A major factor in solar’s rising popularity is the dramatic decrease in system component and installation costs over the last 10 years. More recently, homeowners have had increasing options for financing, such as zero-down purchase deals and leased systems. Plus, solar has social cachet, bestowing on the owner a reputation for a progressive outlook.
Homeowners go solar to save money and go green. But this raises a basic question: Does solar improve the resale value of a home?
In short, yes. Numerous studies conclude that solar does increase home value. Two 2015 studies by Lawrence Berkeley National Laboratory show that homebuyers are willing to pay a premium of some $15,000 for a solar home and a 2019 report by Zillow found that homes with solar panels sell for 4.1 percent more than those without. A consumer guide from the U.S. Department of Energy states that a solar electric system raises a home’s property value by $20 for every $1 in utility savings per year.
U.S. Solar Power Generating Capacity 2010 – 2021
Source: SEIA/GTM Research U.S. Solar Market Insight
But the resale value of a solar home depends on a number of factors: The size and age of the installation; whether the solar installation is owned or leased; availability of federal and municipal tax incentives; utility company rates, restrictions or incentives; and characteristics of an individual market area. This article offers guidance to help you make an informed decision about going solar.
However, a home seller must own the solar-power system to reap such rewards. Homeowners with leased or Power Purchase Agreement (PPA) solar systems benefit from the lower energy costs of having solar without having to invest upfront capital, but their financial reward when the home is sold is limited and the paperwork more complex.
Panels Without Financing
A 2019 study by the real estate experts at Zillow found that homes with a solar PV system sold for an average of a href=”https://www.zillow.com/research/solar-panels-house-sell-more-23798/” target=”_blank”>4.1 percent more than similar homes without solar. For a median-valued home that means an increase of $9,274. For a mortgage lender such as the FHA, a solar system is defined as a “Special Energy System.” This means that the system must be included in the assessment, most commonly by comparison to similar solar-equipped home sales in the market area. Since the seller has already paid for the solar installation, he or she pockets the solar premium — not to mention having enjoyed lower utility bills.
A leased system is not a real property asset since the ownership is held by a third party. An appraiser can determine the value of a leased system by doing a comparison with similar leased-solar home sales in the market area. However, while the presence of a solar-power system will make the home more attractive, the buyer faces several challenges: Lenders like the FHA and many banks will not include non-asset, leased systems in property assessments; solar lease payments must be included in the buyer’s debt-to-income ratio, and the lessor solar company must show proof of insurance to cover any potential damage to the mortgaged property. Depending on the municipality, a leased system may lead to higher property taxes.
With a power purchase agreement, or PPA, a homeowner contracts with a solar energy developer to install a solar system at the home for a fixed period of time, typically 15 to 25 years. The developer agrees to supply electricity to the homeowner, generally at a rate below local utility rates. While the homeowner benefits from lower energy costs, the homeowner does not own the system, and any tax credits or energy credits (SRECs) go to the developer. Like leased systems, PPA systems are not considered real property assets on mortgage documents. However, since a PPA agreement can be transferred with the sale of a home, a PPA system does increase a home’s marketability. An appraiser can determine the value of a PPA system by doing a comparison to similar PPA-solar home sales in the market area. Depending on the municipality, a PPA system may lead to higher property taxes.
Panels Financed With Another Loan Type
A homeowner can finance a solar installation with a home improvement or second mortgage loan from a bank or credit union, a personal loan, a Fannie Mae HomeStyle Energy mortgage or any other financial source. A home buyer likely will require proof that the seller has satisfied the conditions of the solar system loan before the sale is finalized.
Expert Q&A: Ben Hoen of Berkeley Labs on Solar Home Value
As of 2016, there are 1 million photovoltaic systems installed nationwide, and that number is growing. Ben Hoen, a research scientist with Berkeley Lab Electricity Markets and Policy Group, a U.S. Department of Energy National Laboratory, was the co-author of a recent study on the impact solar panels make on home resale values and answered Lets Go Solar’s questions about the study’s findings.
Is it worthwhile for me to spend the money on a home solar power system, assuming my property is physically suited for panel installation?
