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Shadow Inventory: Overshadowing a Real Estate Recovery

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The Chris Williams Radio Show

The Chris Williams Radio Show


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What is really out there in real estate land?  Since many lenders were slow to put their inventory up for sale just how many homes are in the Shadow Inventory.  An insightful discussion with Chris Williams.


0:05 Tony Vignieri

Welcome to the Real Estate Report with Chris Williams of Blue Sky Capital. This is where you can learn about what's happening in real estate and how you can make big money in today's real estate market.

0:23 Tony Vignieri

Hello and welcome to the Real Estate Report with Chris Williams. I am your moderator Tony Vignieri. We have a really interesting real estate discussion on the table today, the Shadow Inventory. With me on the show is real estate expert Chris Williams, the CEO of Blue Sky Capital in San Diego.

0:42 Chris Williams

Hey there Tony.

0:44 Tony Vignieri

Hey, it's my pleasure moderating the show with you today Chris, this is really going to be an interesting conversation. Now for our listening audience some background on Chris and his real estate investment firm, Blue Sky Capital. Chris Williams is an expert in real estate investment, finance and syndications. He has handled more than 300 real estate transactions and spent 13 years managing real estate teams. He is the proud recipient of the Prudential's Presidential Award and he has won that award nine years in a row. In 2011, Chris launched Blue Sky Capital, a private equity firm in San Diego that is helping to rebuild neighborhoods through systemic and disciplined approach to buying and selling distressed real estate. Chris, we've heard this term before and many real estate know what we are talking about, but for those in the audience not quite sure what this means, explain the Shadow Inventory.

1:38 Chris Williams

I sure will Tony. So shadow inventory, you know it's often spoke about phenomenon but really highly misunderstood. So there are two types of shadow inventory. The first type of shadow inventory are the home owners that the banks have started the foreclosure process on, but postponed it right before the end of the process over and over and over. You know we see banks postpone the final sale of this foreclosure processes for years. One, two, three years in a row, they will postpone it, that's a particular type of shadow inventory, the houses that should foreclosure.

2:19 Tony Vignieri

And it's liked I interrupt you there; you know why is it that they're doing that. Why are they delaying those?

2:27 Chris Williams

Well they are delaying those for a number of reasons, one is the banks are literally overwhelmed; the varied with the number of distressed properties that they are really must foreclose. So part of it is that they just can't handle the volume. The second thing that has them delayed and has it be shadow inventory is the banks have some question about their ability to foreclose because back in the Heyday when they were selling loans back and forth and back and forth, they lost a lot of the paperwork. So a lot of these banks can't foreclose because if I have got challenge in court they probably lose and the third reason is that the banks mistakenly think that the market is coming up in value, so they are delaying so that they think they will take less of a loss and I do say mistakenly think that because the market is not coming up in value and won't for a while.

3:18 Tony Vignieri

So they are holding on, I mean that's really what it is. They are holding on to it and then it's hard to figure out how many are really there.

3:25 Chris Williams

There it is. So that is one type of shadow inventory, but there's another type of shadow inventory, which people say shadow inventory like it's anonymous but it's not. So here's the other type of inventory, which is there are millions of properties but the banks have foreclosed on, so they went to the foreclosure process they took it to the final step a company like me and my team did not buy it, so the bank is the owner of it now and the bank still holds the real estate. Banks own more houses in our country then any other institution organization in the country that have singled or as landowner right now. So that is there shadow inventory and the reason why they are holding it and not distributing it is because they don't want knock the bottom out of their own market if the banks literally, but every house they own on the market values would probably, who knows made it up, 5% of what their worth today, it's a guess, I don't know. So the banks have trickled these houses back out to the market and it actually created an artificial supply problem in the real estate market. See if you talk to realtors Tony, they will tell you there are not enough houses. Well, there are plenty of houses; the banks are holding them back.

4:38 Tony Vignieri

Right, that's really not fair.

