Does a $20,000 solar system really add $20,000 in value?

Would you pay $20,000 for a solar system if you knew it added $20,000 of instant home value? That’s exactly what a solar salesman told the client of a real estate friend. Is that legit though? What advice would you give someone talking to this salesman? This is a timely scenario, so I wanted to share my friend’s question and my response. I’d love to hear your take in the comments below.

solar panels in real estate - sacramento appraisal blog - image purchased and used with permission from 123rf - 2

Real Estate Friend: I have a client that wants to add solar to his 1989 house and was quoted a price of $20,000. The solar guy told my client that it would add value dollar for dollar…doubt that. Let me know your thoughts.

My Thoughts: Where is this SALESMAN getting “dollar for dollar” from? Is he a real estate value expert? Could he prove the value actually? Would the system add $20,000 in value regardless of the neighborhood, state, or price range? What if the system cost $40,000 or $80,000? Would that add $40,000 and $80,000 respectively? It’s a great sales claim, but achieving dollar for dollar is not something that happens in real estate in every case. For example, a kitchen remodel might cost $50K, but that doesn’t automatically mean buyers are going to line up to pay $50,000 more for the house. Or a built-in pool could run $35,000, but we all know buyers don’t expect to pay full price in the resale market (sometimes they’ll go for $10-15K or so, right). Thus the cost of something doesn’t necessarily translate dollar for dollar to the value. When it comes to solar, it’s more of a marathon of value so to speak because there will be value recognized over time as savings happen (as opposed to an instant rush of full value at the present time). I am not saying the house could not be worth $20,000 more, but my BS alarm is beeping I am skeptical. Appraisers and the real estate community have to consider what buyers are actually presently willing to pay for the system. Granted, we have limited data, and solar is still an emerging field, but we have to study homes with and without solar. What sort of price difference is there? Also, how much money will the system actually save the owner each month? Moreover, when considering monthly energy savings, how much more home could a buyer effectively afford because of the savings? If I were your contact, I would read this solar Q&A I did, but I would also do the math. Will the savings from solar far outweigh the cost of the system? If not, what energy conservation steps might your client’s household make instead? Lastly, if the solar system is leased, it won’t actually add anything to the value because it’s more or less considered personal property.

Questions: What do you think of the solar salesman’s claim? How would you respond? Any thoughts, stories, or further insight? I’d love to hear your take as an agent, appraiser, or home owner.

Home Office Update: By the way, I’ve been building a new home office these past few weeks, and it’s been fun to make progress. Shoutout to Keith Klassen for helping me with the framing. If all goes well, crown moulding will be up this weekend.

home office

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Comments

  1. Tim S says

    What’s interesting is solar sales companies nationwide use California sales data as their benchmark for these claims of dollar-for-dollar value increases. (In Ma, using CA numbers and MA incentives, it actually comes out to almost $2 per dollar invested).
    I mean it seems to be a simple calculation…here’s how much you save per year ($2k in my case) vs the expected life and term of home ownership. I personally doubt that the system I paid $33k for is worth more than $15k to a prospective homeowner. With incentives my system has already paid for itself (3 year ROI) and I currently have no plans to sell this property in the next 5-10 years anyway.
    Good blog post, CA is leading the way in capturing this sales data.

    • says

      Thanks Tim. I appreciate your comment. I think it’s great that your system is already paid for. Like I said, solar is a marathon. If it can pay for itself over time, great. Then any value premium it commands in the resale market is only a bonus. But to say it is worth dollar for dollar in the resale market immediately is a claim we really have to weigh carefully. Moments ago I had a real estate agent share with me how a $70K system is struggling to sell in the resale market despite the property being priced $55K above the competition (still too high?).

  2. says

    Thanks for posting information about the valuation of photovoltaic solar systems Ryan. This seems to be a cloudy subject with regard to appraisal.

    In my market area (Ventura and Santa Barbara Counties) we do not have an MLS field for photovoltaic solar systems. It is hit and miss trying to find comps. Sometimes it is mentioned in MLS comments but mostly it is pure luck to see the system on the roof when you pull up to the property to shoot a photo. But sometimes the system may not be visible from the street.

    Still, very few properties have photovoltaic systems but the number is increasing rapidly. Obviously, paired sales would be the best method for valuing photovoltaic systems but most often you simply do not have a recent sale of a similar property with a photovoltaic solar system. In such cases I use the PV Value tool (www.pvvalue.com) to value the system. I took an Institute webinar about a year ago which taught how to use this tool. They recently upgraded the system and it is now easier to use. Basically, the system is a discounted cash flow model that discounts the future benefits of the savings in electrical costs to present value. It also takes into account the initial cost of the system, the size of the system, depreciation, and the anticipated lifespan. The actions of market participants will always be the most reliable method for valuing solar systems. But when comps with solar systems are not available, or when supporting data is needed, the PV Value tool does the trick for me.

