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Paying Cash for a Property and Proof of Funds - Guides for Buyers and Sellers



Cash Purchase of a Property


Index to Sections in this Article
Guide for Buyers
What 'Cash' is NOT
Amass Your Cash
Suggested Steps for Preparing a Proof of Funds (POF) Letter
Ways to Sweeten the Cash Deal
FAQ's about Proof of Funds
What Are the Advantages to Buying a Property With Cash?
Proof of Funds for a Short Sale Offer
Proof of Funds for a REO Sale Offer
Comments/Suggestions by Other Agents about POF Letters
Sample Proof of Funds (POF) Letters
Guide for Sellers

 

Guide for Buyers

If you are a property buyer and/or investor, and have determined that paying cash for a property is your best option; or, if you are dealing with properties which a mortgage is not obtainable because of condition, lack of credit or it's under $50,000 -- which is the cutoff for most mortgage lenders under which they will not lend due to a lack of cost effectiveness -- paying cash may be your only option.

When paying in cash (and in lieu of a mortgage lender's Pre-Approval Letter) the seller will want proof of funds.  Proof of funds is just showing where the money is at or is coming from.  ”Proof of funds” could be one or more of the following:

  • a bank statement(s),
  • a mutual fund statement (if it indicates cash available for quick withdrawal),
  • a letter from the bank/institution stating you have a specific amount of money with them as of a specific date.


You might ask, "​Why?  Don't they trust the buyer?"  And the answer is "No, they don't !".  We live in a digital society that says show me the money.​

Continue reading to learn the best ways to "show them the money" when placing a cash offer.





The Cash Buyer and What 'Cash' is NOT

In simple terms, a cash buyer is a person or entity who has cash on hand to close. There is no loan involved, no mortgage -- just cash.

Many buyers may consider themselves to be a cash buyer but they actually are not. These are buyers who are:

  • In the process of selling stocks or mutual funds
  • Holding a certificate of deposit that has not yet matured
  • Borrowing money from a relative
  • Refinancing a personal residence to raise the cash
  • Waiting for a probate court to distribute assets
  • Borrowing against securities
  • Liquidating funds from a retirement account
  • Obtaining a mortgage secured to the property they are buying

In other words, if the money is not liquid (i.e., if not readily available), then the buyer is not a cash buyer. ​The buyer is just a person making an offer that is contingent on another set of circumstances happening.

Sometimes buyers who are obtaining hard money loans present offers as cash when they are not cash. That kind of behavior is considered deceptive at minimum, and possibly violates contract law.

 

NOTE:  You will need to work on obtaining a Proof of Funds Letter or equivalent documentation BEFORE searching for properties as you will NOT be able to make a serious offer to a seller without it, epecially if it involves a bank or similar institution. (For example, see below for details about bank requirements for short sales and REO properties.)



House for Cash


Amass Your Cash

Amass Your CashYou can use cash from various sources to buy a house, including personal savings, cash gifts and inherited money. If you plan to use the proceeds from securities or another real estate sale, liquidate those assets before you enter into a sales contract to buy the house. (For cash offers, you don't need to show in your bank account seasoned funds (i.e., basically funds that have been in your account for at least 60 days), which is a requirement for a home mortgage loan. You should have all the cash you need on hand when you sit down with your real estate agent to write up an offer.


If you don't yet have the necessary cash, Figure out how to pay in cash

Buying your property with cash might seem like an impossible dream. Here are some tips to help you achieve it:

  • Set aside unexpected windfalls, such as work bonuses or inheritances.
  • Lock money in a long-term CD to earn interest.
  • Once you have accrued cash, look for a house you can afford without borrowing extra money.
  • Consider moving to a less populated area, further from a big city, where home prices are likely to be lower.
  • Avoid the temptation to waste money. Tell your friends and family about your goal of buying a home; they will help keep your spending on track.



 

Suggested Steps for Preparing a Proof of Funds Letter

A top concern for sellers is whether the buyer that they go into contract with will be able to close. One of the best ways to ensure that a transaction makes it to closing is to deal with an all-cash buyer who doesn't have to wait for the approval of a lender. But sellers still may be left wondering if their all-cash buyers actually have the money that they claim to have. Buyers can prove their ability to pay with a proof of funds letter.   Just follow these steps:

1. Contact your bank and let them know that you're about to begin the process of making offers on various properties. Ask a bank representative to transfer certain funds into liquid accounts that you can access quickly.   (Ideally, you should open an account with the funds intended for cash offers. Again, ensure that the account will enable the funds to be quickly liquidated.)
 
