Sellers often expect buyers to pay the full cost of a solar system. So they say, “I spent $30,000 on this system, so let’s price it $30,000 higher.” I get the sentiment, but is it reasonable? Let’s talk about it.
This isn’t a “how to value” solar post, but a conversation focused on some logical points that might help sellers see why buyers often don’t pay the full cost of an owned solar system in the resale market.
1) Location: I don’t doubt the value of solar, but I do doubt the market always recognizes the full cost of solar in the resale market. If a solar salesman says the value is always the same as the cost of the system, that sounds like a great sales pitch. Is it real though? Does it work in Alabama, Missouri, and Antarctica? Is it the same for a $75,000 house compared to $850,000? Probably not.
2) Dollar for dollar: It’s always the dream in real estate to get buyers to pay dollar for dollar for any home improvement done by sellers, but that’s not so easy to pull off. Even if you look at Remodeling Magazine’s 2018 Cost vs. Value Report, hardly any items on the list give close to a 100% return compared to the cost. Of course solar is different because it saves money, but there still might be a principle here worth considering.
3) Age of the system: Imagine a solar system that is built to last 20 years, and it’s now 5 years old. An owner says, “I know the system isn’t new, but I paid $40,000 for it, so a buyer should pay $40,000 too.” That’s a nice thought, but the system is 25% used up already, so why would a buyer pay the full cost of a brand new system? It would be like saying, “I realize my car is 5 years old, but I want you to pay the sticker price from the dealer because that’s what I paid.”
4) Rebates: Were there any rebates when the owner purchased the solar system? For instance, if there was a $5,000 rebate for a $25,000 system, that means the real cost of the system was $20,000. This is important because why would a buyer pay $25,000 if the seller technically paid $20,000? Moreover, newer systems are bound to be more efficient and maybe even less expensive, so why pay full cost for an older system?
5) Savings: Imagine an owner saves $150 per month on her energy bill for a solar system that cost $25,000. In this situation at $150 per month it would take 14 years to save the full $25,000. Would buyers pay upfront for 14 years worth of savings to keep $150 per month in their pocket? Are buyers even going to be in the property that long? Let’s remember the benefit of solar is realized over the course of two decades, so paying for all of that benefit in one instance may not reflect what most buyers are willing to do.
6) HUD solar programs: A home owner told a Realtor friend that HUD allows appraisers to add the cost of a solar system into the value. That sounds like an awesome idea, but it isn’t true. Appraisers don’t have a mandate from HUD or Fannie Mae to handle solar by adding the cost of the system to the value. What is true though is FHA allows owners and buyers to add solar on a purchase or refinance and get a loan (in some cases) for the full cost of the energy improvements. See page 453-454 in the HUD manual.
The puzzle of solar: This isn’t a post to explain how to value solar, but I hope some of the points above might bring perspective. In short, valuing solar is like a puzzle. We have to look to many pieces for the answer, so we’ll check out comps, consider the cost and age of the system, be in tune with how much money is saved each month, etc… If you think it would be useful, I can do a follow-up Q&A post about valuing solar (let me know).
I hope that was helpful.
Class I’m teaching: On September 17 I’m teaching my favorite class called “How to think like an appraiser“. I’d love to see you there.
Questions: What do you think of the points? Anything to add? What advice would you give to sellers expecting buyers to pay the full cost of solar?
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I have a solar system and can attest to what you have said. Have been able to isolate enhanced value of “purchased solar” on a total purchase price basis. No where near cost of system that I have been able to detect. Monthly leased solar, no value. Have heard of solar system being removed as a condition of sale in a couple of instances.
Thank you so much Mark. I’m so glad you brought up leased systems too. Everyone, what Mark is saying is accurate. This post is about owned solar. A leased solar system is personal property and it’s not going to contribute to the appraised value. If a buyer wants to assume a solar lease, that’s between the seller and buyer. It’s really not the appraiser’s issue to deal with though.
Here is a link to one of the best studies done on the contributory value of solar that supports what you said, cost and value do not always equal: https://emp.lbl.gov/sites/all/files/lbnl-1005058.pdf In Oregon, with current incentives and years of falling prices per kWh, we are seeing the payback on solar at more like eight or ten years. Without incentives, solar will pay back in most cases. Also the warranty period on the systems are usually around 25 years, but the systems will likely continue to product energy for many many years beyond that period, just at a reduced rate than when newer. I’m sure you have a solar calculator from the 80s that still works :-). Lenders like solar because studies have shown that most people who default on loans do it when utilities spike, like when running AC. Solar can help people be less likely to default on their loan.
Home run comment Gary. Thank you. I’ll check out the link. I know you teach 7-hour solar classes too (or maybe even longer). I find too many sellers are completely stuck on the idea of solar contributing 100% of the cost, and it’s an unfortunate reality that means sellers are instantly overpriced for the market.
Interesting about the defaults. I’ve not seen a study like that, but utilities and gas prices are no joke at times and make a HUGE difference in affordability. I do wonder what period of time was studied in this case study though and whether there were other economic issues going on at the time also. Fascinating nonetheless. Thanks.
