How do Solar Panels affect the mortgage and closing process?


Eddie Knoell:                      I’m Eddie Knoell.

Tom Knoell:                        And I’m Tom Knoell.

Eddie Knoell:                      We’re the Mortgage Brothers team in Phoenix, Arizona. Welcome to our podcast everyone, this is our 11th episode. Tom, what are we talking about today?

Tom Knoell:                        Today we’re talking about solar panels. Are solar panels all sunshine, or do they sometimes have some storm clouds above them? Let’s talk about … This is not a pro and versus con, but this is, how should borrowers view solar panels, as if they’re walking up to the house that they’re looking at buying. Whether they know the house has solar panels or not. Oftentimes, there are borrowers who’ll walk out of house and say, “I had no idea it had solar panels? Is that good?” Again, we’re not talking pros and cons, but we’re talking about it from the lender’s perspective. Let’s dive right in. First off, the big question is, is how do lenders view solar panels? Are they even allowed?

Eddie Knoell:                      The answer is, yes, they are allowed, in almost all cases. Solar panels that the owner, right, the seller has, are either leased or owned. Really, those are the two options. The lender, when we do the loan, we just want to know a couple things. One of them is, we want to make sure that the solar agreement that the owner has, we want the buyer to get a copy of it, and then we’re going to get a copy of it too, we want to make sure that there is a warranty against all malfunction and defect that the solar panel company, basically warrantees that work on those panels, and that lease must be transferable to our buyer.

Tom Knoell:                        And why would the transferability thing be important? Right? It would be important to be able to have rights to that lease.

Eddie Knoell:                      Yes. It has to be transferable whether it’s owned or leased. Now if it’s leased, inherently there is a payment, a lease agreement with a payment to the owner, because the owner of the solar panels isn’t the seller it’s … Let’s just take Solar City for example, it’ll be one of those big solar companies, they are the owner, they have to transfer to the new buyer.

Tom Knoell:                        Okay, so if we were to make this ananagous to a car, it’s like a car sitting on your roof, that car is either owned or it’s leased. And if it’s owned you may or may not have a payment on it. You may pay cash for it.

Eddie Knoell:                      That’s right.

Tom Knoell:                        And if it’s leased you will have a lease payment on it. And instead of giving it back to the dealership solar companies don’t, I don’t think they actually come and take the systems off of houses. The lease would actually be a long lease, a 20 to 25 year lease, and at the end of that lease term there’s either going to be renewal rights or ways to upgrade the solar system, because after 25 years that solar system-

Eddie Knoell:                      Right.

Tom Knoell:                        Is probably getting pretty tired.

Eddie Knoell:                      That’s right. Okay. So if an owner owns that solar panels outright, there’s no loan, well that’s easy they just, it’s a part of the real estate, it just goes right with the house, it’s just a fixture of the property. But if there’s a loan on there, that loan itself is with the property as a lien, and it must be transferable to the new buyer as well.

Tom Knoell:                        Okay. So you have-

Eddie Knoell:                      Well it doesn’t have to be. I know deals that actually the sellers have actually paid that off as a condition of the contract.

Tom Knoell:                        Okay, so if you have a very nice seller, they’ll actually pay that off for you?

Eddie Knoell:                      Yeah.

Tom Knoell:                        Not always, not typical, but sometimes?

Eddie Knoell:                      Yeah. It’s always good to know if, how much is that balance even before you make your offer? Because I had a seller who, he only owed like five thousand dollars left and they used, the buyer used that as a kind of leverage, you know? Pay off that as part of the conditions of the sale.

Tom Knoell:                        Right, okay. So the transferability protects the borrower, what does the actual solar company have to protect themselves? Because all of a sudden they had owner A, and now owner B is coming along. Do they have the rights to be able to do a credit check? Or do any type of qualification on borrower B?

Eddie Knoell:                      Absolutely, that’s a good question because any buyers out there, they’re going to have to qualify for that lease, or the loan transfer, because you’re now going to be essentially someone whose going to be obligated to make those payments. So yeah, they’re going to pull your credit, so there may be certain credit limitations you have to-

Tom Knoell:                        Right.

Eddie Knoell:                      Take care of.

