What Is a Personal Financial Statement (PFS) in Real Estate?

A Personal Financial Statement (PFS) assesses financial health within property transactions, providing insights into an applicant’s capacity and creditworthiness. Understanding a PFS is important for anyone engaging in real estate, from securing financing to participating in investment opportunities.

What is a Personal Financial Statement (PFS)?

A Personal Financial Statement provides a snapshot of an individual’s financial position at a specific point in time. It details what an individual owns, what they owe, and their income and expenses. It combines elements of a personal balance sheet and an income statement, assessing creditworthiness and financial capacity. The PFS helps individuals track financial progress and external parties gauge financial stability. It helps in understanding liquidity and solvency, providing a clear picture of an individual’s ability to manage financial obligations.

Components of a PFS

A Personal Financial Statement is composed of assets, liabilities, income, and expenses. Each contributes to a comprehensive picture of an individual’s financial health.

Assets represent everything an individual owns with monetary value. Current assets, quickly converted to cash, include cash, checking and savings accounts, certificates of deposit, and marketable securities like stocks and bonds. Non-current or fixed assets are held for longer periods and include real estate (primary residence or investment properties), retirement accounts (401(k)s and IRAs), and personal property (vehicles, jewelry, collectibles). For real estate, details like property type, address, purchase date, original cost, and current fair market value are included. Assets are valued at their current fair market value.

Liabilities represent an individual’s financial obligations. Current liabilities are due within a year, such as credit card balances, short-term personal loans, and unpaid bills. Long-term liabilities extend beyond one year, commonly mortgages, auto loans, and student loans. Other long-term debts may include notes payable. Each liability lists the outstanding balance, monthly payment, and creditor’s information.

The income section details all sources of money received over a specific period, often monthly or annually. This includes salary, wages, and commissions. Business income, rental income, and investment income (interest and dividends) are also included. Other income sources might involve capital gains, alimony, or child support.

Expenses account for money spent during the specified period. Major recurring expenses include general living expenses, debt payments, insurance premiums, and taxes. Net worth, a key financial indicator, is calculated as total assets minus total liabilities.

Why a PFS is needed in real estate

A Personal Financial Statement is important in real estate transactions, serving various purposes. It provides a transparent view of an individual’s financial capacity, essential for assessing risk and financial credibility. This document helps establish trust and clarity in financial arrangements.

Lenders require a PFS for mortgage applications. This allows them to assess a borrower’s ability to repay the loan, looking beyond the property’s value. Lenders analyze the applicant’s net worth, liquidity, and existing debt to determine risk. A strong PFS can demonstrate sufficient liquid assets to cover potential shortfalls or unexpected expenses.

For real estate investors, a PFS is used when seeking financing for property acquisitions or engaging in joint ventures. Private lenders use it to understand an investor’s financial profile, even without traditional salaried employment. It helps potential partners evaluate an investor’s financial strength, contribution capacity, and ability to withstand market fluctuations. This assessment is relevant in multifamily real estate and other large-scale investments.

A PFS can be used in other real estate contexts, such as commercial lease agreements or partnerships. Landlords may request a PFS to verify a prospective tenant’s financial stability and ability to meet lease obligations. In real estate partnerships, each partner’s PFS can inform the distribution of responsibilities and potential capital calls.

Preparing a PFS

Compiling a Personal Financial Statement requires attention to detail and thorough documentation. The process focuses on accurately presenting financial information gathered from various sources. This ensures its reliability for financial assessments.

Accuracy is important when preparing a PFS, as lenders and other entities rely on this information. Overstating asset values or understating liabilities can undermine credibility. Assets should be valued realistically, often at their current fair market value. For real estate, this means using a current market appraisal, not the original purchase price. For other assets, current balances are used.

Gathering supporting documents is a step in the preparation process. This includes recent bank statements, investment statements, and mortgage statements. Tax returns provide verifiable income and expense details. Loan documents for auto, student, and credit card statements are needed to list liabilities accurately.

Organizing this information logically is essential for clarity and ease of review. Many financial institutions provide specific forms or templates for PFS requirements. A standard template or well-structured spreadsheet helps ensure all necessary categories are included and calculations, like net worth, are correct.