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Chris Salese

For some reason, when you randomly say the word carrot, you can’t really predict where your mind will to take you after saying it. I guess it’s just an awkward word.

Perhaps it’s because a carrot could be referenced in an expensive jewelry discussion or traced back to a famous cartoon character or simply something that you might eat in your salad.

But depending on how you bounce around from visual to visual, a carrot is also one of the most common words used in the description of “inducement.” That’s right, I bet you didn’t go there first.

Whether you are aware of it or not, an inducement to purchase can happen on either the selling or buying side of a transaction.

For instance, according to the federal Department of Housing and Urban Development, “the inducement to purchase refers to certain expenses paid by the seller and/or another interested party on behalf of the borrower.”

If this happens, it could result in a dollar-for-dollar reduction to your purchase price when computing the adjusted value of your property before applying the appropriate loan-to-value percentage.

As an example, inducements may include, but are not limited to the total contributions that exceed 6 percent of the purchase price or contributions exceeding any loan origination fees, other closing costs and discount points of your transaction.

Furthermore, inducing the purchase of a property with, let’s say, a decorating allowance, repair allowance, excess rent credit, moving cost credit or personal property items are not allowed as well.

On the flip side, the replacement of any existing personal property items is not considered an inducement of sale provided their replacement is completed before closing and no cash allowance is given to the borrower.

These items could be things like a range, refrigerator, dishwasher, washer, dryer, carpeting or window treatments.

If it’s determined by your lender that there is an inducement to purchase issue, then your lender will only be able to lend on the lesser of the sales price minus any inducements to purchase or the as-is property value.

Per HUD, an inducement to purchase also exists when a borrower is not paying a real estate commission on the sale of their present residence when the same real estate broker or agent is involved in both transactions and the seller is paying a real estate commission on the property being purchased by the borrower that exceeds what is typical for the area.

Basically, you should pay attention to the details of your listing agreement, especially if they are wrapped around or contingent on the events happening with a different property. And even more so if you are using one of the newer digital real estate buying and selling platforms.

While alleged inducements to purchase can be tricky to spot, they seem to be packaged up rather neatly during hyper real estate market conditions.

Conversely, the constant pounding down of shorter time frames to complete inspections and the ridiculous demands for super-fast closings are equally to blame for those who want to risk chasing the carrot.

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Chris Salese can be reached at chris@delsurmortgage.com or 707-363-4439. He is a licensed California mortgage lender (LO NMLS #254469 — CA-DBO #254469 Corp NMLS #1169 Equal Housing Lender.

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