When right-to-rent meets principal reduction

By Felix Salmon
April 15, 2010
right-to-rent with mortgage principal reductions, and turn the whole thing into an entirely voluntary private-sector program with no government involvement whatsoever? It might look a little bit like American Homeowner Preservation, a for-profit company which has a very interesting idea for keeping people in their homes.


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What happens when you cross right-to-rent with mortgage principal reductions, and turn the whole thing into an entirely voluntary private-sector program with no government involvement whatsoever? It might look a little bit like American Homeowner Preservation, a for-profit company which has a very interesting idea for keeping people in their homes.

The details can be found here: the core of the scheme is where AHP persuades a lender to accept a short sale on a home. That’s the principal-reduction bit; the right-to-rent bit then kicks in when the buyer of the home — an AHP client, along with the seller — agrees to rent back the home to the former owner at a low, affordable rate which can’t be more than one-third of the tenant’s income. Rent increases by 5% annually for five years; at any point, the tenant has the option to buy back the home at a predetermined price which rises year by year; tenants get financial counseling to enable them to do that.

The buyer can sell the home at any point in the first five years subject to the existing lease and option; after that, it’s put on the market and any profits over and above the option price get split equally between the buyer and the tenant.

If everything goes according to plan, the buyer makes healthy returns: here’s one financial projections sheet which foresees returns in the low double digits. And the homeowner ends up buying back their own home for much less than they originally bought it for. Meanwhile, AHP makes relatively modest fees of a few thousand dollars along the way.

I don’t know much about American Homeowner Preservation, and their website could use a bit of work. But in principle, I think there’s a very good idea here. Any bank dealing with AHP is going to want to make very sure they’re getting a genuine market rate for the house in question, but so long as that’s the case, and the bank is open to short sales in principle, this looks like a win-win for all concerned. The owner gets to stay in their house, the bank gets to avoid the expense of foreclosure proceedings, and the investor gets decent returns. Clever!

Comments
7 comments so far

” this looks like a win-win for all concerned. The owner gets to stay in their house, the bank gets to avoid the expense of foreclosure proceedings, and the investor gets decent returns. Clever!”

I believe you forgot about little old me “the loser” in the “win-win” deal.. You know the type.. Never over spent.. Always saved.. Pays taxes on time.. Takes care of parents.. Lives in a 900 sq ft house to maintain some sort of financial integrity. All this while my friends bought a mcmansion overlooking the ocean by over extending themselves. The are probably at this moment enjoying a few martinis on their back deck celebrating the IRS forgiveness of past taxes due.

So who loses?.. The taxpayer that bailed out the bank and absorbs the lost. Who wins? The banking executives who now have the cash to start this company because of the bank bail outs and the morally deficient friend living it up on the taxpayer dollar.

You can bet your bottom dollar I don’t have the connections to get in on this deal as an investor? It will be all the “in the know” Realtors in the completely deficient and corrupt real estate market and that is only if you think it deserves being called a “market”.

How far does this country think it can step on and push the “little” folks who contributed nothing to this disaster? I can barely read a column like this because it is so bad for my health. I get so upset with how entitled this country has become.

How many of the last great financially prudent folks are crossing over to the dark side? It only takes one time to “get away” with not paying your mortgage to get you addicted to the “game” of the good old USA. Next credit cards and gaming the low income mortgage loans backed by the govt. How long can we watch 6 million folks not pay their mortgage and go on vacation.

Does anybody real think we are moving in the right direction? Does this country really think they can fool all of us? I don’t get.. I really don’t..

Posted by triplec | Report as abusive

At first glance, this idea sounds singularly repulsive. It sounds like amnesty for shady lenders, when they ought to be in jail. No, worse. It sounds too much like a game; a game of putting happy face make-up on un-prosecuted usury by the ius-less bankers who make up 85% of lenders in this country, according them of all people ius ultimae noctis on the taxpaying posteriors of all galley-slaves of this prison-ship economy which is sailing ungallantly against the dwindling gale force of the U.S. Constitution. That’s what it mainly sounds like.

But then, you know, the way things are these days… maybe the meek are lucky even to rent space on this planet which they inhabit under economic house-arrest anyway. Maybe suffering from the flesh-eating virus of the U.S. economy really isn’t so bad after all if you just put enough hot sauce on it. Maybe being forced to buy commercial health insurance by law from blood-suckers really is better than a national single-payer plan. Maybe when he expelled the shylocks from the temple, Jesus was just having a bad day. Maybe granting bankers equal dominance over the assets of those foolish enough to believe in them as capricious priests and mohels have assumed toward young boys really is… a win-win situation.

But I disagree.

My idea of a win-win situation is, if the bankers and politicians put down their weapons of mass financial destruction and come out with their hands up, they may live. Or, they can commit suicide by cop. Rien ne va plus.

Posted by HBC | Report as abusive

Let me state that this firm could be 100% on the up and up, but if you take a look at the site, the analysis and the way they PROJECT returns for success stories, it seems odd. My initial reaction was how are they funding purchases, as this type of money is very expensive these days. When I realized that they were bringing in residential investors as white knights and have no skin the game, it made me think something is off.

