Tuesday, May 15, 2012
Proof of Funds - What is the deal?
It's a warm and beautiful sunny day outside right now but I am itching to write about this topic! As we meander our way through our busy days in our real estate investing lives, we routinely run into people who are very focused on receiving proof of funds (POF) almost immediately, before even creating a relationship when discussing assets they apparently have for sale. Let's examine the purpose of a POF and what the other party claiming to have assets for sale really is accomplishing by requesting this information.
First off, let's be very clear..........real sellers do NOT ask you for a POF immediately before allowing you to examine the asset. What I mean by this is that if the seller has control of the asset, they will never ask you for a proof of funds up front before you have even had an opportunity to see the address of the asset, let alone the financial details concerning the same property. In most cases we are asked to sign a non-circumvent, which is completely fine and that in itself should be sufficient to allow one to make a preliminary examination of the underlying asset and it's economic feasibility for potential purchase. Here's a simple analogy:
You go into the car dealer's showroom to look at a brand new Ford or Honda. You talk to the salesperson and they say, "Oh, you want to look under the hood of that one there? Well...you know that you must provide us with a bank statement showing us that you can afford to buy that car before we allow you to open the hood." What a ridiculous request huh? Just about everyone would be taken aback by such a request or even offended, and that scenario would likely never happen.
It is exactly the same way with the seller of a real estate asset. If they own it or control it, they should have absolutely no problem in allowing any potential purchaser to review, analyze and inspect the asset. If they have a problem with this and are asking for a proof of financial capability up front, then this is the sign of an amateur, not a professional and most likely, they do not control the asset. That means we are almost certainly wasting our time with that person. DON'T WASTE YOUR TIME!!! Time is very valuable and we can't get more of it, so why waste it with someone who is an amateur? In almost 99.9% of these cases, you will either not see anything worth buying or even not see anything to look at!! In the meantime, you have potentially shown your cards by offering the proof of funds.....not a good approach.
The purpose of a POF is to show the seller that you are real and can follow-through with the transaction without having to obtain a loan. With a real seller, POF is never asked for with very rare exceptions, up front. Typically, an LOI may be necessary to obtain all relevant documents to allow a thorough preliminary due diligence to determine the financial viability of an asset. In some cases, an LOI isn't needed either, and an open approach to allowing an asset examination takes place. This is the sign of a professional and real seller. POF is usually required after the execution of a PSA (Purchase and Sale Agreement). At that point, there is absolutely no problem in asking for proof of financial capability and it should be made readily available to the seller upon request.
So, the next time you run into someone asking for POF up front before you have even inspected their "engine", tell them that you will provide them with the POF if they will prove to you that they have provided something worthy of purchase and not junk or nothing at all. They should at least meet you half-way, and if not, then just do the right thing and walk away and save yourself a great deal of wasted time.
Have a productive and amazing week....until next time.