Portland Area Real Estate Appraisal Discussion

I just returned from the Oregon Solar Energy Conference as a guest speaker/panelist discussing the valuation of residential homes with owned (not leased) solar photovoltaic (PV) systems.  It was an honor to share the panel with Ben Hoen, a staff research associate with Lawrence Berkeley National Laboratory who coauthored a study published in the Winter 2016 Appraisal Journal titled, “An Analysis of Solar Home Paired Sales across Six States.”  The contributory value of PV in appraisals done for residential lending is a hot topic in the solar industry because the easiest way for owners to finance PV systems is within the mortgage of their home.

During our session we discussed the rapid increase in solar installations across the country, including Portland, and the complexities that such features present to appraisers.  Some of the appraisal problems identified by the panel include: finding comparable sales of homes that sold with owned PV systems, difficulties in obtaining performance characteristics about the PV systems on home sales, how to ask for and find appraisers with solar or other green credentials, and the green addendums  that can be filled out by homeowners and agents to help appraisers gather information about a property.  (Click here for an example of one popular green addendum)  The panel also discussed several different ways that appraisers can support adjustments for PV solar systems.  A listing of techniques that appraisers can use to estimate and support adjustments for PV systems follows.

1. Paired Sales – This method is most accepted, but it can be difficult to find comparable sales; however, an appraiser is not only limited to properties that would compete with the subject for paired sales. For example, the appraiser might appraise the subject as if it has no PV system and then use sales from a nearby community (or further back in time) to help support an adjustment that can be applied to the gridded comparable sales in the report and other approaches to value.
2. Cost Approach – Studies, like those published in the recent “Appraisal Journal,” have shown that there is a strong correlation between the net cost of a PV system (less total of all incentives) and value. This is reasonable because someone should not pay more for something on one home that they could merely purchase for another home; although cost and value are not always equal, and it can be difficult to accurately estimate depreciation if the system is more than a few years old. In addition, the appraiser must estimate the current cost of the system and not its cost at the time of installation. This is particularly important because of the rapidly falling cost of solar power systems within recent years.
3. Income Approach – Recent studies also show that the present value of the energy savings has a strong correlation to value. This is reasonable because the main selling point of a PV system is to save money on future utility bills (although buyers often see other benefits such as prestige or feeling good about conservation). Appraisers and others can estimate the present value of energy savings using spreadsheets or a free online tool called PV Value. The limitation of this approach is that it can be difficult for the appraiser to estimate or support the risk premium to apply to the discounted cash flow (studies on risk premiums are coming) and other factors like energy production or energy prices over time. The good news is that much of the necessary information can be obtained from the new system documentation and unknowns can be estimated using PV Value defaults or online estimators like Solmetric Roof Azimuth Tool or PVWatts Calculator.
4. Additional Support – After appraisers have performed one or more methods to support an adjustment for PV, the indicators can be checked against recent studies to see if the results are reasonable given the quickly growing body of evidence. However, appraisers need to be aware that often the studies are dated by the time they are published and may not be applicable to a particular subject property.

If you need more resources, the Appraisal Practices Board recently issued an advisory on “Valuation of Green and High-Performance Property: One- to Four-Unit Residential.”  It is a voluntary guidance for appraisers on methods and techniques for valuation that includes green homes, but it also includes a section on PV systems.  Solar power systems are here to stay and are becoming increasingly common.  Are you ready?

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

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