Proof of funds when making an offer

Buying & Selling Real Estate
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Proof of funds when making an offer

Ryan Gillis
Real Estate Investor · Carlsbad, CA · Member since 2011 · 2 posts · 1 vote

I have received mixed information on this. I am wondering how you guys are writing your cash offers on REO's and shortsales regarding proof of funds. I'm planning on using a combination of hard money and private investors for gap funds. I have these squared away, but I need to know how people are writing the most successful offers, specifically in California, if possible.

I've heard that some people submit a bank account statement from a "proof of funds person" and depending on who you talk to, add them to the contract or they don't but add a "gift letter" with the bank statement. I have a couple people that I can use for proof of funds in a cash offer, but they would likely be not be interested in signing all the paperwork for each offer we submit and/or follow to close. They would also be leery of any risk involved with being on the offer. The plan would be to deed the property over to our corporation at close.

I've also heard that some investors are writing offers with a clause reserving the right to use hard money and that some are simply telling the bank that they are switching to hard money right before escrow (without having the clause in the offer).

I'm looking for some help to clear this up and get some good feedback on what is working for you guys (again, preferably in CA, but open to hear posters from anywhere).

Thanks!

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y

Hard money is a loan, not cash. If you want to make cash offers, submit a bank statement from the same person or entity making the offer showing funds to close the deal and a check for 10% of the offer. Otherwise just admit its financed and submit a pre-approval letter with your offer.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    For REO deals, the stongest offers are all cash with actual bank statement POF's along with the copy of the EMD check and articles of incorporation. Anything short of that makes teh offer weaker.

    Banks are fullly aware that an all-cash offer without loan contingency, but with a proof of funds letter from a lender is no strnger than an offer with a financing contingency.

    So you must find a way to lock up your deals while using OPM (other people's money.
    Since you intend to use a HML plus gap funding from private investors (whom I assume you will place in second position) you are in a tough position on the POF issue. Minus the HML and you can write your offers in a land trust and show your POF from you funding partner, simply claiming that he/she is one of the beneficiaries of the trust (that is not actually formed until your offer is accepted).

    You can also open a new entity, name your funder as an owner, then use their bank statement along with the articles showing they have ownership in the entity. You would then have to either keep them as a very samll % ownership or have such % sold to you at, before, or right after closing. A hard money lender will not do this though, so having them in the equation makes your job tough.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Hard money is a loan, not cash. If you want to make cash offers, submit a bank statement from the same person or entity making the offer showing funds to close the deal and a check for 10% of the offer. Otherwise just admit its financed and submit a pre-approval letter with your offer.

    4Reply
  • Michael Seeker
    Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    14y

    I've found what Jon said to be very much true. I use HML for flips and I ask the lender for a pre-approval for each property I submit an offer on.

    Eventually I'd like to get in good enough with the lender that he'll no longer need to review the deals but rather state that I'm in good standing and have access to investment funds.

    1Reply
  • Catrina Alexander
    Real Estate Agent · Spring, TX · Member since 2011 · 13 posts · 1 vote
    14y

    Hello everyone,

    I'd like to chime in also...if I could. I'm a Realtor here in Houston, Texas. I submitted an offer on a rehab that I wanted to grab up for a client that's wanting to do Owner Financing on this house. The list price is 69,900 and has been on the market for more than 60 days. The comps have sold for around the list price and the ARV range is between 92k-103k. My offer was for 55k financed with no supporting docs (i.e. POF, bank statement). There's trash in the garage & backyard, fence needs replacing on one side and needs typical updating such as paint, fixtures, carpet, etc. I've talked to a couple HML lenders and they're stating that an accepted offer needs to be submitted to them. Question is, is there a way for me to submit a contract stating it's a cash deal without it actually being a "cash deal". If not, what is the best way to approach something like this...for future reference?

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Catrina,
    If it is not a cash deal, then you can't state it is one, otherwise they will be asking for the proof via POF. If you don't have it, then you need to sumbit your offer as financed, but do not check off the financing contingency. This will help a tad, but not as much as a real cash offer with POF bank statement.