2. Request that the bank issue a proof of funds letter that you can use with offers. The letter must be written on bank letterhead, be signed by a bank official, and state how much money you have available in your accounts with the institution.   (Proof of funds (POF) letters come in many different types, but a "verification of deposit" (VOD) letter should be more than adequate. Verification of deposit letters usually contain information such as the balance at the time of the letter, an average balance and an account number.  [see Sample POF Letters below])
 
3. Attach your proof of funds letter to your offer document so that the seller immediately sees that you're qualified to buy his property.

4. Include a few months worth of bank statements showing that you have enough money to buy the property with your offer. (i.e., Obtain three recent bank statements that show your available cash to meet or exceed the offers, and including closing costs, contingencies, etc. ) This will distinguish you from the buyers who claim that they're "all cash" but are using a line of credit or non-traditional financing source and, in certain cases, got their proof of funds letter through a website. When you attach your statements, black out your account numbers.



 

Ways to Sweeten the Cash Deal

The seller gets cash at closing, whether you pay in cash or use a home loan. Therefore, some sellers may not be persuaded by the less-complicated cash offer unless you sweeten the deal.

If the house is new or recently constructed, you might consider removing the home inspection contingency from the contract and conducting a home inspection for information purposes only.

If the house you are buying in cash is vacant, consider proposing a close-in closing date -- 10 business days or less. This is possible in the absence of the home loan underwriting process, which takes time.


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Frequently Asked Questions (FAQs) About Proof of Funds

What are Acceptablel Ways to Show Proof of Funds?

When you plan to buy a home with cash you need to show proof of funds to the seller, and there are several ways you can do that.

When you’re buying a house for cash you’ll be asked to show proof of funds, in order to make sure you can pay for the home, and there are some specific ways that agents want you to do that. Your proof of funds is very important, because it can affect whether you’re able to get under contract on the house you really love. Talk to your agent and be up front about how you plan to pay for the home. Then you can get information from them that helps guide you toward the right way to show your proof of funds. When you do that, it will give you the opportunity to provide the right proof the first time, so you can make your offer and send it to the seller in the hopes that it will be accepted.  

Why do you need proof of funds?

You need proof of funds when you make a cash offer on a house, to show that you can actually purchase the home you want to buy. Just like most real estate agents won’t accept an offer on a home without a preapproval letter from the bank when you’re getting a mortgage, they generally won’t take a cash offer unless you can prove that you have the cash. Essentially, that serves the same purpose as the preapproval letter and indicates that you’ll be likely to honor your offer and complete the purchase of the house. The seller will be more likely to accept your offer if you have proof of funds, as well, so that means you have a higher chance of getting the house.

What kinds of sales require this proof?

If you’re buying a home and getting a mortgage, you don’t need to provide proof of funds. You’ll just need to put down your earnest money and give your agent your preapproval letter. Then the offer will go to the seller and the negotiation can begin. The only kind of sale that generally requires proof of funds is a cash sale. Because you won’t be getting a mortgage, you need to make sure that the seller knows you have the money to buy the house. In many cases, your agent may not even be willing to present your offer if you won’t provide proof of funds for a cash sale.      

Can you bring in your bank statements?

Before you make a cash offer, be sure you talk to your agent about how they need to see proof of funds and how soon they will need that proof, so you don’t end up losing a home you really want due to a paperwork problem. You generally can’t just come in with your bank statement from last month, showing that you have the money. There’s no proof that the money is still in the bank as of the day you bring in the letter. You might have spent all or part of it since your last statement, so your agent won’t likely accept that. Instead, you can get a printout from your bank on its letterhead, dated that day, that shows your current balance. By doing that, you’re showing that the money is available to you on the day you make your offer.

What if the money is in another type of account?

The money you plan on using to buy your house may be in another type of account, such as savings, or an investment. If the investment is something you can cash out quickly, a statement with the current date and the amount and letterhead, just like you would need from your bank, may be sufficient. If the money is in an account that takes time to pull funds from, you may need to move those funds before making your offer. Your real estate agent can give you that information, and it’s important to ask about that before you find a house to buy, if you think you may need to move money around. Since that can take some time, you don’t want to be caught without a good proof of funds when the perfect house shows up.

