The real estate industry is constantly evolving, and the requirement for a Proof of Funds Letter is one of the more significant recent developments. Historically, when a potential buyer for a real estate property signed a contract to purchase it, it was assumed that the buyer had the necessary funds or financing to close. However, times have changed, and so have the requirements many sellers now want from buyers.

Starting in the mid-1970s, several professional real estate investors decided to add an income stream to their real estate interests by teaching students to become real estate investors. The difference between their teachings and traditional real estate investing was that these gurus taught strategies for doing transactions with little to no money of their own. Their credit history and even bankruptcies didn’t matter in getting deals.

There are eighteen ways to do wholesale real estate transactions using no money, except for an Earnest Money Deposit (“EMD”) in some cases, from the investor buyer. Powerful advertising made these no-money-investing programs popular, and their originators became wealthy. The biggest problem that started to arise was the competition between new investors who found it easy to get a seller to sign a purchase contract but then struggled to find a buyer, resulting in the cancellation of their contracts.

The result was heartache for sellers who had planned to use the proceeds of their sale to buy another home, or they needed the money to live, and often faced foreclosure if they didn’t sell. Sellers, licensed sales agents, and realtors® got so frustrated by these investor strategies and defaults that they reacted by trying to ensure the proposed “cash buyer” had the cash to close. Hence, they started asking for proof of funds.

The proof of funds letters typically consist of a bank statement that clearly shows the investor’s ownership – his name and address are on the statement. The dilemma was that most of these investors lacked sufficient funds to purchase the property and often didn’t even have an EMD. The result was that a closet industry sprang up where transactional lenders generated Proof of Funds (“POF”) letters for these investors.

While an actual bank statement rarely backed these POFs, they did seem to work for a couple of years. They most often were a letter from a bank officer stating that the lender’s account had an Average Balance of X dollars for a specific month. In some cases that I have seen, these average balances were less than the investor needed to show to get his contract signed by the seller.

As sellers and licensed agents continued to have investor defaults, they started contacting the specific person or entity issuing the POF. This was a turning point for POF letters because most turned out to be non-existent issuers, or they were unwilling to say that the investor had access to their funds.

A POF is a potent tool for real estate investors to secure purchase contracts signed by skeptical property owners and to obtain approval from licensed real estate agents. If you need one, ensure that the issuer has the funds in their bank account (verified by a bank statement), they answer the phone number listed on their letter, and they explain to the caller what they do and how they fund investor transactions. This is a must for both transactional lenders for wholesale double-closings and hard money lenders.

In summary, do your due diligence to see what you will be getting for a POF and put yourself in the seller’s mind about whether you would accept this document to give you a sense of confidence that you, as an investor, can purchase his house.

Frequently Asked Questions

“A Proof of Funds Letter (“POF”) is a document that demonstrates a real estate investor’s ability to finance the purchase of a property. A seller wants to accept the most credible investor’s offer, and providing a POF gives an investor an edge over other investors. Requesting a POF has become standard practice for licensed real estate agents and savvy sellers.”

“In all the transactions I encounter, the most acceptable Proof of Funds Letter includes a current bank statement that has been verified by a bank representative or a corporate officer, an approved Line of Credit from the lender that is more than the amount needed for a specific purchase, and contact information for the seller or his licensed real estate agent to confirm with a direct phone call.”

“Some lenders allow Proof of Funds Letters to be generated online, typically within seconds. Often, these POFs are “property-specific,” meaning the POF is for a single property and a specific amount. This requires the investor to be less flexible regarding price changes, allowing the seller to use this amount as a price to encourage other investors to bid against it. Properly issued POFs can take from one or two hours to one or two days and include a Line of Credit, no specific property designated, the lender’s contact information, and an expiration date.”

“While a bank statement should be sufficient as Proof of Funds, it depends on whose name and address appear on the bank statement and whether it is a one-page screenshot or a complete monthly statement. A screenshot should be ok for most sellers, but commercial lenders require at least one whole month’s statements to avoid fraud.”

“A pre-approval letter is a written acknowledgment from a commercial lender that the borrower will have the ability to fund a purchase, subject to contingencies for last-minute changes in credit or loan ratios, before the property is purchased. A proof of funds letter is a “snapshot” in time of funds that are available to a buyer for the purchase of a property, used to satisfy the requirement of a seller or licensed sales agent.”

“Wholesalers can and should use a Proof of Funds Letter when they don’t have their funds for a purchase to remain competitive, but it must be from a transactional or hard money lender that has the funds to loan to the investor and close on the property. An investor should be cautious to ensure the issuer of the POF is ready, willing, and able to fund their purchase or deal, as the deal can be lost even after a signed contract is received from the seller.”

“What we see is most Proof of Funds (“POF”) that are property-specific have an expiration of 30 days or as little as one week. Non-property-specific POFs, often Letters of Credit, have 60 or 90-day expirations. The purpose of the expiration is so that the recipient, the property seller or a licensed sales agent, gets insight into the buyer’s ability to purchase the property. If the accompanying bank statement is 45 to 90 days or older, the investor’s offer is typically rejected.”

“A POF letter issued by a transactional does not guarantee funding at closing. We have seen many issues arise before closing, including changes of mind by end-buyer lenders, proposed delayed repayments to the transactional lender, and numerous other problems that can’t be resolved quickly or at all. This is also why dealing with an experienced transactional leader is so important.”

“From what we see, when dealing with an ‘experienced’ licensed real estate agent, an investor will, 80% of the time, be required to submit a current Proof of Funds Letter. Inexperienced licensed sales agents and homeowners directly require a POF about 35% of the time. It is “cheap insurance” and instant credibility to have a POF ahead of time, as it provides a sense of security when making offers on MLS®-listed, off-market, and direct-to-seller properties. “

“If the Proof of Funds you use is fake, and you are trying to get a loan to purchase a property, you potentially have legal responsibility. If the lender involved with making a loan is a hard money lender, you are not in too much legal trouble, but if you are getting funds from a federally or state-insured lender, you have criminal liability. The legal responsibility for submitting a POF to a seller or hard money lender that is fake is considered an “Unethical Business Practice” punishable as a misdemeanor in many states. If your POF has expired, renew it to avoid losing a great profit.”