What Does Proof of Funds Mean in Real Estate?

Key Takeaways

• In real estate, proof of funds (POF) is a document that shows the amount of money a potential buyer or entity has on hand for the down payment, escrow, and closing costs.

• In most cases, proof of funds must mean cash or some other liquid capital, and investments such as mutual fund accounts, retirement accounts, and life insurance are ineligible.

• Some of the documents one can submit as POF can include bank statements, security statements, investment account statements, bank letters confirming fund availability, and bank-issued balance certificates.

Real estate investors and those seeking to enter the market will at some point come across the term “proof of funds,” which is often key to property procurement. In fact, without such proof, securing the real estate may not even be possible. So, what does proof of funds mean in real estate? That, and more, are covered below.

What is Proof of Funds?

In real estate, proof of funds (POF) is a document that shows the amount of money a potential buyer or entity has on hand. Such a document may be needed when buying the property to demonstrate to the seller, or lender, that funds are available to cover the down payment, in addition to escrow and closing costs.

Provision of a POF ensures that the purchaser has the means to complete the transaction, as well as legal access to the funds. Such funds must derive from a verified authority, such as a banking institution.

In most cases, proof of funds must mean cash or some other liquid capital. Investments such as mutual fund accounts, retirement accounts, another individual’s bank account, shares, proof of possessions, bonds, and life insurance are ineligible for POF.   

Why Do You Need Proof of Funds?

Proof of funds shows the ability to pay for large purchases such as a house, where it may be required for loan applications. When buying a house with cash, a POF may be needed to prove the funds are there. Such a document may also be necessary when making a down payment in cash.

In addition, proof of funds may be required for investment opportunities. Investors may have to show their financial capacity when taking positions in certain opportunities including business purchases or private placements.

Further, those seeking a loan may have to provide the lender with proof of their ability to make payments or pay closing expenses. 

Other possible uses of POF documentation include:

• Business transactions. Proof of funds documentation may also be needed for business transactions such as mergers, partnerships, or acquisitions.
• Immigration applications. Applicants may have to show immigration authorities that they have the wherewithal to sustain themselves when moving to a new country or during their stay.
• Establishing a trust. Creation of a trust account could require demonstrating proof of funds for the initial funding, or that the creator has the ongoing financial capacity to operate the trust.
• Private sales. Private sellers may request proof of funds to ensure that the buyer has the necessary funds for transaction completion. This could involve real estate or industries including collectibles or art.
• Contract bidding. Proof of funds may be required when participating in contract bidding processes, particularly for government or major projects.
• Business licensing. POF may be required when applying for some permits or business licenses to ensure compliance with regulations and financial viability.
• Auction participation. Proof of funds may be required when participating in auctions to ascertain the ability to meet payment obligations or bidding requirements.
• Franchise opportunities. Proof of funds may be necessary before buying a franchise to show financial capability.

What are Some of the Documents that Qualify as Proof of Funds?

Some of the documents one can submit as POF can include bank statements, security statements, investment account statements, bank letters confirming fund availability, and balance certificates issued by banks. Having said that, bank statements are the most common documents to use as proof of funds and can typically be found at a banking institution branch, or online.

In general, documents older than 90 days are unacceptable, although in some situations documents may not be older than 30 days. For example, a mortgage lender may require POF documentation from the most recent month available.

There also may be requirements concerning formatting, although in general, the document must include clear, legible data including the account holder’s name, the amount of funds available, their bank account number, and bank details. 

If they are clear and legible, digital, or scanned copies of proof of funds documents are in many cases acceptable. It is a good idea to verify such permissibility with the involved institution or party. 

If the funds that are to be used for a property purchase, for example, are spread across multiple accounts, items such as the bank’s name and address, an official bank statement, account balances in checking and savings accounts, and an authorized bank representative’s signature will be needed for all of them. Thus, it may be easier and more efficient for all parties to consolidate funds into a single account.  

Proof of Funds vs. Preapproval Letter

In real estate, a pre-approval letter is often required by the seller or seller’s agent when buying the property. 

A preapproval letter is a document that states that a lender loan is forthcoming. On the other hand, a proof of funds letter establishes that the purchaser has funds on hand to handle costs associated with the property purchase. The preapproval letter comes after providing proof of funds.

Investing in Real Estate: Diversify Your Portfolio Through Yieldstreet

There are a myriad of ways to break into real estate, a market that remains popular for its possible secondary income streams, stable cash flow, leverage, and tax advantages. 

As an “alternative” investment to stocks and bonds, real estate is among Yieldstreet’s offerings. The leading platform, on which nearly $4 billion has been invested to date, offers more alternative asset classes than any other platform. 

Yieldstreet has private as well as commercial opportunities, including a Growth & Income real estate investment trust (REIT), which allows investors to put capital in real estate without holding the physical property.  REITs are enterprises that own commercial properties such as office buildings, retail spaces, hotels, and apartment buildings.

Yieldstreet’s REIT makes equity investments in commercial real estate in key markets and property types throughout the U.S. Such property types include multi-family, industrial, retail, self-storage, and hospitality properties, with minimums starting at $10,000.

In addition to the possibility of steady passive income, real estate helps with portfolio diversification, which can protect against inflation and stock market volatility. In fact, diversification is crucial to long-term investing success.

Alternative Investments and Diversification

Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk. 

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million.  These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.

However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

Proof of funds is necessary for a real estate investor to demonstrate the ability to cover costs associated with buying a property such as a house. Such expenses can include a down payment and closing costs. Sellers may require POF, even if a mortgage lender does not.