Typically when I review an analysis and see “Annual Return” it is a red flag–it is a largely irrelevant metric often used to make an investment appear more profitable when presented to unsophisticated investors. The other red flag on the analysis is the lack of an “under-perform scenario,” such as a lessee default, major repair costs or market stagnation.

Then I took a look at the site and found that AHP is broker bringing in residential real estate investors (unsophisticated). The site also pushes the altruistic angle of investing. Not that it is wrong to push the feel good aspect, but it does make me stop and think something smells funny.

Something seems fishy!

Posted by AlexUD | Report as abusive

Interesting. With all the recent news about the supposed plan from the government bringing short sales, I was pleased to see when looking through AHP’s website that they have been around for more than two years. No “we hope this works, fingers crossed” plan launches here.

Perhaps I did not put on my critical hat this morning the way prior commentators have but looking at this, AHP makes sense. You get a return on your investment that is modest. Looking at the financial projections, the site conservatively states the return and does provide an ‘under-perform scenario.’ It clearly stated that if the lessee defaults, the missed payments are added to the option and that the same is true of repairs.

I like that I cannot find a question the site isn’t willing to answer. On their webpage, there is an area for questions and AHP looks more than enthused to answer questions. That type of transparency is quite comforting. If I was looking for more diversification in my portfolio, I’d feel safe investing in this.

From the standpoint of homeowner, this looks like a great last end solution. Loan mod didn’t work? Can’t work with the bank? Try AHP. Most homeowners at their wits end of default look into cash for keys or short sales that make them lose their home anyway, not try working with someone who will keep you in your home for a few years at the very least?

Thank you Felix for highlighting something like this. Perhaps more companies will come up with solutions for everyone and halt their Internet criticism with a constructive solution like AHP!

Posted by kaitlyn | Report as abusive

As a housing counselor, I see families trying to hold on to their homes the best they can. They have to go to food banks to feed their children! These aren’t people who bought “mcmansions” they couldn’t afford!

People have lost jobs. They were responsible and paid their mortgage until they no longer could. Homes have lost value and the owners can’t sell because they now owe more than the house is worth. Do you want families to be out on the street? This is what happens with foreclosures and sheriff sales.

This program is a good idea for both homeowners and banks. Abandoned houses bring down the property value of the entire neighborhood. These abandoned houses go back to the banks after foreclosure anyway. Just drive through your own neighborhood and you can usually spot the foreclosed homes.

Keeping families in their homes contributes to the stability of the neighborhoods and the economic growth of the community. It is a win-win situation.

This sounds like a great program. It gives families a second chance.

Posted by JK1 | Report as abusive

I couldn’t help but add my 2 cents. I am one of the investors who purchased some AHP properties. My mother passed away and left some stock which was losing money hand over fist. I sold the stock and had enough to buy 2 homes. The first was owned by a plumber who lost a lot of work because of the economy tanking, the second was owned by someone who was a school teacher who tried to make the move into a sales position, which also left her hurting when her client base dried up (again because of the tanking economy). Both homes needed a little work, which was included in the acquisition price. The plumber is working again and I actually hired him to work on the second house. The lady returned to teaching and is doing well. Both have not missed a single rent payment and both are appreciative of AHP and small investors like me. I borrowed some money to purchase 2 more properties and am thankful that I can not only get a return on my investment, but am helping some people stay in their homes. Some of my properties have been in the family for over 20 years. Now, those people are not leaving, and they plan to buy back their homes.
I have been rambling, but I really am thankful for AHP giving me a channel to help people, while also making some money. Sure there are risks, but I would rather place a bet on a person wanting to keep a house than a market that fluctuates with every word out of washington. I am not being paid to give this little speech and AHP doesn’t even know I’m writing, but when I believe in something I like to let others know about it.
Good luck with your investing, I don’t need luck with mine.

Posted by roboticist | Report as abusive

Actually, this is this the real deal folks! I too am one of the investers who purchased a home thru AHP. The previous homeowner was about to lose their home to foreclosure – literally the same week that we closed. So, in affect the previous homeowner was able to stay in their home (now as a renter) saving everyone alot of grief. The grief being legal fees for the banks pursuing foreclosure/ auctions, and the previous homeowner of completely losing everything he and his family had put into this home for the last 20 years.
Also, as the first ignorant person commented, the banks do Not have their hands in the cookie jar. He/she quoted, “The banking executives who now have the cash to start this company because of the bank bail outs and the morally deficient friend living it up on the taxpayer dollar.” I know that AHP fought with the banks over a year to get the short-sale approved in my case. If the banks had an incestous relationship with AHP, it would have happened alot quicker than that. I’ve had numerous talks with AHP, and believe me it takes alot of time and effort to convince the Big dopey banks that it will be much better to execute a short-sale than pursue the alternative. But wake up!!! Short-sales are happening whether or Not AHP exists. At least with AHP, they are looking for the best alternative to this Housing crisis and helping to minimize the pain for everyone. It’s good karma here folks. Instead of seeking “an eye for an eye and a tooth for a tooth” metality, we need to find a solution to this madness. And I believe AHP has done just that.

Posted by Laureus | Report as abusive
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