Solar Panels are BIG business these days and for good reason. The appeal of lowering energy costs and “going green” along with the recent affordability of systems motivates many to outfit their houses with solar photovoltaic (pv) panels. According to the Sacramento Metro Chamber, twenty-five solar permits are filed every hour in the United States and probably one of those was in California. The big benefits of lowering our dependence on oil, being a steward of the environment, and contributing to the economic growth of the region by supporting solar (pv) system installations outnumber the smaller issues that have yet to be fully comprehended as we grow this new industry.
Please note: I am not a solar expert, a lender, nor a policy maker. I am however, a real estate agent and solar panels have some niggling little bits that may impact a real estate transfer for buyers and sellers. My intent is not to make any exacting statements, but to shed some light on some of the issues that have cropped up in real estate transactions for buyers and sellers recently.
Do Solar Panels Add Value to Your Home?
Well….the truth is that it DEPENDS. The problem is that solar panels alone do not necessarily add value. Just like a pool, it may or may not add value based on the comparable sales in the area. Here’s an example from local lender, Kevin Nunn, an educated voice who is also playing on the national stage with regard to how solar impacts real estate lending. He compares solar to pools. He illustrates that there are areas in Folsom where a pool actually will reduce a home’s value by $5,000 whereas a home in Elk Grove with a pool may be increased by $10-15K. Why is that? A specific area in Folsom may have more retirees with no children and they prefer no pool because of less maintenance so houses without a pool are valued higher than those with (all other features being similar). In contrast, an Elk Grove neighborhood with young families may value the home with a pool higher because it’s a family-centric activity and other houses in the neighborhood are being valued higher if they have pools. The same goes for solar. If all the neighbors have solar AND the homes are selling for more because of the solar, then a home in that neighborhood may be valued higher with solar. The comparable sales will tell the actual story – it’s therefore impossible to make a blanket statement either way without looking at the data. Ask your Realtor or an Appraiser.
There’s one more thing I need to mention about this subject. If the system has been leased and the lease is not paid off, then the panels will add no additional value to the home. A buyer is not going to both pay for the lease AND pay added value for a home because of solar panels – they would be paying twice. The biggest reason value can’t be added for a lease is because the panels are not “real property” under this structure. Unlike the house itself, they do not belong to the seller and will not be conveyed to the buyer.
Can’t I just transfer my solar lease to a new owner?
Yep! You can. So what’s the issue? If a buyer is financing the purchase of the home, the lease payment generally must be included in the buyer’s qualifying ratio to be able to purchase the home. There have been multiple cases where the buyer doesn’t qualify with that extra lease payment.
Are there any issues if I own the system outright?
There’s another question here that matters – did you purchase on a HELOC (home equity line of credit)? If so, the HELOC needs to be paid off in the sale.
Don’t PACE financing programs transfer to the new owner like Mello-Roos?
No. First off, what is PACE? It stands for Property-Assessed Clean Energy (Programs) and it’s a mechanism for financing energy efficient and renewable energy improvements to private property. Examples of this are HERO, Ygrene, mPower, etc. Repayment may occur over a 10 to 20 year period through property assessments which we all understand as our property tax bill. What is interesting is that PACE has no problem with the obligation being transferred to another owner. The issue is that Lenders don’t want to play second fiddle. PACE obligations are super liens like taxes and get paid FIRST. Lenders, you can’t blame them, want their money without anyone else saying they got there first. Bottom line – if the property sells for less than the mortgage PLUS the PACE obligation, the PACE loan gets their obligation paid in full first and the lender gets what’s leftover. You can imagine why they aren’t interested in financing in a case like that. PACE systems must also be paid off with the proceeds of the sale. Also note that if the homeowner pays it off early, they also may be on the hook for pre-payment penalties.
What about a PPA (Power Purchase Agreement)?
First off, this is a financial agreement where the System Owner (let’s just call this a Company) arranges for the design, permitting, financing and installation of solar pv system on a customer’s property. The Company sells power generated to the homeowner at a fixed rate typically lower than what they would pay their local utility company. So because the payment is variable depending on the usage of energy from the system, this PPA doesn’t typically have to be included in the buyer’s qualifying ratios. In this situation, the homeowner doesn’t get the tax credits or other incentives generated for the system so there’s a big tradeoff.
Home buyers should be aware that purchasing a home with solar may mean they pay lease transfer and/or other fees relating to the system. At the end of the day, buyers may be able to get a better ROI on a system added as a part of their purchase versus a system that is already there. Ask your lender about these programs to enable that: EEM, 203(k), HomeStyle Renovation, Solar Provision.
I wrote this simply to make people aware that there have been some issues in real estate transactions with transferability of Solar PV Systems as well as misconceptions about the value added by such a system. My purpose is in educating people so they have information with which to make intelligent decisions. When considering buying or selling a home with solar pv panels, consider using a Realtor who is well-versed on the subject because this isn’t a static industry, there’s a lot changing. Knowing how solar pv systems will impact the sale before you get into contract will ensure a much smoother transaction.
What kinds of questions do you have?