The Shadow Inventory Comes Out of the Shadows Across America

shadow inventory

Meet Marc and Jasmine: they are elbows-deep in what is known in the real estate business as the ‘Shadow Inventory’.   You’ve probably heard of the shadow inventory since the economic meltdown began in 2008.  It refers to the millions of supposedly bank-owned properties that have been sitting in the vaults and on the books of the behemoth “Big 5” banks. What most people don’t realize, though, is that the shadow inventory consists not of millions of distressed houses owned by the banks, but of over 6 million defaulted mortgage notes lost in the banks’ broken default and collection systems.  The shadow inventory might be your neighbor, your cousin or even you.  We’ve all heard the never-ending stories of some trying to get their mortgage loans modified, through a myriad of government programs with fancy acronyms that end up going nowhere.  Some folks, good folks, haven’t made a house payment for 3-5 years, for no reason other than their lenders haven’t accepted anything short of payment in full, which on a modest home in Ohio worth $70,000 might be $20,000 or more!

Enter the Shadow Inventory Road Show, the brainchild of Marc Gold, managing director and fund manager of the Irvine, CA-based private equity fund, the American Home Recovery Fund.  Mr. Gold says “most traditional real estate investors, up to very recently, had no clue that there are literally hundred’s of billions of dollars in paper that is being traded from the major banks and GSEs (government-sponsored entities like Fannie Mae and Freddie Mac) to various private equity and hedge funds like mine as well as much larger ones.  The discounts that we receive on these paper purchases would blow the minds of most Americans.  We have paid as little as 10 cents on the dollar for a 1st position mortgage on someone’s house.”  He continues, “To put it into perspective, let’s say your house is worth $80,000 and you owe $100,000 (it’s very common for a large part of the population to still be upside-down on their home values), I may be able to buy that mortgage from your lender for anywhere from $10,000 to $40,000 depending on a number of factors.  I then become that homeowner’s lender, and in my business model, I am now in a tremendous position to change their lives for the better, immediately!”

shadow inventoryThe road show started from the American Home Recovery Fund’s own business practice of driving the areas where they are investing and buying their non-performing mortgage loans.  Gold explains, “We have had instances where after a 15-minute conversation with a homeowner that I just met in front of their home, tears are rolling down their faces, true tears of joy.  We are seriously changing people’s lives across the heartland.  As corny as it may sound, I really like to think of us as the knights in shining armor.  Think about it: I’m getting what the banks are considering throw-away paper (yes, they sometimes value someone’s mortgage as zero value), and I’m putting the time and effort into finding out what the problem was with ‘Joe Homeowner’, solving that problem together, and giving them the break and fresh start that so many Americans need and that the banks aren’t able to give them.”

“There’s plenty of deal flow and plenty of profit in these deals, to where we truly create a win-win-win situation for the fund, our borrowers and ourselves as the operators.  It is a perfect alignment of many factors that delivers this once in a generation opportunity.”

Jasmine Willios recently joined Marc’s team in business development and investor relations.  Her 5-years+ experience in investment real estate fix-and-flips as well as traditional land lording in many of the markets served by the road show makes her a perfect complement to the team.  “Jasmine’s experience with investors investing with self-directed IRAs as well as joint ventures falls right in line with our fund’s goals of casting a wide net to help educate more investors about these opportunities and ultimately collectively helping to stabilize America one home and one homeowner at a time.”

shadow inventorySo what and why is the road show?

Gold continues, “Being in Orange County, California, there is a tremendous amount of investor capital here that wants to get in the space, but literally only here in their own backyards.  I was getting pretty frustrated that I couldn’t get some of these very ‘savvy investors’ to think outside the box.  We’d been buying our mortgage notes for almost 2 years, I knew what kind of returns we were getting and I knew that with a lot more capital to invest, we could knock it out of the park.  The problem was, the return percentages were great, but the actual dollars weren’t sexy enough.  How excited could a Newport Beach seasoned investor get about buying a $10,000 mortgage and getting paid off $17,000?  It’s ‘only’ a profit of $7,000,” Gold says tongue in cheek.  “If I did that in 60 days, that’s almost a 400% annualized return!  I will do those deals all day long.  So fast-forward to about 4 months ago.  I said to my partners, what if we took these investors out on the road, showed them these deals, showed them what a $30,000 house in Kokomo, Indiana looks like, (remember, $30,000 is what a new roof costs out in their areas), gave them all the tools and a number of the connections that it took us over a year to learn and develop and got them over that hump and into the game.  My partners thought it was a great idea; at the end of the day, we’re really not creating more competition for ourselves, but we are creating an enclosed ecosystem of note buyers and sellers for the loans that don’t fit our model of modifying and holding, and we’re building a growing community of socially responsible investors, all collectively trying to fix a VERY broken system.  Also, back to what I mentioned earlier: there are still well over 6 million defaulted mortgage notes out there that need to be worked out – lots of assets for everyone that wants to come and play.  When I first started in this space about 3 years ago, we said we had a 3-5 year window to take advantage of these conditions.  3 years later, we are all still saying the window is 3-5 years.”

Jasmine explains, “While certain areas like Southern California, Phoenix, AZ and Las Vegas have been experiencing record equity growth, many areas in the rest of the country are still slow and steady, the way it’s supposed to be.”

The learning curve for the new note investor can be between 1-2 years.  Attending conferences, getting a mentor, figuring out who to buy from, who to use as a licensed servicer, which vendors you need, as well as which ones are good is the toe-stubbing segment of the new investor’s starting points.  Imagine that learning curve can be 100% eliminated, and you had everything you needed with the snap of a finger!  That’s the business in a box that we put together for investors on the road show.

For further information about the Shadow Inventory Road Show, including awesome videos from prior trips, please visit www.note.guru


Jasmine Willois Jasmine Willois has been a real estate investor in short sales, deed-in-lieus, REO flips, rentals, and notes since 2005. She is a founder of Jazz Up Indy, Inc., an REO fund manager at AHRF, and an active Realtor in California. Her companies are known to provide security and comfort to real estate investors via independent research, property management, accredited investment opportunities, and live coaching. Her reputation for her judicious use of resources and results-oriented portfolio management style has opened many doors for her clients. She received her B.A in Economics from CSU Long Beach and holds an MBA in marketing. She currently lives in San Diego, CA with her husband and two children. An advocate for responsible investing, she educates investors on conservative real estate cash flow strategies and the abundance of real estate-related opportunities that lie outside their backyards. She can be reached at jazzupindy@gmail.com.

Marc GoldMarc Gold has been in the mortgage and real estate business since 1991.  He is co-founder of the American Home Recovery Fund and NoteWerx, the industry- leading note management software platform.  Marc is considered an industry expert and speaks around the country on the distressed real estate and mortgage investments and the opportunities investing in the Shadow Inventory.  Marc lives in southern California with his wife Cindy and their 3 sons and their very manly 9 lb. Maltese.  He is a very proud veteran of America’s Navy and a strong supporter of various veterans’ causes.  He can be reached at marc@ahrfund.com

creative real estate financing, shadow inventory
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