Tag Archives: inventory

But what about the Shadow Inventory?

Tale as old as time, song as old as rhyme, Beauty and the Beast.  That’s a catchy tune.  And my little girls love the movie.   Honestly, I enjoy it too.  Lumiere, the suave French candelabra, cracks me up.  His big solo number, Be Our Guest, is very entertaining.

So imagine my frustration when I found out I couldn’t buy this film after my youngest daughter was born in 2004.  I looked everywhere.  Best Buy.  Walmart.  Amazon.  Barnes and Noble.  Nada.  Zilch.  Nothing.

Fortunately, we had a trip planned to Disneyland.  Problem solved.  I would go directly to the source – Main Street U.S.A., Disneyland, California.  The souvenir shop there had the movie selection prominently displayed behind the cash register.  I could see all of Disney’s big hits:  Aladdin, Cars, The Incredibles, Sleeping Beauty and Cinderella. 

But wait a minute.  Where was Beauty and the Beast?

It’s in the vault she said.  What?  The Disney cast member repeated it again – it’s in the vault.  So I said well go back there and get it!   No sir, you don’t understand.  Disney puts movies in the vault for extended periods of time.  You will have to wait until it’s re-released.  That was 2005.

Disney finally pulled Beauty and the Beast out of the vault – last October.  I gave it to my daughter for her 6th birthday.  I also paid $24.95, about twice what a normal kid movie would cost.

You see, the folks at Walt Disney are master marketers.  They don’t just make whimsical princess movies and cool adventure attractions like The Pirates of the Caribbean.  They’ve figured out how to create artificial demand.

Disney got a rational guy like me to pay double, and wait five years, for one of their products.  People who don’t even have children or grandchildren yet bought this movie out of fear it would get locked up in the vault for another decade.  Pretty smart.

That’s why I find it a little amusing when I’m in real estate circles and someone asks me about the shadow inventory.  Aren’t you worried about it?  If the banks unleash this shadow inventory on the retail market don’t you think prices will plunge even further?

The answer is no, I’m not worried about it because the banks will not unleash this shadow inventory (if there really is a shadow inventory) on the retail market.

First of all, let me clear up one myth – banks don’t foreclose on a  mass of houses, board them up and then wait to sell them off for months or years on end  (at least not in Arizona).  Many experts define this as shadow inventory.   I’m on the ground here in Phoenix and that does not happen.  Once a bank forecloses they promptly secure it and sell it as an REO. 

The home directly behind mine was foreclosed on last week and it was on the multiple listing service 6 days later.  The banks do this because there is too much liability in home ownership.  If they foreclose on a house and then let it sit they are responsible for property taxes, homeowner association dues, utilities and general maintenance. Even worse, bad things tend to happen in or around abandoned houses.  When bad things happen people sue – not good.

Banks are far more likely to postpone foreclosure proceedings on the current homeowner for months or years at a time.  I bid on house at the auction earlier this week.  Its sale had been postponed 38 times – 1148 days.  This property has been in foreclosure for more than three years.  I bid on two other houses scheduled to go to sale this week – their sales had been postponed 12 and 18 times.  And guess what?  All three of these sales were postponed again.

There is another camp of so-called experts who refer to these homes as our shadow inventory.  But how do we know the owners of these homes won’t eventually bring their loans current, get a loan modification or execute a short sale?  My guess is only a small percentage will actually get foreclosed on and end up on the market as an REO.

Here’s why I’m really not worried about shadow inventory (if there really is such a thing) – artificial demand.  The banks are actually copying the Disney marketing model.  They’re being fairly strategic about what they release and when.  This creates scarcity, which increases demand (albeit artificially).

There is nothing wrong with this.  I’m actually a proponent of it.  It’s good business and probably the smartest thing the banks have done since this crisis began.  It serves us all and makes me want to break out in song – Be Our Guest, Be Our Guest, Be Our Guest…


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Riding the REO Roller Coaster

Earlier this month Swedish scientists published a design for what could be the world’s smoothest roller coaster.  Evidently roller coaster technology has really evolved since the first kind with a loop was designed in 1846.  This 13 foot coaster entered the loop with so much force that it would break the riders’ collarbones.

So ponder this question for a moment…if the Swedes can design such an elegant and comfortable roller coaster ride (a highly scientific, but admittedly fun task) then why can’t banks and asset managers come up with a more efficient system to liquidate their growing inventory of homes?  Yes, there have been some minor improvements.  But, we are three years into this slide and they still haven’t completely mastered what should be a very simple process.

On June 26th I attended an REDC auction.  REDC auctions off excess REO properties that aren’t selling on the MLS.  Many of them aren’t even on the MLS because they have an issue (i.e. they’re occupied or are uninhabitable.) I won the bid on a home in Goodyear, Arizona.  It was an all cash sale so presumably the closing would occur very quickly.  Well, here we are 33 days later and I just got the executed purchase contract from the asset manager at American Home Mortgage Servicing.  What is amusing is that the transaction coordinator at REDC asked if I wanted a “quick closing.”  Can you imagine how long it would take to get this deal done if I said no?

About this same time I wrote an offer on a Fannie Mae owned home in Chandler, AZ.  It had been on the market for more than 60 days and needed a major rehab.  We ultimately had our offer accepted after some back and forth negotiating and were on our way to opening escrow when I got the addendum with this language:


Oh no.  The dreaded deed restriction!  Fannie Mae apparently doesn’t like it when investors like me fix up their houses and sell them for more than they can (in good condition this home would retail for $285,000.)  The problem here is that this home will not sell to anyone BUT a real estate investor because it’s a clunker.  I just checked today and the house is still on the market…93 days and counting.

I’m by no means suggesting that you should give up buying REOs.  There are some great values to be had.  Just be prepared for a wild ride that won’t break your collarbone but may make you sick.

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