Research now Shows Solar Adds Value to Real Estate
Published on 10 Dec, 2017 by Chris Meehan
An increasing number of studies are showing that solar power is adding value to homes when they’re sold. However, the studies are still limited in scope to a handful of states, like California and Massachusetts where the industry has seen the most growth. But the experience in those markets shows that it’s likely to happen in more states across the country as people get more familiar with modern solar installations.
It's a marked departure from when solar panels first started showing up on homes in the 1970s. With low efficiency levels and clunky mounting systems, solar power was more of an "earth warrior" statement than a great way to power a home while reducing electric bills—as it is today.
Many were against the looks and costs associated with solar energy, particularly solar hot water panels—which were unwieldy and often propped up at weird angles to maximize the sunlight hitting them. Meanwhile photovoltaics weren’t very efficient (think single digits) and cost per watt was astronomical—over $70 per watt! For all those reasons and more solar power often was considered more a hindrance than a benefit to homes, particularly when the homeowner wanted to sell.
Residential solar power costs are now closer to $2.80 per watt in early 2017, according to the National Renewable Energy Laboratory’s (NREL’s) most recent report. Thankfully today’s solar installations are a lot cheaper, a lot more efficient and sleek, blending in to a roof better than they used to. For all those reasons and some more we’re going to get to in a bit, solar power is not only becoming a worthy investment for lowering electric bills but also for adding to the value of a home.
All that has lead to a sea change in thinking about rooftop solar. More than 1.4 million homeowners in the country have gone solar. And solar is growing quick. Since the Solar Energy Industries Association (SEIA) announced that 1 million US homes had gone solar in August 2016 at least 400,000 more have gone solar. The industry advocacy group also anticipates that the number of solar homes would double to 2 million homes by the end of 2018.
To help stoke the interest of the American public in going solar SEIA has issued numerous white papers and documents to help people go solar, including everything from standardized forms that help homeowners compare bids for solar installations to questions they should ask solar installers. Most recently it introduced a new report: How Owning a Solar System Impacts My Home Value: A Guide to Valuing Residential Solar Energy Systems.
The report explains evaluation methods and how more research is showing that rooftop solar does, indeed add value to homes in the US in a growing number of cases. However, in some markets it may not be as feasible.
Appraisers Remain Concerned About Solar Adding Value to Homes
One of the biggest problems with properly appraising the value that a rooftop solar installation adds to a home is that there’s not enough standardized information. "Solar PV may add value but that is not a given across the board," cautions Sandy Adomatis, SRA, LEED Green Associate and Owner of Adomatis Appraisal Service.
Adomatis was co-author of Appraising Into the Sun: Six-State Solar Home Paired-Sales Analysis, a report issued by the Lawrence Berkeley National Laboratory in 2015. It’s one of the most detailed reports on how to evaluate the value of rooftop solar to real estate value. But it’s limited to just six states.
Image source: A solar home in Colorado. Courtesy of Chris Meehan.
"It is not only the recoup period that homeowners question but how acceptable is it in your market? If you are in a market that is environmentally conscience, home owners may install solar PV to do their share for the environment and in those markets, solar PV may add value," Adomatis explains warily."In markets where kWh [i.e. kilowatt hour] costs are high, utility grids are questionable—resulting in blackouts, or the market has accepted solar PV as a feature they want, it may add value."
"The owner must decide if they are willing to accept the numbers and hope that if they sell before they recoup their money, will they receive a high selling price because of the solar PV," Adomatis says. "If they can, they will at least recoup some of the initial investment."
"There are certainly a growing number of buyers that are aware of their own environmental impact. For that percentage of buyers, the cache or showing off they have solar PV on their rooftop certainly is part of the value proposition to them, absolutely," contends Craig Foley, chief of Energy Solutions with RE/MAX Leading Edge and founder of Sustainable Real Estate Consulting Services.
A more recent report from Sandia National Laboratories, takes an even more positive approach. That report, U.S. Solar Market Value Report – 1st Edition: Further Evidence that Solar Adds Value to Real Estate, looked at the sale of real estate with solar power in Arizona, California and Massachusetts and concluded that, indeed, solar does add value to a home’s real estate price.
"Solar photovoltaic systems provide cost savings to the property owner in terms of avoided electricity costs that accrue over the system lifetime. From an investment standpoint, the equipment and the value of the energy generated can potentially increase the underlying property value," the report explains.
The study, which Sandia calls a first-of-its-kind study used actual market data from real estate appraisers using the PV Value tool from Energy Sense Finance, which was developed with Sandia. That way the researchers developed a market value for rooftop solar in relation to a property sale or refinance.
