Contract “Kiting”

Q: I listed a piece of property at the recent appraised value of $120,000, but, like most sellers, my seller made it clear that he wanted a quick sale. Two days later, we  received an offer for $114,000 with a $2,000 earnest money deposit. The buyer was to take out a mortgage loan to cover the balance of $112,000. My seller accepted the  offer. The buyer went to apply for the loan and the lender told the buyer that if we would agree to change the contract purchase price to $120,000 with a $6,000 earnest  money deposit, then the buyer could borrow the entire amount of the real purchase price of $114,000 and be out of pocket only for the closing costs. The lender says that all  we have to do is prepare a new contract using these terms, with the understanding that the purchase price is really only $114,000. The buyer’s agent is fine with it, since it’s  going to save the buyer some out-of-pocket expense. The lender is obviously okay with it. My seller just wants to close the sale as soon as possible. The house did appraise  for $120,000, so it doesn’t seem to me that the lender would suffer any loss. What do you think?

A: It sounds like you are describing a practice known as contract “kiting.” First and foremost, REALTORS® who participate in contract “kiting” are placing themselves in peril  with respect to the N.C. real estate licensing law and the REALTOR® Code of Ethics. By concealing the true agreement between the parties, you are engaging in conduct  that is improper, dishonest and potentially fraudulent as well. The North Carolina Real Estate Commission has the power to discipline a licensee for any conduct “which  constitutes improper, fraudulent or dishonest dealing.” North Carolina General Statutes §93A-6(a)(10). By artificially inflating the purchase price of the property, you are a  party to the naming of false consideration in the contract, which is prohibited by Article 2, Standard of Practice 2-4 of the Code of Ethics (“REALTORS® shall not be parties to  the naming of false consideration in any document…). Since the sales transaction must be reported to the IRS, you may arguably be enabling the provision of false  information to the IRS, which may additionally have adverse income tax consequences for the seller. You may also arguably be committing a RESPA violation for facilitating  the provision of information for the HUD-1Settlement Statement that you know to be false. There are also contractual issues to consider- what if the seller arrives at the  closing table and demands that the buyer pay him the contract price? What exactly is the “contract price”? What is the buyer supposed to do, say “well, we had this side deal, so the contract doesn’t really mean what is says” or “well, that’s not the real contract, this is the real contract”? In certain cases, “kiting” could involve criminal offenses as  well. Don’t be so sure that “kiting” is “obviously okay” with the lender, either. It could be that the lender’s individual representative with whom the buyer is working has no  qualms about it, but one has to doubt that the lender itself would take the same position. There is potential harm to the lender, as it stands to reason that all things being  equal, the less cash the buyer must invest in the property at closing, the more likely the buyer might be to default on the loan payments. It makes no matter that everyone  involved in the transaction- from the buyer to the seller to the lender to the agents- agrees to the contract “kiting.” An agreement to act in such a fashion does not convert the  underlying illegal or unethical conduct to lawful or ethical conduct.

© Copyright 2000 - 2023. North Carolina Association of REALTORS®, Inc.

This article is intended solely for the benefit of NC REALTORS® members, who may reproduce and distribute it to other NC REALTORS® members and their clients, provided it is reproduced in its entirety without any change to its format or content, including disclaimer and copyright notice, and provided that any such reproduction is not intended for monetary gain. Any unauthorized reproduction, use or distribution is prohibited.