Can I provide proof of funds for another person and charge a fee?

17 Replies

This is purely hypothetical but I had an idea that I could explore if it's even legal.  My idea is to work with RE investors/buyers, and use my available funds to provide a proof-of-funds letter for their deals, and charge a fee of, say 1% of the value.  This would not be a loan, this would merely be a way for them to provide proof of funds to close the deal. 

Presumably this would be a scenario where they'd have other financing lined up already but not finalized, and they don't want to loose the deal waiting for the final lending approval  to come through.  It sort of fills the gap between closing the deal and getting the final financing approval.

Is this legal, does anyone do this?

I have seen this done before on larger deals ($5M+) and in my medical opinion, even if it's legal, it often isn't honest. :-)

The entire reason to provide a proof of funds to a seller is to credibly and authentically demonstrate your intrinsic ability to perform the financial obligations of the contract. By using an interim "guarantee" you are placating the seller in the hopes of securing financing in time to get final financing done, which may or may not happen. Surely this puts the seller in a bind should the end financing not come through. Usually people lawyer up at that point regarding damages, fraud etc. Please note, that I AM NOT saying that any of this is your intent, I'm only relating what I've personally seen occur with deals I've been involved in (note: I've never been the one to use a proof of funds letter in any deal).

In times past, when I've seen people pay to use a proof of funds letter, its use came with the stipulation that if the funds actually needed to be drawn down on, they would be used at hard rates over very limited terms. 

Then there is the issue of how valid the letter for proof of funds is. I had one developer try to use a proof of funds letter from the Bank of Indonesia for somewhere in the neighborhood of $500M. That didn't end well.

Over all, I'd suggest you get an attorney's opinion. My medical opinion, being what it is, is not defensible in court. But my personal experience is such that if someone ever provides me with a proof of funds letter, I'm checking with the contact at the bank who gave the letter, and their supervisor as well to ensure that the buyer actually has the specific funds mentioned in the letter, under their complete and absolute control, and that those funds have a healthy degree of seasoning before I accept it as valid.

Best wishes,

Rob

What would be the point of you providing proof of funds for another person?  If I put an offer in on a house here in California, why would the seller care if Charles Kamen from New York had money?  I'm buying the house, not Charles Kamen. 

The proof of funds is supposed to show that the buyer has the financial ability to complete the purchase.  (Like a bank statement in the buyer's name showing the required funds.)

1% for a POF is pretty steep. I do transactional funding for that and letters for free. Nothing illegal about it that I know of. Not any more than a lender giving a pre-approval and not closing on a loan. There's nothing binding there, it's proof of funds, not a contract to fund. Like has been said, it kinda defeats the purpose and is a shady practice if you don't have the intention of them being able to use the funds, though.

No, you can't if you are not an institutional or registered lender! How would you look in an orange jump suit and a really short haircut? :)

Thanks everyone for the info!  It's not something I'm necessarily doing, but I did want to educate myself on it.  I agree with the sentiment that while it may not be illegal, it's not exactly ethical.  I had not heard of transactional funding before - I just did some reading on it, and that's actually more along the lines of where I was going with this - making it easier for buyers to close their deals when financing is in limbo.  The way I understand transactional lending is that you're providing a short-term (or same-day) loan to a wholesaler or intermediary who is both buying a property and selling it in the same transaction.  Your lending, then, enables them to purchase the property with your loan (A to B) and then immediately pay you back with the sale of the same property (B to C), plus interest and fees.  If that's correct, it's a great concept (and legal, and ethical, too!).  Can individuals become transactional lenders, or do they need to become an approved lending institution?

Originally posted by @Charles Kamen :

This is purely hypothetical but I had an idea that I could explore if it's even legal.  My idea is to work with RE investors/buyers, and use my available funds to provide a proof-of-funds letter for their deals, and charge a fee of, say 1% of the value.  This would not be a loan, this would merely be a way for them to provide proof of funds to close the deal. 

Presumably this would be a scenario where they'd have other financing lined up already but not finalized, and they don't want to loose the deal waiting for the final lending approval  to come through.  It sort of fills the gap between closing the deal and getting the final financing approval.

Is this legal, does anyone do this?

 I am not a lawyer....but my guess is if you never intend to allow them to use the funds that this is fraud.  

Yup, I'll agree!  Unless there's a stipulation that states that the money could be used if financing falls through, with XX% interest as @Rob Green wrote above.   The transactional lending that @Darrell Shepherd mentioned seriously peaked my interest though, I'm going to try to learn more about it.

Originally posted by @Charles Kamen :

Yup, I'll agree!  Unless there's a stipulation that states that the money could be used if financing falls through, with XX% interest as @Rob Green wrote above.   The transactional lending that @Darrell Shepherd mentioned seriously peaked my interest though, I'm going to try to learn more about it.

You can do transactional lending as Darrell mentioned, have a note and deed of trust ready to go for the closer, put cash in escrow, but the funds are never used. Register as a commercial lender and only do commercial lending. In some states, it can be as easy as a one page filing, if you have money to lend you have money to see your attorney!

Institutional or registered lenders are often exempt from usury laws, individual, unregistered, private lenders are usually not exempt, check your state usury laws.

Paying any fee to obtain a loan is considered points, points are pre-paid interest, points are paid to institutional or registered lenders, not individuals. 

When you charge a fee, you are then acting as a registered lender, if you aren't registered, then you are in violation of registration laws. Besides fines, if the note blows up and you go to court to collect your loan could be thrown out, you were acting illegally as a lender.

Now, POF! What is it needed for? To show a seller the green for a cash sale......or to show a lender proof of funds for a down payment and reserves??

