Many solar companies cite an article from 1998 when they tell you how much solar will increase the value of your home. The reference is The Appraisal Journal: http://www.icfi.com/Markets/Community_Development/doc_files/apj1098.pdf
You may wonder why companies cite this 11 year old article rather than something more current. The basic answer is that solar companies like the result that the author of the article derived. (They won't point out that the article was actually about energy-efficient homes, not homes with solar systems.) Solar companies will typically say "The value of your home goes up by $20 for every $1 of annual energy production by your solar system." Many solar companies use this formula to tell potential buyers that the solar system will increase their home's value by far more than the system's price.
This defies all logic. Let's illustrate this with an example.
Suppose there are two identical homes on a street in Anytown, USA. Each has a fair market value of $500,000. One homeowner purchases a solar system for $18,000. He is told by the solar company that the system will reduce the home's annual energy bill by $1,800. So far, so good. But then the solar company says, citing the Appraisal Journal article, that the solar system will increase the value of the home by $36,000 (i.e., 20 x $1,800). The other homeowner does not buy a solar PV system.
Let's further suppose that the day after the solar system is turned on, both homeowners put their houses on the market. The non-solar homeowner prices his at $500,000 and the solar homeowner lists hers for $536,000. Dozens of buyers come and look at each home. Some want to live in a solar home and some don't. If those who want to live in a solar home (or their real estate agents) perform any amount of due dilligence, they will quickly learn that they can buy the non-solar home for $500,000 and spend $18,000 to add solar to it. Therefore, it would be foolish for them to pay an $18,000 premium for the solar home because this far exceeds the cost of adding solar to the non-solar home.
Furthermore, it is generally expected that brand new solar systems will cost less with each passing year. If that is the case, then the value of an installed (used) solar system will decline each year simply because the cost of an equivalent new system will be less each year. In addition, solar systems have a finite useful life in the range of 20-40 years. Let's say that 30 years is the appropriate useful life. If we want to know what a used solar system will be worth in 5 years, we have to estimate the price of a NEW system five year from now and then reduce the value of the USED system by 5/30ths to account for the fact that the system we purchased in 2009 has used up 5/30ths of its useful life.
Under the theory espoused in The Appraisal Journal article, the difference in value between the solar home and the non-solar home will increase year after year if the price of energy rises over time. This produces the nonsensical result of predicting that the solar system has the greatest market value in its final year as a functioning piece of apparatus! That's just plain nuts!
In reality, if solar equipment prices stay constant or decline in the future, the market value of a solar system is highest on the day it is installed and will decline gradually until it reaches zero when the equipment reaches the end of its useful life. This is exactly the kind of reduction in value over time that we would expect from any long-lived asset whose value is based on its practical utility rather than fashion or trendiness, such as an automobile.
Beware of any solar company that tells you that a solar system will increase the value of your home by more than the system's initial net cost. They either have not thought very deeply about the subject or they are trying to manipulate you. Why would you want to spend your hard-earned dollars with a company for which either of those statements is true?
If you'd like a copy of a spreadsheet that supports the arguments in this posting, send me a note at bkarney [at] comcast [dot] net.
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3 comments:
Excellent article - I fully concur with your statements. Those installers that try to manipulate potential customers are not helpful to the solar industry. In addition, I found a lot of installers that, due to their lack of knowledge, are misrepresenting the many aspects and implications of a solar energy system. Not helpful, especially while solar is quite a complex topic which still needs the financing acceptance that exists in Europe.
Part 1 of 2
Bruce, thanks for your post.
One main limitation the the Appraisal Journal article is that it is creating a theoretical resale value calculation, not an absolute market truth. Right now, we have little broad empirical evidence that solar is or is not adding value to homes, because most solar homes have not sold.
Even though the average person moves about every 6 years, the average homeowner moves only every 11 years ( http://www.census.gov/population/www/pop-profile/geomob.html ). However, I would bet that most people who have bought solar homes are less likely than average to be moving because those who expected to move ‘soon’ would not buy a solar system for fear of not getting enough on resale to have made it worth it.
