How Do HERO Loans for Eco-Friendly Home Improvements Affect Real Estate Transactions?
The Home Energy Renovation Opportunity (HERO) Program is an innovative financing program put in place by Renovate America in 2011 and was made possible through the passage of Property Assessed Clean Energy (PACE) legislation.
Many homeowners have not yet heard about this exciting program that allows you to make water-saving and energy-conserving improvements to their homes.
Aimed at helping homeowners (and businesses) make their properties more sustainable, improve water and energy efficiency and encourage the use of renewable energy sources, HERO loans can be used for the purchase and installation of more than 900,000 products in more than 50 categories.
This can include such improvements as replacing a natural grass lawn with artificial turf, replacing an aging air conditioner with an energy-efficient unit, improving your homes insulation or installing solar panels.
Thousands of homeowners in California have taken advantage of this opportunity to make eco-friendly home improvements, but some questions that can be a bit confusing have come up when some of these property owners decide to sell their homes.
Most of this confusion concerns how HERO loans are attached to the property.
This particular loan program is quite appealing to many homeowners, largely because obtaining this type of loan is based on your home’s equity — rather than your credit score — it has a low, fixed rate, and the loan is attached to your home as a tax assessment.
Payments are made as part of your regular property tax bill and, for some homeowners, the payments could even be tax deductible.
Because the loan is attached to the property as a tax assessment, this also means that the balance could potentially be transferred to the buyers when you sell your home.
All of this makes this program an appealing option for homeowners who want to lower their home’s carbon footprint or save money on utilities; however, this is also where some of the confusion comes up about how HERO loans work.
Choosing your project, browsing the list of approved products to find the perfect solution for your home and applying for a HERO loan through the easy, online application process is the fun part but, as with any loan, there is also a business end that you need to understand.
Understanding how a HERO loan attached to a property as a tax assessment can affect real estate transactions is important for sellers, buyers and real estate agents helping people buy or sell homes.
Homeowners who are considering making home improvements with the help of a HERO program loan and who may choose to sell their homes in the future before the loan has been repaid definitely need to understand how this works in order to determine if a HERO loan is right for them and to better navigate the selling process successfully.
If you are not familiar with the HERO program, you may want to learn a bit more than offered in the brief description above.
To better understand how HERO program financing can help you make energy- and water-saving improvements to your home, you may first want to read two of our previous posts:
Once you have read those informative posts and have a better understanding of how this exciting program can help cover eco-friendly upgrades for your home, read the Q&A below.
These super-informative answers to the most pressing questions about how HERO loans affect real estate transactions include how the loan is attached to your home, your options when you choose to sell your home, how you can get more information to guide you through the process of selling a home with a HERO loan, and a game-changing accommodation instituted in April 2015 that just might be enough to assuage any lingering apprehension you may have about taking advantage of this opportunity.
Before we jump into the Q&A, this might be a good place to give a huge thank you to the HERO program’s Ryan Myers, who was integral in bringing you this in-depth information to help all of us better understand the ins and outs of HERO program financing.
HERO Loans Q&A
IID: Is it accurate that the HERO loan is attached to the home as a tax lien in the first position?
Can you briefly explain what this means (such as how it would be paid first before a mortgage default, etc.)?
HERO: Yes. Property taxes are always paid first – before the mortgage – on any property in the case of default.
Since HERO is attached to the homeowner’s property taxes, it is listed as a lien in the first position.
However, as an accommodation to homebuyers and lenders and effective April 6, 2015, we are now giving property owners who sell their homes the ability to subordinate the HERO assessment to their mortgage when it is required to facilitate the close of a sale transaction.
This new option, in addition to the options of paying off the remaining principal or doing nothing and having the balance automatically transfer to the new homeowner, enables HERO to provide homeowners with a full suite of possibilities when selling their homes.
This solution is available at the time of sale only and the mortgage must be from a qualified lender (e.g., no hard money or private party).
The subordination transaction fee is $350 payable at the close of escrow.
