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.
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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.
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Great article Ryan. Good job going out there and finding an expert and getting the information.
Thanks Jared. I appreciate it. Kevin is very resourceful, and I always learn something when talking to him.
Great Post Ryan, I have this on my list of things to post about as well. I sat down with a particular solar company as if I was a client. It was very interesting the lack of exact information they were willing to provide. This is very much a trend right now, unfortunately like any other trend, it’s going to have kinks to work out. I whole-heartedly agree with Kevin. I’m 100% behind having our homes be as efficient as possible, however, we need to do it smart. READ THE CONTRACTS, ASK SPECIFIC QUESTIONS, GET CLARIFICATIONS, and ask for help. Too many people are being sucked into “it’s free, you pay nothing” scheme. That’s not a reality. So glad to hear this side of the water cooler on solar. There’s an entirely different angle from a Realtors side. And now I must venture to get it done! Thanks!
One last thought there are companies (I’ll leave names out on purpose) door knocking and being very aggressive and locking clients into contracts, while they haven’t even read and understood the agreement it is 1000% inhibiting the sale of homes. Sellers say they were not told the buyer had to qualify. READ YOUR CONTRACTS!!!
Thank you so much Jen. I really appreciate your take on things. I can only imagine how duped a seller feels when trying to sell a house and realizing either the loan has to be paid off completely or the loan must be assumed. Granted, the fine print might not have been read, but it probably did exist, so there is some responsibility to accept for the seller. Nonetheless, having to qualify a buyer for the solar loan can effectively decrease a buyer’s purchasing power – especially on the lower end of the market where many buyers tend to have a pretty tight range of affordability.
I’d love to hear anyone’s experience with solar. Stories and insight are welcome.
Great topic Ryan. In my opinion this is a touchy subject for appraisers since supportive evidence is sketchy in many areas that can support value adjustments in appraisals. I agree the figures from these larger studies cannot be transferred to individual areas, however local support for the value of solar systems are still not comprehensive.
Well said, Tom. I agree. That’s the difficult part. There is so little data, and on top of that sometimes there seems to be very little premium too in certain situations and/or areas. Going “green” is a great idea, and it’s definitely the reality of the future, but something is only valuable if buyers are willing to pay for it.
There is a 3rd option out there on solar and that is the Power Purchase agreement. How are lenders reacting to a PPA? I have seen a few really horrible leases out there that have resulted in reduced sales prices or extended days on market. Solar all to often is a buyer beware at this time as the leases are often not understood buy the homeowner. It has been my experience on homes with solar the owners often have little or no knowledge of their agreements and some do not know if it was leased or purchased. It would be great to see this more clearly understood by the homeowner.
Thanks Cynthia. There is so much confusion. On one hand home owners do sign the agreement, so they should know what it says, but clearly there is a breakdown in communication where owners are not understanding how it all works. I do wonder how it is being explained to the owner. By the way, any onlookers who have stories or knowledge are welcome to pitch in thoughts.
I was in Solar sales for a time, while my company offered solar leases (PPA’s), I could never bring my self to sell one. A PPA (power purchase agreement) is a terrible deal for homeowners. I know from sales training that the goal is constantly to flirt with non-truths, to imply that a solar lease is a better deal than it is. In reality, the homeowner not only pays for the panels, but also pays the profits on those panels of around 200%.
As with all leases, the primary benefit goes to the lease holder. What is NOT understood is that while not technically a “lien” with a specified amount…a UCC filing (common to almost all PPA’s) DOES cloud a title. This is NOT explained in most PPA’s. It is my understanding that you simply cannot get clear title with that UCC sitting on it…your lease company has to agree to remove it, and then reissue to the new owners if they wish to continue.
I would agree with the above poster that 90% of ppa customers I encountered (asking for help getting OUT of a PPA) do NOT understand the package they have bought. As these agreements age, and more lessee’s wish to sell their homes, there will be a groundswell of
Thanks for the insight TS. I appreciate your take, and once again, consumers need to read the fine print and/or talk to agents about what it’s like to sell something with a solar lease in place.
I can tell you in training I asked specifically “how does a customer get out of their PPA?” and was told NOT to discuss getting out of a lease. If asked I was to respond with vague “who wouldn’t want to pay less for their power?”. getting out of the lease is not discussed in sales documents( or covered in sales training). I was told to not make any promises in writing, but say basically whatever I wanted over the phone. Pricing changed every week “market fluctuations” so customers needed to get new proposals constantly. A UCC-1 was NOT called a “lien” even though it behaves like one. The entire presentation was disgusting.
