The ins and outs of Pearl’s new tool to accurately capture value of residential solar
the Pearl Equity Calculator is an app that contractors and appraisers use to help better demonstrate the value solar installations can add to a home. It is the industry’s first tool to calculate discounted cash flow using certified contractor data, NREL software to calculate solar production numbers, and an API to Freddie Mac’s 30-year mortgage rate. Rachel Davis, vice president of product for Pearl Certification, explains how the calculator can improve your business.
What is the biggest obstacle solar contractors face when trying to show the value of a solar installation? Does this impede their ability to close sales?
A big obstacle is simply lack of local data. Most contractors struggle to demonstrate the value of a specific installation in the homeowner’s area. Instead, they tend to point to national or state data when offering insight about value.
For example, a frequently cited source is the 2015 Lawrence Berkeley National Laboratory study, which showed that solar adds $4/watt to the home value. The contractor may also refer to research from Zillow, which found that solar panels could increase a home’s sales price by an average of 4.1%. While somewhat useful, these studies don’t provide the homeowner with the specifics they need to feel comfortable with the large purchase they are considering.
Like the famous saying goes, “real estate is local.” As a result, the homeowner, real estate agent, appraiser, and lender aren’t concerned with national averages, but how the home’s specific solar PV system will be valued by the local market. Since solar panels are likely one of the largest investments many homeowners will make in their home, they want to feel comfortable that when they sell the property, the investment will be reflected in their home value.
A contractor who can’t answer the homeowner’s question about what kind of return on investment they should expect is going to face an uphill battle when trying to close that sale.
Why do you think homeowners fail to fully realize the return on their investment in solar when they sell their homes?
There are multiple factors which can contribute to a homeowner not realizing the potential return on investment when they sell their home, but the No. 1 is documentation. We continually hear from appraisers that they don’t receive any information or documentation on the PV system.
One New Jersey-based appraiser told us that she frequently asks for information about solar installations and just doesn’t receive it. A homeowner she recently interviewed for a refinance didn’t even know if his system was owned, financed or leased. Homeowners have so many competing priorities when they are selling a home that the idea of promoting solar might not cross their minds. Even if they are working with a real estate professional, that individual may not be trained in how to properly sell a home with solar to ensure the homeowner receives the maximum return on their investment
Without the proper documentation, the appraiser cannot add any value to the home for the PV system. A home’s high-performing features need to be made visible through the listing and appropriately presented to an appraiser. If the lender and appraiser doesn’t know these features exist, that value won’t be included.
How much value do you think homeowners with solar installations are currently leaving on the table?
Homeowners can be leaving tens of thousands of dollars on the table. If we use an average system size of 6.3 kW and an average of $2.71/watt, we can calculate a system cost of $17,073. These average numbers are sources from the NREL US Solar Photovoltaic System and Energy Storage Cost Benchmark and may be conservative based on where you live in the United States. A homeowner could miss out on any of that investment being added to their home value. This adds up to millions of dollars each year that homeowners are losing out on.
How does the Equity Calculator help contractors demonstrate value?
It provides contractors with the ability to leverage a third-party to show homeowners how much value a solar installation may add to their home. The calculator enables the contractor to use data specific to that home and an appraiser-approved methodology to provide homeowners with information about the value of a solar installation. The Solar Equity Calculator differentiates that contractor from any other contractor who the homeowner may have spoken with about solar. This contractor is going to third-party certify their installation so the homeowner has all the documentation they need to assist in getting the maximum value for their high-performing home.
The Solar Equity Calculator generates a value range for the contractor to present to the homeowner. It shows actual dollars and cents based on specific data of the home.
Pearl ran the numbers on the homes with certified PV systems in our database to calculate the amount of equity our network contractors have created for their homeowners and found that it was over $120 million. And this number continues to grow through our network of qualified solar contractors.
The calculator is built to work seamlessly in the field or in the office. It also is available via API for those contractors who want to integrate it into their own software.
How does the tool help appraisers more accurately calculate the value of solar?
SEIA estimates that by 2030, 13.4% of US homes will have a PV system. This means that appraisers are encountering PV systems at an increasing frequency in both refinance and sale transactions, and that this frequency will increase dramatically over the next decade.
The Solar Equity Calculator makes it simple for an appraiser to calculate the value of a PV system as an input to the income-based methodology. The calculator is free to use for any licensed appraiser and is the industry’s first tool to automatically calculate discounted cash flows of certified contractor installations. The calculator can be used for any home, whether it’s Pearl Certified. For Pearl Certified homes all the certified data will be available in the calculator, making the process even simpler for the appraiser.
How does the calculator work? is it free? Is it available only through the Pearl Certification platform?
The calculator leverages the discounted cash flow method to calculate the dollar value of the energy a photovoltaic system will generate from today through the end of the power production warranty period. We look at the total future cash flow benefits that the homeowner will receive from the PV system over its useful life and calculate what the value of those future benefits is at the moment in time when the calculation is performed. This value is an important data point for the appraiser that can facilitate their use of the income-based approach.
The calculator is free to all Pearl Network Contractors and all licensed appraisers. Pearl Network Contractors are the only contractors that can use the calculator. The Equity Calculator’s results are unique not only because of the methodology used, but also because the calculator’s results are based on certified data from qualified sources. Pearl Network Contractors have been vetted to meet the network qualifications which include their customer service, business practices and commitment to quality to name a few, and can be held accountable for the veracity of the data used to generate the Equity Calculator’s results.
Is there an industry-accepted valuation methodology for residential solar?
Yes, an appraiser can use three methods when appraising solar: comparable sales, cost and income-based. The appraiser is unlikely to simply add the value calculated by the income-based approach to the appraisal. The appraiser is required to take into account the sales prices of comparable homes in the same market that have sold recently.
If the appraiser sees that homes with a PV system are selling for more than similar homes without a PV system, they can use the information from the Solar Equity Calculator which is included in every Pearl Certification Report as an additional tool to help determine how much value the PV system adds to the home. If PV is relatively new in the market and the appraiser cannot find comparable homes with PV that have sold recently, they can consider the income-based approach as the basis for assigning value to the PV system.
The key is documentation. If the appraiser doesn’t know the details of the solar installation like ownership structure or system size, no value will be added.
Is there any other tool like this in the marketplace?
The Pearl Solar Equity Calculator is the industry’s first tool to automatically calculate discounted cash flows of certified contractor installations for the purposes of home valuation. There is no other tool on the market that gives a contractor the ability to answer the question, “How will this solar panel system affect my home’s value?” It also provides appraisers the resources they need to quickly and accurately calculate a key input as they appraise a home with a PV system.
For more information about the Pearl Equity Calculator, visit: pearlcertification.com/contractors-equity-calculator