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Shadow Inventory….What Is It And How Does It Impact Arizona Investment Property?

by Jason Archer

With over 70% of Arizona real estate underwater, unemployment rates approaching double-digits and homeowners defaulting on their mortgages at a record pace, foreclosures are at an all time high and forecasted to continue at possibly a faster rate.  These foreclosures are creating a large shadow inventory for banks.  Shadow inventory can be defined as the total number of properties foreclosed upon and taken back by the banks, but have not yet been listed on the Multiple Listing Service (MLS).  Though the exact number of shadow inventory is hard to determine, many real estate experts suggest the number of properties that banks are holding onto is well into the millions nationwide.  How does this impact Arizona investment property? 

Cash flow Arizona investment property buyers do not worry about 'shadow inventory'.

Increase in shadow inventory equals a longer depressed market.  Banks sitting on a large amount of inventory will eventually impact the housing market.  At some point they have to liquidate that property, which means listing them for sale on the MLS.  As banks begin this process, the supply of homes on the market will increase.  This increased supply will drive prices lower because sellers will need to be more competitive.  Also, the properties that the banks are holding will be listed at a discounted price.  These factors will keep the market depressed until a majority of the shadow inventory is absorbed by the market, which will take quite some time.  This is great news for Arizona investment property buyers!  The ability to purchase affordable investment properties will provide many profitable opportunities for investors.  

Arizona investment property buyers focusing on cash flow are at the advantage when this shadow inventory is liquidated.  As banks are releasing foreclosed property back into the market, there could be some price volatility.  This would present a higher level of risk for real estate speculators.  Cash flow investors, on the other hand, would be shielded from a majority of this risk.  Short-term fluctuations in property values have less of an impact on the profitability of a cash flow investment, as the return is calculated off of the monthly revenue it generates instead of what the property could be sold for.     

Although in the end, there is no true measure of exactly how much shadow inventory is out there or to what extent it will impact the Arizona investment property market.  As investors, it is important to have an investment strategy that is diversified and provides the best possible return potential.  Learn more about cash flow and some advantages it can give to your investment portfolio with Clear Vision Investment Group.

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