If you get a good return on investment, why not? Determining solar resale values is complicated, but if you can get a clear, immediate return on investment (i.e., your savings on energy costs are larger than your finance payments for solar), then it’s pretty easy math.
There are some risks when it comes to market resale pricing. The resale value might not be as rosy as projected. In assessing an investment, a buyer should factor in the PV system’s warranty, performance guarantee, operation and maintenance costs over time and the reputation of the solar company.
Fundamentally, buying solar is just like purchasing any higher-cost appliance, like a car. So approach it with the same questions: Is there a warranty? Are the first years of operation covered by a performance guarantee? What is the resale value given past resale values of the same product?
You note that “determining solar resale values is complicated.” What goes into the equation?
Several factors are notable in estimating a premium price for solar in home resales. The first is replacement value. No one is going to pay more than it would cost to buy and install a new solar system, so a primary determinant is the replacement cost — the cost to install a new system likely will strongly affect what the market is willing to pay.
A major factor in the replacement cost is incentives. Berkeley Lab research shows that a determinant of resale value is replacement costs, less federal and sometimes state and municipal incentives. Often, incentives were significant, and we found that buyers priced the discount incentives provided into the purchase price — that is, they did not pay the full price without the incentives.
The second determinant should be savings value. What is the present value of savings from utility bills that the homeowner may enjoy over time? Analyzing the savings means looking at utility costs in the target area. If retail electricity rates go way up, then the savings increase a lot and should be factored into the purchase price. While it is fair to project that retail electricity rates will rise in any area, it is difficult to pinpoint projected price increases and when they will occur because it is both a market and political process.
Assessing these factors is a dynamic process since the cost of replacement will likely decrease over time, but on the other hand, incentives may decline. However, those are trends. The fact is that at any given time, you can figure in these variables and come up with an estimate for market price.
Data exists to determine how the market sets the resale value of an asset like a homeowner-owned solar system. How does a buyer decide the resale value of a leased solar system?
A homeowner-owned PV system is an asset that can transfer without obligation. The system’s warranties and performance guarantees often will transfer with the sale. A leased system, on the other hand, is a third-party asset, and, therefore, that third party will need to be involved in the transfer. In one study we conducted using surveys of buyers and sellers, we found that a leased system typically did not deter the transaction, but it did make the decision-making and transaction process more complex.
We used the analogy of buying a car to look at the resale value of a homeowner-owned PV system. In that framing, a leased or PPA system would be like a leased car. However, unlike the car market, solar leasing has not been a market practice for enough years to provide reliable data to determine how the market will price a leased system’s resale value.
Another factor to consider in assessing the value of a leased solar system is the status of the lease at the time of the transaction. The current homeowner may simply be keeping up with lease payments, or may have prepaid a portion or the entirety of the lease value. Each scenario could affect what a buyer is willing to pay.
Another unique aspect of a leased solar system is what happens at the end of the lease. By contract, a homeowner can ask to have it removed, re-sign a lease, buy it at a value determined at that time or have it transferred to another home. But what will actually happen? If a homeowner chooses to have the system removed, the solar company may decide just to leave the system in place. But this is speculation. We are not yet 20 years out from the practice of solar lease agreements, so there is not enough data to determine a pattern.
Your Berkeley Lab study shows that it is now a market practice for banks and mortgage issuers to recognize a solar PV system as an asset — but only when the home seller owns the system. What can a home buyer expect from a lender if the home has a leased system?
Mortgage lending varies by institution, but the industry’s practices are largely modeled on Fannie Mae and the FHA (Federal Housing Authority). Fannie Mae and the FHA have in the past designated a leased solar PV system as personal property, not real property, much like buying a home’s interior furnishings. As a result, solar that is owned by a third party has not been included in the appraisal for a home mortgage.
Another impact of a solar lease on the mortgage process is the amount of money still owed on the lease and whether it is listed as an obligation, or debt, on the buyer’s debt-to-income ratio. Fannie Mae recently changed its lending policy to exclude PPA systems from a buyer’s debt-to-income mortgage statement. The obligation to make payments on a leased solar system will continue to be included in DTI.
