Solar Leases Hamper Home Sales

Casey Fleming
Solar installations growing exponentially
Solar leases help drive exponential growth

Solar has been going big for quite a while now. Because of exponential growth more than 600,000 homes and businesses now have solar electric power in the U.S., according to the Solar Energy Industries Association.

Cost per MW declines
Cost of solar installations goes down

Improving design and manufacturing techniques and economies of scale due to the surging business are driving the cost of solar installations down dramatically, too.

If you are considering upgrading to solar energy, one of the questions you’ll need to ponder is how to pay for it. There are some important devils in the details, it turns out. There are (at least) four ways to pay for your solar photo-voltaic panel installation:

Purchase outright – the lowest cost by far, and you immediately own a paid-for asset that adds value to your home.

Purchase with financing – roughly doubles the lifetime cost of the installation, but if you match your monthly payment to the monthly savings in your utility bill (and pay it off before it wears out) then it might make sense for you.

Solar lease – you don’t own the panels, but rather lease them from a third-party leasing company. The panels are not real property and don’t add value to your home, because they are someone else’s property until the lease is paid. Also, the leasing company typically takes the tax breaks and energy company rebates – which can be substantial – associated with solar installations.

Power Purchase Agreement (PPA) – you don’t own the panels and you don’t lease them. Instead, the power company installs a power plant on your roof and then sells you electricity, typically at a guaranteed rate for a contract-defined term. The panels don’t add value to your home because they are the personal property of the power company, and the power companies take advantage of the incentives.

The unsellable home
This real estate agent got a “D” in marketing

The trouble is, when you opt to lease their equipment or enter into a PPA, you might actually be making their home less marketable. Why is this?

To understand this it helps to see that the buyer of the home will be taking over the obligation for the lease or PPA. The power company spent a lot of money to install it, and they don’t just walk away from their investment when you sell your home. The buyer must assume responsibility for the the contract, or you must buy it out, meaning that you make the remaining payments (say, 15 or 20 years) now, in cash.

Here’s where the fun starts. There are four ways in which a solar lease might hamper your ability to sell your home:

  1. The new buyer must qualify to take over the lease or PPA. This means that the buyer must have credit and income sufficient to satisfy the leasing or power company. If the buyer is not qualified, you would have to buy out the solar lease or PPA in order to sell the house. You could do this through escrow, but it could be expensive.
  2. The buyer might qualify for the lease but not the mortgage. If the buyer does qualify as far as the leasing company or power company is concerned, they now have additional monthly debt that has to be calculated into their debt ratios for their mortgage. Many home buyers today are stretching themselves out to the limit, and another payment on top of the housing debt might push their debt ratios over the line, and they will be declined for the loan. Note that we don’t have to count utility bills in a borrower’s debt, but we do have to count the lease or PPA payments.

    What's that? I didn't sign up for that.
    What’s that? I didn’t sign up for that.
  3. Taking over leases and PPAs introduces complexity and confusion into the home-buying process, which is already pretty complex as it is. More than one homebuyer has backed out of a home purchase after discovering that they had to take on the obligation. Your agent might be able to overcome objections, but it’s one more roadblock in the way of selling your home.
  4. It’s pretty well-established that solar photovoltaic panels increase the value of your home – if you own them. With a solar lease they don’t belong to you and don’t add value to your home, and the contract that the home comes burdened with is a liability, not an asset.

It could take years before we have enough market data to fully understand how solar leases and PPAs impact marketability, so for now we have to rely on anecdotal evidence. In the long run it seems likely that the real estate community will find some elegant solutions, especially if a significant number of transactions fall through. In the meantime, if nothing else you can pay off the contract with the proceeds from the sale of your home – assuming that there are any proceeds, of course.

Being in the mortgage business, when folks ask me what the cheapest way to pay for their solar installations is, my first response is “pay cash.” This is why I am not the top salesman in the industry. (Well, one reason, anyway.) If you can’t pay cash, however, financing instead of leasing means your home value will increase because you own the panels, you get the benefit of tax and power company incentives, and the loan will be paid off anyway if you sell.

Before committing to anything, consider the long-term implications of your options. Like in any large purchase, it’s the monthly payment that sales people want you to focus on, but the lifetime cost that matters most.

Casey Fleming, Author The Loan Guide: How to Get the Best Possible Mortgage (On Amazon)
408-348-3442 mobile
Follow me on Twitter for interest rate updates: @TheLoanGuide
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