  3. says

    Oh yes, one more point. It is advisable for homebuyers interested in solar photovoltaic systems to buy a home with the system in place rather than buying a home and then having a new system installed just as it it recommended that homebuyers wanting a pool to buy a home with the pool already in place rather than buying a home and then adding the pool after the sale. The market value of the system will be discounted to reflect functional obsolescence due to over improvement if the neighborhood market does not recognize the full initial cost of the system.

  4. says

    I believe the LA study indicated 3-6% value enhancement, I have found locally to be approx 2% for purchase systems. Most systems are leased, thus no value attributed (because they do not own the system), lease purchase (where property owner has purchased the power rights, but does not own equipment) fares better. 3 year ROI is optimistic based on what I have seen so far, but if you have very high power bills it might make sense. Typical ROI is 7-10 years+. The typical buyer stays in there home around 9 years or so. Some buyers are requiring solar system to be removed, which has caused an interesting conundrum.

      • says

        Yes, total sales price. I have been able to isolate a few paired sales, but you have to research how the solar is held, age of system (there is bleed off), number of panels, etc, etc.

          • says

            Actually not too bad, the Gila Nuclear Power Plant helps. I have had lease purchase solar for 3+ years, I have a 34 panel system, average cost per month for gov’t taxes is about $13. Our average power bills previous to installation were $180/mo. approx 10 yr ROI with 0% interest (cost of capital). Most would need a monthly power bill of $150/mo+ to justify a system.

  5. says

    I agree with your analysis Ryan. I am all for energy efficiency but getting a 100% return on your money is questionable. This whole solar energy thing must work on its own and provide value without government intervention. They are trying to incentivise it so much to get people to use it but at this point in time I don’t think it is a good return on your investment. It’s good that people want to use them but they must realize they will not get their money back right away.

    • says

      Thanks Tom. I’m glad you mentioned that. Appraisers do have a unique perspective. It’s easy to target appraisers when escrows are not going right, but there is some insight there to glean. What is the market doing? We tend to be able to get a good balanced answer when we ask a multiplicity of real estate professionals. I recommend asking that question to an appraiser, real estate agent, loan officer, and title company to see what they say.

    • says

      Thanks Tom. This industry is bound to grow over time, especially as solar becomes less expensive, buyers become more informed, and the systems become more efficient. Saving energy is clearly a positive direction, but right now it’s an emerging industry with some growing pains.

  6. says

    Great post. My thought is that a $20k solar system rarely costs anywhere close to that after incentives. Out of pocket costs minus incentives is the best way to look at these systems. I think that the net cost to owner is an upper limit of the contributory value. Why would any educated or informed buyer pay more than the net cost for one house with a system than a house without a system that they could simply make a call and get one installed?

    • says

      Excellent point, Gary. I think you are absolutely right. I plan to go to Home Depot later today. There is a solar company in the store that is trying to sell their product. I plan to get caught in conversation to ask this company how much value the solar adds. I’ll be curious to hear what they say about a $20,000 system (and then a $40K or $60K system). ๐Ÿ™‚

    • says

      I have interviewed several buyers that purchased a home with non-leased solar. About half indicated that they liked it, but would not of paid for it themselves. So in their eyes, it was worth nothing? One other thing, if you are looking at solar, probably best to have a new roof prior to installation.

      • says

        Interesting. I bet it was worth something to the buyer, but the buyer can still feel a sense of relief for not having to fork out the initial payment. It’s like the classic built-in pool. The buyer can enjoy it, but also rejoice that he/she did not have to install it. Good point on the new roof.

  7. says

    Solar systems are a big topic of conversation in a private facebook group for Arizona real estate agents I’m in. They are generally considered a problem. They greatly complicate transactions and can kill deals.

    Pricing. One of the problems is in pricing the home because some sellers actually believed the solar salesman that the system will increase the home’s value $20,000 or whatever. The seller is a true believer in solar, captured all the installation subsidies and still says, “But the salesman said it would increase value dollar for dollar so my house should sell for $20,000 more than the comps.” Arghh! It’s hard enough to get sellers to accept the value of their home and solar systems often makes it even harder.

