Energy improvement program can hobble home sales

A growing number of California communities – including the region’s second largest city, Elk Grove – are allowing homeowners to finance energy-saving improvements through their property tax bills.

The approach enables homeowners to install costly green upgrades without having to pay cash upfront; loan payments are made along with property taxes. Known as Property Assessed Clean Energy, or PACE, the financing programs began in California in 2001.

The programs are now authorized in 31 states and are seen by local officials as an economic generator and a way for homeowners to reduce their carbon footprint and utility bills. A wide range of improvements qualify, from solar panels to electric vehicle charging stations.

But the approach can add a layer of complexity to home sales and refinance applications. Interest rates also tend to be higher than for mortgages and home equity loans, from 6.75 to 8.35 percent in the Home Energy Renovation Opportunity, or HERO, program that Elk Grove has authorized.

Still, interest and awareness is increasing as more homeowners seek upgrades, said Bob Davison, an engineer with Sacramento County. Last year, 143 PACE projects were funded in Sacramento County for a total of $4.24 million. This year, 629 projects totaling $11 million were funded through April, he said.

The PACE loans are typically funded by bonds, and those can be issued by municipal financing districts, state agencies or finance companies.

Lenders such as HERO offer loans over a five-, 10- or 20-year period. Rates are fixed and determined based on the length of the borrowing period and life of the product, said HERO spokesman Severn Williams.

The programs have been well-received among contractors, who stand to benefit from the increased business.

“This program has increased our business about 14 percent and allowed us to grow – and when we grow we hire more employees,” said David Hosking, with Bell Brothers Plumbing, Heating and Air, one of the local contractors approved to participate in the PACE program.

Problems can arise, however, if a homeowner goes into default or seeks to refinance. Under the terms of a PACE loan, the PACE lender gets paid before other creditors, including the holder of the mortgage.

“PACE is relatively new, and as such, there have been some challenges, including some issues around transferability,” Williams said.

In 2010, Fannie Mae and Freddie Mac said they would not underwrite mortgages for homeowners involved in PACE because the loans added too much risk in the event of a default. The Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, said late last year that its stance had not changed – despite efforts by Gov. Jerry Brown and former state Treasurer Bill Lockyer to create a fund they said would cover the two major backers of home loans.

Some homeowners have had to pay off their PACE loans before they can refinance.

When Patti Smith sought a refinance last year for her senior community home in San Diego County, she had to pay off a $14,774 HERO loan she previously took out for an air-conditioning unit, tankless water heater and replacement ductwork.

“I was flabbergasted when our mortgage company told us we had a lien,” said Smith, 62. “The contractor who pushed the HERO program never mentioned the word ‘lien.’ If he would have we would have never done it.”

Smith said she also had to pay a penalty of $1,734.14 to HERO for paying off the loan early. The HERO program has since waived the penalty fee for homeowners.

One selling point of PACE loans has been that a home seller can transfer responsibility for paying off green improvements to the buyer when they move, since the assessment is collected through county property tax payments. But real estate agents warn that such transfers aren’t as smooth as once envisioned.

Some buyers or their lenders demand that home sellers pay off the lien before completing a sale.

“People need to have the particulars of these programs presented to them,” said Joe Gibson, a Sacramento-based real estate agent with Coldwell Banker. “The loans may have an impact on homeowners’ ability to sell.”

Gibson has yet to encounter a home sale with a PACE program attached. He believes the program is so new that few real estate agents know how the programs work.

So far there have been no transferability complaints with the HERO program in Elk Grove, said Kristyn Nelson, a city spokeswoman.

“Each of the programs offer slightly different efficiency upgrades and interest rates, so it is up to the homeowner to do the appropriate research about which program is best suited for their needs,” Nelson said.

O.J. Vallejo, lending consultant with First Priority Financial, said if he was buying a home, he would insist on the seller paying off a PACE lien. He suggested that the price of a home would likely already account for the added value of improvements; for instance, the same home with solar panels would sell for more than without.

“If the value of the energy system is built into the price of the house and it’s also included on the property tax assessment, aren’t you paying twice?” Vallejo said.

This story was originally published July 17, 2015 at 2:47 PM.