Before you make a cash offer, be sure you talk to your agent about how they need to see proof of funds and how soon they will need that proof, so you don’t end up losing a home you really want due to a paperwork problem.





What Are the Advantages to Buying a Property With Cash?

Buying a home or other property with cash has definite advantages in today’s market.    National Association of Realtors® (NAR) lists the following advantages of paying cash for a property:

If you can afford to buy up front, the advantages are many:

  • Sellers are likely to favor buyers who can pay in cash.
  • The home price may be reduced for those who pay in full up front.
  • All-cash purchases streamline the home-buying process: No loans means less paperwork and no delays for mortgage approval.
  • Cash buyers can save money (and time) on closing costs, bank appraisals, mortgage applications and fees, title insurance, and so on.
  • Cash purchases avoid the risk of low appraisals
  • Cash purchases eliminate the risk of loan denial.
  • Cash buyers pay much less for their homes in the long run: No loans means no interest.
  • Cash buyers never have to worry about losing their homes because they can’t afford to repay their mortgage loans. (Peace of mind is priceless.)
  • Cash buyers gain full, immediate equity in their home.  (In case of emergency, they can draw on that equity for quick cash.)

Financially and emotionally, paying with cash benefits the home buyer.

 

See also: Comments Posted by Other Agents regarding Cash Proof of Funds

 

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Proof of Funds for a Short Sale Offer

Offers on short sale properties involve much of the same documentation as traditional, non-distressed home sales. A short sale requires approval from the seller's mortgage lender, as sale proceeds fall short of paying off the seller's mortgage debt. Buyers provide proof of funds to verify sufficient money on hand to buy the home should the lender approve the short sale. Buyers may need to update proof of funds periodically due to protracted short sale approval times.

Show Me The Money

Show Me the Money!

Buyers may place all-cash offers or finance the purchase price of a short sale with a home loan. The seller, the listing agent, the lender approving the short sale, or a combination of these entities may request that the buyer provide evidence of liquid assets with the offer or within a certain timeframe after offer acceptance. The buyer must demonstrate readily available funds sufficient to cover the purchase price and closing costs in the case of an all-cash buyer. The down payment plus closing costs is usually required in the case of a financed buyer. The amount of funds required may vary, but ultimately demonstrates that the buyer is ready and able to follow through with the purchase.

Forms of Verification

Lenders and sellers may vary in their standards for proof of funds documentation, but, generally, the buyer must supply a current form showing the amount of money, the place where it is held, and verification that it belongs to him. A loan officer from the buyer's mortgage lending company or a representative from the buyer's banking institution may provide a letter certifying he has verified funds. In many cases, the seller, the listing agent or the seller's lender may request actual bank or money market account statements for their own review. A buyer may conceal Social Security numbers, account numbers, or other sensitive information on these documents to protect his privacy.

Staying Up to Date

The short sale approval process may last several months to more than one year, in some cases. As a result, the buyer may have to update proof of funds periodically to reassure the seller's lender that he still has the money to buy the home or to bring the lender's file current. The lag time between document submission and short sale lender review may range from weeks to months, which means monthly or quarterly statements may become outdated. Buyers can help expedite the short sale process by keeping their most recent proof of funds on hand and ready to submit to the lender if requested.

Proof of Funds Possibilities

In the event that a seller has more than one mortgage debt, the buyer may have to submit two sets of proof of funds -- one for each lender. Lenders work independently and usually at different paces when processing short sales, even when dealing with the same property. Additionally, lenders may request different forms of proof. A short sale buyer must be prepared to offer various forms of proof in an expeditious manner during the short sale transaction.



 

REO Sales Offers

For REO deals, the stongest offers are all cash with actual bank statement Proof of Funds (POF's) along with the copy of the EMD (Earnest Money Deposit) check and articles of incorporation (if operating as a business entity). Anything short of that makes the offer weaker.

See "How to Buy a REO or Foreclosure Property" for additional information.

See also our article, Investing in Residential Real Estate, which includes information about buying HUD properties, etc.

Contact us to request our help wth writing effective offers on bank-owned listings.
 

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Comments - Posted by Other Agents on Various Real Estate Forums on the Internet regarding Proof of Funds...


