Do Solar Panels Increase a Home’s Value?
This is one of the top questions we are asked in discussing the ROI of installing solar on a home. And while many real estate professionals will err on the side of caution and take the line that we don’t know – recent reports from Zillow (one of my favorite nouns-turned-verb “I Zillowed Their New Place!….) and others have found that the value is there.
So, yes.
How much will Solar Add to My Homes Value?
Well, that is the rub. To quote Zillow’s report “During the past year, homes with solar-energy systems sold for 4.1% more on average than comparable homes without solar power. For the median-valued home, that translates to an additional $9,274.”
Of course; your mileage will vary. You can see details in the report, but to summarize for our area, Bay Area homes are at that 4% mark in 2018. And a nationwide study by the US Department of Energy’s Lawrence Berkeley National Laboratory, resale values increase an average of $4 for each additional solar watt installed. This means that a standard 5kW system could increase your home’s value by as much as $20,000.
Installing a renewable energy system can result in increased property valuation (i.e. the value of the property on which the solar electric system is installed). The papers on this topic assume that by decreasing utility bills (operating costs) the property owner`s cash flow can accommodate higher loan-to-value ratios. In other words, by reducing monthly expenses, a property owner can afford to take on more debt. According to one report by the Appraisal Journal (Nevin, Rick et al, “Evidence of Rational Market Valuations for Home Energy Efficiency,” Oct 1998) a homes value can be increased by $20,000 for every $1,000 reduction in annual operating costs due to energy efficiency improvements. This assumes a 5% cost of money ($20,000 x 5% interest = $1,000).
Does a solar lease or loan make it harder to sell a home?
So, now that we have data that not only can adding solar panels to a home saves energy costs and help the environment, it also can potentially increase a home’s value, what holds people back? This takes us to another question we are frequently asked in discussing potential residential solar projects.
The answer is no, but here are the situations to understand.
If you are to compare two houses side by side and one has an appliance that generates energy and the other does not. The home with the energy-producing appliance is more valuable. However, not all solar systems are purchased outright. Many solar systems have been financed and the finance company has a fixture filing on their asset.
- If you have a lease or a power purchase agreement (PPA), then a third party financing company owns the system and the property owner is renting the system for the benefit of the power generated. During a transfer of title, there are certain things to understand:
- Many leases and PPA’s have escalator clauses from 1.9% to 3.9%, where each year the monthly payment escalates. Over time, this can take a reasonable monthly payment and increase it to a very expensive monthly payment. Many people would rather have a fixed monthly payment.
- The system tax benefits (including depreciation) are all taken by the financing company that owns the system.
- If the title transfers within the first 60 months, there would be a recapture of the tax credits and depreciation. This amount exceeds 30% of the system cost and could significantly impact the cost of purchasing the system. Alternatively, during this time, the homeowner could assign the system to the new owner, subject to the approval of the financing company. We assume that most people purchasing property have strong credit.
- Thereafter the 60th month, the system can be purchased with no recapture expense.
- One thing to note with a lease or PPA is that the financing company that owns the system is also responsible for the maintenance of the system. If you purchase the system, you now own the system and no longer have the benefit of a third party maintaining your system. One alternative would be to “prepay” the lease, making all the payments for the lease or PPA upfront and enjoying the benefit of the systems production for the remainder of the term.
- Additionally, the financing company will file a UCC1 fixture filing to secure their interest in the asset (the solar system). While this is not a mortgage, this fixture filing can make it difficult to transfer title and will require the financing company to lift or remove the UCC1 to allow for transfer of title.
- If you have a loan, the financing company does not own the system, however they have a UCC1 fixture filing to secure their interest in the asset (the solar system). While this is not a mortgage, this fixture filing can make it difficult to transfer title and will require the financing company to lift or remove the UCC1 to allow for transfer of title.
Phew.
While this sounds complicated, solar financing companies know that this is an important aspect of providing a great service to their customers and this is very common for them to accommodate. If you work with experts, this is really an easy thing to navigate. For many this can be a challenge; but this is where working with a great company makes this process much easier and can assist in finding solutions to make this process effortless.
Follow up actions – pick one, or both.
If you are a realtor and want to learn how to help your clients increase their home value, invite them to join you in next week’s on our Facebook Live event. (Click here to register.) If you can, join us live and ask questions, or if you can’t make it, you will get a link to watch the recording. (Or if you’re not a realtor, but interested to learn about this topic, please join us, this session is open to anyone!)
If you are a realtor curious about any snag or issues a solar lease can add to the sellers process, join us for a Webinar happening this Thursday, May 2 at 3pm. (If you can’t attend, we can send you the recording afterward if you register.) Click here to sign up.