4:41 Chris Williams

No, it's really not, because they create this it look, if you read any of the news you will hear people saying wow we are seeing fewer new listings but we are seeing an increased in sales, if you put that together supply and demand is prices should go up, prices are going up. Why? The majority of sales are done by investors we covered on our last show that impact suffered mobility, but the bigger point here is that the banks are trickling the inventory out as they own and creating a decrease in supply.

5:13 Tony Vignieri

Wow, so then there really all these homes out there at various stages that are not on the books, so to speak, if I said that, right?

5:20 Chris Williams

Well, that's right. No one knows the exact number of the second type of shadow inventory, right? No one says, no one track and I guess to this trackable, it will be difficult to do, but probably in the millions you know we foreclosed on about a million homes a year and we have for the past five years. So say five million homes have been taken back have all five million resold? No, not even close. The other piece of that shadow inventory is there are about six million homes actively in foreclosure but are not foreclosed yet. So if you put all that together there are I don't know 11 million homes that have either been foreclosed or are need to be and there is another 11 million that are upside down in the mortgage and not in foreclosure yet. The side of this problem is, it's bigger than anything we've ever seen on the history of our country.

6:06 Tony Vignieri

I would assumed if we had someone from a bank on today they really wouldn't want to talk about this or would they, are they going to...

6:14 Chris Williams

Oh no they wouldn't. They -- who knows what they would say, but it seems to me that I am the only guy in town talking about this, right? But, for our economy to recover nationwide and frankly worldwide since we lived in the world. We must have a real estate recovery. Look, jobs are coming back, GDP is actually picking up, consumer confidence is higher, yet we still have a massive dragon on our economy is because we saw the largest burst thing of an asset bubble that we have every seen and until that recovers, this is how things are gonna look.

6:51 Tony Vignieri

Wow, I mean if you take this sound good to something very basic if you are running a business and you know and you're setting your prices or your sales based upon inventory that you don't know what you have or I have heard that's bigger or smaller than what you have that's kind of difficult isn't it?

7:08 Chris Williams

It really is and it is live the real estate market there is still so much uncertainly and then when you add that tight credit markets and the difficulty that it is for a real qualified buyer to get a loan, it just compounds the problem, but I will tell you what Tony for a company like mine and for everyone that does what I do, which is buying stiffly just kind of real estate, it is dream come true, because these banks have taken a problem, but frankly could be resolved in a very short period of time if they left the market do a thing and they have extended it out, who knows how long I would imaging a decade from now will still be talking about all these shadow inventory.

7:46 Tony Vignieri

Right. And if you're talking about Blue Sky Capital explain that process and how that's really helping to get that you know to help solve this problem and to reset the housing market.

7:58 Chris Williams

Yeah, sure. So you know what we do is we come in and we buy these properties at auctions before the bank gets up. So, they don't stay a shadow inventory cause when we buy them, we then set them back to real market value, we do an amazing rehab on it and then we put a happy family in it that is someone is paying their mortgage on time, so we stabilized the neighborhood. So we actually short circuit the bank adding a property that is shadow inventory by being the one that buys it rehabs it and resells it. You see Tony; we say that we are rebuilding neighborhoods one house at a time.

8:32 Tony Vignieri

I get you. So obviously if Blue Sky Capital isn't buying that house from the bank it may just continue to be there and continue to be a rundown house etc. I mean that's really what you are talking about helping to rebuild neighborhoods, right?

8:49 Chris Williams

Precisely, yeah precisely. So you know my invitation to inventors that are out there, if they get into the game, get in the market, be a part of the solution get out there buy these houses, let's move this inventory off the book, its gonna take a team effort from people from coast to coast really working to have our real estate market recover.

9:09 Tony Vignieri

And let me asked you from a standpoint of real estate as an investment today. I mean on previous shows we talked about the fundamental breakdown on the housing market and how that's affecting you know upward mobility. We've talked about pushing the problem down the road of mortgage modification programs. You know we talked about the second wave of foreclosures. When you put that all, it's a lot of information, if I am real estate investor what's the best thing to do right now?

