Proof of Funds in Real Estate – Why is it Needed to Buy a Property?
In real estate investing, it is unusual for a seller of a property to request a buyer to show that he has the money to actually purchase his property, but it does occasionally happen. This document shown as confirmation is often referred to as a proof of funds (“POF”). It is usually a bank statement, money market statement or other document that shows the buyer has cash available at a specific time of the month. If it’s that simple, then what’s so special about it?
Many investors try to do wholesale deals by contracting with a seller. The investor then finds a buyer before actually closing with the original seller. This practice is called wholesaling. It is not illegal despite what some Realtors® and ironically even some closing agents think. To make this transaction complete the end-buyer needs to have cash to purchase the property. They could also have a hard money lender ready to loan the funds to close. An experienced investor will ask his end-buyer for a POF or a loan commitment from a hard money lender.
Realtors® working for sellers as their listing agents only make a commission if the property sells and closes. Investors can be a headache for listing agents. They are not serious buyers unless they can make a profit on the wholesale transaction. The agent only cares about the buyer closing. They are not really concerned if the buyer can make a profit.
In the mind of a listing agent and some lenders’ representatives involved in short sales and REOs, a POF from a buyer means he has the ability to close with cash. These cash buyers are greatly preferred to buyers who need a conventional or even a hard money loan. If a buyer doesn’t close then everyone in the transaction is a loser. This is the reason some experienced listing agents request a POF from a buyer.
Some investors have gone to the extent of manufacturing a POF from their existing bank statement by using a pdf editor. However this practice eventually catches up to them. It can come with disastrous results. The preferred way, if the investor has limited or no money, is to contact a professional lender who will supply a POF as part of their funding process. When the investor finds a buyer and goes to close, he can use transactional funding for the purchase from the original seller. The investor’s buyer will use his own money or borrowed funds to close on the same day. The investor will walk away with his profit and not having had to put any money in the transaction.
Some hard money lenders and transactional funders provide POF’s to their prospective borrowers. Some also charge or have a potential borrower sign up and pay on a monthly basis. Whether the POF is free or has a cost, an investor’s ability to have a seller sign his contract is greatly enhanced by having a POF.
In a few rare cases a seller will ask that the POF be in the actual name of the buyer. This can be a problem but can be addressed in a couple of ways. The simplest answer is to go on to the next deal but that means no wholesale profit. The investor may be able to get the POF provider to transfer the funds to the investor’s account but this is only likely if the investor is very familiar to the funding source. The other option is to have the investor add the POF provider to the contract with the seller.
In summary, having a proof of funds in real estate for making offers greatly enhances your ability to get sellers to accept your offer over other investors.
To your limitless success,