Ryan,
This is awesome stuff! Thank you for the timely post!
Thanks Cheryl. I know we’ve had conversations about this before, so thank you too.
Ryan,
Another way to value a solar system (not the real estate) is to calculate the ROI. In your example, saving $150/month amounts to $1,800 annually. If the homeowner invested $25,000 in the solar system example, it would yield a 7.2% after-tax return, not considering the federal tax credit. Not an altogether bad return in today’s market. Again, this is not reflected in the property appraisal, but something for a home buyer to consider.
As always, your posts are engaging and relevant. Keep up the good work.
Best,
Tom Caruthers
Thanks Tom. I appreciate your thoughts, and you know your stuff when it comes to energy improvements too. There are many different ways to look at solar and it would be wise for others to do exactly as you said. Solar isn’t really an instant payoff like the salesmen say it is. Let’s look at it as something that can add value over a couple decades and then pay accordingly. What is it worth in an instant? Well, that’s what appraisers have to figure out. What is it personally worth to an owner though over the course of 20+ years? That’s another questions. As always, thanks.
The only “instant payoff” I’m aware of is the FHA “Solar and Wind Technologies” loan, which allows an FHA borrower the chance to include a solar system into a purchase or refinance loan. Using the above example, the monthly cost, financed at 5% would be approx. $135/month, and the savings is $150. Most don’t need a calculator to know that is a good deal. Too bad too few mortgage banks offer that loan.
Thanks Tom.
https://www.energy.gov/eere/solar/downloads/pv-value-0
Thanks Steven. I’ve you found success with using this website, I’d love to hear any stories. I appreciate the link. For any onlookers, lots of appraisers use https://www.pvvalue.com/ to assist in valuing solar.
Solar PV is but one component of a large conversation about “Green Homes”. Recent regulations that standardize the implementation of “green” features on new construction may make it easier to comp-out a property in the future but for now, it’s a time consuming process for the appraiser to suss-out. Here’s a link to a related artice: https://www.dartappraisal.com/media/17292/DresdenRES0917.PDF
Hey Mike. Long time to talk. Thanks for pitching in your two cents. Well said. Hopefully we will have more data at our disposal in light of the changing California law. It will be interesting to see what the stats really tell us too.
Good article with many good points… Now if I can only get the borrowers to read it!
Thanks Becky. I appreciate it and I hear you. I do hope Listing Agents can share some of these logical points to help information flow. It’s much better if a seller / owner doesn’t have the 100% return on value perspective.
Keep Educating Ryan! The replies are great too.
Thank you Mike. I appreciate it. The replies are golden. I always love the comments section. This is where the post gets better.
Good stuff Ryan- I have worked for a solar company and sadly, many times the sales teams go for the easy answer to an objection that often results in the $4$ request on the appraisal, when in fact solar is not that easy. It requires math as many of the previous comments break down. And in real life, it is not just 20 years… My home PV system is 18 years old now, paid for itself in 7.4 years, and is still running at about 91% of the initial efficiency. My solar thermal system paid for itself in 4.5 years and basically has an unlimited life-span. How do we value that? (not expecting an answer). Love reading your stuff! Thanks again- Brad
Thank you Brad. I agree. It is about numbers and then what the market is presently willing to pay for the future benefit of savings. I think one of the problems in valuation is we don’t often have specific numbers to even work with. When asking an owner for dollar figures on savings, for instance, I rarely have the owner actually give me anything definitive. Or asking how many KW of power the system has, I sometimes get a blank stare.
It sounds like your system has been a huge asset. 91% after 18 years is fantastic too.
Hello All, I have a thought/question to pose regarding this topic. Using your above example, a savings of $150/mo. at 14 years to approximately pay off what are your thoughts about using the present worth factors? So a monthly payment at 14 yrs financed at 5% (the loan); the total comes to $25,200 multiplied by the present worth of $1 (.497308) would equal a value today of $12,532….. Just one thought…. You could also then reduce it by 25% for the time already used, or use a 9 year factor, what do you think?
Hi Corina. I love the thought. It’s like a financial calculator… If we’re lucky a simple calculation would perfectly reflect the market, but the question still becomes whether this calculation would make reasonable sense for every neighborhood, price range, and market. The answer is probably no. So while we can attack valuing solar from many different angles, we still have to come up with some sort of value support beyond just a calculation or just what a national study says each kilowatt of power is worth for a solar system. Calculations and studies can be useful I think, but I can see where they can be imposed on a property too.
Anyone have thoughts? Please pitch in no matter what you think. I know there are people reading this post who teach solar classes too. What’s your two cents? Would you use this methodology? Why or why not?
Great post – thanks Ryan. It seems that in my market area buyers have been not been willing to pay as much for solar on a re-sale property as compared to just a few years ago. I think this is attributed to a few things including cost of owned systems going down, better lease options/deals, more informed buyers, more solar companies/competition and if there is such a thing as solar being the “new cool thing/I’m special” then that feeling has decreased over the last 10 years with solar being more prevalent.
