Kitsap County’s “Shadow Inventory”

The real estate industry has coined “shadow inventory” as those properties in which the owners are having problems making their mortgage payments and may have to sell.  Some of these sales will be short sales (in which the mortgage balance will be greater than the sale price) or outright foreclosures (defaults or strategic defaults).

This post is aimed primarily at the markets in Kitsap County but some of the procedures will apply throughout the United States.  I readily admit I have never completed a short sale nor foreclosure transaction (I’d rather be 20′ up a ladder cleaning our gutters) but I have spoken with brokers in our office who have and who also represent local lenders.

In Kitsap County the number of foreclosed properties has decreased by over 70% percent since May of 2009 based on the monthly reports I have received from Pacific Northwest Title and Escrow Company.  The number of short sales being listed for sale has also decreased over the same period but I can’t quantify how much because the numbers are so inconsistent.

Anyway, as short sales and foreclosed properties enter the market transactions do finally occur, sometimes on the third attempt which seems to track the national average.  Figure the process from submitting a purchase and sale agreement to close could take as long as nine months, worst case!  But in some cases these type of properties can close in five months or less.  Remember, each transaction is unique unto itself and there are so many variables that can affect the negotiating process and time required to complete the transaction.  Timing is also an issue with lenders based on end-of-quarter and end-of-year financial reporting.  Sometimes lenders will wait for these times until making a final decision (lenders have the final say on short sale transactions even though the homeowner signs the purchase and sale agreement).

The concensus in our office is that we have another 16 to 18 months before we absorb the majority of short sales and foreclosures that have yet to be identified and sold.  But the end is coming and once we reach it, I believe real estate in Kitsap County will finally start to appreciate and over the next 12 years will average about 3.15% annually which has been the trend since 1980.  Using the Rule of 72, an investment will double in value when annual appreciation over a set time in years multiplied equals 72 (for example 3.15% average appreciation means an investment will double in value in 22.8 years (72/3.15).

If you think you might be interested in buying/investing in distressed properties here are some tips:

• Find a Realtor@ who “does” short sales or foreclosures because they know the process
• Be prepared to be “mickey-moused” by the lender especially if there is a second mortgage
• Don’t take anything personal, you’re just a statistic in a big abyss
• Stay in touch with whomever is representing you on a weekly basis

I hope this post has been helpful.