POF’s and VOD’s in Real Estate Investing
Before seven years ago it was rare for a Seller or a listing agent to ask a Buyer for proof that he could purchase a property for cash. Because of investors telling Sellers they were cash buyers when they weren’t and failing to close, things have changed. Nowadays it is very common for Sellers and listing agents to require a Proof of Funds (POF) before they will submit an offer to a Seller.
In its simplest form a POF is a copy of the Buyer’s bank statement showing enough money to purchase the Seller’s property. Ironically it is against Federal law to show a retirement account as a POF, even if the IRA, Keough or 401K is a self-directed plan.
As an investor the value of a POF is immense if you can’t get your offer before a Seller without one. If you don’t have the money to purchase a Seller’s property, the solution is to go online to a website which gives POF’s for little or no cost. They are plenty of them and they offer one of two types of POF’s, either for a Specific Property or a General POF.
As their names imply, a Specific Property POF is for a property that the site website owner, usually a transaction funder or a hard money lender, specifies on the Approval Letter that he is ready, willing and able to fund. But, applying each time an investor makes an offer on a property can be tedious to apply for a new POF.
More investor friendly is a General POF that states the investor, or his entity, has been approved for a certain amount of funding by either a transaction or a hard money lender. In addition, this type of POF should be accompanied by a Letter of Credit (LOC) that stipulates the investor has access to a specific amount of funding. These LOC’s will always have a contingency clause so the lender can back out at the last minute if he decides to do so.
The next level above a POF in terms of security for a Seller to be certain a Buyer has funds to close is a Verification of Deposit (VOD). In this document the transaction funding source gets his bank statement verified by a bank employee. This requires an additional effort by the transaction funder, and it is mostly an advertising ploy as this level of proof is seldom requested.
The biggest issue with any POF or VOD is, “Whose name is on the account?” In some cases, the document provider simply does not put his name on the actual bank statement. This could lead to the investor claiming the POF is his and this could be a real deal killer if the Seller or listing agent finds out. In these cases, it’s best to explain to the Seller or listing agent that the funds are your “Funding Partner’s” and he will be funding the purchase.
It is illegal for a person requesting a loan from a conventional lender (bank, savings and loan, credit union, etc.) to falsify or use another person’s POF to acquire a loan. This Federal Regulation doesn’t apply to hard money because they are providing private money which is not insured by any type of mortgage insurance. If an investor is borrowing funds for a same-day double closing, it’s because he doesn’t have the money to close. Despite this the transactional funder loans 100% of the funds due from the investor Buyer to close.
Consequently, hard money lenders require Buyers to put some of their own money in the transaction and pass rigorous credit and experience qualifications. Hard money lenders are often referred to as predatory lenders simply because they do not make a loan unless they are sure they can make money if the borrower defaults. The lender will have to go through a foreclosure process to be able to sell the property in the event of a borrower default.
In summary, getting a POF for your real estate investing is critical to your ultimate success. If you have funds available to use for your own POF you are heads and shoulders above other investors. It is not recommended that you falsify a POF or VOD especially where the seller is a conventional lender such as in a Real Estate Owned (REO) or short sale property.
Dave Dinkel
Search Terms – letter of credit, proof of funds, hard money loan, POF’s, LOC’s, VOD, transaction funding,
IRA, Keough, 401K, verification of deposit
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