When diving into the world of real estate investing, securing your dream home often means providing assurance to sellers that you're both serious and capable. You might already be familiar with a mortgage preapproval letter, which signals a lender's confidence in your ability to repay a loan.
However, there's another essential document, especially for cash offers, known as a proof of funds (PoF) letter in real estate. This critical document gives you an edge, showcasing that you have the financial backing to follow through on your purchase.
Beyond just qualifying for loans, a PoF letter attests to your readiness and financial strength, ensuring sellers that you're not just window shopping.
Let's dive into real estate proof of funds letters to help you better understand their nuances, their significance in the real estate market, and how they differentiate from other financial attestations:
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Proof of funds, often abbreviated as POF, is a documented verification that you possess the funds you claim to have. A proof of funds letter in real estate is an essential document attesting to your financial capability to purchase a property. Sellers frequently lean on these letters, considering them as a green signal that you have enough money for the transaction, from down payments to closing costs.
While a POF real estate letter gives a snapshot of your available funds, it is distinct from a mortgage preapproval letter. The latter comes from a lender, signifying they're willing to offer you a loan for your home purchase. In contrast, a POF letter signals you already have the funds on hand, which is particularly crucial for all-cash offers.
Originating primarily from banks or financial institutions, these letters generally encompass vital details, including:
While bank statements stand as the most popular form of POF in real estate, there are alternatives like certified financial statements that may suffice depending on a seller's preference for viewing your current balance. So, if you're venturing into an investment property purchase, it's prudent to secure both a preapproval and a POF letter early on.
This approach not only offers clarity on your spending capacity but also adds substantial weight to any offers you make, reinforcing them with tangible evidence of your financial readiness.
*You can also check out our video below where host and CEO of Real Estate Skills, Alex Martinez, teaches you How To Get A Proof Of Funds For Wholesaling!
While both proof of funds (POF) and preapproval letters are crucial in the real estate arena, they serve distinct purposes. These documents attest to a buyer's financial capability, but the nature of their validation varies significantly.
A preapproval letter emanates from a lender, signifying they're inclined to grant you a loan for purchasing a property. However, it's crucial to understand that being preapproved doesn't directly translate to immediate loan acquisition.
Initiating the mortgage process typically starts with prequalification, a preliminary step where a lender offers an estimate based on cursory assessments like your credit score. This assessment, sometimes termed a gross estimate, gives you a ballpark figure of what you might receive as a loan.
The evolution from prequalification to preapproval entails furnishing more granular details. This could encompass bank statements, pay stubs, and even undergoing a rigorous credit check. It's a thorough inspection of your financial standing, weighing factors like debt and credit health, to finalize the exact loan amount you qualify for. To streamline this, tools like a mortgage approval checklist can be invaluable.
On the flip side, a POF real estate letter provides a snapshot of your current financial assets. It's evidence that you have the requisite funds on hand to cover immediate costs, such as down payments and closing expenses. Sellers might request this letter in tandem with, or sometimes in lieu of, a preapproval. Some sellers might insist on it even if your lender doesn't mandate it for the mortgage procedure. Given its weight in reinforcing the credibility of your financial health, it's wise to always have a POF handy when navigating real estate transactions.
In essence, while a preapproval hints at what you might get from a lender, a proof of funds affirms what you already have. Whether you're gearing up for a cash offer or looking to strengthen your buying position, understanding the nuances between these letters can give you an edge in the competitive world of real estate.
Proof of Funds (POF) is typically required for each and every piece of real estate you’d like to purchase. For example, if you are a wholesaler sending 20 offers a week on potential deals, then you’d need a Proof of Funds for each of those offers given that all the properties are different addresses.
The Proof of Funds is required to buy real estate so that deals close with a higher percentage because the buyer has proven they have (or have access to) the funds to close the deal. See, real estate agents and sellers do not like working with jokers & amateurs who do not have the financial ability to close a deal.
This is a big waste of time for everyone. I mean think about it for a second, would you accept offers from people who do not have any money to buy the home? Of course, you wouldn’t because they have no money!
Yes, be sure to include proof of funds on each and every cash offer you send. A majority of new wholesalers do not know that they need a POF and this leads to a significant amount of their cash offers being rejected. To be taken seriously, you need legitimate proof of funds for the cash offers you submit to buy real estate.
