C. Brent Bowen, an industry veteran and instructor on a recent advancement in residential solar valuation, discussed several aspects of solar-equipped residences with Valuation Review, while attempting to provide clarity regarding the appraisal of these types of properties.

“I’ve been appraising residential properties in the Dallas/Fort Worth metroplex since the late 1990s,” Bowen said. “Early on in my career, it was very rare to see solar panels, so I didn’t put a lot of mental energy into how to handle them from a valuation standpoint.  As time passed, I began to notice the number of roofs with solar steadily increasing.

“Like most appraisers, I would have a momentary panic when I arrived at a home which had solar panels affixed to the roof,” Bowen added. “The same thought would go through my head that likely went through the mind of most: ‘Please, let these things be leased!’”

He explained that because leased panels are typically treated as personal property, he hoped he could avoid the issue altogether.  However, Bowen knew that eventually, he was going to need to learn how to deal with the contributory value of this improvement. 

So, he got curious about how solar photovoltaic (PV) systems work, how the market reacted to those systems, and how his peers were addressing the solar valuation issue.

Surprisingly, Bowen did not start by taking classes on solar valuation.  At first, he did a lot of reading and research on his own. 

“On some level, I was reinventing the wheel.  I did watch some videos and webinars by other appraisers, but for the most part I wanted to try and figure it out on my own,” he told us. “I had actually been developing my own technique for several years before I took my first solar valuation class. In the beginning, I was walking down the same path as many appraisers who had traveled this road already.  Income-based approaches seemed to be an obvious go-to for this amenity.”

“It wasn’t long before I found the most prevalent discount cash flow technique tool used by appraisers, as well as some other published guidance on the matter,” Bowen added. “However, the more I learned, the more I was nagged by several issues with which I was uncomfortable.”

For one, a discounted cash flow method relies heavily upon a discount rate.  Small swings in the discount rate result in large swings in the valuation; that’s just the way that the math works, he said. 

“I discovered the discounted cash flow method works really well in a consulting assignment, particularly for a client wanting to evaluate the potential purchase of a solar PV system,” Bowen noted. “In that case, the specific client can choose the discount rate which is most reflective of their financial situation.  But, when the assignment is a market value-based assignment, it is necessary to support a market-supported discount rate.  In fact, it’s not just necessary; it’s a USPAP requirement.

“There are also some issues related to utilizing a cap rate or GRM which need to be addressed in those income approach methods,” he added. “Other issues include dealing with a reconciliation where there are some variables which directly impact one approach to value, but which have no direct implication at all to other approaches. Of course, the issue which is most critical is what data to extract from the market and how to accomplish that. This is a particular tricky issue given the very limited data available in many markets.”

When asked to expound on what he meant by a “tricky” issue, Bowen clarified, “...tricky, in that when one is talking about market value, there are some necessary assumptions about the market participants.  One important assumption is that market participants are well informed or well advised.  With regards to solar PV systems, market participants are typically not well informed.  Given that the real estate community as a whole is also not well informed, the market participants are not always well advised either.

“This poses an additional problem for an appraiser engaged in market research,” Bowen said. “Not only does an appraiser need to find sales data with owned solar panels, the appraiser needs to find data with solar panels which are well-marketed.  Well-marketed solar panels are those where the listing agent has provided sufficient data for potential buyers to evaluate the solar PV system and become informed prior to making a purchase decision. That higher bar for finding comparable data with solar makes it even more rare to find enough comparable data to support adjustments for solar panels as an amenity.”

But what if an appraiser can’t find comparables? Should they just conclude that there is no value? Bowen cautioned drawing that conclusion too soon is very risky. 

 “An adjustment of zero dollars has to be supported just as much as any other number,” he explained. “It is still incumbent on the appraiser to support their assertion of zero dollars.”

Of course, the natural question becomes, if an appraiser is appraising a home with an owned solar PV system and there are no comparable sales with solar, how can an appraiser support an adjustment, whether it be $0 or any other number?

“Sometimes the market ‘speaks’ in ways that we aren’t used to listening to.  Looking at market data through different ‘lenses’ can be pretty revealing actually. For instance, I live in a very hot climate and inground pools are common,” Bowen answered. “It’s not unusual to look at a satellite image of a community and see pools in nearly every backyard.  With that said, there are some neighborhoods where the same aerial view will show very few pools.  Without looking at a single sale, I can tell you that the same pool will have a value close to the physically depreciated cost (maybe even higher) in the first neighborhood, and much lower than the physically depreciated cost in the second neighborhood.  How could I possibly determine that without looking at a single sale?”

Bowen then went on to explain how he made that observation from a logic-based lens.

“In the first neighborhood, almost every homeowner, when faced with a decision of whether or not to install a pool, decided that the value of the pool exceeded the cost (at least when the pool was constructed).  If they had not decided that the pool would not have been built,” he concluded. “Similarly, in the second neighborhood, almost every homeowner made the opposite decision, the value was lower than the cost, thus no pool was ever constructed.  Before I ever look at a sale, I’m already wanting to know ‘why.’ 

“The same type of consideration can be applied to solar.  If you begin to notice that more and more residential solar is being installed in your market, that tells you something. It doesn’t matter if that solar is leased or owned.  Every roof with solar represents a homeowner who made the decision that the anticipated cost of that system was less than its value to that homeowner.” 

The assumption, though, should not be made that one doesn’t need any sales. Bowen said. Rather, finding sales data with well-marketed, owned solar PV systems is important, even if it isn’t directly comparable to one’s subject property. 

Learning how to study the limited sales data and make observations regarding how the market reacts is vital, he emphasized, to understand how the market will likely react to a home with solar.  However, appraisers aren’t always used to making the type of observations which are necessary.

What steps does Bowen recommend appraisers take who want to better understand solar valuation?

“Get educated,” he told us. “That doesn’t necessarily mean taking a class, although an introductory class in solar might be the quickest way to get good information.  It can be time consuming to sort out the good information from the sales pitches aimed at consumers, statistics focused on public policy positions, or technical specification data relevant to electricians and installers.

“For appraisers already familiar with a basic understanding of solar PV systems, I’ve begun offering training for a solar valuation technique which (in my opinion) solves the major pitfalls of what would be considered a standard protocol,” Bowen added. “I’ve prepared a framework and spreadsheet template with step-by-step instructions on how to modify the technique for any market. I show appraisers how once the groundwork is laid, the market-supported contributory value of solar can easily be estimated in minutes.”