You drive up to the property. There they are, on the roof: those shiny black rectangles that are just about to turn a simple assignment into a headache. What to do? Put the car in reverse and slowly back away? Call the client and have them re-assign the order?
Those are certainly options. But in today’s tight market, with orders as scarce as hens’ teeth, let’s explore some other approaches to solving this problem.
First: How do appraisers value any amenity of a property?
Appraisal 101 would suggest the matched pairs analysis. So our first task is to find a property with solar panels that’s similar to the subject.
That search quickly comes to a screeching halt. (I can almost smell the brake dust.) There are no comps with solar panels in the area. So when we type the report, a comment like this might slip past the reviewer and underwriter: “A thorough search of the subject’s marketing area revealed a scarcity of sales comparables with solar panels.”
So far, so good. Now let’s continue with that reasoning: “Due to a lack of comparables with solar panels, no contributory value can be extracted.”
This supports a zero (0) adjustment, right?
Well … maybe. A savvy underwriter or reviewer might wonder why the appraiser didn’t consider the cost and income approaches.
What?! The cost and income approaches? Is this underwriter/reviewer serious?
Appraisal 102 and USPAP Standard 1-1 might suggest that you go beyond the market approach and matched pairs analysis. Don’t make me quote USPAP in a solar-panels article. You know it by heart: the rule says appraisers should use recognized methods and techniques necessary to produce credible results.
So which methods and techniques do appraisers recognize to value solar panels?
That depends on which appraiser you ask.
If you ask me, I might point you to the other two approaches to value. We all know about the cost approach. But does the typical residential appraiser recognize the income approach?
It’s kind of like going to your 20-year high school reunion: you don’t recognize everybody there, but after a few trips to the punch bowl, your memory is refreshed. The income approach, for many of us, is a long-lost classmate from an appraisal class taken many years ago.
In the beginning of appraisal school, there was the sales comparison approach. Next, we were introduced to the cost approach. Appraisers thought, Well, that’s nice, but the sales comparison approach is more reliable. Probably true. But then one day a crazy substitute appraisal teacher showed up and blew our minds with a thing called the “income approach.”
What in the world does this have to do with appraising a home? The income approach is for income-producing properties, like apartment buildings and 2-4 unit residential properties.
And what possible connection is there between the income approach and valuing solar panels?
We’re getting there. But first, let’s move beyond Appraisal 102 and into Solar 101.
If appraisers can wrap their minds around the idea that a kilowatt-hour of electricity has monetary value, we can begin to discuss the income approach to valuing solar panels. Anyone who has paid an electric bill lately can probably grasp the concept that a kilowatt of energy equals money—just look at your checkbook and see what you paid to the electric company last month. Divide that by the number of kilowatt hours you consumed. (That information is on your bill.)
Now try this: replace rental income with the value of the energy those solar panels produced.
I’m absolutely serious.
The Three Approaches to Value
Appraisers are often assigned properties with unique features. Any appraisal toolbox should contain an array of tools for solving those valuation problems. What should we have in our appraisal toolbox to solve the solar question?
We bring the sales comparable tools with us on every assignment—that’s a no-brainer. It’s the proverbial hammer.
Somewhere deeper down in that toolbox is the cost-approach tool. Determining contributory value via the cost approach isn’t optimal—it’s a bit like hammering in a nail with an Allen wrench—but it can be done. And way down there at the bottom, coated with dirt and grease, is the lonely and neglected income approach. It’s the torque wrench of the appraisal toolbox: you don’t use it much, but when you truly need it, it’s irreplaceable. And as I mentioned earlier, you CAN use the income approach to determine the contributory value of solar panels. Yes, I said it: you can use the income approach to determine an adjustment for solar.
In short, when faced with a complicated assignment, it’s our job to dig deep into the appraisal toolbox and use all of our tools to produce credible results. Consider all three approaches to value. And for any uncommon amenity you encounter upon arriving at the property, there’s usually more than one way to determine contributory value.
In the case of solar panels, it is possible to convert kilowatt hours of electricity into a monetary figure, and think of that as income.
Solving valuation problems like these can become easier when we dig a little deeper into the toolbox.
Mark Buhler will be teaching a live-virtual course on How to Appraise Solar Panels (7 hrs CE) on Wednesday and Thursday, April 19 and 20. The purpose of this course is to equip students with the knowledge, techniques, and tools to value solar photovoltaic systems. Solar PV has become a valuation issue among appraisers and their clients. This course will provide an understanding of what is expected of appraisers when working on a property with a solar photovoltaic system. You won’t want to miss this opportunity to learn even more on this topic. Register today!