In the most developed and largest residential solar market, California, the final appraised value that solar rooftops added to homes was highest, according to the Sandia study. It found that the mean value of new solar installed on a house that sold in 2016 was $3.93 per Watt, so a 5 kiloWatt rooftop solar system should add roughly $19,650 to the real estate value of a home sold in 2016.
Image source: Courtesy of Sandia National Lab.
The mean value of new rooftop solar to a house in California in 2015 was $3.76 per Watt in added value, meaning a 5 kiloWatt system should add an average $18,800 to the value of a home. "For a 12-year old system that sold in 2015 and 2016, the mean value was $1.86/Watt and $1.96/Watt, respectively," the report stated.
The lowest value added came from Massachusetts. The researchers noted that they had very few data points to contribute to the results there though. "For a new solar system installed and sold within 2015 and 2016 (using the average income value), the mean value was $2.12/Watt and $2.17/Watt respectively. For a 3-year old system that sold in 2015 and 2016, the mean value was $2.09/Watt and $2.09/Watt, respectively. Very few data points contributed to those estimates," the report observed.
Image source: A solar home in Colorado. Courtesy of Chris Meehan.
How do you calculate the value solar adds to a home’s real estate value?
There are many considerations that come into play when choosing how to calculate the value solar power adds to a home, including what methods appraisers use to calculate that value. Choosing a value methodology and an appraiser familiar with solar is important. "A significant number of lenders/underwriters/appraisal management companies are unknowledgeable of solar PV and do not seek to hire appraisers with knowledge of the system," says Adomatis.
The recent SEIA report acknowledges three approaches to valuing rooftop solar’s impact on real estate: the income approach, the cost approach and the comparable sales approach. The income approach establishes the value of rooftop solar panels by the projected income the array will generate for the homeowner over the system’s expected lifespan. "Valuing a system on this basis most closely aligns the value with the homeowner’s perspective (both sellers and buyers)," the report stated.
Another methodology is the cost approach. That approach considers the cost it would take to install the system that’s on the home when it’s sold. It takes into consideration the age and quality of the installed system. Since the value of a system falls over time this approach must account for that.
The third methodology is comparable sales approach. That approach values the solar panels and equipment by comparing the sale of similar homes with and without solar on them to determine the system’s impact on home prices. Since there aren’t enough solar homes in every neighborhood across the country at this point, it’s hard to use this method to evaluate the value of a solar array.
"Comparative marketing analysis can be very difficult because there may not be homes in the neighborhood with solar PV and if they do, the posting agent that entered info into the Multiple Listing Service almost certainly didn’t list the critical information we need to value it on a home," Foley observes.
It’s possible the comparative methodology could become common in the future as rooftop solar becomes more common in neighborhoods. At this point, however, few neighborhoods or states for that matter, have enough rooftop solar to allow this method to accurately account for the true value a solar system adds to a home. Ultimately SEIA recommends using the income approach to evaluate the value of solar.
There's another wrinkle to consider. Ownership. "Solar PV that is leased, a result of a Power Purchase Agreement, or owned but financed with a solar loan that records it as personal property with a UCC-1 filing cannot be included in the market value of the real property," explains Adomatis."This is a problem for the real estate industry to resolve. How do we identify with certainty that the solar PV is real estate?"
"Fannie Mae makes it very clear that personal property has no value even though it transacts and may move to the next buyer and they may be paying for 50 percent, 60 percent or 70 percent of the PPA, [but] we can’t add any additional value for leased solar PV because its considered personal property," Foley adds. In such instances, a selling homeowner may have to purchase the system outright from the lessor or PPA holder to recoup the value of the solar array at closing.
Image source: Courtesy of Lawrence Berkeley National Lab.
While solar installers are able to give accurate quotes on how much a solar array will cost, as can tools like solar-estimate.org, they’re not the best positioned to tell homeowners and prospective buyers how much value a solar array will add to a home when it’s sold.
That’s the realm of appraisers, many of whom are just beginning to or still learning about the value that renewable energy and energy efficiency adds to homes. Tools like the PV Value tool from Energy Sense Finance, which is endorsed by the Appraisal Institute, can help appraisers and real estate agents understand the value solar adds to real estate. Savina Home also offers a solar value calculator that was developed in conjunction with the Department of Energy’s SunShot Initiative.
"When we market solar PV…we want to sell the benefits of anything in the energy efficiency or renewable world," Foley recommends. "Those benefits are lower operating costs, healthier homes with clean energy. They’re more comfortable. Those are the things we need to focus on with the average consumer."