Truth breakdown on the HERO Program and energy-efficient upgrades
Solar panels and other eco-friendly home products are growing in popularity and spreading across California neighborhoods. What’s seemingly great is, many of these smart improvements are eligible for unique financing that is added on to property taxes. This allows homeowners to invest in their home’s energy efficiency without the large up-front costs. This opportunity is available via the HERO Program, which is made possible by Property Assessed Clean Energy (PACE) legislation – so the two names go hand in hand. While it sounds like a win-win solution for modern homeowners, there is much controversy over HERO/PACE because the program can be both beneficial and detrimental.
The way HERO/PACE works is, a homeowner first applies for financing through the program. Once approved, the program helps refer contractors and professionals to install the eco-friendly products. One of the most popular upgrades is solar panels, however, they can also include doors, windows, HVAC, artificial turf and other energy-conserving items. Once new products are installed, homeowners sign off on the work and the professionals are paid – meaning, “HERO finances 100% of the cost to purchase and install eligible products with fixed rates and flexible terms,” per heroprogram.com
Financing through HERO/PACE seems like a breeze for homeowners, especially with the option to spread the cost of the upgrades over 5 to 25 years (aka the flexible terms). However, as mentioned in the opening of this article, homeowners should be aware that this type of debt is attached to the home’s property taxes. While it may not sound like a big deal, it can pose some issues:
1. Listed as a lien – since the debt is recorded as a lien and attached to property taxes, some lenders will require it to be paid off in the event of refinancing or obtaining a second mortgage. This means if borrowers were to default, the HERO/PACE lien would be paid out first, the primary mortgage would be paid out second and if applicable, the second mortgage would be paid out third. As you can imagine, mortgage companies are not fond of this payoff order of operations, so they try to avoid it.
2. Complications in selling or transferring title – when it comes time to sell a HERO-upgraded home, there may be issues with the new buyer’s lender and transferring title with the existing HERO/PACE lien on the home. This is mainly due to the lien causing payoff problems and other concerns, as mentioned above.
3. Mislabeled line item on reports – from my own experience in helping clients purchase a HERO-upgraded home, we discovered the lien was listed as “Mello-Roos” on a report during escrow when the property was not located within a Mello-Roos District. Initially, this caused panic and confusion before I uncovered the fact that someone had mislabeled the line item – not maliciously, but because there wasn’t a “HERO, solar panel, etc.” line-item option. This may have been detrimental to my client, since the additional fees were not factored in to their monthly debt. Originally, they may have not qualified for the loan, but in my clients’ case, the seller was paying the lien off at the close of escrow so they were able to complete the transaction. I caution other agents and lending professionals to be aware of this scenario.
Technology offers some amazing options these days, which includes the energy-efficient home upgrades that HERO/PACE promotes. It’s an excellent choice for many people, but my goal is to help provide clarity on the program from a professional real estate angle. And more importantly, to encourage homeowners to read the fine print and understand how a HERO/PACE lien on their home could affect future sales or other lending transactions – for better or for worse.
If you have questions about the HERO Program or need more real estate advice to get your home listed and sold in San Diego County, email or call Michael Biondo at 619-993-9559 to get started.