Friday, April 20, 2007

The Chinese Fire Drill

Maybe there are a few of you that still remember the “Chinese Fire Drill.” That’s where you are driving around with about 3 other people in the car and stop at a red light. All 4 doors open and everyone, gets out and runs around the car, gets in a different door and you drive off just as the light turns green.

With real estate right now, we have the owner, the bank, the appraiser, the RE agent and the note holder involved in salvaging this foreclosed real estate. Their goal is to market the property, and sell it. They want it off of their books and the light is about to turn red.

From my limited experience, there were only two organizations that were set up to handle this sort of fire drill, the VA and HUD. The VA was excellent and knew what they were doing,. HUD on the other hand was pathetic, the word "Worthless," comes to mind.

What does this have to do with today’s foreclosure market? It displays what I call “The Disconnect phenomenon.” The note holder is removed from the local market, and fixates on the loan value and its' recovery.

We have a local bank managing the property, and a real estate agent trying to sell it. The question arises, how do you aggressively market an item remotely from a thousand miles away, let alone evaluate it realistically? What you’re probably looking at is another 6 months of a listing that doesn’t sell. So you have: from last payment received, 6 months to foreclosure, and 6 months on your first expired listing. Total 1 year no income.

It doesn’t take much to realize that if the foreclosures don’t sell the first year, because of improper evaluations of the properties, there will be twice as many the next year if you project it out.

Notice, what you will be looking at, is the failure of management to agree on a price that would move the house. It will stay in inventory. It’s the inventory buildup shock that will kill them. These note holders could lose more than 50%, in the San Diego market.

The essence of a Chinese fire drill, is to display action, as if to solve the problem, but what is done accomplishes nothing, kind of like our Congress at work!

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