Making an Offer with Private Lender Financing - South Florida - Palm Beach

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Making an Offer with Private Lender Financing - South Florida - Palm Beach

James G.
Palm Beach Gardens, FL · Member since 2010 · 50 posts · 7 votes

I have several private lenders ready to provide capital for my flipping business. My question is regarding submitting an offer to purchase a listed on the MLS. Most sellers want either a proof of funds (cash in my account) or a preapproval/prequalification letter. As has been mentioned in several other posts, when using a private lender, they should give you a preapproval letter; however, one BP member indicated these letters aren't worth the paper on which they are written. Additionally, my private lenders are individuals that would not have any formal preapproval letter. Furthermore, my lenders are new to this process and I want to make it as easy as possible for them.

One post indicates using a personal LOC or POF for the offer, then closing with the private lender's capital. In this case, neither of these options is viable.

In listening to the BP Podcast, it sounds like a lot of investors use private lenders. So, I am curious of how BP members have successfully submitted offers using private lender capital? i.e. have you been successful with including a preapproval letter from a private lender, do you get the funding prior to making offers (a blind investment loan), etc.?

I have read through most of the private lending posts, but haven’t seen an detailed explanation for a successful offer process. Thank you!

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Jeff S.
Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
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This is not hard at all @James G.. POF letters are not at all formal. They are generally valueless because they are not a commitment and do not obligate the lender to follow through. On the other hand, if a proof of funds letter is all that stands between you and an accepted offer, then it serves an important purpose.

You'd think agents and banks would know better but I think they require them to cover their butts with their bosses or clients ("Hey, the buyer seemed qualified and showed us he had access to the money. How was I supposed to know it would fall through?").

All you need for a POF is a letter from your lender, and it could be your mom, made out to you or your entity that says you are approved for $xxx in funding for your next flip, or for 123 Main St., or for your next real estate purchase, or whatever. Your private lender should include a recent redacted bank statement showing these funds are available. Large lenders will instead use a letter from a CPA or their bank certifying these funds.

Here's the verbiage we use when asked (which is rare):

Dear James,

This is to confirm that we will provide up to $1.98 toward funding of your next rehab project. Our proof-of-funds for this transaction is attached.

Please understand that this is not a loan commitment. These funds will be available after a review and approval of the property, acceptance of a fully executed purchase agreement, and an acceptable preliminary title report.

Please feel free to call me with any questions at 123-456-7890.

Regards,

Grandma

Goofy as this seems, it's all agents & banks seem to want.

In no case are you obligated to use this lender. Plus, the money on the statement could be gone tomorrow. That's the fallacy with a POF letter. If it helps you get the deal however, and you've assured yourself of adequate funds from at least somewhere, then a POF serves a purpose.

[Also, for what it's worth, contrary to BP dogma virtually no experienced rehabber we work with makes financed offers, yet they all borrow the money. They speak to the agents first, make non-contingent cash offers, and call escrow to break the news that there will be a trust deed (or two) with the deal. Everyone knows the game. You're not there yet.]

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
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    I've not experienced the problem you describe in your post. As a lender, I (see note below) provide a POF and the offer from the flipper I am funding has the source of funds identified as a private lender (in my case via Equity Trust Company). The flipper provides a healthy earnest money deposit and also provides his own capital, so the deal is not highly leveraged. The POF from the flipper is a current bank statement showing cash in an account that he controls (ether his personal account or a company he controls). Both lender and borrower are experienced doing this kind of thing... but like your case the properties purchased by my flippers were MLS listed.

    Hope that helps.

    Note: When I say "I", I mean accounts I (as an individual) control. In reality, my name is not on any documents, just the custodian of the trust as lender.

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  • Josiah W.
    Lender · Miami, FL · Member since 2015 · 134 posts · 5 votes
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    James, are your private lenders funding the whole project? 

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  • Jeff S.
    Lender · Los Angeles, CA · Member since 2009 · 1k+ posts · 2k+ votes
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    This is not hard at all @James G.. POF letters are not at all formal. They are generally valueless because they are not a commitment and do not obligate the lender to follow through. On the other hand, if a proof of funds letter is all that stands between you and an accepted offer, then it serves an important purpose.

    You'd think agents and banks would know better but I think they require them to cover their butts with their bosses or clients ("Hey, the buyer seemed qualified and showed us he had access to the money. How was I supposed to know it would fall through?").

    All you need for a POF is a letter from your lender, and it could be your mom, made out to you or your entity that says you are approved for $xxx in funding for your next flip, or for 123 Main St., or for your next real estate purchase, or whatever. Your private lender should include a recent redacted bank statement showing these funds are available. Large lenders will instead use a letter from a CPA or their bank certifying these funds.

