Automation Finance was founded by Paul Birkett, a former P&G executive who got into non-performing mortgages through a portfolio of single-family rental properties. After liquidating his rental property portfolio to focus on non-performing mortagages, Birkett left the corporate world to launch Automation Finance.
Types of investments Automation Finance offers
Investors are buying into a fund Automation Finance uses to buy up distressed mortgages at a discount, and then Automation Finance initiates a renegotiation process with the homeowners. That typically results in one of three outcomes:
- Loan modification: either Automation Finance accepts less than is owed by the homeowner to fully settle the loan (but still more than they paid for it) or a new payment amount and schedule is agreed upon, and then after several months of payments, the loan is re-sold to another lender
- Deed-in-lieu: The homeowner accepts a cash incentive to hand over the property or cooperate with a short sale
- Foreclosure: Automation Finance initiates the formal legal foreclosure process to either provoke the homeowner to act on one of the other options, or to eventually repossess (and sell) the home.
What do you get when investing with Automation Finance?
A recurring theme among the investment platforms covered on this site is innovation, not just from the perspective of technology, but (perhaps more importantly) the investments themselves. While at first glance an 8% fixed return based on an underlying loan sounds like a debt investment, in this case is actually an equity investment in an LLC.
That model is not uncommon among real estate investment crowdfunding platforms, though typically the investor receives some form of promissory note backed by a mortgage; in this case there is no corresponding note. Bottom line is that investors have less security than typically seen with a preferred equity investment, while also having less upside potential than a straight equity investment. (That’s not to say it’s a good or a bad thing! That that will depend on your specific preferences and situation, but does set Automation Finance investments apart from most of the other real estate investment crowdfunding platforms).
Investors receive “Series A Preferred Stock” shares in an LLC, which do not have any voting rights, but are entitled to receive an 8% preferred return and full return of their principal before the Common Stock shareholders (a company fully owned and controlled by Automation Finance’s founders) receive any return.
How does Automation Finance make money?
There are no direct fees for investors, but the way the various entities are structured, the LLC you’re investing in is effectively paying Automation Finance a number of fees, including:
- a 2% annual Management Fee for various expenses.
- an Administration Fee of $60/month per mortgage
- an Accounting Fee of $5/month per mortgage
- a Legal Oversight Fee of $500 for each bankruptcy filing and foreclosure (plus an additional $250 for any in New York State)
- a Collateral Cure Fee of $100 for each incomplete mortgage that requires “curing”
- Legal Referral Fees related to external lawyers engaged for help in foreclosures and other proceedings
- A number of Transaction Fees, for example 2% of the Gross Sales Price (minimum of $1000) on thesale of any first lien mortgage loan
Prospective investors can review Automation Finance’s SEC filing for more detail on the fees.
Potential returns and cashflow
Investors are entitled to an 8% annual preferred return, as well as a full return of their principal, before Automation Finance receives any of the profits (though as noted above, Automation Finance still earns a range of fees that are deducted as expenses prior to investors receiving anything).
Investors are told to expect to hold their investment for 5 years, though Automation Finance also says their intention is to repay principal and the 8% annual return before the 5 years are up, which would effectively reduce the return (in other words, if you invest $100 and you receive $8/year for 4 years and then the full $100 back at the end of the 4 years, you would not receive any further payments).
Breadth of offerings on Automation Finance
There is only one investment option at the time of this writing, which is to participate in the currently open fund (“Automation Finance Reperformance Fund IV LLC”). Automation Finance invests in loans throughout the US.
Regulatory framework and due diligence expectations
Automation Finance is offering the investment themselves, using Tier II of SEC Reg A+, which means that the offering has been reviewed by the SEC, and as required by Reg A+ “the company will be required to provide investors with additional information, including annual audited financial statements, annual reports filed on SEC Form 1-K, semiannual reports filed on SEC Form 1-SA, special financial reports filed on SEC Form 1-K, and current reports on SEC Form 1-U.”