To initiate the subordination process, please call HERO Property Advisors at 855-CAL-HERO and request subordination.
IID: Are you aware of lenders who are amenable to being in a secondary lien position behind a HERO loan?
HERO: Yes. We maintain an extensive list of lenders who approve financing without payoff of HERO assessment.
HERO Property Advisors can assist you with choosing a HERO-friendly lender.
IID: Are you aware of this being a problem for homeowners who used the HERO program to make eco-friendly home improvements and later chose to sell their homes?
HERO: Yes. Although over 3,000 HERO Homeowners have refinanced or sold their homes and the HERO assessment has been successfully transferred in the majority of those transactions, we are aware that a portion of homeowners have experienced issues with the process.
Therefore, over the last several months, our increased dialogue with professionals in the real estate community has informed us on how to better equip them with the information and tools they need to facilitate HERO home sales and navigate what it is still a new financing option in the marketplace.
As a result of these ongoing conversations, HERO has expanded the ways we can help homeowners and real estate professionals market and sell homes with a HERO assessment.
In fact, we’ve launched a new division of our Program, HERO Property Advisors, as a dedicated resource for this purpose.
HERO Homeowners and real estate professionals can contact HERO Property Advisors at 855-CAL-HERO for assistance at any point.
IID: Have you found that most HERO loans are being transferred to the new homeowner or that they are being paid off as part of the transaction?
HERO: At this time, in the case of home sales (excluding refinances), we have found that approximately half have opted to transfer the assessment while the remaining have paid it off as part of the transaction.
Through our increasing efforts to better support realtors and homeowners throughout this process, we expect to see that more assessments will transfer successfully.
IID: Do potential buyers who are willing to take over the HERO assessment need to qualify for HERO financing?
HERO: No. The potential buyer of a home with a HERO assessment does not need to qualify or reapply for HERO.
When a HERO tax assessment is transferred to new owners, it does so automatically with the sale of the property.
IID: When selling a home with a HERO assessment, how does the real estate transaction differ from selling a home without this assessment?
HERO: Selling a home with a HERO assessment entails providing clear disclosures up front.
Listing agents should disclose to interested buyers that there is an additional tax assessment on the property tax bill while also explaining how the energy and/or water savings help offset such an assessment.
HERO Property Advisors are available to assist in this process and may be reached at 1-855-CAL-HERO.
Additionally, as mentioned earlier, some lenders may require that the HERO assessment is subordinated to the mortgage in order to close the sale, which HERO Property Advisors will also facilitate.
IID: Do sellers or listing agents have to disclose that the property has a HERO assessment?
HERO: Yes. See above.
IID: Can the improvements made using the HERO Program potentially offset the costs of this tax assessment?
HERO: Yes, the utility bill savings resulting from the improvements often help offset the costs of the HERO assessment.
Depending on the improvement, the benefits may greatly surpass the cost of the improvement.
Even in the cases when these amounts are roughly equal, HERO homeowners have told us anecdotally that they prefer putting that money toward their homes rather than to a utility bill company.
Additionally, in many cases, the benefits of the improvement go beyond financial.
This can include increased safety and comfort, decreased allergy symptoms, decreased maintenance (when, for example, grass lawns are replaced), and peace of mind.
IID: How can sellers and buyers get more information or assistance regarding real estate transactions for properties with a HERO assessment?
HERO: HERO Homeowners and real estate professionals can contact HERO Property Advisors at 855-CAL-HERO for assistance at any point.
Give us a call at (858) 925-3000 to talk to one of our design consultants about your project.
To check your eligibility or to apply for a HERO loan online, visit the HERO Program website.
Here are a few more resources you might find helpful:
- California HERO Program Residential Eligible Product List
- Custom Product Application (for products not currently on the eligible product list)
- Searchable Database of Approved Contractors
- HERO Program Frequently Asked Questions
- Real Estate Agent Information and Training Registration
- HERO Program Videos (including a great video showing a backyard transformed by installing artificial grass)
Have you used a HERO loan to make your home more energy or water efficient?
If so, what was your experience with the program?