Gary’s Note: There have recently been issues with real estate deals not appraising at their contracted price. The article below, provided by Marc Jacobs of A&N Mortgage, explains some of the reasons why.

Today I wanted to discuss the Home Valuation Code of Conduct (HVCC), which went into effect May 1^st of this year.  While it may seem like old news, there are consequences that may effect a buyer’s financing options and ultimately your profit.  The purpose of the rule is to prevent any influence mortgage professionals may exert over an appraiser.  Therefore, an uninterested party must be responsible for ordering the appraisal.

The rule doesn’t apply to all lenders equally.  These are the distinctions that need to be understood before a buyer chooses a lender.  I will discuss the procedures used by large banks, mortgage brokers, and finally mortgage bankers like my company, and why mortgage bankers provide the best possible alternative for getting fair appraisals.

Large banks, like Wells Fargo, Chase, Citi and Bank of America use Appraisal Management Companies (AMC) for their appraisals.  These are national companies, many of which are not at all familiar with the areas they are appraising.  The consequences are that properties are being appraised for under market value.  Another reason for the low appraised values is that many of these large banks have ownership in the AMC’s.  Therefore, it is likely that after writing off billions of dollars in bad loans, they are making sure that the appraisals are as conservative as possible.  Lastly, banks that use AMC’s sometimes wait two weeks for the appraisals to be done.

Mortgage Brokers are not allowed to order an appraisal at all.   The lender that is financing the broker’s loan will order their own appraisals, utilizing either the system mentioned above or one similar with all the same consequences.

Mortgage Bankers are able to use an alternative procedure, which I believe to be the best and most efficient.  While I can not personally order an appraisal, there is an impartial employee at my company who can.   The advantage is that we use local appraisers who have years and years of Chicagoland experience.  Our appraisers do not work for bank owned AMC’s.  Rather than looking for ways to lower their value, they search for ways to justify a higher value.  In addition, we can track the progress of the appraisal which makes the turn around time only 24-48 hours.   From my experience, HVCC has been much less of a burden for my realtor partners than those using large banks and mortgage brokers.

In today’s turbulent real estate climate, we certainly don’t need unnecessary obstacles making it more difficult to close deals.  As you can see, it is very important to choose the right lender.  Big is not always better.

According to the Mortgage Bankers Association FHA and VA loans comprised 36% of the mortgage applications in the month of June – which is a lot. There’s a really simple reason for this huge share of the mortgage market and it should come as no surprise to anyone. Since banks have stopped loaning 100% or more of the purchase price to buyers and people have had to come up with real down payments the government is the only game in town for low down payment mortgages. And there is a huge demand for low down payment mortgages.

Now if you are selling a single family home it’s relatively easy for the buyer to get FHA financing – assuming the house is in decent shape. However, condos are a different animal. There are a whole host of reasons that a development won’t qualify and the condo itself can only be mortgaged for $410K.

So you would think that condo listing agents would be all over the FHA program to make sure that their listings are eligible for this government giveaway. But you would be wrong. We have buyers that need FHA financing and there is no point in showing them condos that won’t qualify. There’s actually a field in the MLS where the listing agent can check the types of financing options available but it’s rarely used and even if it is used the FHA option is overlooked. So the first thing we do is call the listing agents to find out if they think the development will qualify for FHA financing. And you would be surprised how often the agents don’t know and don’t seem to care to find out. Well, let’s face it. It’s only 36% of the potential buyers.

I’ve written before about the deplorable photographs that some agents use on their listings but these photos of a short sale loft deserve a prize. I’ve seen people joke about realtors shooting photos with their cell phones on some of the real estate blogs but I never thought that really happened. Apparently so:

This shot of the living room shows you what the room will look like after consuming the Skyy Vodka shown in the kitchen photo.

The agent liked this shot of the kitchen so much that he put it on the MLS twice. The staging is priceless, with the towel wrapped around the refrigerator door, the garbage can in the corner, and the dishwashing soap in the kitchen sink. These are nice touches because they show that the kitchen is barely large enough to fit the garbage can and people can see that the sink is to be used for washing dishes. The Skyy vodka is to the left of the refrigerator.

This photo highlights the natural light available at night.

In general, short sales have the worst photos. Who knows how the banks come up with the agents to handle these and I can assure you that the bureaucracy of a bank would make it near impossible for a capable realtor to take business from these amateurs. Is it any wonder that the banks are losing their asses on these properties and need the taxpayers to bail them out?

I just downloaded the latest roster of Chicago Association Of Realtors (CAR) members and was delighted to see that the number of realtor members plummeted by over 4,000 in the last year. At December 2007 the number stood at 17,266 and as of January 2009 it was at 13,051. That’s almost a 25% drop. And based upon what I know about the productivity of individual agents right now I would guess we are going to see even further declines.

While I sympathize with people who are having a hard time making a living I have to believe that this is a welcome change for the industry. Chicago just had way too many agents. But more importantly, I would imagine that many of the weaker real estate agents have left the business and both the industry and the customers are better off without them.

However, there is a flip side to this story as well. Some of the agents that are leaving are ones whose real estate skills are fine but they just don’t know how to generate business. And generating business is in fact the hardest part of real estate. It’s so difficult that the median net income for a realtor in the first two years is only $9,400 per year and 80% abandon the field in their first year.

So why do so many people go into real estate in the first place and why do they keep banging their heads against the wall? Presumably it’s because of the promise of substantially more money down the road. Some agents make a lot of money, with 13% of the realtors with 6 – 15 years experience netting over $100,000 per year. There is really no other explanation as to why these folks continue to starve while trying to get their own business off the ground (especially in this environment).

Of course, we think this approach of agents trying to run their own business no longer makes sense and that’s why we’ve created a different and better model. Our agents do not do any prospecting or lead generation. We do it for them so that they can focus their efforts on providing real estate services and in the process earn much higher commissions.

The amazing thing is that so many real estate agents are still clinging to the old way of doing business and starving while reaching for that brass ring.

The Ministry of Truth (NAR) is at it again with the launch of a 2 hour weekly radio program called Real Estate Today. Here is how it is being described to realtors:

Real Estate Today will premiere the weekend of February 14-15. We’ll show consumers why REALTORS® are the most credible, trusted source of real estate information, and convince them that using a REALTOR® when buying, selling, or investing in real estate is the smartest decision they can make.

We’ll also be building consumer confidence in the market and in the long-term value of real estate to help bring buyers back into the market.

Kinda makes your skin crawl, doesn’t it? Maybe the above description is just targeted to realtors. I listened to a sample broadcast and it didn’t come across this poorly. As long as they provide objective information about home ownership and the real estate market then it might not be that bad. However, if this is just a thinly veiled self-serving attempt to  do exactly what they are telling realtors that they are doing then it will be another industry embarrassment.

If you have two hours to kill some time Real Estate Today will air online at www.RETRadio.com – visit the site anytime after the premiere to listen to current or past programs. Beginning on February 14, satellite radio subscribers can hear Real Estate Today on America’s Talk, XM Channel 158, Saturdays 5-7 p.m. EST; Talk Radio, XM Channel 165, Saturdays 1-3 p.m. EST; and Stars, Sirius-XM Channel 102, Saturdays 6-8 a.m. and Sundays 9-11 a.m. EST.

Bet you can’t wait.