Solar is a hot issue right now in real estate. Actually, I should say it’s more of a gray area for many in the real estate community since it’s still an emerging market. This is exactly why I wanted to interview Kevin Nunn since he knows more about solar than most. Kevin is a loan officer with Umpqua Bank, he teaches classes on energy efficiency, and he has even sat down with policy makers in DC on issues relating to solar. In the interview we touch on the difference between leased and owned solar, whether a leased system can transfer to a buyer, and advice for the real estate community. Enjoy the interview, and be sure to pay close attention to the asterisk where Kevin mentions the PACE programs (big point).
Me: Kevin, what is your background with solar?
Kevin: I have been promoting the benefits to buyers of including energy upgrades in home purchases for over 20 years, and many organizations have reached out to me for assistance in this area. I was even asked to go to the White House last year to assist in this area.
Ryan: What is the difference between leased and owned solar in the eyes of a lender?
Kevin: I can’t speak for all lenders as each can set their own policies. It is obviously challenging to value an owned system, but no value can be given on a leased system.
Ryan: Is it a problem to lend on a property with a leased solar system? In other words, can a leased solar system transfer to a new owner?
Kevin: It has been my experience that the companies with a lease are very cooperative with transferring the lease. One challenge with a leased system is that the payment must be included in the buyer’s qualifying ratios.
Ryan: Why do so many people say a leased solar system cannot transfer to a new owner when you say it can?
Kevin: Provided the buyer can qualify with the lease payment included, I haven’t had any issue with this. Each lender sets their own guidelines. Some may impose overlays that exclude this. Many see the UCC filing as a superior lien to the mortgage. I have found the leasing companies to be extremely accommodating about removing their UCC and putting it back after the new mortgage records (see comments on the PACE programs below where a “lease” has to be paid off prior to a property selling).
Ryan: What is a “UCC”?
Kevin: UCC stands for “Uniform Commercial Code”. It is effectively a lien against the solar equipment. Lenders have a concern that it could take priority over the mortgage if it was recorded before the deed. That’s why the UCC generally needs to be released and re-instated after the mortgage.
Ryan: Any advice for real estate agents who are marketing properties with solar systems?
Kevin: If it is a lease, contact the leasing company up-front and get their terms for assumption and their acknowledgement they will accommodate the UCC issue. Make sure any lender pre-qualification letters have factored in the lease payment.
* If the system is owned make sure it is not financed through one of the PACE programs that are being promoted right now. Homeowners are led to believe these “assessments” will just transfer over to a new buyer. Fannie Mae and Freddie Mac have been very clear that they will not purchase a loan with these “assessments” in place. It often comes as a very big surprise to owners and Realtors that the PACE must be paid off or they may only be able to sell to a cash buyer.
If the system is owned they should make sure there are local and relevant comparable sales with solar that clearly demonstrate any additional value solar adds in that specific neighborhood.
Ryan: What advice would you give to someone considering purchasing a leased solar system or a house with leased solar?
Kevin: If they are using FHA financing I would suggest they take a look at using the 203(k) and EEM (Energy Efficient Mortgage) to include a new system they could actually own on their house. The 203(k) is ideal for solar because it allows almost 10% in upgrades without value consideration. This is a great opportunity for buyers that is very under promoted. If they are going to purchase the house with the leased system in place they should review the lease terms very carefully and make certain their loan officer has properly factored in the lease payment so they don’t run into issues in underwriting.
Ryan: What do you think of the exhaustive studies out of Colorado (pdf) and Berkeley (pdf) that give a specific value for solar power? Can we apply these values figures to our local market in Sacramento?
Kevin: I applaud these efforts, but I have found that they often do not appreciate the constraints we operate under or the dynamics of our industry. In reality, lenders have to look at a solar system just like any other feature on a property. That property is the security for the loan that has been extended to a consumer. In the event of a foreclosure, the lender has to know that they will be able to resell the property and recover their loan. In this way a solar system is just like any other feature on the property. The reason it is so crucial to use an appraiser with local market knowledge is they understand the premium a specific feature will add in a specific market. Just like a swimming pool will have a different value impact in one community verses another, solar has the same dynamic. National studies and state-wide studies are useful on some level, but real estate is always local.
Ryan: Lastly, where do you see the solar market going?
Kevin: I think it would be hard to find anyone who doesn’t agree that it is a good thing to make homes for affordable, comfortable, and dependable. Clearly there should be a difference in how energy measures like solar are viewed compared to features like a swimming pool. The challenge for lenders is finding the ways to accommodate this within the constraints they operate in. There are a lot of people who are working very hard to find these solutions. I do expect to see changes coming out soon to allow for this. Also, as more solar systems are installed it is going to get a lot easier to quantify the value differential in individual neighborhoods.
Thank you Kevin for doing the interview. I hope it was helpful for everyone.
Closing Appraisal Thoughts:
- A leased solar system is considered personal property and does not factor into the appraised value. If the system is not owned, it generally is not an asset for the property. This is why I recommend listing agents to be clear in MLS on whether a system is owned or leased.
- Keep in mind solar panels may not be worth the same amount in every price range or market. For instance, in Sacramento they seem to carry less weight on the lower end of the price spectrum, but more weight on the higher end of the market. This is why we cannot blindly apply value adjustments from the Colorado and Berkeley studies referenced above without researching the local market. What are buyers actually willing to pay for solar panels? One way to know is to compare homes with owned solar vs homes without solar.
- I recommend being careful to be sure the numbers really work to your advantage for leased solar. If the UCC can be removed so you can sell your property, that is great. But having amazingly low energy bills won’t do anything for you if your lease is actually more expensive than your bills would have been without solar. A lease like this could actually be a liability for your property value, right? In other words, if it is more expensive to own your property, consumers are not likely to pay as much for your house compared to other ones in the neighborhood.
Questions: What has been your experience with solar and real estate? Do you see buyers willing to pay a premium for solar features? Please share any stories or points for consideration.