Thursday, September 10, 2015

Think twice before financing home improvements using a Property Assessed Clean Energy (PACE) Loan...

A few weeks ago I listed a really cute home in the Tallac Village neighborhood. The sellers walked me through the house and showed me around. I took note of the dual pane windows, updated kitchen, central heating and air, drought tolerant landscape, composition roof, and all the other nice amenities the house had to offer. Then I asked the million dollar question: "have you financed any of these improvements?" The seller had indeed financed the new artificial grass using a Property Assessed Clean Energy (PACE) loan. Yikes. Alarm bells were ringing in my head.

She then said, "Oh, but don't worry. The PACE loan will be transferred to the new owner!"

Umm, no.

A PACE loan allows a homeowner who meets the eligibility requirements to finance energy-efficient home improvements, and make payments via the twice yearly property tax billing. Examples of the types of work that can be done to a home are solar, central heating and air, dual pane windows, lighting, a roof, low-water-flow plumbing, insulation, artificial turf, etc.

Let me just say that I have some negative thoughts about PACE loans. There is a lot of room for confusion among homeowners who use this program. This is the perfect case in point.

While in theory, a homeowner may transfer a PACE loan to a buyer, there are two big-time flaws in this concept.

First, what homeowner wants to pay the market value for a home and assume a loan for part of the improvements that made the home worth that amount of money? Nobody. That's a raw deal. Let's just assume for a minute that the $7,000 that the seller of this property financed to pay for artificial turf (yes, that's right $7,000) increased the home's value by even half that amount: $3,500. The house may have been worth $271,500, and the market value is worth maybe $275,000 now after adding the value of artificial turf. Why would a buyer pay $275,000 AND assume a $7,000 loan? No buyer in his/her right mind would do that. (And for the record, I do not think this sort of improvement actually increases a home's actual value that significantly)

Second, and where the real trouble lies, is that lenders will not place new loans on properties with existing PACE loans. Fannie Mae, Freddie Mac, and FHA all consider PACE loans to be "superior" liens. Fannie, Freddie, and FHA will not put a loan on a property and be in the "second position" to ANY loan. Including a PACE loan. PACE loans, because they are attached to a property tax bill, survive foreclosure. A regular second mortgage or Home Equity Line of Credit will not survive a foreclosure.

So while the PACE loan administrator (a company called Ygrene in Sacramento) may allow the transfer of this debt to a new owner, this is highly unlikely to happen unless you happen to sell the house to a poorly advised, all cash buyer. And that ain't happening.

So what does this mean for homeowners? It means if you have a PACE loan, it's going to have to be paid off when you sell. AND, it will have to be paid off if you refinance. Bet that wasn't made clear to you by the contractors pushing this financing for services they were trying to sell you, was it? It wasn't to my seller. And thankfully, we had this conversation early in the selling process, and they have more than enough equity to pay it off with the sale.

Let me share one other anecdote from personal experience as well. I am in the process of re-roofing my own home. My husband and I got five bids, and one of the contractors was trying to sell us on using PACE to pay for the roof and how it was like getting "free money" since we could pay for it over 10-15 years and via the property tax bill. That company's bid was THE HIGHEST, and the highest by about $7,000. Wow. A $20,000 bid, for a roof we are paying $11,000 for is insane. And I would argue that a lot of folks will overpay and not question a contractor's bid when they are financing the cost it over 10-15 years in this "free money" scam. Food for thought.

My advice? Stay away from PACE loans. Or at least be sure to read the fine print and really know what you are getting.

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