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American Homeowner Preservation Review

Summary

AHP buys pools of distressed mortgage loans at a discount, and then works with homeowners to modify or refinance the loan. If they aren't able to do either, AHP forecloses on the home and resells it through the REO process. Investors receive a 12% preferred return (and all of their principal back) before AHP earns any profits, but investors should be sure to understand this is an equity investment, not a debt investment, much less a secured one.

Investor OverviewCompany Information

Pros

  • Low minimum investment ($100)
  • Open to all investors, not just accredited investors
  • Even at minimum investment amount, investors are exposed across pools of loans, providing some diversification
  • Investors receive their full interest payments and principal back before AHP earns profits (they do earn 2% annual fee)
  • Social-impact mission of helping distressed homeowners may appeal to some investors

Cons

  • Investors receive equity, but upside is capped at 12%
  • Relatively short track record (some history with Reg D offerings, but minimal under Reg A)
  • Relatively small company, with majority (~90%) ownership and control with one founder
  • AHP may use up to 70% leverage when buying loans
American Homeowner Preservation logo

American Homeowner Preservation Overview

Chicago-based AHP (American Homeowner Preservation) has one of the more interesting backstories among real estate investment crowdfunding platforms. From their offering circular filed with the SEC:

By 2004, (AHP founder Jorge) Newbery owned more than 4,000 apartment units nationwide and had a net worth he estimated in the tens of millions of dollars. Then financial disaster struck in the form of an ice storm on Christmas Eve 2004, which devastated Mr. Newbery’s largest holding, the 1,100-unit Woodland Meadows complex in Columbus, Ohio. Mr. Newbery wound up in litigation with the insurer, and although the insurer eventually settled for $32 million, the settlement was too little, too late. Mr. Newbery lost everything and emerged $26 million in debt.

The experience led Mr. Newbery to a new purpose in life: to help others crushed by unaffordable debt. He started AHP in 2008 as a nonprofit organization with a mission of keeping families at risk of foreclosure in their homes. In 2009 AHP transitioned to a for-profit entity, but even today Mr. Newbery operates AHP and the Company with a dual purpose: to earn returns for Investors, but also to help struggling homeowners keep their homes.

After switching from a non-profit to a for-profit entity, AHP operated as an open-ended hedge fund from 2011-2013, and then began offering closed-end funds under Reg D (open only to accredited investors), and is now offering investments under Reg A+, open to everyone.

Types of investments American Homeowner Preservation offers

Investors are buying into a fund AHP uses to buy up pools of distressed mortgages at a discount, and then AHP initiates a renegotiation process with the homeowners. That results in one of three outcomes:

  1. Loan modification: either AHP 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
  2. Deed-in-lieu: The homeowner accepts a cash incentive to hand over the property or cooperate with a short sale
  3. Foreclosure: AHP 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.

AHP reports that roughly a third of each loan falls into each category.

What do you get when investing with American Homeowner Preservation?

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 a 12% 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 AHP investments apart from most of the other real estate investment crowdfunding platforms).

Investors receive "Class A" shares in an LLC, which do not have any voting rights, but are entitled to receive a 12% preferred return and full return of their principal before the "Class M" shareholders (a company controlled by AHP itself) receive any return.

American Homeowner Preservation fee structure

There are no direct fees for investors, but the way the various entities are structured, the LLC you're investing in is effectively paying AHP a 2% annual fee for various expenses.

AHP also retains a loan servicing company to help service the loans (billing ,collecting payments, etc), and it's worth noting this provision from the offering circular:

The Company will reimburse HSLLC (the loan servicer) for the salaries for HSLLC employees who are located in the Company’s offices. Currently there are three such employees.

Potential returns and cashflow

Investors are entitled to a 12% annual preferred return, as well as a full return of their principal, before AHP receives any of the profits (though investors' return is capped at 12%).

Investors are told to expect to hold their investment for 5 years, though AHP also says their intention is to repay principal and the 12% annual return before the 5 years are up, which would effectively reduce the return (in other words, if you invest $100 and you receive $12/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 American Homeowner Preservation

There is only one investment option at the time of this writing, which is to participate in the currently open fund ("2015A+", as a reference to SEC Reg A+). AHP invests in loans in 48 states plus Puerto Rico.

Regulatory framework and due diligence expectations

AHP 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."

Final thoughts

While Reg A+ was ostensibly aimed at helping companies undertake "mini IPOs", in practice some of the most active adopters have been real estate investment crowdfunding platforms, using it to create interesting and innovative investment structures and offerings (whether "interesting and innovative" is a feature or a bug when it comes to an investment offering is of course a matter of personal opinion!).

AHP's focus on keeping homeowners in their homes while also offering a return to investors is a differentiation, and should appeal strongly to some investors. That said, prospective investors should be sure they understand the risk/reward profile associated with these investments, which are equity interests but with their upside potential capped.

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