    Lease assumption. Taking over the lease is a huge problem. The solar system owners are not on real estate time so if they don’t approve the new buyer to transfer the lease by the closing date, it can kill the sale. A few (some?) real estate agents don’t want the drama and try to avoid showing homes with solar systems unless the buyer specifically requested solar.

    Roof replacement. No salesman talks about this but roof replacement costs are MUCH higher with a solar system. The sellers don’t take that into account, but more and more buyers are, especially if the roof is getting toward the end of its life.

    Seller lease buyout. It seems like it’s becoming more common for buyers to demand that the seller pay off the solar lease and sell the solar equipment free and clear along with the house.

    It’s a tough position for real estate agents (and I assume appraisers) to be the bad guy and have to tell the owner that the solar system is worth a ton less than what the solar salesman told the owner.

    New minimum electric utility fee. Solar got so popular in metro Phoenix that the electric utilities recently upped their fees for solar customers. The idea was that solar customers weren’t paying their fair share to maintain the whole electric utility system, “Solar-rate changes will add about $50 to the average solar customer’s monthly bill” which, of course, changes the pay-off for all previous solar system buyers.

    I’m certainly not an expert on this but it seems solar systems tend to make the sale more complicated and tend to make home sellers more inflexible on the home’s price.

    • says

      Spot on in my opinion. Solar best for those that intend to stay in the home for a prolonged duration. I personally installed my system to lower operating costs for when and if I ever retire and am on a fixed income. I have briefly looked at the AI model and am not sure they have the entire scope of the appraisal question. My guess is there are also significant regional differences. A sticky wicket for valuation, the appraiser should consider familiarizing themselves with the three types of ownership’s (most MLS’s do not specify) and take into account local preferences/roof condition, etc. FHA has dis-allowed adjustments for leased systems.

    • says

      Thank you John for such a detailed and thoughtful comment. I appreciate that. Yes, it’s a complicated issue. Solar is presented as this black and white clear-cut major instant value add, but you’re right that the real estate community has to often be the “bad guy” so to speak. It’s interesting to hear of electric utilities upping their fees. That does not seem fair to the consumer, especially for the fixed-income consumer.

      • says

        The utilities in AZ are now seeing their customers turn into power producers. They are now saying is that those customers are not paying their “fair share” of transmission costs. The dirty little secret is that the power produced from a solar home is primarily transmitted to the neighbors, thus transmission costs are minimal. In addition, solar producers receive wholesale rate for their power (not retail) thus they are still providing profits to the power company. APS has a stranglehold on the Corporation Commission via political donations, thus they were able to get a charge for transmission costs on new solar customers of $50/month. Far cry from encouraging solar production hearkening back to the past. Such a tangled web.

        • says

          Tangled indeed. In a way this reminds me of the severe drought in California right now in that if residents conserve too much, it can actual lead to increased rates. Thus residents need to help keep the system going.

  8. Christie says

    I have a buyer that we are in contract on a home with a solar lease. My buyer is telling me that it’s going to bring the value down 5 to 10% on the appraisal. Trying to clarify and get some information to see if that’s even true. As stated a solar lease has no value it is personal property. So I’m just confirming that would not make the statement from my buyer true?

    • says

      Hi Christie. Thanks so much for reaching out. Like many answers, it’s not really an answer of YES or NO in some senses because there is more to the story. On one hand the answer is the leased system does not contribute anything to the value because it is considered personal property. Thus there is no automatic damage of 5-10%. However, it is possible that a leased system could damage the marketability of the home. Say for instance a seller cannot pay off the system and the new buyer has to assume the lease if the property is going to transfer. If buyers in the neighborhood are feeling squeezed to come up with the mortgage payment already and now there is an extra lease payment, that could be an issue. In some cases the price might have to be lowered to compensate for the extra lease. I would expect (or at least hope) by the time a contract is established and a property has been vetted on the open market that we would probably see if there was any price resistance already. If we see a property struggled to sell and the issue was the solar lease, then we have our answer. If it was no big deal and buyers paid the same amount as the comps, we also have our answer. Each situation may be different. The truth is we don’t have a constant dynamic that will exist in every neighborhood or price range. Thus there isn’t any 5-10% rule that we could blanket across the market. This is the answer I’d give the buyer. Moreover, I would turn the table on the buyer to ask why 5-10%? Why not 1-4% or 11-12%? Okay, I’m being facetious to a certain extent, but this does bring up a point worth talking about. Does that make sense?

