06/29/22 – Caleb Hanson
There are several primary ways to pay for adding a solar-power system to your home, and each of them has different benefits and challenges. If you want to maximize the potential value of your home in the future, some of those options are definitely better than others. Here are the options and some thoughts on each.
Buy the System Outright
With this option, you would buy the solar-power system completely and pay cash for it. This seems to be the highest return option because it allows you to take advantage of government financial incentives and you get the full value of the electricity your system generates. In California, the owner of the solar-power system will accrue credits when the system produces more electricity than needed, and those credits offset the cost of electricity provided by the utility company during times of lower production (nighttime and winter). That’s called net metering. Also, as the price of electricity from the utility company rises, the cost of most of your electricity will have already been covered through your initial investment in the solar-power system, so you will get a better return over time. Finally, if you choose to sell your home in the future, the solar-power system will be a clear benefit to the buyer because it very clearly will reduce electricity costs compared to a home without a solar-power system. Of course, the big downside to this route is the large, up-front cost, which many homeowners cannot afford.
Buy the System and Get a Loan
With this option, you would still buy the solar-power system, but rather than paying cash for it, you could borrow money to pay for it. This could be done directly with the installation company, by refinancing with a larger loan against the home, or by getting a home equity line of credit. This seems like the next best return because you still get the benefits of owning the system. As long as the payment for the system is lower than your current/expected electricity cost, this is a pretty good route. Because you’ll pay interest on the borrowed money, the return isn’t quite as good as just buying the panels outright though.
If you choose to sell in the future, the loan for the solar-power system will have to be paid off, or the buyer will have to take over the payments. Most of the time, if there is a loan for the solar-power system, sellers should plan to pay the outstanding balance at closing because loan or lease payments count in a buyer’s debt-to-income ratio for loan purposes. That means trying to take over the payments will diminish the maximum amount of loan money they can qualify to borrow, which could diminish their maximum workable offer price.
Let the Solar Company Own the System and Enter a Power Purchase Agreement
If you cannot afford to buy a solar-power system outright and cannot finance purchasing them, the power purchase agreement is probably the next-best option. In a power purchase agreement, the solar company installs the panels and owns them. Then, the homeowner pays the solar company for the power generated by the system. Since there is typically little or no up-front cost, this is a good deal if the rate from the solar company is cheaper than the rate from the local utility company. If energy somehow becomes cheaper from a local utility company, you might still be obligated to pay the solar company at a higher rate. While this seems very unlikely based on current trends, it’s good to be aware of the type of commitment you’re making.
There are a few potential concerns with a power purchase agreement. If you choose to sell your home in the future, the buyer will most likely have to qualify to take over the agreement and approve of the terms in the agreement. This can create challenges during a sale transaction. In particular, if the buyer decides they are not comfortable taking over the agreement, you might be left with a choice between buying the system from the solar company at whatever price they are willing to sell for or losing the buyer for your home. Please make sure that you are clear about what the options will be if you choose to sell in the future before entering a power purchase agreement, and make sure you see those options up front and in writing.
Lastly, you most likely won’t get the government financial incentives for installing a solar-power system because you don’t own the system.
Let the Solar Company Own the System and Lease the System
In a solar lease, the solar company owns the panels and you make lease payments to them. If the system generates enough electricity to completely cover your annual usage, it might still be a decent deal if the lease payments are lower than your current electricity bill. However, it probably won’t be as good as one of the purchase options because you won’t get the government financial incentives, and you have higher odds of challenges if you sell your home.
If you choose to sell your home in the future, you might have to buy the solar-power system, or the buyer will have to take over the lease payments. Lease payments for solar count in a buyer’s debt-to-income ratio for loan purposes. That means that taking over the payments will diminish the maximum amount of loan money they can qualify to borrow, which could diminish their maximum workable offer price. On top of that, they might back out of the purchase if they don’t feel comfortable with the lease terms. Please make sure that you are clear about what the options will be if you choose to sell in the future before entering a lease agreement for a solar-power system, and make sure you see those options up front and in writing.
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