In the fix and flip business, it is very common to come into contact with deals that have been priced at a deep discount because the owner is in a distressed situation. Sellers may be going through a divorce, financial issues, estate issues or need to relocate by a specific date. Regardless of what the issue may be, it is likely that these owners are heavily discounting the property because time is of the essence. Because of this, the seller needs to be assured that you are truly capable of closing the deal if they are going to allow you to be the buyer who removes their home from the market – and other potential buyers. They need proof and assurance that you are financially capable of following through on your offer quickly.
Knowing that the home seller will have this concern, the best approach one can take is to leave no question of doubt in your offer. Leaving a security deposit does not always remedy their situation, so most sellers will ask for the transaction to be a cash exchange. As a cash transaction, the buyer does not have the luxury of a loan approval based contingency – simply because the seller wants to decrease the possibility of not closing on-time. When these are the concerns, most sellers will ask for a Proof of Funds Letter.
What is a Proof of Funds Letter?
A Proof of Funds Letter, or POF, is a bank statement or letter written by an authorized third party which assures the seller that the buyer has the available funds to close the sale. Much like a Pre-Approval Letter in a traditional bank loan, the Proof of Funds Letter acts as proof that the buyer has the ability to close and that this will not be a hurdle the buyer needs to overcome, potentially putting the seller in a stressful situation.
When Would I Need a Proof of Funds Letter?
The timing of submitting a Proof of Funds Letter can vary between the time you make an offer until after the offer has been accepted. Often times investors want to make a strong first impression when bidding on an investment property. They want to reassure the seller that they are a strong candidate and will have no problems closing, thus freeing the seller from their distressed situation. There are even flippers who will send an actual check for the deposit along with the offer and a Proof of Funds letter to entice the seller to choose them over other potential flippers. This method can be very enticing and convincing in a seller’s mind when they are holding an escrow check for $20,000 along with a Proof of Funds Letter showing their ability to bring the rest of the funds to the table almost immediately.
If, for whatever reason, you are waiting on a Proof of Funds Letter from a hard money lender or a bank, it is perfectly acceptable to submit the POF upon acceptance of the contract. The seller or seller’s representative will often ask for the escrow check and Proof of Funds Letter immediately after accepting the terms of the deal.
How Can I Request a Proof of Funds Letter?
The process is easy! If there is cash in your bank or brokerage account, you can simply call or email the institution and they will be more than happy to issue it to you. If you do not have the entire amount of cash to close on the transaction and are utilizing a hard money lender, the lender can issue a POF as well. Typically, you will need to submit the property address, the purchasing entity’s name and the purchase price so they can state the correct amount in the letter. Most lenders will have a relatively small fee in order to issue these to you. Often, these fees will range from $250-500, but most lenders will credit the amount you paid at the closing on the HUD-1 or Closing Statement.
How Quickly Can I Obtain a Proof of Funds Letter?
Once you ask a lender or institution for a Proof of Funds Letter and have sent them the required information and fees, it typically takes no longer than a few hours to have the letter issued to you. These lenders and institutions understand how vital it is to have all of the required documents accessible to the seller when you are making an offer in a fix and flip scenario. Make sure to include the email or fax number that you need the letter sent to and they will be able to turn it around quickly so you can get the property under contract immediately.
Buying The Property
There are many other advantages to having accessible proof of funds letters. They are designed to give the seller of a home confidence that you do in fact have the money to follow through on your end of the deal, and without this proof, it is almost impossible to take advantage of any kind of wholesale transaction like REO’s and short sales. A proof of funds letter will also give you confidence in your transaction. You will move forward in the purchasing process knowing that you have sufficient funds to back you up on your quick flips, all the while becoming more experienced in lending interactions.