Tom Knoell:                        And we’re really bringing this up, not to frighten anyone, because the chances are there’s a higher threshold for qualification on buying a house than there is for qualifying for that solar lease. So it’s not like you’re going to get into a position where you’re going to be able to afford the 300 thousand dollar house but, “Oh guess what guys, you can’t afford the solar system.” But it is something just to be aware of, that there will be a credit check likely, and things like that because this is still a two way street. There is a borrower and there is an owner of that solar lease, if it’s being leased to you.

Okay, so we talked about are they allowed? The answer is yes, there’s some things within the actual solar agreement that a borrower can look at. Not all borrowers really want to be digging through a solar lease, so my guess is 98% of all the solar agreements out there will meet the needs of a lender, but should be considered as part of the due diligence going into the house. Now lets talk about value because the borrower/buyers walked up to X, Y, Z house, didn’t even know it had a solar system, now it does. Not so much from a market value perspective, but from an appraisal perspective, what does an appraiser do with that? Because the owner, that will be part of whether or not the borrower can qualify for this loan, or if the house appraises. Does it affect appraised value?

Eddie Knoell:                      Okay, the answer is different for leased, leased panels will not be, appraisers will not count value. Will not give nay value for a solar panel that’s leased. So what will happen is, again it’s considered just a fixture that is a part of the house at that moment, but because it is a lease, the guidelines have basically said no value.

Tom Knoell:                        Now why do you think that is? Because that’s frustrating, you’ve got a system that potentially costs what, 10, 15, 20 thousand, and the appraiser is going out there saying that there’s no value to it. How can that be?

Eddie Knoell:                      Yeah. I think that the appraisal, and the guidelines that came out by the institutions like Fannie Mae and Freddie Mac, FHA and the VA, is that they thought that ownership of the panels would demonstrate that you actually had, actually owned that asset. The fact that the owner of the panels would be Solar City or some large solar panel company, if you didn’t have ownership it’s like if you had leased the pool. Now I know, the pool, there’s not a good, I can’t think of a good example that’s similar, but it’s basically there’s nothing else in your home that is leased. A home is about ownership, the asset itself, the collateral is about ownership.

Tom Knoell:                        Right.

Eddie Knoell:                      The fact that you have a fixture up there that’s leased, puts it in a category where they just won’t allow the value to be … Now that may change over time, but for now they’re saying leased panels-

Tom Knoell:                        Okay, okay, and there’s probably an argument to be made that there’s a useful life calculation on solar panels, and after a certain point there’s diminished value, and at some point they have no value.

Eddie Knoell:                      Yeah.

Tom Knoell:                        But what happens if the solar panels are actually owned?

Eddie Knoell:                      So if they’re owned, you’re going to see the value adjustment on the appraisal. If, in most cases you’re going to see a value adjustment, but it’s probably going to be very small okay? Any buyer out there, or seller, don’t think that you’re going to all of a sudden get a great appraisal, and they’re going to give you the value of the panel or your system. If you spent 20 thousand dollars on your system, you might only see a five thousand dollar adjustment on it, on the appraisal. And in some cases they don’t even have to, because if the comparable sales in the neighborhood do not demonstrate that solar panels give value, they don’t have to.

Tom Knoell:                        Okay.

Eddie Knoell:                      You know what I mean? Like if there is no evidence then they won’t give it. Now again, it’s an asset if you own it, it just will not give you, it’ll just be a line item adjustment on the appraisal, and likely will be small.

Tom Knoell:                        Right. And this is when I feel bad for the appraisers job because in these large communities where, I don’t know what percentage of homes have solar panels, but it’s got to be hard to make an appropriate adjustment so that he does give the most true value he can to it.

Eddie Knoell:                      Yeah.

Tom Knoell:                        Solar panels are tough. Okay, now forgive me for asking this, but have we talked about how solar panel payments potentially affect qualifications?

Eddie Knoell:                      No, no, I’m glad you asked because when we were talking about the leases and the liens, what we forgot to talk about is the actual payments themselves. If there is a production guarantee in your lease agreement or the ownership agreement, the lender, us when we do the loan, will not count that payment, the loan payment or the lease payment, against you. So again, there’s a production guarantee which means, like a solar company says, “If your solar system doesn’t produce so many kilowatts an hour for so many months, we’ll actually refund you.”

Tom Knoell:                        Okay. So AKA, that’s basically a payback, that your lease could be 150 dollars a month, but they’re going to guarantee you that you’re going to at least receive 150 dollars worth of energy savings?

