Being a syndicator can be tough. You’re often asked to make stuff happen—but you may not have the funds to actually make stuff happen. And yet it still has to happen! What is a real estate investor to do?
So when a broker tells you, “The seller will entertain your offer but only with proof of funds,” you’re stumped. You don’t have the funds because you’re going to raise them and presumably have it all at closing.
But sometimes it really helps to have the proof of funds. It makes your offer much stronger and it increases your chances of getting under contract.
The proof of funds letter is useful for larger multifamily deals as well as single-family house deals. It’s a key tool to getting deals under contract.
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What does “proof of funds” mean?
Proof of funds is essentially a document that verifies how much money a person has readily available.
This money must be liquid, so it doesn’t include retirement savings, life insurance, or other assets like real estate properties you own.
Sellers might request proof of funds letters in order to guarantee you’re a serious investor or to make sure the sale won’t fall through because you can’t pay the fees.
What does a proof of funds letter contain?
The proof of funds letter is usually on the financial institution’s letterhead, stating that their client has $x within the account and to contact them for any questions. It might also include a recent bank statement.
Proof of funds letter vs. pre-approval letter
A proof of funds letter details how much money you currently have. Often, it’s used to show that you can cover the down payment, closing costs, or any other inspection fees.
A pre-approval letter describes the amount that a bank is willing to loan you to purchase the property.
3 ways to handle requests for proof of funds when you don’t have any
But what if you don’t have any funds to prove yet?
1. Push back
A request for proof of funds is a question of trust—or rather a lack of it. If the seller knew for sure you were going to be able to close, they wouldn’t ask you for this.
The first thing you should do is to push back with something like this.
“I understand you’re concerned about our ability to close since we will be raising the money. But I already have the verbal commitment from my investors for the money we’ll need to do the deal. It’ll be in the escrow account when we close, but I don’t have it in a bank account right now. So I can’t give you proof of funds.
“But how about this? Why don’t we get together and get to know each other? If you don’t feel 100% comfortable with moving ahead with us, we’ll part as friends. What do you say?”
If you’re feeling gutsy, you could add, “If your seller insists on proof of funds, we’re going to have to move on. I have another four deals I need to look at today.”
People do business with people they like and trust. The best way to build trust is with an in-person meeting with the broker and/or seller. This gives you a chance to build rapport, tell them what you’ve done and what you want to do, and share the team members you have around you.
If you can’t meet with the broker or seller in person, then you’ll need to do it remotely with a phone call and email. If only email is possible, create a cover letter that provides an overview of your accomplishments and how you will be raising money to complete the deal. Include your bio and the investor package for this deal. Do the best you can to make the seller comfortable with moving forward with you.
If the first tip fails and you still want to get into the deal, there are two more ways for you to potentially satisfy the seller’s request.
2. Demonstrate intent by your investors to invest
Another option, shy of an actual proof of funds, is letters of intent signed by each of the investors to indicate their interest and the amount they are considering investing. I’ve done this with at least a couple of offers recently, in addition to a cover letter and bio, and it has satisfied the seller.
For the investors, the letter of intent is not legally binding in any way, and it doesn’t cost them anything to sign it. However, it adds significant credibility to your cause.
3. Get proof of funds from one of your investors
If the second tip doesn’t satisfy this obstinate seller and you’re intent on getting into the deal, there is yet a third option. And that is to get one of your investors to give you proof of funds.
How to get a proof of funds letter from one of your investors
If you can’t produce the proof of funds yourself, you’ll have to get it from someone else. That “someone else” is going to be someone who has the necessary liquidity and likes you.
Note that this person doesn’t need to commit to investing with you. That may or may not happen. All that you need right now is a proof of funds letter from them. This is typically a letter from the person’s financial institution that says they have $x with them. The letter does not obligate the person to use that money in any way.
In other words, it doesn’t cost or obligate them to anything.
The only thing you need to do is find someone with the right net worth and ask them to help you.
1. Create a sample deal package
A “sample deal package” is an investor package representative of the kind of deal you want to do. Everything is real (the photos, financials, etc.); the only difference is that you don’t actually have it under contract.
2. Reach out to people who can help you get a proof of funds letter
Create a mind map of everyone you know. Create circles for every social group you’re part of—neighbors, friends, family, co-workers, religious organizations, sports, clubs, etc. Then, in each circle, write down the names of people you know. This is your immediate sphere of influence, which contains people who already know you and presumably trust and like you.
Then email those contacts.
Your goal is to get a series of yeses from people. So don’t start out the email with, “Will you give me a proof of funds letter, yes or no,” but instead tell them in general terms what you’re doing and ask if they would be willing to have a five-minute phone call to give you some feedback. Describe what you’re doing and ask them if they would be willing to help.
Their answer should be, “Yes, how can I help?”
That’s when you tell them that you’re looking for a proof of funds letter for $x, and do they know anyone?
They might say that they could do it. Or perhaps they can refer you to someone they know well. Then follow up with any referrals you get and repeat the process.
Remember these points:
- Don’t discriminate. Talk to everyone you know, whether you know they have the net worth or not. They might have it or they might not. They may be able to at least refer you to someone who might.
- It’s a numbers game. Realize that only a small number of people you talk to will have the net worth for the proof of funds letter, maybe not any of them. Don’t be discouraged! Just get an agreement from your contact to help you, and then encourage them to refer you to someone else they know.
3. Request a proof of funds letter
Once you’ve found someone who might be able to do the proof of funds letter and is interested in helping you, schedule an in-person meeting with them. In that meeting, make the person comfortable with you by talking about your story and experience, what you’re trying to do, and the team you’ve built to help you. Use your sample deal package to talk about what a deal could look like, answer any questions, and address any objections.
Then tell them what you’d like them to do, which is ask their financial institution (bank, financial advisor, or brokerage) to write them a proof of funds letter.
Should you include proof of funds in your next offer?
The proof of funds letter is a very simple yet powerful addition to your offer package.
Simple, because it costs nothing to produce and doesn’t obligate anyone to use the funds for the prospective deal. Powerful, because it makes your offer package look serious and sets you apart from many other buyers making offers.
Is it easy to get? That depends on your personal network. If you already know high net worth individuals, it’ll take you a couple of calls. If you don’t, you’re going to have to mobilize your sphere of influence to help you. But stick with it, and you shall have what you desire.