What happens when a home with leased solar panels is sold?

Recently I encountered one a situation with a home that had a leased solar array, and a common question I get from both home buyers and sellers: What happens when a home with leased solar panels is sold?

This home was beautiful. Great layout, open kitchen, fantastic backyard...and a leased solar system already in place on the roof. The seller had entered into a solar lease agreement a few years prior for a 20-year term. The solar array had generated power to offset their cost of their monthly utility bills, which the seller had loved...and at the time of sale, the solar lease was transferable to a new homeowner.

Sounds good, right? Almost.

The buyer loved the home. They were especially excited about the idea of lower energy bills and sustainability. But once they got their hands on a copy of the actual solar lease agreement and dug into the fine print, the mood shifted.

The terms weren’t a dealbreaker on the surface, but the buyer had some questions. The monthly solar lease payment increased slightly each year. The agreement required the new owner to formally assume the lease through the solar company’s process, which involved a credit check and added paperwork. At the conclusion of the 20-year term, the homeowner did not actually own the solar panels...instead they had the option to extend the lease, or have the panels removed, or IF they wanted to buy those panels there was a balloon payment option at the end of the term. The buyer wasn’t thrilled about the idea of being locked into a third-party agreement they hadn’t chosen. On the upside, not owning the panels meant they did not have responsibility for maintaining the panels. The buyers were torn...

Rather than walk away, the buyer made an ask: they loved the idea of having a home with solar panels, but only if they could own them outright. After a little back-and-forth, both sides reached an agreement: the seller agreed to pay off the solar agreement at closing, which converted the system from a leased asset to an owned one and gave the new owner full ownership of the solar array from day one.

So many homeowners in Sacramento are now installing rooftop solar systems (and rooftop solar is actually required on new construction homes!), but not everyone realizes how it can affect a sale. The reality is that many buyers will happily assume a solar lease from a seller, while other buyers will not love it and want to negotiate with the seller to pay off the solar to own it outright. 

Leased Solar vs. Power Purchase Agreement Solar vs. Owned Solar: What sellers and buyers should know...

Leased Solar Systems are owned by a third party. Homeowners pay a monthly amount for the use of the solar system. These leases often last +/-20 years and are usually transferable, but buyers need to qualify and agree to the lease terms.

Often confused for a solar lease is a "Solar Power Purchase Agreement" (PPA). A solar lease charges you a monthly fee to use the solar panels, while a solar power purchase agreement (PPA) charges you based on the actual electricity the system produces. With a lease, you pay for the equipment; with a PPA, you pay per kilowatt-hour of energy. In both cases, the 3rd party solar company owns the system and typically handles maintenance.

Owned Solar Systems, whether paid in cash or financed and paid off, are treated like other fixtures. They generally add value to a home and are simple to transfer because there’s no lease to assume.

What to do if you are selling a home with Solar...?

Pull out your solar contract before you put your home on the market...buyers will want to review it. They likley also will ask for copies of your energy bills...be prepared and download 12-months of your bills so buyers can evaluate the seasonal fluctuation of power production and utility billing, AND so they can look at your "true-up" bill if you have one. In California, you will also want to complete the "Solar Advisory and Questionnaire" Disclosure.

Be upfront about whether the system is leased, on a power purchase agreement, or owned (with or without a loan). And be prepared to discuss options: Are you willing to pay off the lease? And how much does it cost to pay off the lease? Can the lease or power purchase agreement be assigned? Will the buyer need to apply to assume it?

In my case, the seller closed the sale, and the buyer got a great home and a fully-owned solar system. But it was only possible because we had the right conversations upfront, read the fine print, and stayed flexible.

So yes, you can absolutely sell a home with solar in Sacramento. But whether it’s smooth and seamless or unexpectedly sticky depends on many factors.

Need a new water heater? A new one may not fit in the existing space....

As I was meeting a new seller client a few weeks ago and walking through her house for the first time, I noticed her water heater appeared that it was at the end of its useful life. Seriously, it looked like it had boiled over! She is fortunate though; since her water heater is not confined inside a closet, and instead just sits against a wall in her garage, she will not have to make many modifications when she has the water heater replaced.