Here are some sample comments (in italics) posted by agents on Trulia, Zillow, Activerain and Realtor.com so you can get a feel for the variation in agent views on this topic and some added comments by us (in blue):

Have your Agent add a clause to the sales contract that states buyer will provide proof of down payment with in 24 hrs. after sellers acceptance of offer or contract is null and void and deposit returned to buyer. (or language Agent deems appropriate)

If you are in a multiple offer situation, esp. with other cash buyer(s) who provided proof of funds or have good credit and a mortgage pre-approval, they may make a decision to accept the offer from another cash or mortgage buyer as your funds will be considered unsecured at best and seller may not want to run the risk of loosing qualified, fully funded buyers.

Simply put the words, "Highest and Best" on the contract to show the seller that although you have more money, this is the most you will offer.  

This means that when another offer(s) comes in for the same property, yours may not receive the opportunity to participate in another round of offers (even though a relatively minor increase in your offer amount could clinch the sale).

Though some real estate agents will tell you to include your current Proof of Funds letter along with your offer letter, this could show the seller that you may be able to pay a higher price than the offer. Instead, make the provision of providing the proof of funds after your offer is accepted.

If you are concerned about showing bank statements with balances higher than the offering price, because of concern that seller will be tempted to ask for more because he knows you can pay it; here are some Realtor responses:

In our area a seller won't even consider an offer without proof of funds.  As far as the listing agent seeing the balance of your account and thinking you'll pay more because you have it in the bank, that's insulting.  They don't know what other financial obligations you have for that money.  You should pay at or around the true market value (hopefully a little below) and that is that.  Do you think that Donald Trump is over charged for real estate because he's a billionaire?  You are right, getting a statement each time you make in offer is silly.  Adding special wording like another agent mentioned is just game playing, and can annoy the seller at best.  Make your offer based on the market value of the home and you'll be fine

In my view, it is not necessary to have a statement balance which is equal to the bid. In fact if the balance is larger than the bid you appear as a very solid candidate.  The balance of many  investors cash buyers often far exceeds the bid yet they tend to argue the price down the most.

If necessary, your agent can easily explain that the excess balance is to cover new landscaping,  remodeling or similar new work.

As with any purchase, you should be ready to walk away from the purchase if the seller makes unreasonable demands.

If you are still concenred about overstating your funds, then here is another option suggested:

Yes, you will need to provide proof of funds. You might consider opening a separate account with the amount of $$ you want the seller to be aware you have.


Re: Proof of funds - If a cash offer is submitted, you must include proof of funds to close. This can be a bank statement, a letter from the buyer’s bank, an investment account statement, etc. Please cross out the account numbers, we as listing broker’s don’t want to see them, and prefer not to have them—protect your financial privacy at all times!  If you submit a cash offer without proof of funds, it is not considered an offer, and will not go to the seller.

See above Guide for Buyers for details on how to properly provide proof of funds.


Proof of funds is so important with an all cash offer.  It shows the Sellers that the Buyer DOES have the ability to proceed to close.  They DO HAVE FUNDS AVAILABLE!  Most sellers will either reject the offer sans Proof of Funds -- OR -- they may counter the offer with a provision that the Buyer PROVIDE the Proof of Funds within 24 hours -- OR -- they may accept another offer from another Buyer who HAS proven their ability to CLOSE ESCROW.

See above Guide for Buyers for details on how to properly provide proof of funds. 


From what I understand, the agent is asking you to provide proof of how you are going to purchase a property, correct? If you are looking to go conventional then you would need a pre-approval letter, if you are looking for private financing than you would need proof of the money that they are lending you, if you have the cash yourself to pay for the property than you could show a bank statement. How do you intend to purchase the investment property? Have you looked into getting pre-approved for a mortgage? Getting pre-approved is the first step if you don't have all the cash. If using a private lender than it is a good idea to find one before you start looking.

See above Guide for Buyers for details on how to properly provide proof of funds.





