I write a lot about raising money from others, especially as a way to get started with multifamily investing even if you don’t have your own cash or good credit.
The challenge is that if you’re raising money, chances are that you don’t have the net worth or liquidity to satisfy a seller’s request for proof of funds. As a syndicator, you don’t already have the funds sitting in a bank account. You’re going to raise it from others and deposit the money into an escrow account for closing. But you don’t have it right now.
This can be a real challenge to get a seller to ratify a contract with you. It’s not uncommon for the broker and/or seller to want see proof of funds. This can be a major problem that you need to know how to address, and many sellers won’t accept your contract, even if you offer an outrageous price.
While showing the seller actual proof of funds would certainly satisfy them, there are other things you can do instead. Here are 3 tips you can follow when you get the request to show proof of funds.
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3 Ways to Handle Requests for Proof of Funds When You Don’t Have Any
Tip #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 a 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 a proof of funds, we’re going to have to move on. I have another 4 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 the seller. This gives you a chance to build rapport, tell them what you’ve done and what you want to do, and share with them 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 a bio of yourself and the investor package for this deal.
Do the best you can to make the seller comfortable with moving forward with you.
If Tip #1 fails and you still want to get into the deal, here are two more tips for you to satisfy the seller’s request for proof of funds.
Tip #2: Demonstrate Intent by Your Investors to Invest
Another thing shy of an actual proof of funds is to offer to the seller letters of intent signed by each of the investors that indicates their interest to invest and the amount they are interested in 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.
To 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.
Tip #3: Get Proof of Funds From One of Your Investors
If Tip #2 doesn’t satisfy this obstinate buyer 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 a proof of funds.
Proof of funds can take different forms: It can be a bank or brokerage statement, or it can be a letter from the investor’s banker or broker. Many times investors prefer the latter because it doesn’t disclose exactly how much they have, but only confirms the amount that you need to show.
A proof of funds statement or letter doesn’t cost the investor anything. It’s not legally binding, and it doesn’t require the investor to invest any money at all. So there is no obligation whatsoever on the part of the investor.
It’s not uncommon for a seller to want to see proof of funds. It’s the BEST way for the seller to stave off the riff-raff from tying his property up for the next 60 days without the ability to actually close. Follow these steps to address the POF issue:
If you follow these tips, you’ll never get stumped by a proof of funds request again.
What strategies have you used when asked for proof of funds that you can’t necessarily provide?
Let’s discuss in the comments section below!