Welcome back to MOR Financial’s REI Blog where we cover all things Real Estate Investing. One of the most consistent problems that I hear about is that people cannot put bids in because they do not have a POF. Now, if you are like me when I first started, there were so many abbreviations that I simply could not keep track of everything. I couldn’t have told you what a POF was if my life depended on it.
POF, or Proof of Funds, is the letter that shows that you have the ability to purchase the house that you are attempting to acquire. You have to have money to make money, right? Well, nowhere does it say that you have to have your own money to make money. That is where the POF comes in.
There are several places you can get a POF from. Some are simple, while others are more complicated. Let’s go over the easy ones first, then we’ll tackle the harder ones.
First, if you have your own money, you can provide your own proof of funds letter. All this really entails is providing a copy of your bank statement (please black out the account number unless specifically asked for it) showing that you have enough money in the bank to make the purchase. It could also be in a self-directed IRA or other brokerage account that you have access to. If you need to bring a couple of them together in order to put together the number that you need, that is usually acceptable. This is the easiest possible way to show proof of funds. Unfortunately, most of us are not in that position when we start rehabbing houses.
Second, if you have someone in your network who is willing to provide the statements, that is almost as good. It doesn’t matter if it is a family member, co-worker, or a gap funder. As long as they are willing to show that you have access to the money, it is accepted. If this person is your business partner then it’s even better since the banks know that the individual putting up the money is directly involved from a business standpoint. A single degree of separation is welcome when it comes to getting the proof of funds.
Third, some hard money lenders will provide you with a letter of credit for you to use. What this says is that they are willing to lend you up to a set amount on a deal by deal basis. They will, of course, have to approve each deal. The letter shows that you have the ability to get the money when needed. The difficult part of this is that you typically need a track record with that lender before they will extend it out to you. If you have done a couple of deals, ask! If you don’t ask, you won’t get. It is really that simple. Of course, if you use a lender’s POF, you should always use them to fund your deal. It is good business practice. This type of letter is one reason that I keep saying that you need to honor what your team brings you and work on having a solid relationship with each of them. Remember, your network is your net worth!
Fourth, and something that has the potential to have problems, you can buy a Proof of Funds letter from various companies. I know of a couple of them but haven’t used them. They typically charge you for a letter that says that you have access to their lines of credit. This is an area of “buyer beware,” though. You need to do due diligence on anyone that you do business with, and this is no exception. Unlike colleagues or someone who is part of your Team, someone who simply sells you a POF letter isn’t necessarily held accountable. I am not saying that they are bad or dishonest, just that they are an unknown factor at first. Like any good business practice, vet the people that you do business with.
This is a business and you need money to do business. Make sure that all of your paperwork is in place and that you know who you are dealing with. One day, when you succeed in this business, you won’t need the POF letter from someone else… your bank account will have enough in it!
If anyone has more questions or wants more one-on-one coaching, don’t hesitate to contact me. This is a passion for me and I truly enjoy sharing what I know with others. Thanks for coming by and getting a bit of the education. Until then, remember that you, too, have that inner warrior that it takes to achieve greatness and success. Feel free to drop me a line at AShotOfBaile [at] gmail.com.
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