Real Estate Council of Alberta Fundamentals Practice Exam

How does Contract Kiting deceive lenders?

1. By representing the property under market value

2. By using false tax returns

3. By presenting two contracts with differing prices

4. By submitting inaccurate credit reports

The correct answer is: By presenting two contracts with differing prices

Contract Kiting deceives lenders primarily by presenting two contracts with differing prices. This practice typically involves a seller creating multiple purchase agreements for the same property, each with a different sale price. The intention is to mislead lenders regarding the actual value of the property and the true sale terms. When a lender reviews the documentation, seeing two contrasting prices can create confusion about the property's market value. The lender may assume that the higher price reflects the actual sale value, while in reality, the lower price might be the price the seller is willing to accept. This manipulation can influence a lender’s decision to provide financing, potentially leading to a loan approval based on inflated property values. In contrast, the other methods listed—such as representing the property under market value, using false tax returns, or submitting inaccurate credit reports—do involve dishonest practices, but they do not specifically encompass the essence of Contract Kiting. Contract Kiting uniquely capitalizes on the dual contract scenario to create discrepancies that mislead lenders during the appraisal and underwriting processes.