Eddie Knoell:                      Right.

Tom Knoell:                        Which is one of the ways that they justify-

Eddie Knoell:                      Yeah.

Tom Knoell:                        Being able to install the system. Okay.

Eddie Knoell:                      Yeah, and that really protects the borrower too, because if the borrower buys, or buyers of the house with the system, okay that’s great that it’s producing energy today, but what if in two years those cells go defective or something? They just don’t produce well?

Tom Knoell:                        Mm-hmm (affirmative).

Eddie Knoell:                      You know what I mean? Not only are you going to be paying APS and SRP, the bill, you’ll be paying this extra loan payment. So that warranty will help, that production guarantee will help offset.

Tom Knoell:                        Okay. So basically if we just kind of recap here real quick, lenders allow them, more homes are achieving solar panel systems today than they have been over the recent past, my guess is that number will continue to climb. From the value perspective if they’re leased, appraisers aren’t giving any value to them. So just be very mindful of that. If they’re owned, appraisers will give some value, it’ll be limited value, probably even more so than a pool. And then from a qualification standpoint, when we look at PI, TI, a potential mortgage insurance payment, a Homeowners’ Association payment, and now a solar payment, I mean those things can really impact how you get qualified. So that is one important thing is to find out, is there a lease payment? Is there a loan payment associated with that solar panel?

Eddie Knoell:                      Right. And I’m going to say one more thing too, that when we close the loan, the title company, if there is a lean right from the loan or a lease, the title company is going to be required to release that lien before we put our lien on. They want to release that lien of the solar company, and then put that back on afterwards.

Tom Knoell:                        Okay. So it can only be in second position then?

Eddie Knoell:                      Yeah, and there van be a fee for that, that the solar company will charge. So we’ve seen it a couple hundred dollars, but in some cases there’s no fee. But that mechanism needs to be done. And the real estate agents, buyers, everyone’s, by the end of the transaction they’ll actually be very familiar with how that all works but-

Tom Knoell:                        Right. Okay. And then I thought I would end it by saying this, because I was scratching my head, and I had been for years about solar panels. And it dawned on me as were getting ready for this podcast that I’m thinking, solar panels are a lot like electric cars in that the electric industry, as well as the solar industry, is getting efficient enough to be able to start producing in more mass levels. But there’s still developments, and still enhancements that need to be made to make it 100% worth it. So when you’re getting solar panels, you are getting savings from it, but at the end of the day, the payment that you’re making versus what you’re getting back is still very, very close. So it’s not a no brainer.

And I was talking to a neighbor of mine who’s got this electric car, and we were talking about the gas savings that he gets with his electric car, and I figured out that the savings he gets with his electric car over gas is the same amount of money that he spends to actually buy electricity, whether he’s pulling it from his house or whether he’s paying for it at one of these electric stations. And also to continue the analogy, the slight inconvenience that he has in trying to find electrical charging station is the same inconvenience a borrower may have when they go to re-roof their home because of a solar system. You know, they’ve got these panels up on this roof, there’s just little things about theses solar systems that again, they’re what I’m going to call kind of a feel good component.

Eddie Knoell:                      Yeah, I agree. I agree, this is something where, okay yes, solar panels are going to lower your bills, they’re going to be a great way to offset the rising costs from our power companies like APS and SRP. But at the same time, the panels themselves are going to, probably the technology is going to get better, things will become more affordable over time.

Tom Knoell:                        Right. Right. So I think final recap is, solar panel are becoming more popular, we can absolutely lend on them. Just keep in mind some of those technical pieces within the solar agreements themselves. And know along the way that you may be replacing some solar panels, and there may be some slight inconveniences as you re-roof and whatnot. And you’re not getting a ton of value out of them, like most people think. So keep those in mind, and hopefully that isn’t digging too much into it.

Eddie Knoell:                      I think it’s good. I think we’re-

Tom Knoell:                        Okay.

Eddie Knoell:                      I think we covered it, and of course if anyone has questions, I’m sure we’ve probably missed something, you guys might have something that you needed answered further, please reach out to Tom and I. And tom, I think we’re good.

Tom Knoell:                        I think so, let’s call it a day.

Eddie Knoell:                      Time to go home.

Tom Knoell:                        All right. We’ll see you folks.