  9. Jeff Nicholson says

    Ryan,

    I know this blog post was made quite a while ago, but I just stumbled on it while searching for an appraisal article. I’ve been in the solar business for years and certainly been asked about home resale effects. I think good facts can speak for themselves. The solar salesman you reference was almost certainly talking about “Selling Into The Sun”, a publication by Lawrence Berkeley National Laboratory, which analyzed thousands of solar home sales across eight states. This study found that homes with a PV system installed commanded a premium equivalent to more than $4 per Watt of installed capacity in California, and more than $3 per Watt of installed capacity elsewhere. To put that in context the average installation price for a new system at the end of 2016 was $2.98/Watt BEFORE the 30% federal tax credit ($2.08 after the credit). That study was pretty comprehensive and lends weight to the dollar-for-dollar home value increase. I think solar holds its value so well because it continues to save owners money on their electric bills for decades. Someone buying a house with a pre-existing solar system could easily save enough on energy in 7-10 years to outweigh the added cost.

    Note that Fanny Mae and FHA both require solar to be valuated when it’s owned by the homeowner. If the system is leased by a third party (like the solar installers who hang out in Home Depot) the system shouldn’t be included in the appraisal and can sometimes be a detriment to sale. The Appraisal Institute has a lot of info on PV, going back at least to 2009. I know they’re offering solar valuation courses for CE these days. I’d like to take one of those classes myself. PV Value is a pretty good free online tool that AI leans on pretty heavily.

  10. Jeff Nicholson says

    I should also add a few responses to some misconceptions in the comments.

    The LBL study indicated that solar can add value equivalent to its purchase price WITHOUT the federal subsidy (30% tax credit). So the dollar-for-dollar argument doesn’t hinge on government support.

    Most of the cases I’ve encountered where a new homeowner wants solar removed involve solar hot water, not solar electric systems. Solar heating collectors are much bigger than photovoltaic modules and are rarely installed these days. Many of those systems date back to the 70s and 80s and often are dysfunctional, thanks to a broken pump or other issues. PV systems are “sexier” looking and a lot more reliable, so there’s little reason to take them down as long as they’re making you money.

    PV should never be appraised as a percentage of home value. The value of the system is tied to its capacity to produce energy. More powerful systems will be worth more because they can save more. I’ve installed very small systems on very expensive houses and relatively large systems on run-of-the-mill ranchers. The initial cost of those systems ranges anywhere from $3,000 to $30,000, so it’s important to value the system by the installed wattage, not as a percentage. PV Value will take the guesswork out of this as long as you know the wattage.

    I agree that roof replacement is an issue. This is something I wish home inspectors keyed in on (I used to be one). A well-installed PV system can easily run for 30 years with minimal maintenance expense, but if the roof needs to be replaced the modules will need to come off first. Not all components need to be removed but the installer might charge $4,000 or so for an average uninstall/reinstall (two days of work for a crew). That is something the buyer should be aware of and if roof replacement is pending I’d support discounting the solar premium on the sticker price accordingly.

    • says

      Thank you Jeff. I appreciate your take and insight. I think your comments add value here to the post. Regarding the national or state-wide study, we still have to think of value in terms of a local market, neighborhood, and price range. Dollar-for-dollar is a nice concept, but where does that work? Does it work the same in Beverly Hills as it does in Compton? Those are just rhetorical questions, but they help illustrate the principle that value does not work the same way in every price range and location, so we have to be cautious about applying one end-all metric to each valuation. So a solar system in Minnesota might have a different value than Arizona. I realize this point was made above, but it’s an important one to consider when value claims come along that say, “It’s dollar for dollar no matter where it’s installed and no matter the price range.” I’m not saying you are saying that, but only this is a piece of the puzzle to consider when we are unpacking value.

      Thanks again. Excellent comment. Please pitch in your two cents any time.

  11. Jeff Nicholson says

    Ryan,

    I agree completely! I don’t have enough info to know if the salesman was blowing smoke or not. The LBL study supports dollar-for-dollar in some markets and in some markets even better than dollar-for-dollar. The study was limited though. The trends in the study can be hard to find, too. For instance, I live in rural Virginia which wasn’t included in the study. North Carolina and Maryland would, but they have much, much different solar economics than Virginia does, so I ignore their data. PA, however, has almost the exact same solar economics and solar production potential as Virginia. Since PA was in the study, I think it’s the closest thing to an indicator I have in VA. Still, I’m careful to tell my customers only that in a similar state a study showed this or that, not that they will receive any certain value from the deal at all… Blanket statements will get all of us into trouble!

    The LBL study suggests the best possible methodology for local conditions is using comps. Makes sense to me, as long as the comps themselves are accurate!

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