How Solar Appraisals Work

 

The benefits of solar energy are proven and undeniable. You have the eco-friendly perspective, whereby using solar energy you are reducing the earths reliance on fossil fuels and reducing ones carbon footprint. Then there are the financial benefits. The installation of a solar energy system results in a reduction of a buildings electricity bill, and because the cost per kWh of electricity produced by a solar system remains relatively the same throughout the life of the system, installing a solar system is a hedge against utility price increases which are proposed to increase 11.8% in the fall of 2013 (http://www.duke-energy.com/north-carolina/nc-rate-case.asp) annualy.  With advances in technology, all components of a solar PV system can now be warranted for up to 30 years.

               

More and more people are looking to take advantage of these benefits, and right now is the best time to buy solar in history. The last few years have seen dramatic decreases in prices of solar PV systems, dropping from $7 per watt installed to a current average as low as $3.75-$4.25 per watt. Additionally, current tax incentives for solar, including a 30% Federal tax credit and a state tax credit as well as utility rebates in certain states, make the initial investment as well as the payback period significantly less than in the past.

               

The only real remaining obstacle has been the appraisal of solar systems. Appraisers across the country are just starting to gain the knowledge and tools they need to accurately appraise these systems, but still often find it difficult to assign a specific value. Many people, buyers and appraisers alike, are not yet up to date on current trends in the solar market and in advances in solar technology. Many believe that the payback period for solar PV is still 15 to 20 years, when in reality it is more like 5 to 7 years for residential and even less for commercial.

 

In the past there have also been issues with maintenance and replacement of components with solar systems. However, with advances in technology and installer capabilities, if a solar system is installed by a reputable and knowledgeable solar installer, there is very little maintenance for the life of the system, and most systems are warranted for 25 to 30 years. 

 

Another hurdle, particularly in the appraisal of residential systems, is that appraisers often go strictly based off of the sales comparison approach, trying to value the added cost of the system strictly based on how much a similar home with a similar system has sold for. The main difficulty with the sales comparison approach is that there are currently a very small amount of homes that have been sold with solar installed.  This is mainly because many installations are very young due to the substantially lower cost of installing solar in recent history. This means that very few people have had solar installed long enough to be looking to sell their homes. Additionally, this approach does not take into account the added value that solar gives by decreasing the cost of home ownership through the reduction of utility bills over a 30-year period, in which time the system will prove increasingly valuable as utility rates continue to increase exponentially. What appraisers really needed were the right tools and resources to value solar systems as best they can.

 

Well now there is good news for the appraisal of solar systems. The Appraisal Institute, the nation’s largest professional association of real estate appraisers, released an official form for the appraising of green building and energy efficient features on residential homes in 2011.  This means that appraisers now have an official form to attach to their appraisal that properly include these features, such as solar energy, in their formal report. Homeowners and new homebuyers can include this addendum in their appraisal, even if the appraiser doesn’t, to give to the lender.  In addition to the new form, appraisers also have a new tool to help determine the value of a PV system.

 

There is now new software to help appraisers properly and accurately value a solar system called “PV Value”.  “PV Value works online to determine the value of a PV system. This is done using an income capitalization approach whereby the energy value is calculated over the lifetime of the PV module warranty. Inputs to PV Value include the zip code of the location, local utility rate, and characteristics of the PV system. An appraisal range of value estimate is returned as a function of a pre-determined risk spread. This tool can be used to value a PV system at any location in the U.S. through its interface with the National Renewable Energy Laboratory’s “PVWatts simulator” (http://info.appraisalinstitute.org/blog/bid/121532/Appraisal-Institute-Announces-Support-for-New-Solar-Valuation-Tool). 

 

On Jan 31st, 2012 the Appraisal Institute officially announced its support for the PV Value software. “We are pleased to continue to serve as the industry leader in real estate valuation by offering our support for this innovation,” said Appraisal Institute President Sara W. Stephens, MAI. “We encourage real estate appraisers, mortgage underwriters, credit analysts, real estate property assessors, insurance claims adjusters, photovoltaic industry sales staff, and others to take advantage of this new tool” https://pvvalue.com/login/index

 

What does all of this mean for solar?  Appraisers now have the basis for properly valuing solar systems, which means installing a solar system means added value to a home or business.  This also means better financing options.  When adding a solar system to a new or existing home, the appraised value of the solar system can be included in the mortgage for the home.  The monthly savings on the utility bill is greater than the increase to the mortgage payment, resulting in net monthly income from the system from day one.  For existing homes, an owner can either re-finance his/her loan for the increased appraised value, or take advantage of a shorter-term loan specifically for the solar system.  Due to the available tax credits, shorter-term loans may make more sense for those who can afford the payments because they can refinance the home after the solar system has been installed and in many cases eliminate or dramatically reduce their mortgeg insurance premium. . Although you will pay more the first year than you save, after refinancing post tax credits you will save the same amount from energy production as you need to pay towards the loan. This will allow you to pay off the system earlier allowing you to get the full benefit of production for the rest of the system lifetime, resulting in greater savings in the long run.

 

Solar arrays will increase the value of your home by an estimated $2,660 per kW.

 

7 kW = $18,620 in added value, but, after incentives, $10,500 out of pocket

Net Gain in Equity = $8,120

 

Article from The Appraisal Institute discussing how valuations are calculated http://energy.sandia.gov/wp/wp-content/gallery/uploads/TAJ_FA13_Feat2_SolarPV_e2.pdf

 

Institute for Build Effience Solar Valuations    http://www.institutebe.com/InstituteBE/media/Library/Resources/Financing%20Clean%20Energy/Solar-PV-Appraisal-Methods.pdf

 

This article was written by by Robert Kardos of Accelerate Solar in North Carolina and modified for present rates and circumstances