Understanding how solar panels impact property value is crucial for buyers, sellers, and lenders alike, especially as the popularity of solar energy soars across the US. With over 3.9 million residential installations by the end of 2022 and expected growth in the coming years, solar's influence on market value is a pressing question. Despite the boom, accurately assessing the added value of solar installations remains challenging, often leaving property appraisers in unfamiliar territory.
Typically, the companies selling and installing solar may not be the best to assess the value of an installed system. It would seem property appraisers are better suited to address market values. However, many are just beginning to or are still learning about the value of renewable energy sources like solar. Installers like us need to help accelerate that education process. So, let's jump into it!
Chart from SEIA - Solar Market Insights Report 2023
This has been and will continue to be widely debated. Early studies showed a willingness to pay 4% more for a property with solar. Yet, the data was limited, and many real estate professionals argued that solar did not add value to properties. In 2008, a study in California showed homes sold faster with solar panels, with a premium of $15K for an average-sized residential system. In 2015, a Berkeley Lab study examined eight states over 11 years and found that, on average, home buyers were willing to pay $4 per watt more for a house with solar. That means an average-sized 6 kW residential system would add $24,000 to the property.
In addition to having the research noted above, SEIA (Solar Energy Industry Association) suggests using one of the following three methodologies to calculate the added value of solar.
The Income Approach
The Income Approach takes the expected energy cost savings minus the ongoing operating costs. This is often referred to as the avoided cost, which is the billing rate of the utility. Advantage – this is the rationale that drives most solar purchase decisions.
The Cost Approach
The Cost Approach represents the current cost of replacing the solar system. This reflects the current pricing of a system, but solar systems depreciate over time, so that must be considered. Since solar prices have fallen over the years, you do not want to pay more than a new system costs. And incentives often affect the cost approach. In other words, buyers are willing to pay replacement costs AFTER incentives. In 2010, residential pricing was $6.75/ Watt. In 2016, closer to 3.25/Watt. The cost approach takes into account the age and quality of the installation.
The Comparable Sales Approach
The Comparable Sales Approach is when comparable properties in a geographic area are matched against each other - one with solar and the other without solar. This is a common appraisal method for real property, and the more solar panels are installed, the better this method should work. However, there may not be enough installations in many areas yet for this to work well. And then there is always location, location, location. When doing property comparisons, it may be hard to factor out other contributing factors to value variation.
The reality is that much has been written and debated about solar energy's impact on a property's value. There are many underlying determinants like age, energy production or output, quality of the hardware and installation, warranties, production guarantees, and so on. This can seem a bit overwhelming, but fortunately, some tools can help, such as:
Solar professionals like Paradise Energy Solutions can also provide a value assessment of a system, including system testing to verify functionality and performance. Remember that when calculating the value, you must consider projected maintenance and insurance costs. Our company always projects these in our proposal cash flows, but not everyone does.
I’ll wrap this blog up with a quote from Marjorie Youngren's article Ask the Realtor: How do solar panels affect a home’s resale value? “There is so much detailed information on this topic I could go on forever, but the more that I investigate, the more I am convinced solar can save you money on energy, look sleek, and even boost the resale value.”
We agree with Marjorie and would love to talk with you and answer your questions about assessing the value of a solar system.