The benefits of a solar system are numerous – they can result in lowered energy bills; protect owners from energy rate hikes; extend the life of a roof by shielding the roof from rain, snow, and debris; and most relevant for the real estate industry, solar systems can help a home sell more quickly, and for more money. In fact, according to a 2021 study by Zillow, 67% of potential Buyers ranked energy efficiency as a “very to extremely important” feature for a home, and a study by the US Department of Energy found that Buyers were willing to pay $15,000 or more for solar-powered homes.
From the perspective of a settlement company, however, a home with a solar system can complicate a closing, and these complications can sometimes kill the deal. It’s for this reason that the July 2023 contract changes to the Northern Virginia Association of Realtor’s (“NVAR”) standard forms included two addendums relating to solar panels. The K1400 – Solar Panel Addendum to Listing Agreement, which is an addendum to the Listing Agreement; and the K1401 – Solar Panel Contingency Addendum to Sales Contract, which is an Addendum to the Sales Contract. More information on NVAR’s July 2023 Contract Changes can be found in our article (here).
In addition to using these new forms to successfully navigate through some of the obstacles created by transactions involving solar systems, here are some questions Buyers should consider asking:
1. Owned or subject to a Solar Loan (lease, PPA or loan) – Is the solar system owned or is it subject to a lease agreement, a purchase power agreement (PPA) or a loan (hereinafter collectively referred to as “Solar Loan”)? If the system is owned outright, the Seller has the right to convey the property. This results in a smoother transaction and can lead to greater savings/value for the Buyer. If a system is subject to a Solar Loan, it can add challenges to the transaction including but not limited to finding a Buyer that is not only willing, but also able to assume the agreement and increased costs. Some things to consider with a Solar Loan are listed below in the “Leased Systems” section.
2. Manufacturer/Installer of the panels – Who are the manufacturers and/or installers? Knowing who manufactured and/or installed the panels allows Buyers to find out (1) if there are any known issues with the panels; and (2) the reputation of the companies who manufactured and installed the panels. Are they still in business? Can they stand by their warranty?
3. Age of the panels – What is the age of the system? Solar panels typically last between 25-30 years.
4. Maintenance requirements and recommendations – is this within the Buyer’s budget? Is the Buyer able to budget for any necessary repairs or outright replacements that may be required?
5. Maintenance of the system to date – How has the system been maintained to the present date? Have there been any issues? What is the service/repair history from installation to the present?
6. Insurability of the home with the system in place – Consider the insurability of the home with the system in place. If it is insurable? If so, what are the additional costs to the hazard/homeowner’s insurance, if any?
7. Annual power bill – Looking at 12 months worth of bills can give Buyers a greater idea of what savings can be expected for the year. In reviewing the bills, consider how the Seller’s usage compares to the Buyer’s anticipated usage, for a more accurate picture of what savings can be expected.
8. Nature of grid tie in – What is the nature of the grid tie in and is net metering allowed. Ask to see a copy of the connecting agreement with the utility provider, if applicable.
9. Tax implications – What are the tax benefits, if any, and who is eligible for these benefits? If the system is subject to a Solar Loan, it may not be the homeowner.
10. Warranties – Ask the Sellers for full documentation of the system including details about the original sale and warranty coverage.
Leased Systems: If the system is subject to a Solar Loan, the Seller will need to (1) purchase the system outright; (2) terminate the agreement and pay any associated termination charges – the solar company then has the option of leaving the panels on the roof or removing them creating a question of who will pay for the cost of remediation to the roof if the panels are removed; or (3) have the Buyer assume the Solar Loan – this may require a credit check and/or the payment of transfer costs. If the Buyer is using borrowed funds to purchase the property, the Buyer’s Lender may also need to approve of the assumption of the Solar Loan. If a Buyer is willing and able to assume the Solar Loan, it is prudent to also consider the following:
1. Current electric rate per kilowatt hour – What is the current rate that the Buyer can expect to pay?
2. Escalator rate, if any – Payments for both leases and PPA’s will typically increase by a specified amount each year based on the escalation clause (aka “escalator”) in the agreement. Escalators are typically a small percentage increase above the rate paid in the previous year.
3. Remaining term of the agreement – What is the remaining term of the agreement?
4. Termination options and costs, if any – What options exist for the termination of the agreement? It may require the Seller to pay off the system completely before settlement. Is this something the Seller is willing and/or financially able to do?
5. Transfer process and/or fees, if any - If a Solar Loan can be assumed by the Buyers, what does that process look like and what are the associated fees, if any? What restrictions and/or requirements exist with respect to the Buyers' Lender for the underlying mortgage?
Asking these questions upfront can help Buyers better gauge the actual benefits and/or feasibility of purchasing a home with a solar system. Not asking the proper questions can result in the deal falling apart at the last minute.
For a copy of our Solar Checklist outlining these questions, reach out to our Business Development Team at bd@vestasettlements.com.