Thank you Gary. I appreciate your take. We definitely have to think about those things. On a related note, it’s interesting at times to see sellers spend so much money on solar, bu then not be able to talk hardly at all about the system. So appraisers might ask questions, but sellers don’t know the basic answers. It’s not easy to figure out how to value something if we cannot obtain information such as how many kilowatts of power the system has, what savings is like each month, how much the system cost, etc… Well, typically sellers remember how much it cost, but I find in many cases there isn’t much fluent market conversation happening unfortunately.
I’ve been tracking home sales with solar here in
“green” Austin, Texas for quite a few years. Solar sucks on the resale side. The City of Austin has pushed the technology with rebates, and the very best return I have seen is a value increase of about 20% of the cost; most returns are much lower, and frequently a zero increase in home sale price versus a similar home with no solar. The home owner that installed the solar got the rebate, but his buyer a few years later doesn’t want to pay anywhere near what they received as a rebate. Further, please tell me what is “sustainable” about solar? Somewhere on earth mountain tops are being scraped off, or giant holes are being dug in the ground to obtain the lithium, cadmium, nickel, lead, etc., that will be needed to build the system. Then giant gas powered dump trucks haul off large amounts of dirt for someone else to later sift through for several thimble-fulls of these materials. The market here in Austin sees through solar gibberish. Maybe it’s different in other parts of the country, but it’s my instinct that most buyers in most parts of the country are suspicious of solar.
Thank you Paul. I really appreciate how close you pay attention and I think you pose excellent questions about sustainability too. On a side note, if everyone goes solar, we’ll have issues with power companies making profit, so that’s something to watch also.
I do find some buyers are very hesitant about solar – particularly with assuming a lease. Though some buyers do assume a lease readily because the buyer is desperate for the house and the seller is not in a position to pay off the lease. It’s interesting out there.
I like the NPV & ROI calcs. That would be max market value of a “used” solar system…. how much it saves. With a declining cost of newer more effective systems, initial cost is no way to value a used system.
My concerns are consumers sucked into the “it gets paid with your property taxes” pitch and load an easy near six figures of “energy” improvements to their home with a free TV. Its subprime with lipstick.
Jeff’s comment is a testament to the average consumer’s perception of the residential solar sales experience. A deserving perception, I might add.
That’s sobering Jeff. It is easy to get sucked into energy upgrades too if you’re really not putting any money down. “It’s no big deal because it will be a part of your tax bill….” Those are famous last words until an owner is surprised at how high that bill is or how inconvenient it may be to have to pay off the lease before escrow closes. On that note, I find there is so much confusion about solar. It’s frankly not always easy to understand if it is owned or leased.
Ryan, excellent points. I wish all appraisers saw it this way! And you didn’t even dive into the complexity of appraising the different TYPES of solar – is it wholly owned (e.g. paid in full)? Is it owned but financed? PPA? Leased? CA’s HERO-program? Makes your (our) job quite complicated!!
Thanks Jacob. Yeah, as I alluded to in a comment above, it’s not easy to sift the types of solar and whether it is owned or not either. If it is leased though, the answer is simple. It does not contribute to the value because it’s personal property.
Good stuff Ryan. I often get this question and try to look at this from all sides. A part of the agents duty is to negotiate on behalf of their buyer or seller. The appraiser is tasked with supporting an opinion of value. While agents may consider the market value of a home to be what they can sell it for, an appraiser has to be able to demonstrate the value with data-which is often elusive or non-existent.
Fannie Mae’s Definition of Value reads ” Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
A well informed, knowledgeable buyer or seller would likely see the benefit of solar on their budget and ensuing bottom line. Any property owner that has experienced the sticker shock of an electricity bill during an extreme heat or cold spell, may gain an increased appreciation of the value of solar-or any other renewable energy source.
Return on Investment is a major concern. We are seeing the payback term shortening with the price of solar declining and electricity rates increasing. Market acceptance varies across the nation, and is partially dependent on the cost of electricity and price of solar PV installations. Louisiana electricity (per kWh), is half the price of California, and 1/3 the price of Hawaii.
The bigger picture and long term vision goes beyond dollars and cents though. New technology and innovation will not only reduce the price of powering a home, but in the long term should provide a benefit to the environment. Renewable energy sources, such as solar, wind and water are here to stay. Its time for all parties to take notice and gain competency in this new frontier.
Great stuff. Thank you Mark. I know you teach solar courses too, so I appreciate you pitching in your two cents.
Good solid points, Ryan. I’m all for solar power and would love to see more people use it to take advantage of natural energy but we need to let the market determine its value. When the government gets involved and makes it a requirement to have this feature I don’t think that is a good idea.
Thanks Tom. I appreciate your take. It’s going to be interesting to watch over the long haul what happens in California since solar will be a requirement for new construction as of January 2020. For builders it’s much cheaper to install solar if they’re doing it in mass, so that will effectively help people have solar without having to pay such lofty amounts. I’ll be curious to see how much more expensive homes are in light of it, but I’m guessing not much because of such of a bulk discount that builders will get. But we’ll see. How will the resale market treat it? That’s my big question. Moreover, as such an emphasis on solar sweeps the state, what will happen to energy rates for non-solar customers? If energy companies start making less because of solar, that’s something to watch.