How to Value Solar Panels in an Appraisal

The presence of solar panels on residential properties is increasingly common, leading many homeowners and prospective buyers to question how these systems influence a home’s market value. Valuing solar panels during a property appraisal is a specific process. This article explains how appraisers determine their contributory value to a home.

Understanding Solar Panel Ownership Structures

The ownership structure of solar panels is a primary determinant of their contribution to a home’s appraised value. Appraisers distinguish between systems owned outright by the homeowner and those under third-party agreements like leases or Power Purchase Agreements (PPAs). This distinction determines whether the panels are considered a fixture of the real property or a separate contractual obligation.

When a homeowner purchases a solar panel system outright, either with cash or through a loan secured by the property, the system is generally considered a permanent fixture and part of the real estate. Freddie Mac’s guidelines, effective August 7, 2024, affirm that owned solar panels can increase a home’s value and be considered in the appraisal.

Conversely, solar panels under a lease agreement or a Power Purchase Agreement (PPA) are typically not considered part of the real property. In these arrangements, a third party owns the solar panels, and the homeowner either pays a monthly lease fee or purchases the electricity generated at a set rate. They do not usually add value to the home itself and are not factored into the appraised value. Instead, the lease or PPA becomes a separate consideration during a sale, often requiring the new buyer to assume the contract.

Solar panel financing can further complicate valuation if the panels are secured as personal property, such as through a loan that allows for repossession or Uniform Commercial Code (UCC-1) filings. Even if financed by the homeowner, the panels might not count toward the home’s appraisal value if not considered a permanent fixture. Lenders require clear documentation to verify ownership and ensure the panels are treated as real property for appraisal purposes.

Appraisal Approaches for Valuing Owned Solar Systems

Appraisers use various methods to determine the contributory value of owned solar panel systems to a property. These approaches align with standard appraisal practices, adapted for solar technology. The goal is to reflect how a solar system impacts a home’s market value, considering its energy-saving benefits and installation costs.

The sales comparison approach is often preferred when sufficient data is available. Appraisers search for recently sold homes with similar owned solar panel systems in comparable markets. They then adjust for differences in system size (kilowatts or kW), age, energy production, and other property features to value the subject property. A challenge can be finding enough direct comparable sales, especially in areas with lower solar adoption rates.

The income approach estimates the present value of future energy cost savings generated by the solar system. This approach considers the system’s annual energy production, local electricity rates, and a discount rate to convert future benefits into a current value. For instance, studies suggest that for every dollar of annual energy savings, a home’s value can increase by approximately $20. Appraisers may use specialized tools, such as the PV Value tool, to help calculate discounted cash flows from energy savings.

The cost approach estimates the depreciated cost to replace the solar system with a new, similar one. This method considers original installation, material, and labor costs, then accounts for depreciation due to age, wear, and technological obsolescence. While useful for new systems, accurately estimating depreciation and obsolescence for older systems can be complex, as solar technology advances rapidly and market costs fluctuate. Appraisers often consider the physical age-life method, dividing the system’s age by its estimated useful life (typically 25 years for panels) to determine depreciation.

Appraisers typically combine these approaches to arrive at a credible valuation for an owned solar system. The sales comparison approach is often considered the most persuasive when robust comparable data exists. However, in markets where such data is scarce, the income and cost approaches provide alternative means to assess value, ensuring a comprehensive analysis of the solar system’s contribution to the property.

Preparing for an Appraisal with Solar Panels

Homeowners with owned solar panel systems can significantly aid the appraisal process by proactively gathering and presenting specific information to the appraiser. Providing comprehensive documentation ensures the appraiser has the necessary data to accurately assess the solar system’s contribution and apply valuation methodologies effectively.

Homeowners should compile the original installation contract, detailing system size in kilowatts (kW), panel type, and inverter specifics. The installation date is also important for determining the system’s age and potential depreciation. These details provide the appraiser with a clear understanding of the system’s technical characteristics.

Performance data is important for valuation, particularly for the income approach. Homeowners should provide past utility bills demonstrating reduced energy consumption. Monitoring data, often available through online portals or apps from solar installers, can show actual energy production over time, validating the system’s efficiency and savings. This data quantifies the financial benefits of the solar installation.

Financial details related to the system’s acquisition are beneficial. This includes the original purchase price and any loan documents if financed as part of the real property. Details of any incentives received, such as federal tax credits or state and local rebates, should also be disclosed. This information helps the appraiser understand the net cost of the system and its financial history.

Homeowners should provide records of any system upkeep or repairs, demonstrating proper maintenance and longevity. Information regarding panel and inverter warranties is also valuable, as these provide assurances about the system’s future performance and potential for replacement or repair. Organizing and presenting these documents helps the appraiser conduct a thorough and accurate valuation of their solar-equipped home.