9:40 Chris Williams

Well if you're real estate investor. I think you have, first have to decide, what type of investor are you? Are you a buy and hold investor, or you want to buy houses, put tenants in it and then sit back for a few years. I think the risky thing about that is that it would have to really cash flow well as a rental with little to know appreciation, because I don't think we're gonna see market appreciation for many years and that's from the last show that we just did talk about the fundamental breakdown in the market. So I think the place to be in this market is in the buy and flip game. With this up and downs that we have in supply, demand and pricing. It is the greatest opportunity that enables we will probably ever see to buy a really nice house, really cheap and then to do a great rehab on it and to resell it. We think this is the place to be in the market right now.

10:32 Tony Vignieri

And it's not only that it's the place to be in San Diego, but it similar in other parts of the country.

10:38 Chris Williams

Oh! Yeah, sure. Because the, the economic factors that are in San Diego really collapsed like the rest of the country existed everywhere because the collapse that cause the greatest asset bubble burst in the history of our nation was all driven by credits and easy money and that existed coast to coast.

10:58 Tony Vignieri

Got it. And you have a website; tell us about that in about -- I know you have case studies on there that people can see.

11:06 Chris Williams

Yeah, sure. We do have a website. We invite listeners to go to blueskycapital.com, take a look at our website, get a look at who we are and what we do and click on over to the real life case study section and I'd like you to go I think it is the second one down on African Holly Trail, this is a great deal that we did. We bought this house for £581,000 and we did all cash at the auction and this is an ideal for us because this house was built in 2008. And in 2008 I mean that was only two and a half years old when we bought the thing, three years old when we bought. And we did zero on the rehab nothing, we didn't even - we didn't have break out a paintbrush and we didn't have any market time, because what we did Tony is we created a win-win situation, here is the win-win. When we went to the door to meet the former home owner of the house that we now own really highly accomplished person that has gotten from financial trouble. We sat down and we talked with her to find out what she wanted to do and she said that she had two girls that were still in school and she wanted them to finish school in that house. So we said okay we'll work for that. We want just to work for everyone so we went out and we found an investor buyer that only wanted the house for a rental and didn't want to live in it. We sold that house to that investor buyer, so that they got to stay there and those girls are finishing school in that house. So you see the bank won because they got a distressed asset off the books. The neighbors won because we reset the market and got that distressed house off the market. The home owner won because she got to stay in her house and have her girls finished school there, and of course me and my investors won because we got to go and do the business that we do.

12:41 Tony Vignieri

That's great. That's a great story and again that's all about neighborhoods, that's all about people and that's all about helping in these times.

12:50 Chris Williams

Indeed, you know we really do all have to stick together to get through this.

12:55 Tony Vignieri

That's great. Any closing thoughts for our listening audience, we have discussed the shadow inventory today and you're right not many people if anyone is taking about this and they really appreciate your insights on it, any closing thoughts?

13:10 Chris Williams

Sure, here is my closing thought. If you are a home owner and you think it's time for you to sell your house get your upside down get a hold to us. We'd liked to talk you about it we will give you your options and if you are in our area then we will even talked you about buying your house from you. And then if you are an investor that is with me that buying and selling real estate is the place to be today, we invite you to go to blueskycapital.com get a hold of us and we'd be happy to talk to you about our business model to see if this does fit.

13:37 Tony Vignieri

That's great. Well thanks for all the information today. Again, a really interesting and insightful discussion on the shadow inventory and that's overall about informing the listening audience to what's happening in real estate today. Thanks Chris and again the Blue Sky Capital website is blueskycapital.com or you can call them at 877-424-7479 and an easier way to remember that number is 8774-ChrisW. Thanks for joining us on today the Real Estate Report with Chris Williams. We are on the air weekly to keep you updated and informed about what's happening in real estate today. I am Tony Vignieri, for Chris Williams and the Blue Sky Capital team, have a great real estate day.

14:24 Tony Vignieri

Thanks for joining us on today's real estate report with Chris Williams of Blue Sky Capital. Join us again next time and remember, this is where you can learn all the insights about how to make big money in today's real estate market.