Great article as usual Ryan. When you released this blog post, I was in a three day Green Appraiser training thru Earth Advantage. Well worth the time if it comes to your area. This was a topic that we were discussing in class and I was able to forward your article to the instructor. Even around Portland, Oregon, we’re starting to see PV on quite a few homes, but most are leased systems. With owned systems, the people who spend the money, don’t typically sell. That can make appraisals and comps very difficult on owned systems. Our instructor had the exact stats of how many homes had owned PV systems in Oregon and there had been only single digit sales and not sufficient data for a study of contributory value. That leaves few individual paired sales, cost minus incentives, net present value of electricity, studies like Nevin’s, or other creative methods to consider when estimating and reconciling a value for owned systems.
That’s great Gary. Sounds like an amazing class. I hope to see a local class happen next year on the subject, and I would definitely like to take it. There sure is a data problem. What is a 50-60K PV system worth on the resale market? That is the question. It’s interesting to hear how leased systems are also more normative in your area too. Leased solar seems to allure people since they don’t have to spend their own money to get the system (if they save more than the lease of course). It would seem better for the solar industry as a whole if more people owned the systems, but that’s not the trend yet. We’ll see how things unfold in the future.
Gary, I took this course too in my state of Alabama. It was actually sponsored by a state agency and was free. It as a good class but like you said there is still not enough comprehensive data for appraisers to be able to determine adjustments for appraisals.
Interesting, Tom. I’ll have to check it out when the show comes to Sacramento then. It’s interesting that the state is sponsoring the class. It just goes to show how powerful “green” is these days.
And you thought “Brown is Sexy”, try Green…lol. 😉
Ha ha. Nice one, Gary.
Not related to value but it’s interesting to note that solar upgrades are not taxed when added.
Thanks Nathan. The government has certainly created incentives to get “green” upgrades used more regularly. Saving on taxes is a huge win in my book.
I LOVE the interview style blog here. Very smart, easy to read and follow. I’m going to use that. Great information about solar panels as well.
Thanks so much Jay. I like that an interview is able to let the reader scan through which questions are most interesting – not to mention share lots of content. Thanks for the comment.
Just a quick note on PACE. Although FHFA has provided guidance to Fannie Mae and Freddie Mac regarding PACE liens, the majority of PACE assessments have transferred in both the Sonoma County and HERO programs. PACE providers are actively engaging appraisers, real estate agents, lenders, etc… to discuss issues related to PACE. Education is definitely key here for all parties (including PACE providers). If anyone is interested in learning more about PACE or providing feedback that would be helpful to a PACE provider please contact me at jhutman@renewfund.com (CaliforniaFIRST PACE).
Thanks Jeremy. I appreciate the comment and your open invitation for conversation with the public. It’s good to hear that a majority of liens have been able to be transferred, though I’m curious if you have a percentage. Does that mean 51% or 99%? Also, were these cash deals or loans geared toward Fannie/Freddie? Thanks. Again, I appreciate the conversation.
I do not have the specifics on whether it was a cash deal or a loan geared towards Fannie and Freddie. Perhaps the folks at Sonoma County or HERO have more information. From the reports coming out of those two programs it looks like PACE liens are transferring with 60+% of sales. Approximately 80% of refinances are also going through.
Thanks Jeremy. It’s hard to parse the stats here. They could really mean anything depending on how they are interpreted.
Sorry for the confusion. When a home is sold, 60% of the time the lien transfers to the new owner. When a home is refinanced, 80% of the time the lender approves the refinance with the PACE lien attached.
Thanks Jeremy.
Actually it depends how you choose to look at it. If you were buying a car and had to choose between 2 identical cars and with the car I am selling you I give you a gas card that allows you to buy gas for $1 a gallon, no matter how high the price of gas goes, which car would you pick? Well that is how my “pay for power” set up works. No matter how high the price of electricity goes (and it will only go up) I, or the buyer of my home will pay a fixed rate, which is already lower than electricity currently costs. Also since I don’t own the system I don’t pay for insurance or repairs.
Thanks Tony. I appreciate your take. There are always many ways to look at a situation. Installing leased solar panels will make sense for some people while it won’t for others. Whatever the case, it’s very important to consider some of the points above so consumers are aware of how it works in the resale market to sell a property with leased solar.
If you were buying a house would you buy it with a leased car in the garage? Since the leased array adds NO value, it is nothing but a liability on the roof.
In your “car” analogy, imagine if you had to split your payment with two different gas companies, and you can’t “opt out” you have to buy that gas, from that company, no matter what.
