Homeowners - Beware of the HERO program financing for home improvements

Real Estate Agent with Pedersen Real Estate 01435175

Some Big Problems with HERO PACE program - Homeowners Beware!

My home improvements HERO programhusband and I took a listing a recently where the seller was selling his mother’s home.  She had passed away a few months before this time.  He told us during the listing appointment that she may have had some home improvement work done to the home involving the HERO program.  HERO stands for Home Energy Renovation Opportunity.  This program provides financing for energy improvements made to your house, solar, windows, plumbing, etc. where repayments are paid through your property taxes, and 100% financing is available.  This program is offered in  a number of states, including CA where I live and work.


We needed to find out more about both the program and the lien on the house.  We found an additional tax lien from HERO against the property in the preliminary title report but WITHOUT an amount.  After some effort on our part as well as the seller, we discovered that the balance owed was almost $12,000.  This was the first time we had encountered this type of lien and the person we spoke with at the City kept insisting that the HERO lien was transferable.  WRONG!  That is not always the case.

HERO program problems



You see, since the financing for the HERO program is a tax lien and it is paid with your property taxes, it takes first position over other liens against the property (i.e. mortgage lenders).  Lenders will NOT lend on properties where they do not have “first position.”  So the loan had to be paid off prior to the close of escrow.  Part of the problem was that we could not document any demonstrative improvements that would justify a value increase to the home for the appraiser.  According to the son, his mother had the house texture-coated a few years ago through the HERO program.  The home was a single story 1100 sq. ft. stucco home.  The seller had to pay off the lien out of the proceeds of the sale in order for the sale to go through.  But the purchase price did NOT reflect any improvements to the home that justified the HERO lien.  This seller was lucky because he had enough equity to pay off the HERO lien but many sellers are finding that they do not have enough equity to pay off the lien and they believe that the buyer can assume the debt.


In the past couple of months, the California Association of Realtors and local Realtor associations have been trying to educate Realtors about the program and its risks.  What risk?  For one, some Realtors and sellers have been sued for not disclosing the HERO liens.  This issue is also shutting down sales and refinances as most banks, in particular conventional loans, will not finance purchase loan or a refinance loan on houses that have HERO liens on them.  Here are some things to be aware of.


1)  The HERO loan is recorded against the property as a tax lien.

2) The tax lien is in the first position, meaning that if a homeowner goes into default, HERO gets paid before any other creditors, including the lender(s) that hold the mortgage.

3)  That the first position is so important that the Federal Housing Finance Agency prohibits Fannie Mae and Freddie Mac (they handle conventional loans) from purchasing mortgages with these types of liens on the property - either as refinances or purchases.

4)  For those who get on the program, if they don't call their mortgage services right away, they will have a deficit in their impound account for paying their property taxes.

5)  HERO loans don't always show up on the first tax bill; it often shows up in the second tax cycle, so homeowners find themselves in a situation of having to pay more (up to double) the first year to true up the impound account.

6)  Homeowners with HERO financing think that these loans are assumable, but often they're NOT.  For the most part, banks won't lend on a property unless the HERO debt is settled prior to closing. 

7)  The financing is very expensive.  There is a one-time administration fee of 6.95%.  Plus the annual interest is about 11%.

Here’s an example of a lawsuit that actually took place recently in CA.  A woman agreed to pay $345,000 for a clear title on a house in April 2013.  She got embroiled in a civil lawsuit accusing the seller and others who handled the all-cash sale of failing to disclose and pay off a $28,675 property tax assessment for HERO-financed windows and doors that could grow to $59,431 over 20 years. 


So please be very careful before agreeing to the HERO program.  There is a lot of BIG money behind this program and pushing it as a benevolent and beneficial "save the planet" type program - and mostly ignoring the details and negative consequences. We're not saying  not to use the program - we are just trying to make sure people have all the facts before they go ahead with this program. 

Posted by

Vicki Pedersen 
Pedersen Real Estate

Deena – HERO Property Advisor

 Hi Vicki, You are so right that existing homeowners, buyers, sellers and their real estate agents need to understand how the HERO Program works.  That’s why we have a dedicated team of HERO Property Advisors who work with real estate agents and the professional team (appraisers, mortgage lenders, title reps, etc.) involved in property transactions. Our team has worked on a variety of solutions (including subordination) that can be tailored to unique circumstances. We invite you to give us a call to personally address your concerns at 1-855-CAL-HERO (1-855-225-4376) and look forward to connecting with you.  -Deena

May 20, 2015 09:53 AM
Endre Barath, Jr.
Berkshire Hathaway HomeServices California Properties - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

Vickie I have been warning people of this for a while, funny part is I am on a neighborhood website and tried to warn people... they are all missing the point... at resale time it will bite them...Endre

Jul 31, 2016 12:26 PM
Patricia Kennedy
RLAH@properties - Washington, DC
Home in the Capital

Vickie, this sounds like Monkey Wrench Central!  Haven't seen anything like that in my area, but all good things seem to start in California!  We'll have to stay alert.

Aug 01, 2016 12:17 AM
Teri Pacitto
Compass - Westlake Village, CA
Real Estate, Your Style...Your Home...My Specialty

This HERO Program was new to me until yesterday when a client called me and said they are considering installing artificial turf on this program and to the cost of $25,000.  They plan to retire and move on a couple of years and asked if this will impact the sale. 

Needless to say my Real Estate Radar went up and my reaction was...yes!  

Does anyone have any experience with this in a recent sale transaction?  I know that any increased liens or encumbrances on a property will impact the sale but the clients are being told by the company that bid the work to not worry and I'm being negative toward this program.  

Any imput?

Aug 06, 2016 01:12 AM
Vicki Pedersen
Pedersen Real Estate - Riverside, CA
Providing Exceptional Real Estate Service

HERO liens are shutting down many home sales unless the sellers have enough equity to pay off the lien at closing.  But FHA/VA have came out very recently and said that they will accept the HERO/PACE liens as "assessments"  - and that they'll take the second position to these.  But it is very questionable if the actual lenders will do  these loans because they probably won't be willing to accept the risk.   Its too early to know for sure.   Fannie and Freddie will  not take a second position - so a conventional buyer will not be able to get a loan if there is a HERO/PACE lien on the house that won't be paid off prior to closing. 

Aug 06, 2016 07:16 AM
M.C. Dwyer
Melody Russell Team at eXp Realty of California, Inc. - Felton, CA
MC Dwyer-Santa Cruz Mountains Property Specialist

Thanks for writing this important and informative post, Vicki!

Sep 10, 2018 03:57 PM