There’s no doubt about it: real estate investing involves paperwork. Mountains of paperwork. So it takes an inherent ability to be organized and thorough to become successful. But unfortunately, many real estate investors make common mistakes with their paperwork that can lead to problems down the road. One of the critical pieces of your arsenal should be a Proof of Funds letter, but if you’ve never heard of one, you might be wondering what you’re missing out on for securing your next fix & flip. If you have heard of it and use POF letters but aren’t having much success, you might wonder what’s going on and how you can get better at securing these deals.
Luckily, I’ve found there are two common mistakes real estate investors make when it comes to Proof of Funds Letters:
- Not using them at all.
- Writing a deal as cash when it should’ve been listed as financing.
We’ll get into those in a minute. First, let’s talk about what a Proof of Funds Letter is, how to get one, if you really need one, and the mistakes everyone seems to make their first few times. Let’s dive in.
What is a Proof of Funds Letter in Real Estate?
A Proof of Funds Letter is a document that proves that the person selling the property has enough money to cover the costs of purchasing and maintaining the property. It is often required for a real estate investor to buy a property.
The Benefits of a Proof of Funds Letter in Real Estate
- It shows credibility. Having a Proof of Funds Letter shows that you have a preexisting relationship with a private lender and can access the funds you need to make the transaction happen.
- It speeds up the transaction. Having a Proof of Funds Letter shows that you’ve already been vetted by a hard money lender and can get the money ASAP. In a competitive market, the faster you can get the seller their money, the more likely it is you’ll be the next owner.
- It streamlines the process. When seeking a loan for a real estate investment, it is important to understand that private lenders can be quite different than banks. Loans from hard money lenders are typically much faster because these institutions do not require as much documentation or personal information. What is most important in this type of transaction is the property itself – your collateral – and having built trust with your lender ensures subsequent deals will go faster.
How Do I Get a Proof of Funds Letter?
There are a few ways to obtain a proof of funds letter. One way is to have your bank or lending institution provide you with a letter stating that you have enough money available to purchase the property. Another way is to request a letter from the escrow company or real estate agent handling the sale of the property.
Do I Need a Proof of Funds Letter Every Time I Want to Purchase an Investment Property?
There is no universal answer to this question as it will depend on each case’s specific facts and circumstances. However, generally speaking, a proof of funds letter may be helpful if you are purchasing an investment property that is not your primary residence or if the purchase price is above a certain threshold. In these cases, it can help reassure potential lenders that you have the financial resources necessary to cover the cost of the property.
Two Common Mistakes Real Estate Investors Make with Proof of Funds Letters
Mistake 1: Not Using Proof of Funds Letters At All
This may seem like a no-brainer, but without proof of funds (or at least some sort of documentation verifying your financial ability to invest in real estate), you’ll likely be met with skepticism from potential lenders and landlords. A bank statement or recent pay stub will do just fine, but if you’re using leverage or have other unusual financing arrangements in place, make sure to include copies of those documents as well.
In order to prove that you have the funds necessary to purchase a property, many real estate investors turn to letters of credit. However, if you don’t use proof of funds letters, your potential buyers may not believe that you actually have the money available.
Proof of funds letters can be used in several ways. You can provide them as part of your offer letter or as part of your due diligence process. If you’re using them as part of your offer letter, make sure that you include copies of the property documents and send them out to all interested buyers.
If you’re using proof of funds letters as part of your due diligence process, make sure that you keep copies for yourself and send them to lenders.
Mistake 2: Writing a Deal as Cash When It’s Really a Financing Deal
Many gurus tell you to write every offer as cash; I’ve had this backfire on some of my borrowers where the deal has fallen through at the table. Some sellers don’t really care how you structure the offer, but the actual definition of a Cash offer is that the money is yours.
There should be no lien attached to the money if it’s a cash offer. The logic behind “cash only” offers is that they think the banks are more interested in cash offers over financed offers. I actually asked an Asset Manager, and they said it doesn’t matter.
If they know you can close fast, you’ve got a greater chance of getting your offers accepted, and if you have a Proof of Funds letter that demonstrates that you have access to the funds, you’re going to get your “GOOD” offers accepted. Now, occasionally we’ll have a customer come back to us and say that their proof of funds letter wasn’t accepted.
Any time this happens, we review how they’re submitting their offers, and almost without fail, they’re presenting their offers as cash offers. The problem with this is that it’s a little harder to get a good loan if you’re submitting it as a cash offer.
The bottom line is: if you’re serious about real estate investing, you should be submitting 50 offers a week, and every offer should include a Proof of Funds Letter.
If you don’t have access to our Proof of Funds letters, you can try it out with a 30-day money back guarantee. This means that you could submit as many offers as you’d like! This is where you can prove that you’re serious about real estate investing. If you won’t take action when it costs you nothing but time and focus, it’s a good indication that you’re barking up the wrong tree.
Commit to yourself to make 50 offers this week.