Ask Cornerstone: How to get proof of funds and close a deal quickly?
I’m confused about at what point I should be looking for a private / hard money lender. I’m looking to buy properties from wholesalers and other sellers. Wholesalers usually want proof of funds (POF) to get into contract on a property. To close the deal quickly, one would ideally need to have all the cash required in the bank. Outside of that, a hard money lender wants to see the deal first before they will give the proof of funds letter. It seems like a Catch 22… the seller wants POF to get into contract, but the lender wants a contract to give POF! Can I eventually develop trust with lenders so they can provide proof of funds instantly? But before that relationship is built, how should I get started?
The first part of your question is in regards to when one should look for a private/hard money lender. Since it is important to know what a lender’s terms are in order to analyze a deal, you should be talking to lenders even before you start looking for the properties to find out their requirements and costs.
Knowing the cost of a loan is a critical factor to getting the Proof of Funds (POF) you require. Unfortunately, there is no such thing as instant proof of funds based on trust. The only type of instant proof of funds is your own hard cash.
So besides having your own cash to entirely fund a deal, the next fastest way is to use a private / hard money lender (HML). No matter how good your relationship is with a HML, he or she won’t give POF based on trust. They give it based on analysis of the property. You won’t get POF if the property is not being purchased at the right price (i.e. there is enough profit projected to reduce risk.)
I generally turn around most of my POF letters to my borrowers in two to eight hours. I’ve analyzed thousands of deals and can do so quickly. That being said; don’t rely on your lender to analyze your deals. You should know how to analyze a property the way a lender looks at a property. It’s critical to know how to do this so you never overpay for an investment. You will develop a great relationship with a lender if you bring him or her deals that make sense because you analyzed all your costs of a project in advance.
When you analyze a potential flip you must have certain information to decide what offer you are going to make:
- After Repair Value (ARV),
- Cost of Repairs,
- Time to complete the job, and
- Financing costs.
Plug those figures into a flip calculator. The Cornerstone Company flip calculator (available here) lets you compare scenarios side by side. Only with above information can you determine what is the maximum price you would be willing to pay for the property in order to make acceptable profit and be relatively certain that the lender will fund the project.
So, it’s not “instant”, but it is pretty quick once you have some practice at analyzing deals.
Final note, HML usually require an agreement to receive POF. (I.e, you can’t just use them for a letter and disappear!) The agreement generally states that if you buy the property you will use the lender that gave you a POF letter to get a loan at pre agreed cost and terms.