Most importantly, a solar ppa is a terrible deal, and you’re now relying not on a solar lease scam artist, but a realtor to explain your complex leasing scam. nine realtors out of ten are going to tell you to satisfy the lease prior to sale instead of trying to explain a “transfer”.
The most important thing to remember is that a solar ppa is the most expensive way to go solar. And an educated homebuyer will NOT want to assume one.
Thanks for your take TS. I’d love to hear a response from Tony since it was his car analogy (hopefully he subscribed to comments).
It does make sense that a solar PPA is the most expensive way to go. When you’re leasing something, no matter what it is, there is a big price tag. But if you buy something and actually own it outright, you will pay far less. Many owners simply do not have the capital to pay for solar outright, so I can see why a leased system is attractive. Whether it’s a good idea or not is something each owner has to decide.
There are now structured loans specifically to capture incentives, then finance the remaining principal. these payments are less than the PPA/utility payments.
In my state tax incentives/rebates/utility credit and SRECS on a typical 5kW $20,000 array could total about $80k (with no rate escalator)…THAT is what a customer is sigining over when they get their “FREE” array.
Tony, it sounds like you’re suggesting the leased PV system adds value to the house. The leased system could add to the sales price just like if I gave the buyer a free car to use that was left in the garage. That would make the price of the house go up, but what Kevin is saying is that leased PV would not add to the value of the real property that a bank would loan on because the leased PV is personal property owned by someone other than the homeowner.
There is NO way arround the fact that the car in the garage is NOT free. it comes with a payment book. The potential buyer has to pull another credit application at the same time they’re applying for a mortgage.
Now imagine your realtor saying ‘oh, by the way, there’s a solar array on the roof that genertates power at half price, YOU have to assume the payments on that for the next fifteen years” insert image of customers walking away….
Thanks for this very thorough review. My company Savenia (www.saveniahome.com) is an independent 3rd party that has rated solar systems for home sellers in many states, including leased systems. We find many people undersell the value / benefits by not explaining how much their system is worth, how much it is projected to generate / earn over time and how much it will cost to run, in addition to environmental benefits. Large studies show that homes with owned solar systems sell for a price premium, and our ratings have shown additional value for buyers of solar homes with pre-paid leases or contracts that lock in low energy prices relative to the market. When solar benefits are clear, prospective buyers are better informed to balance all aspects as they conduct diligence on contracts.
Hi John. There is certainly room for clarity on the savings solar can offer, though there is also room for clear contracts too so consumers and the real estate community can translate what a contract actually says. Do you think national studies to show value can apply to every smaller community and/or price range? I’m curious.
Hi Ryan. In terms of national studies on increased value of owned systems – I don’t think you can just apply these figures across the board as there are so many differences amongst systems and geographies. What we can say is that there is robust data out there showing that buyers will pay a premium for solar (and other efficiency upgrades), and it is up to the seller to make a strong case that their system is a positive differentiator for the home. That’s where Savenia can help.
Such a great article and information! Its wonderful to provide the industry with such an educational wealth of info. Personally it helps me sort through the things we hear, which at times, is inaccurate. Thanks Ryan!
That makes my day to hear. Thanks Cindy. 🙂
A leased system, overall I have heard the price amount is around $40,000 +/- …. Gov rebates will be roughly $20,000 +/-. Does the family that’s having this system installed have to pay taxes on the full $40? Also, the family is held accountable for the $20 for how long? Once the 20 or 30 year lease is up, does the family walk away free and clear? If family sells home, knowing that it’s personal property, and the buyer doesn’t want it then the family can’t sell it unless they pay it off, I assume.
I was also told by a solar company that a purchased system is transferable as long as the buyer has a credit score of (it was either 720 or 740) which will limit your number of buyers drastically. If system is purchased than the solar company is in 1st position to be paid off if there is a foreclosure, a HUD, or a SS being done on the house. FHA or VA will probably want to stay as far away from this as possible. In order for all this to make since there’s going to have to be a meeting of the minds because I see the banks coming out on the short end of the stick and you and I know this ain’t going to happen. Right now this industry is somewhat unregulated and there are a lot of get rich quick people that are saying a lot of things that may have some shades of gray. The American public has to do their homework and problem is a lot do not – then all of a sudden they become victims and than a bail out is called for. Meanwhile the “fat cats” of the industry are sitting somewhere on a beach sipping martinis.
I probably sound like a pessimist or a real negative person but actually I’m not – it’s just like anything else – something new, advertise enough, make it sound like ya gotta have it – and bam, throw’em under the bus. Get it regulated, than advertise it! But, it’s too late!!!!!