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  • Ryan Gillis
    OP
    Real Estate Investor · Carlsbad, CA · Member since 2011 · 2 posts · 1 vote
    14y

    Thanks for all the feedback so far. It's all been helpful. For a little clarification, the market here in the San Diego area is extremely competitive. REOs are getting 20-30 offers the weekend they hit the market. My understanding is that banks here aren't really accepting anything but strong cash offers with favorable terms.

    Catrina this next part may be helpful to you, but I haven't done it myself and I don't really want to support the ethics of this strategy. I know of investors here that will submit their offer as cash with a separate "proof of funds person" on the offer (including their bank statement), usually vested at 1%. 3 days before escrow, the investor informs the bank that their cash has been tied up in other projects and they will be using hard money to fund the deal, giving them all the information of their HML. Again, I'm not recommending this strategy, but I know of people that have used it many times without fail.

    I would like to find a way (as simple as possible) to ethically write offers that have a chance of being accepted in this competitive market, taking into consideration my need to use hard money and gap funds. If anyone has any other suggestions, I would love to hear them! Again, thanks for the input so far.

    0Reply
  • Mitch Kronowit
    SFR Investor · Orange County, CA · Member since 2009 · 1k+ posts · 1k+ votes
    14y

    Sorry in advance for the tone this post is going to take, but as a buyer who has lost out on homes because of other people's bogus offers that subsequently fell through, I get a little incensed at people making "all cash" offers when they don't have the cash.

    I don't care if Jesus Christ himself promised to give you $1 million in small bills 5 minutes after you lock up a property under contract, if you do not, at the time of the offer, possess and control the full amount of funds to close the transaction, you are NOT making an all cash offer. To say you are is nothing short of deception. How did I make an all cash offer on my last deal? Easy, I had the cash!

    If you are going to finance the purchase, just say so. Have your pre-approval letters ready to present with the offer. I understand it's very competitive out there in certain areas, but submitting inaccurate and misleading offers is not the way to get a leg up on the competition. Stick to solid bona fide offers and you'll eventually close deals. A good track record for completing escrow will carry more weight than some sketchy proof-of-funds letter from a HM lender nobody's ever heard of.

    Now, if you do indeed have the funds and consequentially pursue financing for the deal, that's different. You had the funds to close, but pursued an alternate and completely acceptable route to seal the deal.

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  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    14y

    Cash means cash. That means you could write a check for the entire amount right now. "You" means the person or entity that's listed as the buyer on the contract. Anything less is not cash. Coming up with some BS might work, if you actually manage to close. But if the deal falls through because your "cash" disappeared and you couldn't close, then word will get out that's you're "all cash" offers aren't worth the paper they're written on.

    This a tough business. People who have a bank account full of ready cash have a big advantage over those of us who don't. But that doesn't make it OK to write less-than-truthful offers.

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Ryan Gillis:
    ...
    I would like to find a way (as simple as possible) to ethically write offers that have a chance of being accepted in this competitive market, ....

    Just put a bigger number behind the $ - OK, you didn't want to hear that, but it certainly is "a way".

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    14y
    Originally posted by Ryan Gillis:

    I would like to find a way (as simple as possible) to ethically write offers that have a chance of being accepted in this competitive market, taking into consideration my need to use hard money and gap funds. If anyone has any other suggestions, I would love to hear them! Again, thanks for the input so far.

    There is NO ethical way to submit a cash offer if the buyer (you, in this case) doesn't have the cash at his disposal.

    Just because a lender, friend, family member, other investor, etc says they'll provide funding for the deal (and provides a POF), doesn't mean they will. Lenders go out of business, friends and family change their minds, etc. If you don't have the cash in your bank account (or otherwise liquid), it's not a cash deal.

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  • Yan P.
    Lender · Chicago, IL · Member since 2010 · 84 posts · 23 votes
    14y

    Will Barnard,

    Are there any requirements from the bank to submit offer in the name of the company and forward operating agreement with passive/limited partner's name? Minimum ownership...other considerations I might never learn without doing?

    0Reply
  • Catrina Alexander
    Real Estate Agent · Spring, TX · Member since 2011 · 13 posts · 1 vote
    14y

    You guys...

