If I Have No Cash Or Credit For A Down Payment, Will I Need To Obtain POF To Get The Deal Closed?
The situation that will require proof of funds is working with a lender to get a mortgage approved. Any lender who is providing acquisition financing will want to see the money sitting in a bank account with your or your partner’s company name on it as part of their underwriting.
So at some point before closing, whether it is early or later in the process, you will have to be able to provide proof of funds in order for the deal to close. If you personally don’t have the funds there are a number of ways to raise them.
One is with a money partner. There is nothing new or revolutionary about this. You have a deal in the early stages of being tied up, most likely you have an LOI submitted and the Seller is showing interest. You create a deal summary and then contact every person you know who would be a possible candidate for partnering with you. For every one that says they are not interested, you say to them you understand, but do they know of anyone who would be interest. In about half the cases you will get another name, and so you call them, and continue your search.
Another way to find partners, and private lenders for that matter, is to advertise the property for sale. Advertise it heavily in as many places as possible to get as many calls as possible. With each caller you give them the deal summary and follow up after one or two days.
In the best case you will have a buyer for the property you can wholesale to. If they say they are not interested, you ask them what was it about the deal that made them not interested; they will tell you. If the reason they give is related to the property, note what it is and let them know you will be in touch with another property that fits their criteria. If the reason they give is related to price, ask them if they would like to partner on the deal instead, with them being the money partner and you doing all the work. Depending on who you are talking to, this will be interesting to them. A younger go-getting investor will say “no”, because he/she doesn’t need you, an older more veteran investor will probably be interested, because having their capital and track record make money for them, instead of their personal time and effort, is more what they are looking for.
In both cases, a partner will want at least fifty percent of the deal, but for you, who are getting started and can’t do the deal without what the partner brings to the table, fifty percent of a deal that happens is a whole lot better than nothing. The upside to this is you get the experience of doing the deal and managing the process and dealing with all the problems and challenges. This by itself is worth the fifty percent of profits you give away. In addition, you are going to do a lot of deals, the first few being done with a partner isn’t going to kill you, and it gets you in the game.
Whichever way you find your partner, once you have found them, it is their balance sheet and their bank account that is used to provide proof of funds.
Another way to provide proof of funds if you don’t personally have them yourself is to line up private lenders to the cash requirements of the deal. You may have a mortgage lender financing 70% of the deal, and you need to raise funds to cover the 30% down payment, rehab, and closing costs. Again, you prepare a deal summary showing the merits of the deal and all the details, then approach people you know, and those involved in real estate about being a private lender for your deal.
There are many ways to find private money, and you go into overdrive with all of them during the couple of weeks that your deal is coming together. Once you have found the private lenders who have agreed to fund you, you have them provide you with a bank statement showing the funds they will be investing, to be used only for the purpose of proof of funds (for which you provide them a written assurance), and then you forward these bank statements to the lender to complete your file.
OK, so this covers a couple of possibilities for situations where proof of funds “is” needed. There are also all of the situations where proof of funds is not needed. When you are dealing direct with the Seller and you create seller financing, or buy with a master lease option, proof of funds is not only not needed, it is rarely even mentioned.
When dealing direct with the seller the main currency is trust, which you are totally in control of creating, and when through your interaction with the seller you are able to build rapport, demonstrate your expertise with financing and creating solutions, when the seller is motivated and needs out of their property, once they trust you and buy into your solution, they will do whatever you ask them to do. You are the problem solver, proof of funds is the farthermost thing from their mind.
Whether the transaction you are putting together requires proof of funds or not, you should not recognize it as something that presents an obstacle to closing the deal. If in your case proof of funds is required, there is always a way to provide it.