    Here's the verbiage we use when asked (which is rare):

    Dear James,

    This is to confirm that we will provide up to $1.98 toward funding of your next rehab project. Our proof-of-funds for this transaction is attached.

    Please understand that this is not a loan commitment. These funds will be available after a review and approval of the property, acceptance of a fully executed purchase agreement, and an acceptable preliminary title report.

    Please feel free to call me with any questions at 123-456-7890.

    Regards,

    Grandma

    Goofy as this seems, it's all agents & banks seem to want.

    In no case are you obligated to use this lender. Plus, the money on the statement could be gone tomorrow. That's the fallacy with a POF letter. If it helps you get the deal however, and you've assured yourself of adequate funds from at least somewhere, then a POF serves a purpose.

    [Also, for what it's worth, contrary to BP dogma virtually no experienced rehabber we work with makes financed offers, yet they all borrow the money. They speak to the agents first, make non-contingent cash offers, and call escrow to break the news that there will be a trust deed (or two) with the deal. Everyone knows the game. You're not there yet.]

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  • James G.
    OP
    Palm Beach Gardens, FL · Member since 2010 · 50 posts · 7 votes
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      @Chris Martin Thank you for your response, great to hear you've had lots of success with this. To clarify, you, as Equity Trust Company, provide a POF to your investor. However, your POF is not utilized in making the offer because your investor submits cash offers based on their POF, then closes with your capital? In this case, the investor has cash-on-hand for 100% of the purchase price, less the deposit, for their POF. Did I understand this correctly?

    In my case, my investors are new to private lending and, therefore, do not have a formal company they utilize to lend. Also, while I will putting money into the deal, I can't show a POF for 100% of the purchase price.

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  • Jeff Rabinowitz
    Investor/Landlord · Farmington Hills, MI · Member since 2011 · 1k+ posts · 1k+ votes
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    I have usually turned down requests for pre-approval letters as I have no inclination to spend time analyzing a deal that is not a deal yet. Also, I do not want to see documents I provided used on multiple offers. My impression, when I have been asked to do this, was that the borrower was inexperienced and their offer was not likely to be accepted anyway. Those who borrow from me repeatedly have never asked for nor needed pre approval letters.

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  • James G.
    OP
    Palm Beach Gardens, FL · Member since 2010 · 50 posts · 7 votes
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    @Josiah W.

    I'll be putting money into the deal. I'll fund a sizable escrow payment and the renovation costs. But for the initial offer, I think it would be best, from the seller's perspective, to show one source of funding for the purchase price. Have you had any success with this? 

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  • James G.
    OP
    Palm Beach Gardens, FL · Member since 2010 · 50 posts · 7 votes
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    @Jeff S.

    Thanks for the response. I'm aware of the "game" of making cash offers, then utilizing financing; however, in my market, if you make a cash offer the seller wants a POF with your account info. Therefore, I use the Florida contract that indicates that the offer is not contingent on financing.

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
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    Originally posted by @James G.:

      @Chris Martin Thank you for your response, great to hear you've had lots of success with this. To clarify, you, as Equity Trust Company, provide a POF to your investor. However, your POF is not utilized in making the offer because your investor submits cash offers based on their POF, then closes with your capital? In this case, the investor has cash-on-hand for 100% of the purchase price, less the deposit, for their POF. Did I understand this correctly?

    In my case, my investors are new to private lending and, therefore, do not have a formal company they utilize to lend. Also, while I will putting money into the deal, I can't show a POF for 100% of the purchase price.

    The POF is material to the offer in some cases. It really depends on the circumstances. The flipper may or may not have all the cash. In some scenarios he puts in a 10% EMD with POF from ETC and his own bank statement for the remainder. The seller (and their broker) most likely look at the offer and say to themselves I don't think he'll walk away since he has 10% deposit.... But each deal is different, and depends on the circumstances.

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  • James G.
    OP
    Palm Beach Gardens, FL · Member since 2010 · 50 posts · 7 votes
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    @Jeff Rabinowitz

    Interesting thoughts, I appreciate your response. I would definitely like to abstain from requesting a preapproval letter from my investors. I'm gathering from the responses that I shouldn't include any POF or preapproval letter with my offers. My only issue with this is that when submitting offers on short sale properties, the seller's bank usually requires evidence of funding.

    I imagine your rehabbers are experienced and have a personal LOC or POF for their offers, but they probably didn't start with these on their first deals.

