Financing Upgrades Through Property Taxes

[Grant Anderson]

Hi everyone, I am in California and am not sure if this is only in California or not. I have done a few rehabs and recently was approached by another rehabber that wanted to wholesale one of his flips. The numbers were very thin by my estimation. He said that I could get about $30,000 of the rehab costs through a program like ygreen.com, basically if you upgrade Windows, roof, drought tolerant landscaping, and other energy efficient items, you are able to get a loan that is attached to the property taxes for the property. When you sell the property the new owner takes over the payments because it is added to the property taxes. Does other rehabbers do this? It seems like the new homeowner is now on the hook for the rehabb costs without even knowing it. I understand that I can make more money doing this because it reduces my costs but just wasn't sure if it is the right thing to do to the new homeowner. What is everyone else's thoughts on this?

[Laura Ozols]

@GrantAnderson

I recently did a lot of research into these "green" programs for solar, energy efficiency windows & doors, tankless water heaters, etc.  What I learned from my research is 

(1) It is not a loan paid to you directly.  Each of the programs has certain contractors associated with them and they pay the contractors directly as they complete the work on the home.

(2) It is a tax lien on the home and the "program" is the 1st lien holder.  What this means is that no traditional mortgage company will finance the home as the 2nd lien holder so if you plan on refinancing or selling the home, you have to pay off the "program" to be able to do so.

(3) Some of these "programs" have penalties attached for early pay off or transfer of loan to another.

(4)  The interest rates on these "programs" for these loans are high as many of them do not use credit scores to qualify people seeking the loans.

Finally, there was a recent news article in my local paper about the "HERO" program [one of the green programs] which warned about using the program for these very reasons:

**Beth Mills, a spokeswoman for California Banking Association, said in a telephone interview that any program that makes homes more energy-efficient is valuable, but the financing structure is problematic.

“Essentially, they are cutting in line,” Mills said, referring to the super-lien priority status over a mortgage.

“Few, if any lenders are going to accept this secondary lien position,” real estate agent Then said, so the tax-lien associated with the HERO improvements will have to be paid off, in most cases, at the time a sale closes or the mortgage is refinanced.

The question becomes, who will pay it?

Jane Chaname, of Remax Results in Moreno Valley, said she lost a listing because of the tax-lien provision. Sellers of a $339,000 home learned they had to pay off $20,000 in energy upgrades because the buyer wanted to finance the sale with a government-backed loan.

“Because the $20,000 took so much away from their equity to put into another home, they decided not to sell,” she said.

Another client of Chaname had difficulty selling his home because would-be buyers balked at paying $16,000 more for a home with HERO-financed air conditioning, duct work, water heater and insulation when similar homes were selling for less.

The buyers argued they were paying for the improvements twice – through the higher valuation on the house and assumption of the loan. “We sold his home, but only on condition the HERO loan was paid off for the buyer with proceeds from the sale,” Chaname said. **

I would recommend that you stay away from these programs in doing your rehabs.