SELLING A HOME WITH A HERO LOAN ATTACHED
Some things seem to be too good to be true are. The HERO loan program looks like a great way to do some home improvements, upgrade energy efficiency and not spend any funds out of pocket.
I’m not going to pass judgment on the whole program as I’m sure it has its good points, but from a home seller point of view there can be some issues damaging a homes value. Let me give an example.
Dan and I listed a property in The Village of Heritage in Fontana, and the homeowner had just recently obtained a hero loan for a new a/c system and all new windows six months prior to listing. The cost was $22,000, with a 10 year repayment at 8.5%. The amortized amount of $260.37 per month was added to their property tax bill for a total of $3124 annually. The property was valued at $400,000 (after the improvements), but unless the hero loan (which was still over $21,000) was paid off by the seller at close (which of course they did not want to do), then the buyer would have to assume the new tax bill, which would have been $9176.24 per year or 2.29%, which was $764.66 per month. The $21,000 in upgrades did not add $21000 in value to the home; no buyers wanted to pay the additional taxes (especially at that interest rate; buyers that normally qualified for $400k did not qualify for the home because of the added extra tax expense; and the seller did not want to pay off the loan – so the end result was that they had to keep the house, and are now working on trying to pay off the loan.
If you are considering energy efficient improvements, then ask yourself:
How long am I going to own the home? If long term, would I be better off to get a home equity line (if possible), at a much lower interest rate? If not, then a HERO loan may be a good option for you.
Always check with your tax accountant to determine if the loan payments or interest (even though they are in your “tax” bill) are tax deductible. If not, again, a home equity line may be a better option.
If you are planning to sell in the short term, how much of this expense will be reflected in an increase in value? Even if dollar for dollar, if the buyer is the one that assumes the loan/taxes and are affectively paying for the upgrades, then they will want to reduce the amount paid for the home commensurately.
As always, simply research and make an informed decision before moving forward, and, let me know if I can be of any help.