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  • James G.
    OP
    Palm Beach Gardens, FL · Member since 2010 · 50 posts · 7 votes
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       @Chris MartinThank you, very helpful!

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
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    @James G. The "acceptance" of private lender preapproval letters is a bit of a judgment call on the part of listing agents. There's a group of wholesalers out of Dade all working with the same mentor/coach/partner. When I see a preapproval from this group, I know it's garbage, as they have no intention of closing unless they can wholesale it. As you mentioned, with the current FARBAR contract you can select the "cash, not contingent on financing" option. With a private seller, on a traditional sale, I wouldn't have an issue with it if I believed you actually intended on closing, with a 10% EM which is typical for real cash buyers, and no funky contingencies. With an REO or a short sale though, you'll need as legitimate a preapproval as possible.

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  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
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    Originally posted by @Chris Martin:
    Originally posted by @James G.:

      @Chris Martin Thank you for your response, great to hear you've had lots of success with this. To clarify, you, as Equity Trust Company, provide a POF to your investor. However, your POF is not utilized in making the offer because your investor submits cash offers based on their POF, then closes with your capital? In this case, the investor has cash-on-hand for 100% of the purchase price, less the deposit, for their POF. Did I understand this correctly?

    In my case, my investors are new to private lending and, therefore, do not have a formal company they utilize to lend. Also, while I will putting money into the deal, I can't show a POF for 100% of the purchase price.

    The POF is material to the offer in some cases. It really depends on the circumstances. The flipper may or may not have all the cash. In some scenarios he puts in a 10% EMD with POF from ETC and his own bank statement for the remainder. The seller (and their broker) most likely look at the offer and say to themselves I don't think he'll walk away since he has 10% deposit.... But each deal is different, and depends on the circumstances.

    Putting in a 10% EMD increases an investors beta (I use that term broadly) significantly. If the investor is unable to secure funding then they're essential out their deposit or it sits in limbo until its arbitrated/negotiated.

    I'm not a flipper per se, but I would think it advisable to structure an EMD say as 2-3% initial deposit with the remainder due at the end of the due diligence period. Any blowback from the seller/broker would then be directed to the offers all cash basis. At least that's the way I would approach it.

    I guess if there is no due diligence the investor has to rely on their confidence they'll be able to get it funded. It just seems to me the 10% deposit adds greatly to the risk profile in a transaction that already carries enough risk in and of itself.

    Sometimes the best to deals are the once you walk away from.

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  • James G.
    OP
    Palm Beach Gardens, FL · Member since 2010 · 50 posts · 7 votes
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    @Wayne Brooks Great thoughts, thanks!

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  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
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    @Christopher Telles It all depends on the circumstances. I think I sad that in my post. In the case I mentioned, the flipper effectively demoed the building... and the concerns in your post really didn't apply. The 10% EMD just signaled to the seller that the all-cash offer was serious. And your comment "...but I would think it advisable to structure an EMD say as 2-3% initial deposit with the remainder due at the end of the due diligence period..." certainly makes sense. That's what ever one does. I think that's why my flipper didn't;)

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  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
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    @chrismartim Ok got you. I'm kind of new around the bigger pockets homestead and the intent was to point out what I perceived to be added risk in the deal process you explained.

    I probably missed the inference to that one particular instance you mentioned. My bad:)

    Yeah, I've made all cash offers to "get" the deal, but the terms, on the deals I've done, needed to allow me to sleep at night.  

    I know from experience eager buyers sometimes have a tendency to go all in, been there too, to make their thing work. And that's what I was trying to address.

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  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
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    @Christopher Telles,

    To make the @ work, do the following:
    Hold down the shift key and type @?
    Look below this Window, and you will see a list of names of people that have posted in this thread.
    Click on the name of the person that you want notified via an email, that you responded to them.
    If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name.
    Then look below this Window and click on that person's name.
    Raymond

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  • Christopher Telles
    Investor · Irvine, CA · Member since 2015 · 373 posts · 205 votes
    11y
    Originally posted by @Raymond B.:

    @Christopher Telles,

    To make the @ work, do the following:
    Hold down the shift key and type @?
    Look below this Window, and you will see a list of names of people that have posted in this thread.
    Click on the name of the person that you want notified via an email, that you responded to them.
    If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name.
    Then look below this Window and click on that person's name.
    Raymond

    Thanks, yeah, not working for some reason. I'm attempting to insert the @RaymondB here but obviously its not working. Maybe there is a setting in my account dashboard or on my iMac that I need to set/reset. idk, weird. 

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