How to verify a cash buyer's proof of funds

Why you need to verify proof of funds

In wholesaling, your profit hinges on your cash buyer closing the deal. If he or she does not have the funds, your contract falls through, you lose your assignment fee, and you might even risk your earnest money deposit. Verifying proof of funds (POF) is about protecting your time, your reputation, and your bottom line.

Some individuals might claim to be cash buyers without actually having the liquid capital or access to financing. They might be trying to tie up a property speculatively. A legitimate POF ensures you are dealing with a serious buyer who has the financial capacity to perform.

Acceptable forms of proof of funds

The most common and accepted form of POF is a recent bank statement showing sufficient liquid funds. This should be from a checking, savings, or money market account. The statement should be dated within the last 30 days and clearly show the account holder's name and the available balance.

Other acceptable forms include a letter from a bank or financial institution, on official letterhead, stating that the buyer has readily available funds in excess of the offer amount. For buyers using hard money or private lenders, a letter of credit or pre-approval from their lender can also serve as POF. Ensure these letters are specific to the buyer and the amount needed.

Red flags to look for in proof of funds

Be wary of blurry or unreadable documents, statements that look doctored, or POF that is several months old. If a statement shows a balance that is exactly the offer amount, it might be a red flag; legitimate investors often have more capital than a single deal requires. This is not legal, tax, or financial advice; consult with a professional for specific guidance.

Another red flag is a general letter from a 'funding partner' or 'investment group' without specific names or a clear indication of liquid assets. Some buyers use generic, easily falsified documents. You need to see actual funds or a clear commitment from a recognized financial institution.

If the POF is from a foreign bank account, it can add layers of complexity and risk due to international transfer regulations and potential delays. Proceed with extra caution and perhaps require more robust verification for such cases.

Direct verification methods

Do not just accept a screenshot or a PDF without a closer look. Ask for the full bank statement (with sensitive information like account numbers redacted). Compare the name on the statement to the name of your cash buyer. Ensure the dates are current.

For bank letters, call the issuing bank directly using a publicly listed phone number (not one provided by the buyer) to confirm the letter's authenticity. Ask to speak to the branch manager or a loan officer who can verify the funds or the letter's issuance. This is a simple but powerful step.

If a buyer is using a hard money lender, call the lender directly. Ask them to confirm that the buyer is approved for the necessary loan amount and that the funds are ready to be deployed for this specific property. Do not rely solely on the buyer's word or a generic pre-approval letter.

When to ask for updated proof of funds

If a significant amount of time passes between the initial POF submission and the closing date, especially if it is more than 30-45 days, ask for an updated statement. A buyer's financial situation can change.

If there are any delays in the closing process or if the buyer seems to be dragging his or her feet, an updated POF can offer reassurance or reveal a problem. It is a reasonable request to make, particularly if the deal is at risk of extending beyond the original timeline.

Always be polite but firm in your request. Explain that it is part of your standard procedure to ensure a smooth closing for everyone involved. Most legitimate buyers will understand and comply without issue.

The consequences of not verifying funds

Failing to verify POF can lead to serious consequences. You might waste weeks or months marketing a property to a buyer who cannot close, causing you to lose other potential buyers and frustrating the original seller. This can damage your reputation in the market.

It can also lead to legal issues if you enter into an assignment contract with a buyer who cannot perform. While your contract should have clauses to protect you, avoiding these situations upfront is always preferable to dealing with them after the fact. This is not legal, tax, or financial advice; consult with a professional for specific guidance.

Always verify. It is a foundational step in risk management for your wholesale business. It adds a layer of certainty and allows you to move forward with confidence, knowing your buyer is qualified.