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Be a “HERO”: Remember to Disclose This Silent Lien


Julia Wei

by Julia Wei on July 25, 2016

in Lending/Lender Issues, Mortgage Issues, Real Estate Law

Since 2001, California has had PACE programs available throughout the state.  One of the most well known is the “HERO” program, the Home Energy Retrofit Opportunity program which was first established in the Riverside County area. In late 2013, San Jose’s city council voted to participate in the HERO program, joining Berkeley, San Francisco, Menlo Park and other Bay Area municipalities in implementing the program.[1]

Homeowners who were eligible for this program essentially borrowed money to install solar panels or other conservation improvements to their property.  Once approved, the amount spent on the solar panels were then assessed against the property as a lien, plus interest.  The homeowner then spends between 5 to 20 years paying off this special assessment (the PACE lien) on their property tax bill.

Fast forward, and now a new problem has arisen.  Homeowners often may not understand that how the mechanics of the PACE lien works.  The PACE loan is repaid through their property tax bill and owners may have entirely forgotten the financing as a result.  Now when it comes time to list the property for sale, the PACE liens have been causing a problem for buyers and sellers trying to close escrow.

What’s the problem?  Well, for one thing, the PACE lien is a priority lien.  That means that for the buyers, their loan is supposed to pay off all liens against the property and be in first position.  Often when applying for the loan to purchase the property, only the purchase price is taken into account—not the hidden tax lien.

That means that sellers and their listing agents must be mindful to disclose the PACE lien.  The California Association of Realtors issued an FAQ for their members and reminded licensees who use the CAR forms that:

“The C.A.R. residential purchase agreement (RPA-CA) requires a seller in paragraph 8.B.(4) to disclose to the buyer whether any items in paragraph 8.B. of the contract are subject to a lien or encumbrance.  8.B. includes all fixtures and various other features of the property including solar power systems, plumbing and heating fixtures, and any other item included in the sale.[2]

 

In summary, the CAR publication goes on to note that sellers have a mandatory duty to disclosure any material facts of the property, of which a PACE lien most certainly would qualify.  Additionally, the publication goes on to note that the seller must provide a preliminary report from the title company to the buyer, and liens are of public record.

As most real estate and escrow professionals are aware, the preliminary report can be difficult to navigate.  Tax liens should appear there but the seller is not as likely to review the preliminary report as the buyer is.  However, the buyer is less likely to understand the ramifications of the special tax assessment.  TIP–> That means the first line of defense comes from the listing agent interviewing the seller.

In the meantime, this issue remains thorny.  Fannie Mae/Freddie Mac released a statement on these liens.[3]  A buyer in Moreno Valley who got stuck with nearly $30k in liens sued the seller for failure to disclose.[4]   Licensees are held to a higher standard and if a buyer ends up with a five figure lien or the seller fails to close escrow, the consumer is most certainly going to look at the licensee as a central person with responsibility for the problem.  Listing agents can address the early in the interview process with the seller and seek assistance from escrow and title professionals if the preliminary report needs further scrutiny.  Additionally, the selling agent should be mindful to look for this disclosure as well.

 


[1]   Gelhaus, Anne “Residents can pace energy use with new program” June 4, 2014  http://www.mercurynews.com/san-jose-neighborhoods/ci_25900245/residents-can-pace-energy-use-new-program

[2]   CAR Publication “PACE Programs and Solar Leases”

[3]  Federal Housing Finance Agency, “Statement of the Federal Housing Finance Agency on Certain Super-Priority Liens” December 22, 2014  http://www.fhfa.gov/Media/PublicAffairs/Pages/Statement-of-the-Federal-Housing-Finance-Agency-on-Certain-Super-Priority-Liens.aspx

[4] Gruszeki, Debra “Moreno Valley homebuyer files lawsuit over HERO-financed transaction; Realtors say lawsuit illustrates hurdles Realtors, buyers and sellers face at point-of-sale for energy-upgrade assessments” March 5, 2015 The Press Enterprise http://www.pe.com/articles/hero-761687-realtors-property.html

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