Either way, a bogus POF letter is fraud, you are deceiving the seller showing funds that you don't have or can obtain. To a lender, well, providing any misleading information in connection with a loan request is mortgage/bank fraud.....period.

As to the one providing the letter, you become a conspirator to fraud.

If your POF letter contains funds as a loan arrangement, that is then a loan commitment, not the same thing as POF for a lender. A seller might accept the idea that you can borrow the money, if he has a sharp Realtor, or attorney, the seller will know differently.

POFs is YOUR money, not another lender's, not granny's, not your beer drinking buddy's, it's YOUR money!

Lenders do not accept other loans as POF, it's another loan!

If you do the loan as a side agreement, then you're back to mortgage/bank fraud handing that document to an insured lender. 

I fight the "greed bug" everyday, I see "deals" on here where I could step in and fund it or facilitate it, the money isn't the issue, it's the legal aspects that keep me away as well as my ethical dealing. I don't need money from illegal or unethical transactions. 

I suppose there are people with a little money trying to make more and get bitten by the greed bug as they look for ways to transact something they should not be involved with.....it's just greed and the brain telling them to justify it some way. 

As I've said before, the prisons are full of smart people!

Think of our finance laws as an invisible Ft. Knox, you cannot break in, if you did get in you won't get out. You cannot out smart, out wit, out think, or out maneuver finance laws! There is no gray area, you are either across the fence or you are not, you are either compliant or you are not. There are different degrees of being non-compliant, some things you may get your hand slapped, but others will send you on a long vacation. This subject can put you behind bars!

Orange jumpsuit and a close haircut! :)

   

  

Bad idea for all the reasons stated above unless you are providing POF for your own purchase. Providing POF for others without actual intent of lending them the money is dishonest at best. There are just as easy honest ways to make money in RE.

I think its important to remember here that a true POF is your own money in your own account. When someone asks for a "POF" letter from someone else, they are really looking for a pre-approval or loan commitment for a loan. The terms get substituted, but they are different. A true Proof of funds is a bank statement showing cash in an account that belongs to you, which I get with offers on things I'm selling pretty regularly.

I don't have any trouble buying with a pre-approval letter and POF for the lender with decent earnest money and no finance contingency. The sellers just want to know you can/will close for the most part. We didn't have to do those things until the gurus started teaching people to lock up properties they couldn't buy and then go market them and then just walk away if you couldn't sell it.

As bill said, finance is HIGHLY regulated and you wouldn't want to be out there doing business without being set up right.  Realistically, they aren't going to slam you for doing a loan or two unless you shaft someone, but if you make it into any kind of business without doing it right you can definitely get in real trouble.

Originally posted by @Charles Kamen :

As private lenders we would provide POF letters to investors for their offers. Providing the POF gave us access to deal flow as we had first rights to look @ the deals under contract & decide whether we wanted to fund the deal or not. We weren't committed to funding the deals. It's no different than pre-approval letters provided by banks.

Occasionally we'd get calls from the asset managers asking about the POF Some of those calls led to discussions about other property in their inventory, which led to other opportunities.

Initially we didn't charge for the POF, but the number of calls & requests we received became overwhelming so we started to charge a nominal fee fixed fee. It was less than $5.00. We no longer lend or provide POF.

@Crystal Smith  in my lending days we did a lot of these of course.. can't ever recall an asset manager calling us though... could have happened my secretary picked it up or something.  now a days we buy for our own account and I have never been called.

Except with auction.com... being a fairly unsophisticated internet buyer I needed them to walk me through their system... LOL.... they wanted proof of funds as well. I made out cashiers checks for the full amount of the two deals I won made out to them ... and e mailed those in... the guy called me and said no one had ever done that and I need to run that up the flag pole... :) he came back same day and said it was fine.. I suspect though a copy of a bank account not int he buyers name would not work. since it was a cash offer I don't think anything other than proof of cash would have worked.. and I know my guys tell me we are winning deals because we don't have a HML letter and we back up our offers with actual money.. so it seems to be working this summer to our advantage

@Crystal Smith

"Private lending" and "private finance transactions" come out of SEC requirements and not being subject to finance laws, if you're in the business of the activity, you're not a private lender, regardless of what a real estate attorney may think. As I mentioned above, if you're not registered as a HML or lender and you are charging fees as a lender, you're in violation. Carrying on financing related activities for a fee, like providing loan commitments places you under finance regulations. Lending is not really a RE brokerage activity, so don't rely on brokerage services to cross the river into financial services.

Financing is the key to the door in real estate, there are many doors that can be opened from a lending standpoint. :)   

@Charles Kamen , don't be surprised when you get some pleading private messages from now on (if you haven't already). (No, not from me or mine)...

Originally posted by @Jay Hinrichs :

@Crystal Smith  in my lending days we did a lot of these of course.. can't ever recall an asset manager calling us though... could have happened my secretary picked it up or something.  now a days we buy for our own account and I have never been called.

We were surprised the 1st time someone called from a bank to verify that we had provided the POF, but it made sense since someone else was using our bank statement for their deals w/ a letter from us. We, like you, have never rcv'd a call when buying for our own portfolio.

@Bill Gulley

What regulatory agency has jurisdiction for registering HML that you refer to? Federal or State? Only lending my own funds.

In terms of mortgage lending, Massachusetts only requires licensing of mortgage broker, mortgage lender and mortgage originators for owner-occupied residential properties.

Want to be able to charge my points :)

Originally posted by @Phil G. is an HML in that area, she may know the ropes for you. :)

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Get the Ultimate Beginner's Guide

Sign up today to receive the popular eBook for free!