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Front Funding in Owner Financing: How to Make Smart Investment Decisions

Hey everyone, Grant Kemp here from Creative Cash Flow. Today, we’re tackling the concept of front funding. If you’ve been in the world of owner-financed properties, you might have heard of situations where you need to invest cash upfront before selling a house. Let’s break down what front funding means and how to handle it smartly.

Understanding Front Funding

Front funding is a situation where you need to put money into a deal before you have a committed buyer. This is common in scenarios like foreclosures where you don’t have the luxury of a waiting period. When faced with such situations, you need to decide if it’s worth putting up the cash without having it sold yet.

What is Front Funding?

In our strategy, we’re structuring our deals much like wholesalers. When buying subject to owner financing, aim for a 60-day option period in your contracts. This gives you time to market the property and find a buyer. However, in foreclosure situations, you don’t have that luxury. Often, foreclosure leads come in just days before the auction, meaning you need to act fast.

Analyzing the Deal

When deciding whether to front fund a property, you need to determine if the house is worth the initial investment plus potential repair costs. Unlike traditional cash-based deals, owner financing allows buying properties at 85 or 90% of market value and still making a profit.

Factors to Consider

  1. Location: Some parts of town will sell quickly, making front funding more viable. In Dallas, areas like Garland or Mesquite are hot markets. If the property is in a less desirable area, you might want to think twice.
  2. Cash Position: Be realistic about your financial situation. If you have $15,000, it might not be wise to invest all of it in one deal.
  3. Equity Partners: Don’t hesitate to bring in an equity partner if you lack the necessary funds. Partnering with someone who has the capital but not the time can be mutually beneficial.

The Two Times Cash Rule

One useful guideline for front funding is the Two Times Cash Rule. This means that whatever cash you put into the deal, you should aim to have twice that amount in equity after closing. This rule helps ensure you won’t lose money even if things don’t go as planned.

Example: Year 1 and Year 15 Scenarios

Let’s break down how this works with real numbers:

Year 1 Scenario:

  • Payment: $553/month for a year
  • Arrearage: $6,636
  • Principal affected: $1,410
  • New balance: $98,590 (after catching up)

For this to be a good deal, your ARV should be at least $111,862.

Year 15 Scenario:

  • Payment: $553/month for a year
  • Arrearage: $6,636
  • Principal affected: $2,936
  • New balance: $68,693 (after catching up)

Your ARV should be at least $82,000 for this to be worthwhile.

By following the Two Times Cash Rule, even if the deal doesn’t pan out perfectly, you should still recover your investment.

Closing Remarks

Front funding can be a powerful tool in the world of owner-financed properties, but it requires careful analysis and strategic planning. By understanding the concept and utilizing strategies like the Two Times Cash Rule, you can mitigate risks and ensure that your investments are sound. Always consider the property’s location, your cash position, and the potential of bringing in equity partners.

With these considerations in mind, front funding can open up lucrative opportunities, allowing you to capitalize on deals that others might pass by. Remember, the key to successful front funding is smart decision-making and thorough market analysis. Happy investing!

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