Due to new requirements of the National Appliance Energy Conservation Act (NAECA), after April 16, 2015 all water heaters manufactured in the United States must meet higher energy efficiency standards. As a result, these new models of water heaters generally have wider tanks and some different technology components.

What does this mean for you? If you have to replace a water heater that is located in a closet, your closet may not be large enough to accommodate your new water heater. Added costs may include retrofitting or expanding the closet, or even relocating your water heater somewhere else inside your home. Or perhaps you may opt to install a tankless water heater instead, which takes up less space?

As you are planning and budgeting for household repairs, increased costs from the new standards may be something to consider.

Think twice before financing home improvements using a Property Assessed Clean Energy (PACE) Loan...

A few weeks ago I listed a really cute home in the Tallac Village neighborhood. The sellers walked me through the house and showed me around. I took note of the dual pane windows, updated kitchen, central heating and air, drought tolerant landscape, composition roof, and all the other nice amenities the house had to offer. Then I asked the million dollar question: "have you financed any of these improvements?" The seller had indeed financed the new artificial grass using a Property Assessed Clean Energy (PACE) loan. Yikes. Alarm bells were ringing in my head.

She then said, "Oh, but don't worry. The PACE loan will be transferred to the new owner!"

Umm, no.

A PACE loan allows a homeowner who meets the eligibility requirements to finance energy-efficient home improvements, and make payments via the twice yearly property tax billing. Examples of the types of work that can be done to a home are solar, central heating and air, dual pane windows, lighting, a roof, low-water-flow plumbing, insulation, artificial turf, etc.

Let me just say that I have some negative thoughts about PACE loans. There is a lot of room for confusion among homeowners who use this program. This is the perfect case in point.

While in theory, a homeowner may transfer a PACE loan to a buyer, there are two big-time flaws in this concept.

First, what homeowner wants to pay the market value for a home and assume a loan for part of the improvements that made the home worth that amount of money? Nobody. That's a raw deal. Let's just assume for a minute that the $7,000 that the seller of this property financed to pay for artificial turf (yes, that's right $7,000) increased the home's value by even half that amount: $3,500. The house may have been worth $271,500, and the market value is worth maybe $275,000 now after adding the value of artificial turf. Why would a buyer pay $275,000 AND assume a $7,000 loan? No buyer in his/her right mind would do that. (And for the record, I do not think this sort of improvement actually increases a home's actual value that significantly)

Second, and where the real trouble lies, is that lenders will not place new loans on properties with existing PACE loans. Fannie Mae, Freddie Mac, and FHA all consider PACE loans to be "superior" liens. Fannie, Freddie, and FHA will not put a loan on a property and be in the "second position" to ANY loan. Including a PACE loan. PACE loans, because they are attached to a property tax bill, survive foreclosure. A regular second mortgage or Home Equity Line of Credit will not survive a foreclosure.

So while the PACE loan administrator (a company called Ygrene in Sacramento) may allow the transfer of this debt to a new owner, this is highly unlikely to happen unless you happen to sell the house to a poorly advised, all cash buyer. And that ain't happening.

So what does this mean for homeowners? It means if you have a PACE loan, it's going to have to be paid off when you sell. AND, it will have to be paid off if you refinance. Bet that wasn't made clear to you by the contractors pushing this financing for services they were trying to sell you, was it? It wasn't to my seller. And thankfully, we had this conversation early in the selling process, and they have more than enough equity to pay it off with the sale.

Let me share one other anecdote from personal experience as well. I am in the process of re-roofing my own home. My husband and I got five bids, and one of the contractors was trying to sell us on using PACE to pay for the roof and how it was like getting "free money" since we could pay for it over 10-15 years and via the property tax bill. That company's bid was THE HIGHEST, and the highest by about $7,000. Wow. A $20,000 bid, for a roof we are paying $11,000 for is insane. And I would argue that a lot of folks will overpay and not question a contractor's bid when they are financing the cost it over 10-15 years in this "free money" scam. Food for thought.

My advice? Stay away from PACE loans. Or at least be sure to read the fine print and really know what you are getting.