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Appraiser Said What? - Part 2: Solar Panels

One of our missions at Follis Appraisal Services, LLC is to help inform and educate others' on how the appraisal process works, and in order to do so, I thought that I would start a new series for the blog where your questions are answered! I am still working on building our audience both on our website blog and also on our new Facebook page, so I sought the help of our local Association of Realtors to find out what questions other members in the real estate community might have regarding the appraisal process. Here are a few of their questions, and of course, my answers!

Q: Damian Pro with Windermere Real Estate Fairhaven asked: How do appraisers value homes with solar arrays? Some clients have spent $30k on their solar package, but appraisers don't seem to consider them in their valuation.

A: A great question Damian! If a property has functional solar panels, there are guidelines set forth by Fannie Mae for how an appraiser should consider the potential value added.

Solar arrays have become more prevalent in the local market over the previous 10 years and they are predicted to continue to rise in popularity, especially given a recent measure passed by the city of Bellingham to ban natural gas for heating in some new buildings, which is slated to become effective in the near future. The ban will not apply to single family residential structures* or smaller apartment buildings. The new ordinance will require new commercial and large residential buildings (*more than three stories tall) will be required to use electricity for heating, as well as adhere to more strict construction standards for energy efficiency. Additionally, the buildings must be "solar ready" with enough roof space for future installation of panels. The ordinance does allow for the installation of natural gas appliances and fireplaces, and existing buildings are not affected. The ordinance is only for the city of Bellingham.

When considering whether any feature of a home can add or detract from market value, the answer an appraiser will most likely give you is, "it depends". In regards to solar panels/arrays, it depends on whether or not the system is leased or owned. According to Fannie Mae Selling Guide B2-3-04: Properties with Solar Panels, if a system is leased, then an appraiser cannot assign value to the system and the property must maintain access to an alternate source of electric power that meets community standards. Lenders have a large role in the providing the appraiser documentation of the ownership for the solar array.

"Lenders are responsible for determining ownership and any financing structure of the subject property's solar panels in order to properly underwrite the loan and maintain first lien position on the mortgage. When financing is involved, lenders may be able to make this determination by evaluating the borrower's credit report for solar-related debt and by asking the borrower for a copy of all related documentation for the loan. The lender must also review the title report to determine if the related debt is reflected in the land records associated with the subject property. If insufficient documentation is available and the ownership status of the panels is unclear, no value for the panels may be attributed to the property value on the appraisal unless the lender obtains a UCC "personal property" search that confirms the solar panels are not claimed as collateral by any other non-mortgage lender. Lenders are responsible for ensuring the appraiser has accurate information about the ownership structure of the solar panels and that the appraisal appropriately addresses any impact to the property's value."

For non-mortgage lending appraisals, unless an appraiser is provided with documentation to indicate that the solar array has been paid in full, they cannot contribute to market value.

Once the appraiser has received the proper documentation from the appropriate source regarding the ownership of the panels, they are able to proceed with their valuation. An appraiser will make every attempt to identify comparables that are "substitute" in nature, and whether an adjustment is warranted is based upon analyzing paired sales, conversations with Realtors, discussions with local builder/contractors, cost analysis tools such as Marshall & Swift, and peer appraisers.

To summarize:

If the solar panels are leased, they cannot add value to a property.

Lenders for mortgage transactions are required to obtain information regarding the ownership status of solar arrays and provide that documentation to the appraiser PRIOR to the completion of the appraisal report.

Appraisals completed for non-lending purposes will still require the ownership status of the panels, and that information should be given to the appraiser prior to the completion of the appraisal report.

I hope this answers your question Damian! If you have any questions regarding this topic, or have a question you would like to have answered in an upcoming edition of Appraiser Said What?, feel free to comment below, or message us!

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