Valuation of Homes with Solar Panels

Note that this article on valuation of homes applies to solar electric (photovoltaic or PV) systems, not solar pool heating or solar water heating systems.

The solar energy industry’s marketing gurus have ample rule-of-thumb estimates for how much value solar panels add to homes, but that’s all just speculation unless someone is actually willing to pay more for your home with solar electric panels. And those valuations can be challenged by lenders and brokers who are not savvy when it comes to “green home” valuation. Some of those rules-of-thumb I have heard are the following:

  • There was a widely quoted Appraisal Institute report (that is probably outdated now) that concluded that a home’s value goes up by $20 for every $1 in annual energy savings. If solar panels save you $1,000 in annual energy, the home is worth $20,000 more.
  • A home with solar panels is worth the initial cost of solar panels declining at a steady annual rate for 25 years, the typical life under warranty for a solar energy system.
  • A more recent study was done by the Lawrence Berkeley National Laboratory that looked at 23,000 homes sales in eight states in over about a decade. This study concluded that homes sold for a premium of about $4 per watt. A pretty typical 5 kilowatt system would add $20,000 to the value of a home. This was reported recently in a New York Times article.
  • Take the amount of energy saved per year in dollar terms, and back into how much more home that would buy with a 30-year mortgage at current rates.
  • Homes with solar panels sell twice as fast as homes without in some markets.

There are some concerns when it comes to analyzing the value of a solar panel system on an existing home for sale. One major factor is the age and condition of the system. If the system wasn’t installed right in the first place, that could detract from the value, and most home inspectors do not include solar panels in their reports due to lack of knowledge about them. If the system is now relatively aged, which is becoming more of a reality as the market matures, the value of the system surely needs to be adjusted for the remaining life. Local conditions and economic status of the area surely play a part in the value to a buyer.

I’m a finance guy (finance major, economics minor). If I were to value a system from a buyer’s perspective, I would look at basically one thing: the investment analysis. What is the value of the stream of energy savings over time calculated in today’s dollars given an assumed discount factor. I would look at the risk involved and the time horizon for the investment, and choose a discount factor that makes sense. Accounting for expected maintenance costs for the remaining life, I would come up with a net present value that should be what someone is willing to pay as a premium. Of course, some assumptions would need to be made, most notably the inflation rate applied to energy costs in the future, the remaining life, probably maintenance or replacement costs, and the discount factor itself. Since homeowners pay electric bills with after-tax income, investment returns from reduced energy costs need to be considered on an after tax basis, so the buyer’s tax rate (now and in the future) could improve the comparative investment returns drastically.

All of the rules of thumb are too simplistic in my opinion. Each individual needs to determine what a solar energy system is worth to them. One important factor should be noted — if your solar panel investment has a positive net present value, then it should be worth more on the day you install it than you paid for it. However, most likely nobody will pay you more than it would cost them to install a solar energy system themselves. The value of the investment at a later date when you are ready to sell your home is a complex function of time and the other assumptions used in the investment analysis. Theoretically the system value could actually increase after the day you buy it if inflation pushes energy prices higher, giving your earlier year savings a boost. The value of the system will drop off precipitously as the system nears the end of it’s useful life, but by that time you have already reaped most of the rewards from the system.

So the valuation of a home with solar panels is not so simple, but there is plenty of anecdotal evidence and studies that point to higher values for homes with solar electric (photovoltaic) panel systems. I would advise any home buyer to get an analysis done by a competent solar energy consultant, and then share the analysis with your accountant or other trusted individual if you are not a numbers person yourself. For sellers, since you will not know your prospective buyer’s perspective, you are forced to consider the rules of thumb and trust the advice of a real estate professional who is qualified to value solar panel improvements to your home. The added home value perceived by your perspective buyer may be quite different than the value to another buyer. That said, there are a growing number of people looking for homes that are energy efficient with low or no electric bills, so it may be easier to sell a home with solar panels and attract a segment of prospective buyers that would not otherwise consider your home over other options.

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