    Thanks for all of the replies. I definitely want to do the right thing when it comes to offers. I do understand the ethics behind what has being said. I also understand what Ryan and everyone else is stating. Basically, it is going to be difficult for me and other newbies to get deals closed if they do not have cash to back up their offers. CASH IS KING!!! In the meantime, I will implement Will's idea of not checking off the financing contingency and see how it goes. BTW, does anyone know if you get approved for a HML, does the lender give you cash/check to present at closing or how does that work?

    0Reply
  • Ed L.
    Residential Real Estate Agent · Hattiesburg, MS · Member since 2011 · 475 posts · 141 votes
    14y

    I try to keep enough cash on hands to purchase homes under 100k with cash. I submit my offer with pof from my savings bank.

    In order to keep from using my cash I will then establish a secured loc with the subject property as collateral.

    Haven't had any complaints yet. I technically have the cash to purchase and will use it if necessary, but I prefer to use the banks money if possible.

    I don't think the seller cares much as long as they have a guaranteed sell with no financing concerns.

    0Reply
  • Nicholas Kral
    Real Estate Consultant · San Diego, CA · Member since 2012 · 44 posts · 13 votes
    14y

    If you have access to a HELOC (Oh the good old days...) you can use that as POF. If you know a banker well at a smaller/local bank you can have them write a letter saying that you have funds available to purchase a home up to $XXX. That is also an acceptable proof of funds for most banks.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    14y
    Originally posted by Catrina Alexander:
    BTW, does anyone know if you get approved for a HML, does the lender give you cash/check to present at closing or how does that work?

    The lender will generally wire funds to the escrow company/closing attorney prior to the closing.

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  • Catrina Alexander
    Real Estate Agent · Spring, TX · Member since 2011 · 13 posts · 1 vote
    14y

    Ed, Nick and J,

    Thanks sooo much for the responses. I think I got it now. If you couldn't tell, this is my first property that I've submitted an offer on and I'm kinda ignorant in what the process is. With you guys help, I've learned what to do and how to be---ethical. Thanks again for all of your help.....and to Ryan...thanks again for your input and allowing me to hijack your post. I hope you were helped as well.

    Have an awesome day everyone!

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y
    Originally posted by Yan Peters:
    Will Barnard,

    Are there any requirements from the bank to submit offer in the name of the company and forward operating agreement with passive/limited partner's name? Minimum ownership...other considerations I might never learn without doing?

    Requirements? No, when submitting an offer in the name of an entity, you will only be required to submit the articles of incorporation, not the operating agreement itself. If you are using a funding partner for your POF, and the bank statement has his/her name on it which is different from the entity name, then you will likely be asked for a corporate resolution stating that the name of the person with the funds is an owner/member of the entity and has the right to release funds fro the purchase of RE on behalf of the entity.
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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    To add to Will's post, I have seen a few REO listings where they request to see a corporate resolution authorizing the offer to purchase that is being made. That of course is in addition to the other stuff already mentioned when buying with an entity.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    14y

    And one more addition to Will's post -- you will likely be asked by the closing attorney for the Operating Agreement at some point. They'll want to verify that whomever is signing the closing paperwork has corporate authority to do so.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y
    Originally posted by J Scott:
    And one more addition to Will's post -- you will likely be asked by the closing attorney for the Operating Agreement at some point. They'll want to verify that whomever is signing the closing paperwork has corporate authority to do so.
    J, I have yet to be asked for my operating agreement, what they do ask for often is what Steve mentioned, a corporate resolution stating you as the signer have the authority and right to sign on behalf of the entity.
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  • Tom A.
    Investor · West Bloomfield, MI · Member since 2009 · 358 posts · 306 votes
    14y

    There's a few shades of gray between "cash" and "finance". I asked a couple high-volume REO listing agents how they wanted to see offers submitted that were from investors with private funding. Both said to call them "cash" and include a "gift" letter in addition to the funder's POF, explaining the situation, i.e. that the funding wasn't conditional on typical underwriting and the buyer and lender had a track record of performing.

    While an offer like this isn’t as strong as a pure cash offer where the buyer has the cash in their account, it can be a lot closer to cash than to financing. A standard financing deal can blow up for a host of underwriting reasons – FICO slips below the threshold before closing because the buyer just purchased their new furniture, borrower loses their job, interest rates go up and borrower can’t afford the higher payment, the house doesn’t appraise, the borrower’s house doesn’t sell on schedule, some aspect of the borrower’s app can’t be documented, etc.