By being a Pro, you’re prepared and on top of all the information that’s needed. You never want a realtor to have to ask you for information and say, "Hey, you need to send this, that, and that." As a Pro, we want to give them everything they need upfront to be professional, courteous, trustworthy, and to stand out from the rest of the pack.
A Proof of Funds Letter should say these things:
When wholesaling houses and for real estate investments, a Proof of Funds (POF) is needed with every offer. One way to get a Proof of Funds is from one of your Cash Buyers. A Cash Buyer is the real estate investor that is in the business of buying wholesale homes from you to renovate & sell at a profit.
You’re probably wondering, “How Do I Get Proof of Funds From A Cash Home Buyer Investor?” First, you need to find cash buyers & develop a relationship with them before asking to utilize their Proof of Funds for submitting offers. The Proof of Funds is a powerful financial document and will not be given to just anybody. However, if you have a great working relationship with your cash buyer than you will have a higher likelihood of getting the Proof of Funds from them.
Let’s assume you’ve developed a strong, working relationship with your cash buyer because you’ve followed the steps in my previous article. Here’s an example of cash buyer script when asking a cash buyer for Proof of Funds:
"Hi, Todd. I want to send offers that I intend on wholesaling to you. I'd like to send the potential wholesale properties to you first so that we can continue building a great long-term relationship. Can I use your proof of funds so that I can send offers? And just for extreme clarity, if I can't get a yes or no from you in 24 hours, then I will send it to other buyers on my list. As I'm sure you understand, we have to act quickly on these deals."
Let's go into the explanation of why we're saying this script. Remember that a Cash Buyer WANTS wholesale real estate deals. This is HOW a Cash Buyer makes their living by buying, fixing, & flipping the homes you wholesale to them.
Another way to increase the likelihood of getting a Proof of Funds from a Cash Buyer is to give them the first right of refusal on any wholesale deals you get under contract using their proof of funds. A “first right of refusal” essentially means the cash buyer gets first dibs at the property you’re wholesaling. They’re the first cash buyer you send the deal to, and if they want the property at the same price as the other investors, then the property will go to them since they are letting you utilize their proof of funds. Make sense?
I recommend offering this strategy to cash buyers who are serious investors and want to do many more deals. We’re not looking for tire kickers, solely professional cash buyers that want to do multiple real estate deals per month.
So, let me go ahead and show you a screenshot of a proof of funds example from a cash buyer below. As mentioned, a proof of funds can be a screenshot, bank statement from Wells Fargo, Chase, Bank of America, etc. So, this particular financing partner has sent me a screenshot of his bank account from Wells Fargo.
(I've blacked out certain items for privacy reasons). As you can see here, there's $1.2 million dollars in this account. To be exact, this proof of funds example allows me to submit offers for property at the price of $1,260,609.26 and below that number. Pretty cool, huh?
It was really a simple conversation for getting this POF because I utilized the cash buyer script I posted above.
Next is an image of the same proof of funds, but this time I pointed out a couple significant features I want you to be aware of. Take a look:
From the image, the ending collected balance is November 6, 2014. This means this proof of funds will be good for 30 days from that date, which means until December 6th. Remember, agents want to see proof of funds that are up-to-date and from within the last 30 days. So, at the end of the 30 days, on 12/6, December 6th, I would then need to ask for another proof of funds. A new Proof of Funds would just be a new, fresh screenshot of the same bank account with the new date listed of when the screenshot was taken.
So, that is how you get proof of funds from a cash buyer and exactly what it looks like! Many amateur wholesalers & real estate investors don't know what this is & don't know how to get one! Keep reading along so you don’t fall into the amateur bucket!
Now having an exclusive cash buyer with first right of refusal is not always ideal. However, this is a great way to obtain proof of funds if you're just starting out and need proof of funds quickly!
So, what’s another way to get a proof of funds letter?
Hard Money Lenders are in the business of lending out capital on real estate investing deals, especially to investors who need capital for fixing & flipping homes. Because of this, hard money lenders are a great source for a proof of funds letter.
Hard money lenders are typically companies, or individuals, that lend money based on the investment potential of the property you are buying, and typically not your credit score. Hard money Loans usually cost more than an average mortgage from a bank because they’re quicker & more immediate than a bank loan.