Your thoughts
Hi John. Thanks for the comment. You don’t sound negative. I think you’re thinking through the issues. Solar is often advertised as being very straightforward, but there is more to issue (which is why we’re having so much valuable discussion here). I’m not sure on what the credits would be on a 40K system. Not all systems would cost that much either. It really depends on what an owner gets. I have seen some systems that are very low-key, but then there are ones that cost $60K. Once the lease is up, I presume the family owns it. Or if a family pays it off early, it is theirs as far as I know. I emphatically agree with you about the public needing to do their homework.
So what do you do when an appraiser refuses to give a value to your solar panels installation because the only comparable in the area is a leased system.
I own my system and the appraiser is skirting the issue
Hi Kenneth. That’s a difficult situation because ultimately you cannot control what the appraiser does. There might be other solar sales in a market nearby, and maybe the appraiser can use those to see if there is any value adjustment that should be given. At the least you can always forward the studies that were conducted in Berkeley and Colorado for the appraiser’s consideration (I linked to these in the post, though keep in mind Kevin makes a stellar point that the findings in these studies don’t automatically translate into every market, neighborhood, or price range). At the end of the day, you may simply have an appraisal that does not give any value to the solar (and hopefully that does not impact your situation). I’m curious, how much more would you pay for your house with solar compared to a house that does not have solar?
let me put it this way, 2900 square feet of living space and my final bill for Electricity was $434.00
Subtract the $4.00 a month PGE gets and then I got a rebate of $20.00 making the final electric bill for the entire year $366.00.
Apparently that means nothing to an appraiser
That’s an amazing savings Kenneth. It’s hard to not think buyers would be willing to pay something for that in the resale market (I would personally pay more for that type of savings). The question is how much though, and it’s not always easy to find that number (that doesn’t mean a number should not be found though). I appreciate the conversation.
Hi Ryan – thanks again for continuing this thread as I think it’s surfacing the very real issues that sellers, buyers and appraisers are facing. Since we last spoke – last week we won a DOE SunShot award for our Savenia Solar Ratings, which were designed specifically to help capture and communicate the added value of solar in any form (lease, own, loan). I appreciate and agree again with you that more disclosure is needed on all sides. The situation with appraisers and Realtors continues to evolve with training and local availability of comps – but one thing solar home sellers can do today is a better job explaining the benefits of their system to prospective buyers at the time of sale. Benefits include home differentiation, faster selling times and more value capture. http://www.savenialabs.com/blog/2015/05/savenia-wins-2nd-doe-sunshot-catalyst-award/ #SunShot #Solar
Great blog post Ryan and something much in need as the solar sales people are not always forthcoming with this kind of information. Most people hear 0 money down and are in without understanding the long term effects.
We put our solar in a few years ago and have cut our bills to around $750 for the whole year where it use to be close to that for one month. Our system is owned though and I would highly recommend going that route if possible.
Thank you very much DeeDee. I’m glad your solar is working out for you. $750 for the entire year is fantastic considering how high your bills used to be. That’s great!
Great article, just wish it had mentioned the third option of purchasing solar through a power purchase agreement (ppa).
I’ve been doing my research and a ppa seems to do away with a lien, and instead adds a “notice of independent solar energy producer contract”.
I would of like to know opinion on ppa business model, and if a notice acts like a lien.
Hi Robert. Thanks for the comment. There is a relationship between PPAs and the PACE program as mentioned above, though it seems like the rules change every day. This is why I defer to Kevin Nunn (who I interviewed) to split hairs on the program. The key from a home owner’s perspective is to be sure Fannie Mae / Freddie Mac will purchase a loan with a PPA “assessment” in place.
Hi Ryan,
The FHA and VA recently announced will now insure and allow homeowners to refinance their FHA or VA loan when they have a HERO Program PACE loan on title.
The FHA and VA will also allow buyers using FHA and VA to purchase and assume the sellers HERO lien.
This will enable a lot of homeowners to take advantage of the low interest rates or even do a cash out refinance to pay off other debts.
Another option homeowners have is to use the HomeStyle Energy loan to refinance and pay off the HERO Program lien and it won’t count as a cash out refinance…..and possibly even eliminate their PMI!
I wrote a few blog posts about these new developments on my blog.
Thanks Brad. I appreciate hearing this. Feel free to provide the link to a post if you wrote one too. Things are always changing and we need to stay in tune with the market. Thanks again.
Thanks Ryan. Here are the two blog posts I wrote recently where your readers can learn more information.
==> http://homeloanartist.com/purchase-refinance-home-fha-va-hero-pace-loan/
==> http://homeloanartist.com/homestyle-energy-mortgage/
Right on Brad. Much thanks.