Make an offer or two in Real Estate and pretty soon your Seller or Realtor is likely to ask you for “Proof of Funds”.
Simply put, a Seller has much more confidence in your offer to buy if you “show him the money” before he accepts your offer–especially if you are offering lower than asking price.
Sometimes called a “Funding Letter” or “Pre-qualification Letter”, the intent is the same: show Mr. Seller that you have the money to close the deal.
In its simplest form you can pull out a stack of Franklins and make your offer. It works in car deals but its not too practical to carry around 1,000 bills just to prove you can pay cash for that $100,000 fixer upper.
Another simple solution to earn credibility with the Seller is to include with your offer a copy of your bank statement (with private information blanked out) showing your name or LLC name and more than enough idle cash on deposit to close the deal. Those who can play this card have a strong advantage. Many a Mr. or Ms. Seller will take this “proven” offer over a higher priced one with less proof. This technique also works if you have a Line of Credit at a bank–simply submit your offer with the bank statement showing available funds in the Line. (If your business needs a Line of Credit talk to your banker or look at our offering here.)
Well, if you haven’t yet earned your MBA (Massive Bank Account), there are still other solutions.
If you have access to Private Funds from a partner, friend or relative simply have them write a letter directly to Ms. Seller or “To Whom It May Concern” stating that they back your deals with cash and have them include a bank statement or other demonstration of ready money. Again, private information (account number, address) should be blanked out bu the name must match the name on the letter. Including a good phone number so the Seller can call your money partner is a real plus, too. Most Sellers wouldn’t dream of making that call but knowing they can if very comforting to a seller.
What? Your friends and family aren’t exactly flush with green or hesitant to get involved in the business of broken toilets?
Then you need a lender who will fund your deal and write a letter to prove it: the lender’s Proof of Funds letter.
Some lenders will do this for a fee, others for free once you have applied and demonstrated at least some likelihood of qualifying to use their funds.
www.RichUncle.us does provide funding letters but only for a very select list of clients with whom we’ve had a long steady relationship, or when a new clients brings us an exceptionally good deal.
One of the sources we use for funding deals offers an online application and a funding letter can be printed for free right after the initial application is filled and reviewed. They lend in several states which, as I write this, include: New Jersey, Texas, Virginia, Maryland, Washington DC, Pennsylvania, Georgia, North Carolina, South Carolina, Missouri, Kansas, Minnesota, and Alabama. They keep adding states so check back if the state where you invest is not listed.
So to get a funding letter just follow these steps:
- Follow this link to their site: www.RichUncle.us/EDC
- Create a new account and fill out the online application
- Provide the one or two documents they require
- The funding letter will be promptly emailed to you
Now you are well on your way to Offer, Acceptance, Funding, Closing, Rehab, Sale and Profit.
Best of luck and remember your RichUncle if we can help.
Sincerely,
Ted
March 10th, 2009
This Exit Strategies Newsletter
Brought to you by:
www.RichUncle.us
&
Riverbend Capital Group
Dear Business Owner,
Many business owners today are confronted with assessing the value of what they have or, more appropriately, may have left in their privately-held businesses. Consequently, most business owners are looking at their business to determine the value and how it can be extracted. This is a part of the exit planning process.
There are two very different aspects to getting the money out of your business. On the first hand, there is the income that you draw from the business in terms of salary, personal/business expenses, and bonuses that you pay to yourself and/or retirement plan savings. All of this constitutes money that’s coming to you from the cash flow of the business going towards the lifestyle that you have built for yourself. The second and much more important aspect, particularly in light of the recent economic condition, is getting to the equity – the illiquid part – of your business.
As a part of the exit planning process, an owner will want to know their Value Gap – i.e. how much money they need to extract from the business in order to maintain their lifestyle without the business. The chart below helps to
illustrate this point. We see that Bill Brown has $1,000,000 saved for retirement but needs a little more than $7,000,000 to maintain his lifestyle. Bill’s Value Gap is $6,000,000. The question becomes, ‘How can Bill get to the equity in his business in order to close this Value Gap?’
Like most business owners, Bill is focused on running and growing his business (and surviving the current economic conditions). Bill has some money saved for retirement. However, as we can see, it is nearly impossible for Bill to extract enough ‘income’ from his business to meet his exit goals – Bill needs to get to the equity in his business.
Essentially, the equity that’s in your business is representative of more than the accumulated earnings. It is representative of the value that somebody else would pay for it, so the question becomes, ‘How can you plan to tap into that equity over a long enough time period to draw it out to meet your personal goals?’
The first step is to realize that there are many ways to get to the equity in your business. You can find a buyer, groom a successor, or even create a buyer for the shares of your company’s stock. The most important part of this planning process is the recognition of the need to plan for your exit and to measure the amount of equity that you will need to extract from your business.
