Private Money and Proof of Funds

11 Replies

Dear BiggerPockets community,


Presently I've been financing flips/rehabs through a secured line of credit.

The current lending agreement allows me to borrow up to around $325,000 and my bank will allow me to use this money to finance the purchase/rehab of 2x houses at a time.

One of the advantages of having this arrangement with my bank is that I can quickly get POF letters. This has been extremely important because the competition for REOs has been fierce, and because it generally takes many offers to get one accepted.

It's worked out quite well, but I'd like to begin exploring private money (read: friends/family) in order to scale my business.

I have a couple concerns, however.

I'm concerned that a line of credit from a private money lender wouldn't be considered a "cash offer". 

I'm assuming that the seller (bank) wouldn't accept a POF letter from a private money lender himself/herself?

If not, will banks accept POF letters from a private money lender's bank IF I'm offering cash for the property? If so, I'm concerned about timing. If I have to ask my private money lender for a POF letter from his/her bank it's probably going to take a day or two at least. My private money lender isn't a professional lender, so I don't want to "harass" him for a POF letter everyday (since it takes 8-10 offers to get one accepted).

I've also considered negotiating a more traditional business loan. This way I can just use my current arrangement with my bank to obtain POF letters quickly. The problem here, however, is that I'll have to start paying interest before I have a deal lined up-- which isn't the biggest problem in the world, but I'd like to avoid it if possible.

Anyone have any thoughts?

Thanks,
Patrick 

@Patrick M. You may want to consider making your offers cash or finance & submit both the cash & private lender POF. The POF from your private lender should be good for 30 days & clearly state that the funds are for you or your company to purchase properties. You're offer also shouldn't be contingent on the private $.

@Crystal Smith  

 So you're proposing I submit 2x concurrent offers?

One for cash only and one with private money financing?

How can I submit an offer for private money financing and NOT make it contingent on the getting the loan? I really feel like these banks won't go for that. 

Thanks for your reply. 

@Patrick M.

I would recommend you not make two offers but make one offer with both lines of credit. 

Pro Tip: Since the bank POF letter will be "stronger" than the private ones you can get... as you raise private funds use them first. Try NEVER to close with bank funds. Keep the LOC open just to get offers accepted, the seller wont care where the funds come from on the day of settlement.

Something MIGHT come up and you will have to use the bank LOC to close, but pay it off quickly with private funds to free up the line and make strong offers once again... Make sense? Was this helpful? Please "vote" if yes.

@Judah Hoover

 I think that's a solid option. The issue I guess, is that it doesn't necessarily allow me to use all the capital I have access to, because as soon as I use the line of credit from the bank, I'm stuck again. The other problem is I'm only paying 5% interest on the bank loan (no points, small admin fee ~$600). Private money lenders will probably want at least 6% (probably more like 8%). 

Thanks for your reply. 

Originally posted by @Patrick M. :

@Crystal Smith 

 So you're proposing I submit 2x concurrent offers?

One for cash only and one with private money financing?

How can I submit an offer for private money financing and NOT make it contingent on the getting the loan? I really feel like these banks won't go for that. 

Thanks for your reply. 

 NO.  It's one offer where you show all the sources that you have to close the deal including cash, private money, Lines of Credit, Self Directed IRAs....  .    The objective is to provide evidence that you're a strong buyer & can close w/ cash or finance.    

You can submit an offer not contingent on financing because your Proof of Funds will also show you have the cash to close.  You can add an addendum to your offer that clearly lays out that you've been approved for private money but you're offer's not contingent on it as evidenced by the cash portion of your Proof of Funds.  

Please note:  We're not speculating on this.  We've done it.  

@Crystal Smith  

I see what you're saying.

I posed the question because I already have my secured line of credit deployed. Hence wanting to find private money to keep buying REOs while I wait for another flip to sell. In my current circumstance, I won't be able to "offer cash" from my line of credit until I sell a house. I guess I need to find a way to bridge the short term financing "gap" and find solutions for the long-term problem (and I think you've suggested a decent solution).

Thanks.

@Patrick M. Something you may want to consider. Find a private money person that will provide you w/ a letter stating that the attached Cash Proof of Funds is a commitment to fund your deal. Their phone number, email & physical address should be on the Proof of Funds so the asset manager can contact them to make sure it's not a phony POF. You have nothing to loose in trying this until you've freed up you're Line of Credit from your flip.

@Patrick M. Keep making offers the way you've been making them. At closing, you can use private money or the LOC, doesn't matter which as long as the money makes it to escrow/title/closing attorney in time.

Use your private lenders to pay down your line, thereby freeing it up to purchase more properties. It'll be much easier to use their money in this capacity than worry about weaker offers or bothering private lenders with providing you POF's. Most private lenders want things easy and simple and might balk at a POF letter. If a private lender can fund a deal after you've put it in contract using the bank's POF letter, great. If not, just use their money to pay down your LOC, give them a deed of trust on the appropriate property and call it a day. Rinse and repeat as many times as you want or are able to.

My strategy is to use my personal funds for POF when submitting the initial offer (in your case use your Bank LOC as POF will serve the same purpose); in my experience once the POF is generated, it is typically good for 60-90 days depending on the type of R.E transaction(Short, REO etc). Now, when your no contingency offer is accepted, you have the 2 option- have the Private money funds deposited into your account for use in the settlement, or you can have the Private investor wire the funds directly to the closing attorney's escrow account. Either way works, as it has been stated before, the seller typically doesn't discriminate where the cash funds are coming from at closing.

R,

Des