Loan amount and down payment are both calculated as a percentage of purchase price, so inflating the reported price — while quietly returning some of that money to the buyer through an undisclosed side arrangement — increases the amount a lender will advance without a corresponding increase in the real cash the buyer is putting in. The buyer ends up borrowing more than the transaction's real economics justify, and the lender is carrying more risk than it believes it agreed to, based on a price it never had reason to doubt.
This is different from ordinary negotiation, seller concessions handled transparently within a purchase agreement, or genuine appreciation in a hot market — all of which are visible to the lender and priced accordingly. The problem is specifically the gap between what the paperwork says and what's actually changing hands, hidden from the party relying on that paperwork to make a lending decision.
A seller agreeing, outside the purchase agreement the lender sees, to return a portion of the purchase price to the buyer after closing is a direct version of this problem — the lender believes it's financing a purchase at the full reported price, when the buyer's real net cost is lower. The same concern applies to undisclosed vendor take-back financing structured to look like a straightforward cash sale, or incentives from a builder or developer that inflate the reported price without being reflected as a reduction anywhere the lender can see.
Any side arrangement between buyer and seller that isn't reflected in the purchase agreement the lender is relying on is worth surfacing and discussing directly — the existence of an incentive isn't automatically improper, but its concealment from the lender is exactly the problem this module is about.
An appraisal exists precisely to catch a reported price that doesn't match market reality, but a broker doesn't need to wait for an appraiser to notice an obvious mismatch. A purchase price that sits meaningfully above what similar, recently-sold properties in the same area would suggest is worth understanding before the file goes further — sometimes there's a legitimate reason (a genuinely superior property, a bidding-war market, unique features), and sometimes there isn't one that holds up.
Where an explanation for an above-market price doesn't actually hold together once you look at it, that's a pattern worth raising directly rather than simply hoping the appraisal resolves it on its own.
Value inflation is easier to arrange when the people involved in a transaction — the buyer, the seller, the agent, sometimes even an appraiser — have an undisclosed relationship or a financial interest in each other's business beyond the single deal in front of you. A non-arm's-length transaction isn't inherently improper and happens legitimately all the time, but it does warrant a closer, more deliberate look at the numbers than an arm's-length sale between strangers negotiating against each other's genuine interests.
Kickback arrangements — where a referral or a favourable price is quietly tied to a payment between professionals involved in the deal — are a related pattern, and one that touches directly on the professional conduct expectations covered in the next module.
A purchase price is reported at $50,000 above what recent comparable sales in the same building would suggest, and the broker later learns informally that the seller agreed to return $50,000 to the buyer after closing, outside the purchase agreement. What is the correct characterization of this arrangement?
The lender is lending against a stated price that doesn't reflect what's really changing hands, which means the loan-to-value ratio it believes it's underwriting is not the real one — that's the core harm, regardless of timing or whether an appraisal happens to support the inflated number. The tempting wrong answers each minimize the concealment itself: timing after closing doesn't erase the deception, and the risk lands on the lender's capital, not just the buyer's own exposure.
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