Sample Proof of Funds (POF) Letters

Here a sample Proof of Funds Letter provided by a mortgage broker:

I am a mortgage broker in Florida. Proof of funds and pre-approval are two seperate animals. Proof of Funds is a document created by a third party that states you have funds available on hand or at least access to said funds sufficient to complete a transaction. Pre-approval is a statement prepared by a Broker or lender stating that you qualify to borrow money from a lender and that if all information stays the same the lender will lend the buyer money secured by the property to complete the transaction. If you are an investor you never want to incur personal liability as comes with a conventional mortgage. It is much cheaper to establish a working relationship with an investment minded firm who is willing to provide you with a line of credit and Proof of Funds letter based on that credit which is totally independent of your credit history and solely based on the investment. they general charge what a mortgage broker would charge you and you don't have to beg to borrow the money to invest. If the property is bought correctly the property will serve as temporary guarantee the Investment firm will get the line of credit funds back plus the fees they charge for making you the short term loan. They provide a Proof of funds letter that states you have the funds available on hand to "fund" the transaction and that is provided to either the closing agency, the bank or the
Seller like the sample:


SAMPLE PROOF OF FUNDS LETTER
[Bank's Letterhead must be used here]
To:
Copy:
________________

Dear Sirs, Date

Subject: Proof of Funds Letter

We confirm, that _____________________ [Name of Company / Individual] has available the sum of _________________ USD in our bank as of this date.

We confirm that these funds are fully free of any liens, debts and/or encumbrances and are clean, clear and non-criminal origin and are available in the form of _______________________________.
________________________________________

We need the following information about two authorized contact persons at the guarantor bank.  [or "Here is the contact information for two..."]

      NAME                        TITLE                        PHONE #      FAX #
1. ____________________ ___________________ ___-_________ ___-_________
2. ____________________ ___________________ ___-_________ ___-_________
________________________________________

Should you require verification of the above mentioned funds, please, contact us at your convenience.

Yours truly,
_________________            _________________
Authorized Officer        Authorized Officer
_________________           _________________
Date                                Date

 


Here is another Sample POF Letter that uses the term: Asset Verification Letter

Sample POF or Asset Verification Letter

 

 
See also: Sample Proof of Funds Letter templates that can be downloaded for free.

 

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Guide for Sellers

CAUTION:  If you are a seller, here are things to watch when selling a house for cash:

Receiving cash for the sale of a home is a homeowner's dream.

It is possible to sell a home for cash and make a large profit. Many investors pay cash for every home they buy. It is also possible to get scammed. Scam artists are becoming savvier when it comes to defrauding honest sellers out of their hard-earned money. Some of their strategies are obvious, but others are more subtle and difficult to detect. Most do it from a distance, so that they aren’t anywhere near the fallout when it occurs. Learn their tactics to ensure you sell your home to an honest buyer.

In virtually all cases of fraud where a home was paid for in cash, the buyer rendered a check. The seller or real estate professional accepted and deposited the check. The buyer changed his mind and asked for a refund. The seller or real estate professional (upon written request/approval by the seller) refunded the amount of the check. Later, the buyer’s check did not clear the bank, and the seller was out the entire amount. The lesson learned is to never refund cash for a check until the check clears the bank.

Since, as we just stated, proof of funds verifications are often utilized in fraud; Make sure your buyer provides enough information to allow you to run a background check on the buyer and verify that the buyer is making a legitimate offer.

In addition to the above caution statements, Sellers should also be aware of what other sellers, especially banks, consider as valid  proof of funds.  (These are addressed in the "Guide for Buyers" section.)

Obviously, to minimze risk, the best all-around protection is to be using licensed,  real estate professionals to help with bringing your real estate sales transaction to the widest possible market (insuring the highest selling price) and utimately to a successful close.


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References:

This article includes a compilation of excerpts from various sources. For example:


https://www.thebalance.com/why-sellers-demand-proof-of-funds-from-a-buyer-1798438
http://budgeting.thenest.com/make-cash-offer-house-27657.html
http://homeguides.sfgate.com/show-proof-funds-buy-house-cash-35669.html
http://homeguides.sfgate.com/proof-funds-short-sale-offer-94723.html
http://www.realtor.com/news/ask-a-realtor/how-do-we-provide-proof-of-funds-on-a-cash-offer/
http://tampamoves.com/buy/financing/urgency-prequalification/proof-funds/
http://budgeting.thenest.com/show-proof-funds-buy-house-cash-27790.html
http://www.movoto.com/foundation/real-estate-concepts/proof-funds-acceptable-ways-show/
http://homeguides.sfgate.com/things-watch-selling-house-cash-7279.html
https://www.biggerpockets.com/forums/311/topics/73010-proof-of-funds-when-making-an-offer
https://www.biggerpockets.com/forums/22/topics/141769-free-proof-of-funds-letter
http://www.realtor.com/advice/buy/advantages-to-buying-a-home-with-cash/


In addition it includes sample comments that were posted on Trulia, Zillow, Activerain and Realtor.com

 

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