HERO program — a Hero or a Villain? A SoCal Realtors Take on why not to be a HERO By David M. Bowers, Bowers Real Estate July 2017 Newsletter
We are not going to beat around the bush. Attractive HERO loans are not the saviors they are sold to be. First, what is the PACE program versus the HERO program. Let us pretend PACE is Jor-EL and HERO is Superman. PACE is properly known as the Property Assessed Clean Energy legislation passed in 2011. Under PACE is HERO, which stands for Home Energy Renovation Opportunity. But, let’s be honest HERO is no Clark Kent. In this article, we are going to address why. If you disagree, then well, you may be fighting for the wrong side. We have met several homeowners recently who chose the HERO loan program to make energy efficient upgrades or repairs to their home and save money on their utility bills, because HERO loans are based on the equity of the home. For many, refinancing their home to pay for these upgrades/repairs is not an option because it is based on your personal credit and have a low credit score. These reasons make HERO a very attractive option on the surface. Now, let me share 5 reasons why it is not. 1 - Appraisal Value: Appraisers do not generally see energy improvements made to the home as adding to the property’s value. Energy improvements such as new heating and air condition systems, energy efficient windows and doors, drought tolerant landscaping, etc. These improvements, while they are improvements or upgrades to the home, are generally not seen as tangible value to the buyers, much less appraisers. For example, artificial turf in your front yard with a nice rock scape may have fantastic curb appeal, reduce your water bill and help climate change, but generally people will not pay more for it; therefore, it will not be a significant factor in increasing the value of your home. 2 - Hard to Sell: You most likely will be required to pay the loan off before you sell or use the homes existing equity to pay it off at closing. There are a small number of companies who will work with buyers and HERO loans, but even so, this lessens the number of potential buyers who are able to buy
your home. In the long run, if you do not have enough equity in your home, then it becomes much more difficult to sell your home. 3 - First Position Jealousy: The HERO loan is put as a line item on your property taxes and must be paid or the property can be closed on by foreclosure. Lenders make loans because they know if there is trouble they will be paid first. This is NOT the case with a HERO loan which is why the majority of lenders are not willing to lend. This makes it much harder to sell your home because very few buyers will qualify to buy your home. The lenders that do work with the HERO program, still have the appraisal issues to contend with. 4 - High Interest Rates: The HERO program rates are approximately 11%, which is high when compared to conventional loans are around 4%. Also, you are required to pay upfront costs that can be around 6% or higher to get into the program, which consists of management fees and other costs. These costs can make the program more expensive than other options. 5 – Tax Deduction: The HERO program qualifies as a “mortgage” so the interest is tax deductible, but only the interest payments. Many advertise it as totally tax deductible but it is not true. Factor in the tax savings along with the benefits and costs for the program. “So, hero or villain?” Other realtors, lenders, banks may disagree with me, but hundreds of thousands of homes have taken part in this “innovative renovation program.” Repeatedly, homeowners are told the HERO program will increase the value of their home, provide tax credits and act as a total tax deduction, but from the explanations above, it is my hope to prove these benefits to be generally false. HERO is less like Superman and more like General Zod, but I will leave it to you to weigh the benefits and costs and make an educated decision. HERO may not be a supervillain out to take over the world, but it is not transparent and while it may boost the economy, it should be considered carefully and with a careful eye to your future. As a realtor, with a background in finance and homebuilding for 10+ years, I urge you to beware and educate yourself on the cost/benefits of the HERO program. Your home is one of your largest assets. For questions, please call me directly to discuss. As a realtor, it is imperative I keep all past/present/ future clients informed, so they make the best decision for their family. Please, contact David M. Bowers (Cal BRE#01966164) at 951) 365-7983 if you have any questions. *Interested in joining our mailing list? We send out quarterly newsletters with information JUST like this to keep you well informed. Do you mind hearing from us 3x a year? If so, message us on Facebook and we will add you to our mailing list. Next newsletter will be out in November. Stay tuned.