Four ways to pay for residential solar investment

As a real estate agent, I am keenly aware of how changes to my home might affect future resale value. I recognize that a seller’s investment can easily be viewed by a buyer as a liability if tastes and preferences of both parties do not align.

So when it came time to invest in solar energy in my own home, I carefully weighed my options for how to pay for the investment. I had no doubt that adding solar panels to my home would increase its resale appeal — plenty of research backs that up — but I also understood that the world of financing solar power systems can be very complex. And I knew that my choices could affect the appeal of my home to potential buyers.

The first question I asked was whether I wanted to pay for the whole system up front out of my own pocket. I decided that I would rather pay for this investment over time, largely because the benefits of the solar system would accrue to me over time. The savings on my utility bill would likely cover any additional costs I might face on an annual basis.

My next decision was what type of financing would be right for me. I had four main options to consider: a home equity line of credit (HELOC), solar panel leasing, a Power Purchase Agreement (PPA) or a Property Assessed Clean Energy (PACE) assessment. Each of these financing options has its pros and cons for both homeowners and homebuyers.

• HELOCs are a terrific tool to leverage for all sorts of investments in one’s home. But it is precisely the flexibility of a HELOC that led me to conclude that was not the right type of financing for me to use for a project designed to increase efficiency. Plus, a HELOC relies on personal credit as well as home equity and must be paid in full before a home can be sold. I decided that my HELOC would be better put to use when I’m ready to take on my next remodeling project.

• Solar lease agreements and PPAs are both solar-specific forms of financing, and they work in similar ways. In both arrangements, homeowners rent, but don’t lease, their solar panels.

The company that provides the panels owns them and is responsible for maintenance and repair; the leasing company also retains the substantial federal tax credits associated with a solar installation. In exchange, homeowners received a fixed price for their power for the life of the agreement, usually 20 years.

• Transferring solar leases and PPAs to a homebuyer can be tricky. Buyers must not only qualify for a mortgage, but also pass an additional credit check before assuming the loan. The seller can also buy the system for the fair market value and bake the cost of the system into the home sales price.

I decided that these options were also not the right approach for me. I wanted that federal tax credit, and I wanted to own my asset at the end of the financing term — not just hand it back to the leasing company.

• Last, I considered a PACE program known as HERO. Like all PACE financing, HERO funds are based on the equity available in the home, not on the personal credit score of the homeowner. Similar to a solar loan or PPA, HERO financing is paid off in up to 20 years.

But HERO financing can pay for much more than solar energy. PACE financing can fund a wide variety of water- and energy-efficiency improvements. Homeowners pay them off as an additional property assessment. A single HERO assessment can pay for investments in efficient windows, additional insulation and a renewable energy option like solar energy. I really appreciated that flexibility.

Similar to PPAs and solar leases, HERO liens can be transferred to a homebuyer when the circumstances are right. But unlike those other types of financing, transferring HERO financing to a new homebuyer does not require the buyer to prove creditworthiness.

Because HERO is paid through the property tax bill, the new owner can simply assume the balance of the lien. In some cases, buyers — or their lenders — would prefer to see the HERO lien paid in full before the sale is completed. In those cases, HERO financing can be repaid with no pre-payment penalty.

All of these options can make financing a solar system confusing, even overwhelming, for the average homeowner. It can also make life confusing for real estate professionals representing buyers or sellers where a financed solar system is attached to the home.

With the San Diego region quickly emerging as a national solar energy leader, it’s high time for the real estate industry to figure out how to make the most of these various types of energy efficiency financing.

Between the ongoing drought, the threat of climate change and rising water and energy prices, homeowners are increasingly looking for ways to make their homes more efficient.

It behooves Realtors to increase their understanding about the pros and cons of each of these solar financing options so that they can appropriately advise their clients.

Miller is a broker associate with Berkshire Hathaway Home Services, California Properties.

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