Why You Need A Proof of Funds Letter To Flip A House

As a new but serious fix and flip investor, you may have heard about the importance of obtaining a proof of funds letter (POF) before making an offer on a property.

This often-critical document could easily make the difference when negotiating with sellers and securing your next investment opportunity.

Here’s why you need a POF when making an offer on a potential fix and flip.

What is a proof of funds (POF) letter?

A proof of funds letter is a document that verifies sufficient funds in your account – or someone else’s – to complete a real estate transaction. It serves as evidence to the seller that you can write a check for the sales price quickly if needed.

This is especially important for fix and flip investors — as many distressed properties require cash buyers due to their condition.

Why? Most traditional loan types won’t lend on a property that’s in less-than-optimal condition.

Why do sellers require a proof of funds letter?

Sellers typically require a POF letter for several reasons:

• Financial security: A POF letter provides assurance to the seller that you have the necessary funds to complete the transaction, reducing the risk of financing issues complicating or killing the deal.
• Efficient transactions: Requiring a POF letter helps sellers avoid wasting time with unqualified buyers or unforeseen complications that can arise with conventional lending requirements.
• Competitive advantage: Providing a POF letter as a cash buyer can give you an edge over other buyers who rely on traditional mortgage financing, making your offer more attractive to sellers.

Proof of funds vs preapproval for fix and flip investors

When purchasing a property for flipping purposes, a POF letter is more suitable than a preapproval letter from a mortgage lender. Below we’ll explain why.

Actual funds

A POF letter confirms that you have the necessary funds readily available — either in your account or through a fix and flip lender. On the other hand, a preapproval letter only shows that you’ve been approved for a loan — in theory. Technically, nothing is guaranteed yet.

Experienced fix and flippers know that flipping means not just covering the purchase price. It also means having the closing costs — lawyer fees, taxes, plus some extra for unforeseen expenses — available as well.

This distinction is also crucial for sellers, who prefer the certainty of cash buyers over those relying on mortgage financing.

Property condition

Many fix and flip properties are in “poor condition.” “Water damage” could mean a small stain on a ceiling or a flooded basement; each requires its own timetable and budget to fix.

With traditional mortgage financing, situations like this can get complicated quickly. Therefore, sellers are more likely to accept offers from cash buyers, as they know nervous lenders and strict property requirements will not hinder the transaction.

How to request a proof of funds letter

To request a POF letter, follow the steps below.

Choose a fix and flip lender

Research and select a reputable fix and flip lender that provides POF letters for their clients. Alternatively, if you have sufficient funds in your bank account, many sellers might accept a bank statement as proof of funds.

Submit required documentation

Provide the necessary documentation to your chosen lender, such as personal identification, bank statements, and information about the property you intend to purchase.

Receive your POF letter

Once your lender has reviewed and verified your financial information, they will issue a POF letter for you to submit with your offer.

What will the proof of funds letter say?

A typical POF letter will include the following information:

• Your name or the name of your investing entity
• The amount of funds available for the transaction
• The date of issuance
• Contact information for the lender or financial institution providing the funds
• A statement confirming the availability of funds for the specified transaction
• An authorizing signature or notary seal

Proof of funds letter FAQs

Get a proof of funds letter

By understanding the importance of a POF letter and how to obtain one, you’ll be better prepared to succeed in your fix and flip endeavors.