I see is in the affordable lower priced homes. These are the types of homes that make great rental properties for landlords and also make great properties for fixing and flipping to first time home buyers. FHA loans are getting approved and many first time home buyers are buying their first home instead of renting which means there is a substantial pool of buyers for these entry level homes. In South Florida most of the homes that we sell are priced at less than $100,000. Potential landlords are especially attracted to houses in the $60,000 to $90,000 price range since the cash flow opportunities are tremendous. One example is a student 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. I speak to my real estate associates in California, New York, Arizona and Nevada and they all tell me that the situation is the same in their states. Affordably priced single family homes are where the action is right now in the bank owned property market.
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 finally priced affordably. 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. In many cases their mortgage payment can be lower than what they would pay in rent. And these first time home buyers only need to put down 3 ½ percent for an FHA mortgage which means that anyone with decent credit that is renting could probably afford to buy the home that they are currently renting if it is an affordably priced home.
There is also a tremendous opportunity in flipping properties for a profit. Investors can purchase a bank owned home for $70,000, spend $15,000 repairing it and flip it for a profit of $25,000 or more. That is why so many foreign investors are trying to buy these properties. We have investors that are purchasing multiple properties every single month for the purposes of fixing and flipping these properties for a profit. These investors can buy 20, 30 or even 40 homes per year to fix and flip. If you are a cash investor your return on fixing and flipping houses is much higher than any other type of investment that you currently have. For this reason many of our investors are liquidating real estate in other countries and even their stock portfolios in order to invest in single family houses that can be flipped for a profit. The returns that are being made right now in this market cannot be found anywhere else. And this is especially true if you live in a country where you are worried about the stability of your currency or economy like many countries in Europe right now.
Houses that sell at higher prices still suffer challenges because so many buyers cannot qualify for a mortgage. 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 for even larger profits. The key is to find a buyer that can get approved for a mortgage which is still very challenging. Over time, as banks begin lending again this market too will improve and we are already seeing signs of improvement in this market.
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 your first home at a great price, a real estate investor looking to fix and flip a property or a potential landlord looking to buy real estate and hold rental property for the long term for cash flow. Many retirees are taking advantage of the discount in prices to buy themselves their retirement home at a fraction of what they would have paid just 5 years ago. Returns for landlords on rental properties are the best they have ever been. If you are looking to buy rental properties now is the time to buy.
Do not wait for the media to start painting a rosy picture about the real estate market before you buy. 2012 or 2013 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 real estate buying opportunity of your lifetime. You must take advantage of this and start buying real estate right now while you can still get great deals at great prices. Remember that prices have already started moving up.
When there are no more sellers left to sell and when all of the banks are finally done liquidating their properties at bargain prices then prices can only go one way. And that way is up.