This leaves the solar industry with the problem of how to get the evidence to show that the Appraisal Journal article is correct (or not). The problem is further compounded by the fact that the various Multiple Listing Service (MLS) real estate listings don’t have an identifier for which homes have solar, is the solar system electric or thermal, how big the solar is, how much it saves, etc. So appraisers have difficulty figuring out which homes are truly comparable to the solar home in question.
The bottom line is, to my knowledge, there is no proof in the market yet regarding solar home resale value. There is a researcher working for the Lawrence Berkeley Laboratory (LBL) to compare the CEC lists of thousands of installed solar homes (because he’s with the government and is here to help, he can get the private address data that is otherwise not available to the public) with the MLS lists to find out which solar homes have sold. He will then run comparables of the sold solar homes with others to see if there is any statistical relevance to the existence of the solar system.
A problem may exist in the fact that a solar system costing $20,000 to $40,000 may be installed on a $500,000 to $1,000,000 home. While in cash that’s a large investment, it might only represent 2% to 8% of the homes value. One would hope that 8% would show up in studies, but 2% might be lost in the noise. On top of that, because of the rapid changes in real estate dynamics over the last 10 years, it may be even more difficult to figure out if solar is having a beneficial impact.
I have heard of anecdotes supporting solar resale value, and also claims that solar homes sell faster (fewer days on market), but not necessarily for a higher price. Anecdotes aren’t worth much, but might provide clues as to where to study further.
Now, a counterpoint to Bruce’s points: While the logic of what he writes is true – why would I pay a premium for a solar home when I could buy a similar home and add solar at par value? I couldn’t tell you the psychology, but with other types of home remodels, it does happen. According to Remodeling Online, it turns out that remodels in the form of decks, kitchens, windows, and bathrooms often don’t return their cost at resale. But in some markets (geographies), those measures add up to double the cost of the project to the resale value. A deck in San Francisco, Boston or St Louis added more than double, for example.
End of Part 1 of 2
Part 2 of 2
So if there’s a geographic dependence, it might apply to solar too. California is a particularly good place to install solar because of the high electric rates and biggest electric bill savings, so should add more to resale value compared to a place with low rates and less savings.
Bruce has another good point about ‘using up the solar system’ - meaning its value should decline over time as it ages. I agree that this creates an upper limit on resale value that drops lower and lower as the system nears the end of this warranted life (25 years for the modules in most systems). However, it turns out that the 20x value is much less than the 25 year savings during the first 10-12 years, so I would argue that solar system value could increase during those first 10 years, then become capped going forward by the remaining savings, until it has no significant value after the 25th year (once the warranty expires).
See my article at http://www.ongrid.net/papers/PaybackOnSolarSERG.pdf , p14-16 regarding resale value and other economic measure regarding solar for further explanation of the resale logic and some graphics.
All of the above doesn’t mean Bruce is wrong, but it doesn’t mean he’s right either. The market must decide – we need to find out what real people are doing when it comes to valuing solar when they buy homes, since that’s the only thing a mortgage holder can take to the bank, so to speak. That’s where the LBL study comes in. We hope to have its results by Spring 2011 or before, but let’s not get too excited – we may not like the results.
I take it as my job as a solar proponent to illuminate the logic of why solar should add value but also help people understand the limits on ‘logic’ and its effect on reality. I’m also looking forward to legislation that will require all homes being sold to have a standardized ‘energy cost’ disclosure so that people can then start to differentiate between one home and another. California is looking at such legislation now.
Eventually, solar should add value to homes, since it is generating valuable savings of the installing owner and all future owners throughout its life. I hope the real estate market comes to that conclusion sooner than later. In the mean time, we’ve got an education process to undertake.
Thanks,
/Andy
--
Andy Black
CEO, OnGrid Solar
End of Part 2 of 2
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