So, how do you find hard money lenders for proof of funds? Well, first and foremost, attend your local REIA (Real Estate Investing Association) meetings, and meetup.com real estate events. You can also use my Google Ninja Trick by typing in "hard money lender" and your city name into Google.
Here’s an example of my Google Ninja Trick: I went ahead and searched "Hard money lender San Diego" and below is what you see from the results on google:
As you can see here, there are four hard money lenders that you can then reach out to, call, and work with. So, it's not hard to find a hard money lender! So, if you thought that was tough to do, then let’s crush that limiting belief right now!
Once you’ve found the Hard Money Lenders, now you need to let them know you are a wholesaler & renovator, and that you’d like to use their company as a lending source for capital in the future.
Here’s a script example of what you can say to hard money lenders to get a proof of funds letter:
"Is it alright if I use proof of funds from your company to submit offers on deals? I currently have another money source, but they delay in getting me an up-to-date proof of funds from time to time, and I'm looking for a more reliable money partner."
What you want to do when asking a hard money lender for proof of funds is be authentic. If you plan on following the evolutionary stages of a real estate investor, from becoming a wholesaler, to fix and flipper, to a buy and holder, then this is simple because the hard money lender knows you plan on fixing and flipping property eventually.
Let the hard money lender know you want them to be your reliable money partner when you wholesale & fix and flip houses. So, even though you're not fixing and flipping right now, we're leading them up to that. Plus, you're being authentic by letting them know that you wholesale and that you plan on being a fix and flipper. This is important because hard money lenders don't just want to give wholesalers proof of funds all the time because then they wouldn't get any business from that.
Remember, a hard money lender is in the business of lending out capital for real estate investment deals. Give them a reason for doing business with you & for them to give you their proof of funds!
If you plan on progressing as a real estate investor, up the evolutionary stages, you will most likely use hard money to buy a fix & flip deal.
Let’s think about this for a second… who do you think you’ll go to if you need capital to fix & flip a house after you’ve gotten a few wholesales under your belt? You’ll probably go to this hard money lender because they helped you out when you needed a little help.
At this point, you would’ve developed a working relationship with them, and people work with who they trust & who they like! So, start building these hard money lender relationships now so you can get proof of funds & a reliable capital source in the future to buy real estate investment deals!
Let's show you an example of what a proof of funds letter from a hard money lender looks like below. This is an account statement from a hard money lender (I just whited out some of the company names on here for privacy reasons):
Let's look at the most important things on this proof of fund letter (image below):
The ending date on this Proof of Funds is on September 31st. That means we have the ability to send offers from September 31st to October 31st because it's within the 30-day time period. Remember, you always need an up-to-date proof of funds from the last 30 days. Be aware of this because you will need to ask this hard money lender for a fresh proof of funds every 30 days. Don’t be the amateur who gets one proof of funds and thinks it will work forever because that’s not the case!
Now, the total funds available for this proof of funds is a little bit over one million dollars, $1,002,500 to be exact. This gives you the ability to send offers up to that price and any offers below that amount. This is a solid proof of funds given the amount of money we have to work with here.
So, I want you guys to see this hard money lender proof of funds letter examples & the example from the cash buyer so you understand what you're working with and what to look for! So, a proof of funds, a.k.a the golden ticket is really just one phone conversation or one meeting away!
Are you a real estate investor who has a seller or realtor asking for proof of funds? Don’t worry! This is completely normal, and you just need to follow the steps in this article to get a proof of funds letter from a cash buyer or hard money lender! Once you get legitimate proof of funds, then you can show it to the realtor or seller for each & every offer. Let's get into how to show the proof of funds correctly...
The best & easiest way to show a proof of funds to a real estate agent is to send it via email along with your offer terms for the deal, or along with the written contract for the deal. Save the Proof of Funds Letter as an image or PDF document and attach it to the email you’re sending. This will suffice for the realtor. Keep in mind that this is standard practice for the real estate agent, so they may (or may not) make you aware that they’ve received the Proof of Funds. It never hurts to follow up and ask if they have received the proof of funds via email.
The intricacies of the real estate market can be daunting for many, especially when it comes to navigating the maze of necessary documentation. Understanding the fundamentals of a proof of funds letter in real estate is crucial for any prospective buyer. These instruments not only bolster your financial standing in the eyes of sellers but also help ensure a smoother transaction process. As you stride forward in your real estate journey, being well-armed with knowledge and the right documents will undeniably set you apart.
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