In today’s environment, the equity can be managed in many different ways. What’s important, first of all, is that you set a plan and an expectation as to how you can access that equity. The natural inclination is for a business owner to want to sell – to pull the equity out all at once. Today’s marketplace has fewer buyers than previous years, due mostly to the economy and the contraction of credit throughout the world markets. As an owner, you need to know that options other than selling the business are available but may require some creativity on your part. The key is to understand what somebody else would be willing to pay and identify that person. From there, we can go and take a look at how that other person would value what you have and how you would receive those ‘equity’ payments.
So, in Bill’s example above, he needs to achieve a net amount of $6,000,000 for the equity in his business in order to achieve his exit goals. If Bill were to sell the business, he would need to get an asking price in excess of $6,000,000 because taxes (both federal and state) are going to be owed, and advisory fees are going to be a part of the difference between what Bill ‘gets’ for his business sale and what he keeps. Like many owners, Bill is challenged by today’s lack of buyers and lower values. Therefore, he wants to look at alternative ways of getting to the equity in his business.
Bill may look at the option of selling a portion of the equity in his business to an Employee Stock Ownership Plan (ESOP). By selling a piece of the equity today, Bill can bolster his current savings (i.e. increase his financial readiness) while continuing to own a majority of the stock in his company. Although Bill will likely get a lower value for the shares sold today, he can begin to diversify himself away from the business and, potentially, receive important tax benefits that go along with the ESOP sale. This is a controllable way of getting to the equity in your business.
Bill may also look to his management team to assist him in extracting the equity from his business. Bill’s management team has the potential to continue to run the business in Bill’s absence. However, Bill has not started the conversation with these managers as to his future expectation that they will be so empowered. This is a delicate conversation to have with the managers because the future is too difficult to envision today. What this means is that Bill may decide to sell the company in four (4) years when the next exit window opens for him. So, he does not want to over promise his managers a future ownership stake that he cannot deliver. Bill should recognize that there are ‘higher level’ conversations that he can be having with his managers today which would make the company stronger, while also positioning those managers as potential successors to the business. When measured against what Bill needs to extract from his business, it may turn out that having his managers pay him out over time is his best option and he can build a stronger company in the meantime.
In conclusion, whether you’re looking to your managers to help you pull the equity out of your business, or you’re looking to sell to an ESOP, or you are biding your time, waiting for an outside buyer to arrive, it is important to have a concept of equity beyond just the cash that flows from your business to you. And from this very important concept and realization, you can begin to think of your business as the investment that it is and begin to create your exit plan to get to that equity and achieve your personal exit planning goals.
This Bi-Monthly Newsletter Brought to You By:
Ted Montoia
http://www.RichUncle.us
314-729-7858
Ted@RichUncle.us
&
David E. Prouhet
Exit Strategist
Riverbend Capital Group
2464 Taylor Road Suite 307
Wildwood, MO 63040
314-258-2000
DProuhet@RiverbendCapitalGroup.com
Here are just a few quick tips that can help put you in a better position under the discerning eye of an underwriter:
- Do you have past due balances that have been and you want to purchase a home, make sure you bring them up to current status whenever possible?
Do you have outstanding debt that you can afford to pay off right now? Try to get theses accounts down to a zero balance, or at least a lower balance. If your cash on hand doesn’t allow you to do this, try to distribute the debt amongst other open credit cards. You can also consider opening a new line of credit and transferring part of the balance off a card that is close to being “maxed out.” If you can get the resulting balances below 50% of the available credit, you’re on the road to improving your credit score considerably in most cases.
Do not close existing credit card accounts, even if you don’t want to deal with the company any more…Believe it or not, the credit history is a good thing to have!!
When married couples keep separate credit card accounts, some or all of the balances can be transferred to one spouse’s list of accounts. This give the other spouse an opportunity to increase their credit score and designate him or herself as the sole borrower on the mortgage loan. Ownership of the home can remain in both names!
See if your credit provider will increase your available lines of credit. This can, in turn, reduce the overall debt ratio, butonly do this if your credit card company can do that without a hard credit inquiry.
Do you have past dues and charge-offs within the last two years? Pay them off now, if you can! Past dues older than two years will have little to no impact on your credit score if they are paid, but can possibly bring the score down, which is something we don’t want to do…Focus on that 2-year time frame.
Do you see errors in your report? Request the credit bureau delete any outstanding debt that is incorrectly charged to you, or things that should have been removed that you have already paid. They have an obligation to reconcile this within 30days. If you see items on your report that are less than two years old and you have the money to pay it off now, mark the back of your payment check with the following notation: “Accepting this check is evidence that the transaction is complete and this charge will be deleted from my credit record.” If necessary, you can use this canceled check as proof of the transaction in the event the outstanding debt is not removed promptly and interferes with the closing of your loan.
Article featured through the courtesy of Reeves Credit Repair.
