Selling a home with a financed solar system doesn’t have to be complicated. The process can run smoothly – as long as the necessary information is gathered early and clearly communicated to all parties involved.
In the 1980s, there was a huge 70% Federal tax credit available if you put a solar system on your home. At the time, we saw solar systems on roof tops popping up like crazy. Most of those systems were “financed” by the tax savings afforded the homeowner. They were primarily designed to heat water and indoor spaces using radiator-based systems. Today, most of the panels you see going up are photovoltaic (PV), which produce electricity for the home or provide power back to the grid. These new systems are expensive, and the tax credits aren’t as big as the good ‘ole days of the `80s. Most homeowners who install these systems don’t pay cash upfront. Instead, they typically enter into a lease agreement or take out a loan secured by a deed of trust on the property.
Do solar systems add value to your home?
Here’s the big question! Do solar systems increase your home’s value? Maybe – but not significantly. Much depends on whether the panels are owned outright or financed through a lease or loan. First, let’s consider a scenario where the homeowner owns the solar panels outright, with no liens, leases, or remaining payments on the system. Let’s say, for example, the homeowner is saving $150 a month on their electric bill and has no remaining payments on the system. What is a buyer willing to pay for that $150 savings a month for a holding period of 10 years? The sum of 120 payments at $150 a month is $18,000. Taking out my financial calculator, I plug in $150 a month payment for 10 years, with a “safe rate” of 5% and solve for Net Present Value of those cash flows. The financial calculator says $14,142 is the Net Present Value. Would a buyer pay that much more? Certainly not that full amount, but maybe one half that amount. Obviously, you can change the holding period or “safe rate”, which accounts for inflation to arrive at different numbers.
Few people pay cash for their solar systems. Most opt for a lease or a loan secured by a deed of trust, both of which come with monthly payments. To determine a potential value of the system, you can look at the net savings per month, after the payments, and determine a Net Present Value like the example above.
Solar systems for homes create challenges for appraisers trying to determine the value of the system from a lender’s point of view. If the panels are owned free and clear, as in the above example, the appraiser might carry out some sort of analysis as I suggested. According to FNMA rules, the appraiser cannot add value to the appraisal due to the solar system unless it can be proven that the solar panels are not collateral for any non-mortgage lender or lease holder. An appraiser could add value if there is documentation saying the panels could not be repossessed. That is pretty unlikely, otherwise, why bother with a lease or deed of trust.
Selling or buying a house with a solar system
Selling or buying a home with a solar system lease or loan could set forth a few challenges for a real estate transaction. If the owner of the home paid cash for the system and owned it outright, it can be conveyed just like any other free and clear appliance.
Selling or buying a home with a solar lease in place
Options:
The Seller should contact the holder of the lease and determine if the lease is assumable by the new buyer and under what terms. Be sure to ask what the criteria are for approving the assumption of the lease and how long the process will take. Knowing this information will help the REALTOR® write a contract that has acceptable dates and contingencies to protect all the parties involved.
Selling or buying a home with a loan secured by a deed of trust
Options:
In most cases, if the solar system purchase was made via a loan from the solar company or a third party, it was secured by a deed of trust against the home with the solar system. Secured by a deed of trust means that the loan will typically need to be paid off at the closing table upon the sale of the home. The seller should know or inquire about the payoff amount upon placing their property on the market, so there aren’t any last-minute surprises. The seller should also check to see if the loan has any fees if the loan is paid off early. Again, with a free and clear solar system, the seller can price the home accordingly and the buyer can determine any value added based on the electrical bill savings.
There are instances where the deed of trust holder would allow the loan to be assumed by the new buyer. The deed of trust holder would need to agree to subordinate to the new buyer’s first mortgage. The buyer’s first mortgage lender would need to qualify the buyer based adding the assumed mortgage monthly payment.
It is possible, but rare, that the system was financed by a personal, unsecured loan. If that is the case, the seller is free to sell without paying off the loan. However, the seller is still subject to whatever the terms are of the personal loan.
Bottom line: Selling a home with a financed solar system doesn’t have to be complicated. The process can run smoothly – as long as the necessary information is gathered early and clearly communicated to all parties involved. This ensures informed, timely decisions throughout the transaction. Your Realtor® can help guide you every step of the way.
Duane graduated with a degree in business and a major in real estate from the University of Colorado in 1978. He has been a REALTOR® in Boulder since that time. He joined RE/MAX of Boulder in 1982 and has facilitated over 3,000 transactions over his career. Duane has been awarded Realtor® Emeritus by the National Association of REALTORS and the Circle of Legends by RE/MAX LLC. Duane is also the author of two books, REALTOR for Life and The Velocity of Wealth. You can reach out to Duane at BoulderPropertyNetwork.com or at DuaneDuggan@boulderco.com