“What is Shadow inventory?” you ask? To help you understand what shadow inventory is, I would like to first define some other terms that deal with shadow inventories:

Short Sale: is any real estate property in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property.

REO: are properties owned by the mortgage lender after a judicial sale date.

Distressed properties: are properties that are 90+ days delinquent, in the foreclosure process, or properties that are already foreclosed (REO).

Distressed properties on the market: are those properties listed on the Multiple Listing Services (MLS). In other words these are any short sale or REO

Shadow Inventory: 

Total Distressed Properties – Distressed Properties on the Market = SHADOW INVENTORY

The shadow inventory is the total of distressed properties minus the number of distressed properties on the market.

Barring states that automatically require mediation before foreclosure proceedings can continue, or an accepted modification to one’s loan, once a foreclosure proceeding begins the property enters the shadow inventory. However, once the home is on the market for sale as either a short sale or REO, it is no longer in the shadows. Bank shadow inventories are still very much a part of the housing market. As the market improves, this inventory is slowly lessened as properties make their way through the system.

By the end of March 2014, there were 18,796 houses and 25,798 townhouse and condos actively for sale in South Florida. That made a total of 44,594 properties on the market, up slightly from 44,372 in February 2014. However, these numbers pale in comparison from the 72,241 properties that were on the market back in January 2011. The time between 2011 and 2014 is significant because it was in 2011 that thousands of foreclosure proceedings were halted due to the ‘Robo-Signing’ litigation against the major banks. This left thousands of homes in the shadow inventory without any real knowledge, outside of the banks themselves, of how many homes were ready to enter the housing market. As time passed, banks reorganized and renewed their efforts to pursue foreclosures and put more properties into the shadow inventory. The 44,594 listings in March show that the housing inventory is finally being replenished as more homeowners feel more confident with the housing market rebound.

What about the distressed housing market and the shadow inventory in this rebounding market? When looking at Florida, the striking feature of the shadow inventory is its sheer size.

Florida has nearly a third of the total shadow inventory nationwide.

Part of this is due to what happened during the housing recession and part of it is due to the litigation heavy foreclosure system in our state. Keeping in mind that in March of this year 1 in 129 homes in Florida were facing foreclosure, and that on average it can sometimes take over 1,200 days to navigate through the foreclosure system in Florida, it’s no wonder that Florida holds a third of the shadow inventory.

To further put in perspective the situation, in March 2014 there were 1,889 distressed sales in South Florida and 6,737 new foreclosure filings. That is 3.5 times as many foreclosures as distressed sales. What’s more, during the last 2 years there hasn’t been a single month that there have been more distressed sales than new foreclosure filings.

All these facts show that in South Florida distressed properties will remain a significant feature of the market over the next five years, but as another property type, with its own special sales techniques and documentation.

What does this mean for you? Make sure you are working with a Realtor who understands the the distressed property market. Having a listing agent that knows how to make your property stand out or a buyer’s agent who can help you avoid the pitfalls while buying a distressed property will be the key to your real estate success.