In a new study by the Lawrence Berkeley National Laboratory entitled “Appraising into the Sun: Six-State Solar Home Paired-Sales Analysis,” the Florida Gulf Coast was one of the areas analyzed for sales of homes with solar electric (photovoltaic/PV) systems. The results showed a 6.39% premium selling price for homes with solar panels. Previous data was lacking on the subject, and good local evidence of higher home values with solar was scarce. This report is good news for the solar energy industry, and important for our area’s real estate professionals to understand.
We have been hearing from prospective clients recently that they have been told by local real estate professionals that solar panels do not add to home values, dissuading people from making solar energy investments on homes that they don’t plan to keep for a long period of time. It is a rational concern for people who want to make sure they get their money back when they leave a solar energy equipped home. This report refutes the notion that solar energy investments don’t add to home values, and provides homeowners evidence that they can recoup their investment when they move on.
The problem is a lack of education and perception. I have done some talks in front of real estate groups where most of the agents are unaware of how solar panels work, and how a solar energy investment changes the financial outlook for prospective home buyers. Because they don’t come across many opportunities to buy or sell a home with existing solar panels, they may have a distorted perception based on a small sample size of anecdotal evidence. The takeaway from these learning events I host is that agents can better explain to home buyers what benefits they will get by owning a home with solar panels.
One local agent told me after an event that many of his colleagues focus on trivial things like modern paint colors and shiny new appliances. While those things are desirable traits for buyers, a good agent representing a buyer will also bring up things like structural integrity, wind mitigation features, and energy costs when advising clients. Without education on these important home features, agents are most likely to gloss over the features they don’t understand, and subsequently those features are devalued.
The report takes a detailed approach to valuing the solar energy feature on homes. Using a three-pronged methodology of paired-sales, net cost, and future income, the report points out that the traditional method of comparing sales of homes with a feature to homes without the same feature is not necessarily appropriate for solar panel valuations. In the past there was not a large enough sample size in many markets to make an accurate assessment with the paired-sales approach, where “comps” are used to value solar panels. When appraisers use the paired-sales approach they often conclude that solar energy systems have a zero value in a real estate transaction, which is obviously irrational. By looking at the cost of the feature and the future income stream from the feature, a real estate professional can better advise clients on what they should pay for solar panels.
In considering the cost of solar panels, you need to look at the system output rating and its quality, but most importantly a buyer will want to know the cost of the feature net of incentives today. While it’s easy for a seller to tell you how much they paid for a solar energy system, that may be very different from what you would expect to pay today. The reason is that tax, state, and utility incentives have been all over the map in the last several years. People buying solar panels today could pay more or less than someone who bought solar panels 5 years ago because prices and incentives have changed so drastically. They key is understanding how much you would have to pay for an equivalent system today (the buyer’s net cost after today’s incentives). The same equipment may not be available today as technology and efficiency changes. Further complicating things, prospective buyers may have different tax situations, changing their individual net cost.
I like the future income approach where you look at the present value of the future stream of energy savings from solar panels. Because solar energy systems typically have warranties of 25 years from the date of installation, we can look at how much life is remaining on a system and how much electricity the system is likely to offset over the remaining life. Using a few assumptions about future utility electric costs and system maintenance, it’s pretty easy to estimate the present value of the future income (a lower electricity bill is essentially after-tax income to the buyer). Using the mortgage interest rate as a discount factor, we can determine the value of the system to a buyer. The reduced electricity costs will support a higher mortgage payment to pay for the added value of the system. We can also consider the internal rate of return from the future income stream and compare that to the cost of capital (the mortgage rate). This is a rational approach for a buyer who values a solar energy system, but does not want to overpay for the feature.
Solar panels are one of the few features that are easily quantifiable in this way. Insulation, efficient appliances, and newer air conditioners all reduce the cost of operating a home, but the savings are not easily quantified or verified, and occupant usage of those features has a big impact on the realized savings. Solar energy monitoring systems can verify actual system output, placing real numbers on the energy savings. The future energy that will be produced from solar panels is a bankable feature, and should be considered when valuing a home. Through this report we now have solid evidence that buyers are taking note and paying a premium in the local real estate market for solar electric systems.
On the other side of the coin, we have sellers over-selling the value of solar panels. In one recent case, I met a home buyer who said the sellers told them their solar panels would cut their electric bill by one-third. A quick calculation showed the energy value at about $300 per year at today’s electricity cost. I valued the system at about $4,000 using the future income approach. This buyer most likely overpaid for the feature, but they were happy to have a working system that provided at least some savings.
I advise real estate professionals to establish a working relationship with a solar professional. If you send me a few pictures of a solar energy system by email, I can give you a ballpark professional opinion of the system cost and value. If you need a more refined assessment, I will often offer your client a free on-site analysis and a verbal opinion. Establishing these new homeowner relationships is important to me because solar energy tends to spread quickly in neighborhoods where systems are installed. For sellers who want to know what to ask for their feature, or for buyers who want some peace of mind, a solar professional can prepare a written report and valuation, but your client should expect a small fee for this type of consulting work.
Here is a video of the webinar entitled “Appraising the Sun,” where methodology and results of the study are discussed: