When a commercial real estate investor is looking to purchase an income-generating property using any number of creative financing methods, one of the most important keys to their success is their ability to provide an adequate and verifiable proof of funds (POF) both to the seller as the lender. Verification of funds can improve investor credibility with the seller, as well as satisfy the requirement of lenders to know that the borrower has the necessary funds to complete their transaction.
There are a few acceptable ways for lenders and sellers to display POF to close your commercial real estate transaction:
- Bank statements or bank verification
- Brokerage or verification statements
- Escrow account verification
“Bank Verification” This is the most acceptable and widely used method of confirming that investors can complete the proposed deal. As such, the money must be deposited into a bank account and confirmed by bank statements or letter from the banker. This is a “hard” (versus soft) verification method, because the money is deposited into an account in the buyer’s name to serve as proof that the buyer can complete the transaction.
“Brokerage Account Verification” Like bank accounts, brokerage accounts show acceptable means of completing a purchase transaction. Likewise, statements or a letter from the representative of the brokerage firm shall comply with the requirement of proving adequate financial soundness. This is also a “difficult” method.
“Escrow Account Verification” This is the only method that can be a hard or soft proof of the assets required, as the escrow agent simply needs to write a letter of confirmation that the borrower has the necessary assets. finances available to complete the transaction. It becomes difficult when the money is transferred to an escrow waiting for the closing.
Finally, there are companies whose sole purpose is to provide evidence of the financial capacity of Commercial Real Estate Investors to complete their transactions. Many of them provide “Proof of Funds” and Transactional Financing. POF is required at the beginning of the deal and Transactional Financing is for the closing day only. Both methods are a necessary part of the investor arsenal when using creative financing.