Proof Of Funds Letter
A major short sale concern of the lender is investing the time and effort in negotiating a short sale then having the buyer not close on the short sale. Because of this possibility you can expect the lender to request a “Proof of Funds” or a “Mortgage Commitment Letter” as a required part of the short sale package.
This request is often a major obstacle for real estate investors that are flipping the deal with what is known as a double or simultaneous closing. What to do?
Here are several possible solutions:
- Bank Statement. If you have the funds available send the lender a recent bank statement as proof of funds.
- Obtain a Proof of Funds Letter. This letter can be obtained from your bank, mortgage broker, private money lender, hard money lender, or anybody that has the ability to fund the transaction.
- Mortgage Commitment Letter. I’m not a fan of the Mortgage Commitment Letter because a lender issues a loan commitment after it has approved both the house and you. The home appraisal must meet the lender’s guidelines and the lender may require the property be in a better condition then the current state of the home. For this reason I feel a MCL is better suited for buying houses that do not involve a short sale.
- Home Equity Line Of Credit (HELOC). If you have available equity in a property a HELOC on the property can serve you well. First, there is no cost on most HELOC for unused lines of credit. Second, it meets the lenders guidelines as proof of funds even if these are not the funds you intend on closing with.
The bottom line is unless you have an established relationship with the lender it is likely you will have to show proof of funds in some manner. If you are new with limited resources find a good hard money lender to work with and they can provide the letter you need.
You can get a free POF letter from me at www.QuickTurnMoney.com
Double Escrows
Also commonly referred to as a simultaneous closing. Double escrows are misunderstood when they are really a very simple closing consisting of two separate transactions:
- Buy Side – This is the purchase and sale agreement you have with the seller stating the terms and conditions of the sale. For this example the purchase price is $100,000 cash.
- Sell Side – The purchase and sale agreement you have with the new buyer stating the terms and conditions of the sale. In this contract you are the seller. For this agreement the purchase price is $110,000.
When you open escrow with the title company inform them that you would like to complete a simultaneous closing and insist that there are two separate escrows and HUD 1 Settlement Statements for the property. One for the buy side and one for the sell side. As long as they are treated as separate escrows there are no problems, because the title company can only talk to principles of the transaction on each file.
In other words, the title company cannot tell your seller and your buyer about simultaneous closing, terms or other arrangements. Unfortunately some title companies do not understand their fiduciary obligations and will not participate in a double closing. Ask early and if they are unwilling take your business elsewhere.
When it is time to close the transaction insist that the buyer signs before the seller. (You always want the person with the funds to bring the money and sign before the person who owns the property signs; this ensures a smooth, hassle-free closing.)
Note: Not all title companies will do double escrows. Make sure you ask before opening up the escrow!
Tip:If your buyer pays all of the closing costs, the only expense you have to pay with some title companies is the title insurance. To reduce this expense further, request a “hold open” title policy and your cost will only be a fraction of a normal title policy.
Lender Seasoning Requirements
In recent years many lenders have placed title seasoning requirements on loan transactions making it difficult for many investors to legitimately buy properties that are good deals.
The lenders may not want to fund the second part of a double closing because they fear this closing could represent and inflated purchase price. The result has been seasoning requirements where the owner has maintained ownership of the property for a set amount of time; typically 6-12 months.
The seasoning requirement is complete and utter nonsense because property values are reflected in the required appraisals that must be submitted from a lender approved appraiser. Seasoning is a flawed concept and has nothing to do with the property value.
Unfortunately this is no solution to lender seasoning requirements other than working with lenders with more intelligence and practical lending policies. If you are selling a property with a double closing be sure the buyers lender does not have any seasoning issues or your deal could suddenly die when the lender learns the property will not meet seasoning requirements at closing.
To get around seasoning issues you may be able to assign your contract to the buyer for a fee which will keep the seller as the current owner. The major drawback with assignments is you have to ensure your buyer is able to pay your assignment fee without the funds from the escrow.
Assignment Example: You negotiate a short sale for $100,000 and agree to assign your contract to a new buyer for $10,000. Since the new buyer is taking over a $100,000 purchase price the $10,000 must come from their own pocket in most circumstances where lender seasoning would be an issue.
Tip: If you are doing a double closing on a property that requires a short sale it is advisable to find a buyer that does not need to close with conventional financing where seasoning could be an issue.
Nominee Instruction
A nominee instruction allows another person or entity of your choice to legally take your place in a transaction. When and why would this be important?
Let’s say you have negotiated a short sale and you have obtained WRITTEN acceptance from the lender for the negotiated short sale price. Let’s also assume that you have negotiated up until this point in your name which is also the name on the purchase and sale agreement.
If you are like many astute investors you keep assets out of your name and you may want to close this purchase using a land trust or an LLC. But you realize if you would have started the negotiations with the buyer as a land trust or LLC it could have complicated manners and you may not have been able to successfully negotiate the short sale unless it was in your name giving it a ‘normal’ appearance.
But now you are ready to close. All you have to do is use a nominee instruction to the title company and your new nominated entity completes the transaction. Everybody wins.
Land Trusts & Short Sales
Many investors ask how can they use a land trust when buying a short sale? Without getting to involved in land trusts lets just say the reasons for using the land trust are privacy, 1st level of asset protection, and a reduction of liability. For the record I am a big believer in both asset protection and land trusts.
So how can you use land trusts when you are buying short sales? If you are writing a check for the property you can simply use a land trust from the very beginning or use a nominee instruction after the lender has given you written acceptance.
But if you are using a land trust any other time it is likely you will have to close on the transaction in your personal name then deed the property to the land trust. While there may be other ways to close in the land trust this answer is written to apply to the majority of transactions. Exceptions there may be but if you are working with lenders and short sales there is a lot to be said for keeping it simple and getting the short sale accepted.