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How do appraisers adjust for solar panels
October 2nd, 2018 5:06 PM

Dear Kelly Kellogg, The Appraisal Expert, 407-644-8885

How do appraisers adjust for energy efficient amenities including solar power in a home?

Answer: Energy efficient amenities may include various items such as solar power, energy efficient windows, spray foam insulation, energy saving appliances, LED lights, tankless water heaters and heat pump systems. The Appraisal Institute announced on October 31, 2013, that solar photovoltaic systems (solar power) typically increase market value and decrease marketing time of single-family homes in the Denver metropolitan area, a conclusion from a study performed in Denver, Colorado. The value given by local appraisers for the energy efficient items may depend on the cost of the energy efficient items, age of the energy efficient items, depreciation or wear and tear on the items, and most of all, the market reaction to those amenities. How much would a typical prospective buyer of that home be willing to pay for the "energy efficient package" or solar panels amenity? One should consider the actual cost of the solar power installation and depreciation (age, wear and tear).

In other words, if a seller did a solar installation five years ago for a cost of $20,000, one could consider its maximum life span (remaining economic life), the wear and tear during the past five years (depreciation), the monthly savings the solar system provides, and most importantly, the market reaction, or perspective buyer's reaction to the solar amenity. If the solar panel system has a 25-year economic life, then it would be safe to say that it has 20 years remaining economic life which would be 20% of its original value. Therefore, the current approximate depreciated value would be approximately $16,000. The interesting thing about a solar installation is that, once installed, the homeowner begins saving money immediately. Now if we add the savings into the equation, then potentially, that solar amenity could be worth more. I have been told that the average savings for homes with solar installation saves homeowners approximately $150-$300 per month on an average size home. It would be safe to say that a typical homeowner of an average size home may save $1200-$3600 per year in energy bills. In 25 years, that would be a $30,000-$90,000 savings which evens out or may significantly increase your savings in the end. In addition, let's keep in mind that as energy costs typically rise, the homeowner will save even more money on their solar panels. The question remains, how does an appraiser adjust for energy efficient amenities or how much would a prospective buyer be willing to pay extra for the energy efficient items package amenity? Regarding adjustments, if the home is "new" construction, then it would be safe to use local builder's prices of the energy efficient package that they charge to the buyer.

Keep in mind that that cost should not exceed 10% of the value of the home. For example, if the value of the home is $300,000 then the appraiser's maximum allowable adjustment for solar could be a maximum of $30,000 as long as the market or buyers support that. If a builder charges a buyer $25,000 for the solar installation on a new home, then an appraiser may adjust up to a maximum of $25,000 for a Comp that does not have the solar amenity. However, if a builder charges $25,000 for solar for a home that has a $200,000 value, the appraiser is capped at the 10% maximum adjustment of $20,000. On a re-sale, when the subject has an energy efficient package, the appraiser should include comparables with energy efficient amenities. However, if the appraiser includes a comparable that does not have the energy efficient package, if an adjustment is warranted, it is supported by buyers or market derived.

For a hypothetical example of a paired sales analysis, let's assume that two homes sell in the same neighborhood and they have the same floor plan, are similar in quality and have similar locations and views, and the only difference is that one of them has an energy efficient package. A market derived adjustment could be extracted from the following equation: House A (no energy efficient package) sold for $300,000 and House B (with energy efficient package) sold for $310,000. The difference between the two sales prices would be the adjustment for the energy efficient package. The energy efficient package adjustment in this scenario is $10,000. That is a hypothetical market derived adjustment. In other words, buyers of similar properties paid an extra $10,000 for the energy efficient package amenity in this hypothetical example. That being said, appraisers may adjust for energy efficient amenities if the market or buyers are paying a premium for those amenities. The appraiser's adjustments are based on what recent buyers have paid for those items. When providing an appraisal, the best scenario is for the appraiser to include comparables that have similar energy efficient or solar power amenities in order to avoid making an adjustment.

Due to the newness of solar panels in the real estate industry and the lack of resales and comparables on the market, market derived adjustment can be complicated. Therefore, I recommend always having homes with solar panels appraised by an appraiser who has experience and is well-versed with these amenities.

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Posted by Kelly Kellogg on October 2nd, 2018 5:06 PMPost a Comment

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