Over the last 15 years solar has been a growing source of alternative power in the United States (See graph from Solar Energy Industries Association® below). With the benefits of lower electric bills, reducing one’s carbon footprint, and potential tax credits, it’s easy to see why homeowners are choosing to jump on this eco-friendly trend and installing solar panels.
If you’re considering purchasing a home that has solar panels installed, here’s some things you need to know:
Who owns the solar panel system? When adding a solar panel system to a home, homeowners have a few different options. They can purchase the system outright, get financing to fund the purchase, lease the solar panels from a third-party company, or sign a Power Purchase Agreement (PPA) that allows homeowners to purchase electricity generated by solar panels that are installed on their home, but are owned by a third-party company. In short, either the homeowner owns the solar panel system (pays cash or gets financing) or a third-party owns them and the homeowner has a lease agreement on the solar panels or a Power Purchase Agreement for the electricity.
If I’m buying a home with solar panels, will I be the new owner? That depends on whether the solar panel system is owned outright by the homeowner (seller) or if there is a lease agreement or PPA. Real estate contracts vary by state, but many include language that specifies whether the solar panel system is owned or leased.
But it can get a bit deeper than that…
If the homeowner received financing to purchase the solar panel system, that loan must be paid in full prior to the home purchase closes.
If the homeowner has a lease agreement or a PPA, the buyer will assume the contract with the third-party solar company. That means there will be monthly payments, usage terms, and modification restrictions. It is important to read any type of lease agreement or PPA carefully before committing and agreeing to it.
The solar panel system is leased, now what? First, the lease agreement may require a Uniform Commercial Code (UCC) Lien on the property. This means that the third-party company (creditor) that holds the lease will file a UCC with the Secretary of State offices that essentially notifies the public and other creditors of their interest in the collateral (the home) used against the lease. Second, if you are financing the purchase of the home, the lease payments will be considered by your lender in determining your creditworthiness. This could mean that if the home that has a lease solar panel system is already at the tip top of your home buying budget, those lease payments could affect whether you are eligible for the financing on that home. Your lender is going to factor that lease payment into your debt-to-income ratio and determine what you can afford for your mortgage.
What about Property Assessed Clean Energy (PACE) loans? Very few states have Residential PACE loans. Most R-PACE programs generally cover single-family homes and are funded by third parties for homeowners’ energy improvements. Sometimes state and local governments may also offer a variety of assessment-based financing programs that are very similar to R-PACE programs. There has been concerns with R-PACE programs including increased tax bills with the risk of foreclosure, issues with refinancing or selling, and deceptive or high-pressure sales tactics by contractors.
Is a home worth more because it has solar panels? In the land of home mortgages and financing, mortgage underwriting guidelines requires that the solar panel system is owned before an appraiser can even consider whether they add “contributory value” to the property. If the system is owned, it can potentially add value. If it is leased or has a PPA, then technically it is not part of the property and cannot be considered part of the value of the home.
Will I pay more for a home that has a solar panel system? For some buyers, a solar panel system can be a desirable amenity, and they would be willing to pay more for a home that has them. As in any real estate market, a home’s price depends on what the local real estate market will support. If many buyers in the local market desire solar, but not many homes have that amenity, there will probably be a premium. It’s supply and demand. If the demand is high, but supplies are low, prices could be higher than a market where demand is low and supplies are high.
How much will I save on energy costs? There are a variety of factors, including the age of the solar panel system, the amount of sunlight the panels receive, and even how much power usage your household typically uses. Also, the age of the home, quality of insulation, age and condition or windows and doors, efficiency of electrical heating and cooling systems, etc. Ask for documentation on the existing system, any major electrical systems within the home, past electrical bills (usually knowing the high, low, and average for the prior year is a good place to start), and even solar production records. Then you can potentially compare the cost of energy with that of similar homes that don’t have solar.
Other things to consider when purchasing a home with a solar panel system:
- What is the age of the system? Upgrades to a system can be costly. Also consider whether parts for repairs and updates are easily available. The average age of a solar panel system is roughly 25-30 years. Although the lifespan of a system depends on the photovoltaic technology that was used. However, a solar panel system could produce meaningful power past its lifespan, especially if it has been well-maintained.
- How is excess power handled? Selling surplus power back to the electrical grid varies by state and utility provider. Make sure you do your due diligence and fully understand the net metering policies or your area and electrical provider.
- Was the system properly permitted and inspected? If the answer is no, be prepared for a headache with all the unknowns. Will the system have the same average lifespan? Was it installed correctly? Does the solar panel system have to be removed if it is unpermitted? And many more unanswered questions like these could come up.
- Is there a homeowner’s association? If yes, are there any restrictions on solar panels, future modifications to the roof, or future modifications to the system?
- What is the condition of the roof? Solar panels are often roof mounted, so having a roof inspection that determines the roof’s age and condition is essential. If the roof will need to be replaced, understand that you will need to find a company and pay them to uninstall the panels for the roofing company to re-roof the home, and then re-install the panels once the roof is completed.
- Will warranties be transferred with the property? Many warranties on solar panel systems have at least 10 years of coverage, with a premium option for 25 or even 30+ years. Transferability of warranties depends on the warranty. Make sure you look over the original warranty documentation to determine whether it can be transferred to you, as the new homeowner.
- How will the solar panel system affect my homeowner’s insurance? This is something to discuss with your insurance agent. They will be able to tell you what your homeowner’s insurance policy covers, if there are any premium increases to include a solar panel system on your homeowner’s insurance, and more.