The Berkeley Lab study you did with Sandra Adomatis, Selling Into the Sun: Price Premium Analysis of a Multi-State Dataset of Solar Homes, was published in 2015. Will Berkeley Labs continue to do research to update market data?
Berkeley Labs does research on market factors for a variety of renewable energy sectors. We are now doing a study of the resale pricing for solar lease homes, and we’ll have a report early in 2017.
How the market values a solar installation is a subject that will need to be reviewed and reported again and again. Just like the value of a kitchen renovation or other home improvement, solar’s resale value will adjust to current market conditions. So Berkeley Labs’ work is never a final answer, but it is a snapshot of how the market is reacting at a point in time.
Do Solar Panels Increase Property Taxes?
In most areas of the United States, a solar PV system will not increase the amount of property tax you pay.
By most measures, it should. Property taxes are based on appraised value, and a solar system increases the value of your home, the same as any other home improvement, like adding a pool or converting your garage to a spare bedroom. However, state governments are now in the business of promoting solar as an alternative to fossil-fuel-based energy sources.
States can promote solar using one of several strategies:
Exclude solar systems from home appraisals
Exempt residential solar systems from property taxes: More than 30 U.S. states allow this. Some are open-ended exemptions; some are for specific time periods, ranging from five to 25 years.
Include the solar system in the home’s appraisal, but provide a financial incentive — an abatement — that is equal to most or all of the increase in property tax
In most states with solar tax-incentive programs, incentives are for all homes statewide. In California, for example, state tax law disallows a property tax increase if the revised appraisal is based on a solar installation.
In addition to state programs, some U.S. municipal and county governments offer additional tax exemptions or abatements as well. Depending on the area, a homeowner may find a number of other incentives available, ranging from energy bonds to weatherization programs or discount programs for multifamily shared solar installations. Across the U.S. there are 36 states that offer property tax exemptions and 25 that offer sales tax exemptions for solar. These include states like Nevada, Arizona, Colorado, and New Jersey. While these incentives are not directly related to property assessments, they can have a positive impact on a homeowner’s overall tax bill.
In addition to residential incentives, some states have solar tax incentives specific to municipal and commercial solar systems, usually defined as systems generating 250 kilowatts or more. Local and state governments are also active in developing incentives for government buildings, such as luring private developers to build PPA systems in exchange for generous tax benefits. See the Resources below to find lists of available incentives.
How Much Do Homeowners Spend on Solar Systems?
The majority of the cost of the purchase and installation of a solar power system — 67 percent — is soft costs, meaning labor, permits, and overhead. The remaining 33 percent is hard costs for components: solar panels, batteries, converters, inverters, wiring and clamps and other gear associated with installation.
Solar PV Price per watt
Source: SEIA/GTM Research U.S. Solar Market Insight
The costs of solar system components and installation vary by system size, type of panel, quality of the inverter and batteries and labor costs in different parts of the country. The most reliable statistics on costs are based on comparisons of price per watt. The average U.S. home consumes approximately 1 kW of electricity per hour.
Currently, the average U.S. residential solar system:
For example, the overall cost to install a 5 kW system is $13,500. The panels are $2,341; batteries, inverter, controller, framing & wiring are $2,565; labor is $1,345; permits, fees, and taxes are $810; and supply chain and operational costs are $6,480.
After state solar incentives and a 30 percent federal tax credit, the net cost to purchase, install and use this example system for its first year would be less than $9,450.
Batteries vary by capacity and their efficiency in storing energy from the solar panels. The controller functions as a dashboard to reveal how well your solar panels and battery are working, with higher-priced units providing more analytics, including readouts of performance over the past week or 30 days.
Installation is labor: the cost to install components on a roof, garage siding or backyard array, with the vast majority of installations being roof-mounted. Installation costs vary significantly by region of the country.
The most comprehensive analysis available of the impact of solar systems on home prices, taking into account differences in region and ownership type — purchased, leased, PPA — developed by Berkeley Labs for The U.S. Office of Energy Efficiency and Renewable Resources.
As an industry association, SEIA promotes solar in its literature and lobbies government and business groups. Its site has some of the most up-to-date data available; detailed data is only available to members