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April 17, 2017

Energy Upgrades Can Improve Property Value, But Are There Financing Pitfalls?

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Category: Home Sellers, Homeowner Tips, Owning a Home, Real Estate Info


There are loads of good reasons to make energy efficient improvements to your home but choose wisely to get the most bang for your buck.  Not only does it matter what you upgrade but even more important is how you pay for those improvements.  That tankless hot water heater could land you in financial hot water if you’re not careful!

New windows, doors, roof, insulation, et cetera will all make your home more comfortable and potentially more attractive as well as increasing the value.  Few people have the cash available to do the upgrades they intend and so will resort to financing the improvements.  That can be a great way to get the improvements you want with a relatively low pain point in your monthly budget.  Here’s where you need to be careful.

  • There’s a relatively new (since 2010) loan program available that allows local governments, state governments, or other inter-jurisdictional authorities, when authorized by state law, to fund the up-front cost of energy improvements on commercial and residential properties, which are paid back over time by the property owners.  The program is called PACE (Property Assessed Clean Energy).  What this means is that certain lenders are funding the improvements for you and attaching a lien to your property that is repaid through your property taxes.

On the surface it sounds like a great idea and for some it may be but there are some pitfalls to be aware of.

  • Many times the contractor that is arranging to do the work is also the contractor providing the financing for the PACE program loan.
    • Be sure that both the cost of the improvements and the cost of the loan are within typical costs for the kinds of improvements you are considering.
  • Take your time in making your decision.  An offer that is good “today only” may not be your best choice.
  • Understand exactly the cost of the improvements with the financing cost and the terms under which you are repaying the loan.
    • Remember that the loan payments are added to your property tax bill as an additional assessment.  This means that if you become delinquent on your property taxes, you are also delinquent on your PACE program loan and your PACE program lender would be able to foreclose on their lien and you could lose your home.
    • A PACE program loan can also make it difficult or impossible to sell your home.  Most buyers will not be willing to accept your loan obligation as part of the sale.  That means that the PACE program loan has to be paid off before you can transfer ownership to the new buyer.  If you don’t have enough equity in your home to cover the cost of the lien, you may have to bring in additional funds.

Even if everything else looks good, you love the cost of the improvements and the PACE program financing terms, check with your lender before doing this kind of loan because the PACE program loan is recorded as a super lien.  This means that in most cases it is in order of priority above other liens on your property (including your primary mortgage)!  Your mortgage lender will probably not allow you to put them in this position.

In conclusion, as with most things, do your homework, make sure you know what you’re getting into and make your best decision based on the facts.  If you want to talk about your specific situation and how it relates to buying or selling your home, start the conversation with me at 661-375-7325.

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