    On the other hand, most private lender-funded deals I’ve seen aren’t dependent on anything except the deal closing. To be sure, if the private lender abruptly changes his mind, or dies, the deal is in jeopardy. I haven’t seen that happen however, because the buyers have had a solid relationship with their private lender. They reviewed the deal before making the offer and the lender bought into the deal at the time the offer was made.

    Even a true cash deal isn’t 100% guaranteed. Just as a private lender could change their mind, or die, so could a cash buyer. Of course, with a private lender involved there’s two people who could die or whose minds could change. That’s inherently riskier to the seller than a straight cash deal, but with a solid relationship between the lender and the buyer, IMO it’s a lot closer to a typical cash deal than a typical finance deal. The key is for the buyer's agent to clearly explain the situation so that the seller's agent and the seller accurately understand the risk or lack of risk inherent in the private lender's financing.

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  • J ScottPro Member
    Moderator
    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    14y
    Originally posted by Tom A.:

    On the other hand, most private lender-funded deals I’ve seen aren’t dependent on anything except the deal closing.

    In theory, perhaps. But, in real life, most private lenders and HMLs won't evaluate the deal until it's under contract, which means at the point the offer is submitted, the lender hasn't committed to anything. Until it goes through underwriting (or at least some sort of scrutiny) with the lender, a letter is just a promise to *consider* lending on the deal, not a guarantee.

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  • Tom A.
    Investor · West Bloomfield, MI · Member since 2009 · 358 posts · 306 votes
    14y
    Originally posted by J Scott:
    Originally posted by Tom A.:

    On the other hand, most private lender-funded deals I’ve seen aren’t dependent on anything except the deal closing.

    In theory, perhaps. But, in real life, most private lenders and HMLs won't evaluate the deal until it's under contract, which means at the point the offer is submitted, the lender hasn't committed to anything. Until it goes through underwriting (or at least some sort of scrutiny) with the lender, a letter is just a promise to *consider* lending on the deal, not a guarantee.


    I wasn't speaking theoretically, I was speaking based on my real life experience. Of course, that may be different than your real life experience.

    Thanks for bringing up your point, I don't want people to think it's always the way I describe. What you're describing may be the predominate scenario, it certainly is between investors and lenders that don't really know each other or haven't done business together before.

    But in my circles, investors and their private lenders typically have extensive pre-existing relationships. The lenders understand the investors' purchase criteria and the investors understand their lenders' criteria. The investors know when their lenders do or don't have funds available. A phone call from investor to lender is made before the offer to make sure all are on the same page and to discuss timing and logistics. They act more as partners than as arms-length parties. In many cases the lenders are investors themselves. We travel in the same circles, it's actually a really nice way to do business.

    One thing I forgot to mention in my earlier post was that the offers are usually no-contingencies with a 7 or 10 day closing. That reduces the seller's perceived risk since they won't have to wait long to know if the private-lender-funded "Cash" offer closes or not. That also helps make it closer to cash on the cash-financing spectrum.

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Tom A brings up a good point, IF you can work closely with private lenders and HML's in the fashion he describes, you can certainly make your financing offer much stronger than others, but again, you should not be stating it is all cash, it is not.

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  • J ScottPro Member
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    Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
    14y
    Originally posted by Tom A.:

    But in my circles, investors and their private lenders typically have extensive pre-existing relationships.

    That's a great point, Tom...

    If you're an experience rehabber and have a good, long-term relationship with your lender, you're absolutely correct that there's probably near 100% chance that your funding will come through. I completely ignored this scenario in my posts, but that's definitely true.

    My response was more tailored towards those who have to ask the question about proof of funds -- they generally haven't done a deal before, don't have an existing relationship with a lender and there's probably a good chance their funding won't come through, for a variety of reasons.

    Anyone who has that pre-existing relationship with a lender probably doesn't need the wisdom in this thread, but you're 100% correct that those people are in a different category than those I was responding to.

    Thanks for setting me straight!

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