Residential Solar Panel Leases in Real Estate Transactions

Time magazine just put out a fascinating article about the precarious state of the residential solar industry. It’s worth a read for anyone thinking about getting solar installed on their house. If you don’t want to read whole thing, here are the highlights that I found most interesting:

• The residential solar industry is struggling to stay afloat - In late 2023 more than 100 residential solar dealers and installers in the US declared bankruptcy, a 600% increase over the previous 3 years combined.

• Big solar companies have been bundling solar leases as asset-backed securities and reselling them while also retaining and reselling tax credits to large corporations since the solar companies technically “own” the solar panels on homes with leases.

• Because of this dynamic, solar companies have been desperate to acquire new customers in pursuit of growth leading to misleading and deliberately opaque sales tactics and contracts, which hurt homeowners.

• Solar panel installation in Europe is roughly 50% cheaper than it is in the US, because the system in the US is convoluted with intermediaries (sales and finance people) that don’t necessarily need to be there.

When solar companies go under they are acquired and consolidated, which is troublesome for people buying and selling the homes these leased panels are installed on.

What is a Solar Lease?

Solar power is a viable form of energy generation and that could eventually meet the residential demand for electricity if it was widely deployed. Seems like a good thing for the planet and for homeowners, right? The problem is that the up-front cost of solar panel installation is really high.

To get around this and acquire new customers solar companies created a business model where customers “lease” the panels that are installed on their homes where they pay a low up-front installation fee and then pay a monthly fee to the solar company for some term, usually 20 years for use of the panels. The solar company retains ownership of the panels and is responsible for servicing them if any issues ever arise. Leased solar systems currently account for around 70% of residential solar installations.

Sketchy Sales Tactics

If you do any amount of research into solar leases you’ll find that most companies who are going door-to-door selling them have pretty lousy reputations. The industry is fraught with misleading sales pitches and salespeople outright lying about the cost of the products, efficiency of the products, availability of the products given the current electrical panel and setup of the home (I have a client whose panel started on fire because of a shoddy solar install) and services that the company provides.

About a year ago my dad called me to “pick my brain” about getting solar panels installed on his house. A salesperson from a solar company knocked on their door and launched into a whole spiel about how they could get them installed for relatively cheap, how durable the panels are these days, and how it’s a great investment in their home. The salesperson told him that installing solar on their house would instantaneously increase the value of their house by 4% and he wanted to know if that was true.

I scoffed so loudly that it woke up the dog sleeping under my desk. A 4% increase in value in your house because of a solar panel lease? That’s seriously what she said? Absolutely not. Ask any real estate agent how they feel about leased solar panels and I guarantee they’ll have a story or two about the leases nearly killing real estate transactions for one reason or another.

Assuming a Solar Lease Sucks for Buyers

Solar leases transfer to new owners at the point of sale and it’s almost always a huge hassle for the parties involved if the lease is still active. If there’s an active lease the buyers must qualify for the lease as part of their debt-to-income ratio which means the lease payments will factor into a buyer’s monthly debt obligations and can essentially disqualify otherwise qualified buyers if the extra $50 - $100 a month reduces their pre-qualification amount.

For instance, let’s say a buyer is qualified for payment on a house up to $650k but the house has a solar lease on it that’s adding $100 a month to their debt obligations which then changes their pre-qualified amount down to $642k. As the seller of this hypothetical house, does that sound like a solar lease that’s adding 4% in value to your house instantaneously? No.

Buyers have to apply for the lease at the solar company and qualify there, provide documentation of the lease to their mortgage underwriters, and go through the incredibly elaborate process of creating an account at the solar company and getting this all done before closing while also going through due diligence processes on the house and getting all the required mortgage documentation to their lender.

One way sellers can get around putting buyers through all that is to pay down the remaining lease balance before listing their home. Depending on the terms of the solar lease and installation this can mean a few different things, sometimes solar panels are just owned outright (which is awesome) and the lease has been fulfilled so none of the qualification and application components apply. That’s also how it works if a homeowner paid for the solar panels in cash and bought them outright at the point of installation.

However, sometimes solar companies have terms that state that if the lease has been paid off they are still responsible for servicing the solar panels for the initial duration of the lease and technically they still own them until the end of the lease term. I had some buyers under contract on a house in Littleton with this scenario. They still had to create an account with the solar company and provide documentation of the “encumbered items” to their lender as part of underwriting even though they didn’t have to actually pay for the panels or the lease themselves.

This is where things got really fun. The underwriter determined that the way the solar contract was written didn’t play nice with the required lender foreclosure language in the event that the lender had to foreclose on the property. The solar company the sellers used had been acquired by another solar company who immediately laid off all staff, so nobody that we talked to had any idea how to help us. We needed a specific document from them that had to be executed by management and sent back to the mortgage underwriter.

This process took 3 weeks to accomplish and nearly resulted in the buyers being forced to terminate the contract on financing availability. It was mind-blowing for both buyer and seller as well as us agents. We had sellers who wanted to sell, buyers who wanted to buy, and a lender who very much wanted to originate a mortgage but the whole thing was being held hostage by a defunct solar company for a system whose lease had already been paid off.

Future Outlook

If Time’s prediction that the residential solar industry is on the brink of collapsing turns out to be true there is going to be a lot of pain for sellers who have leased panels on their homes. If you have a leased system make sure that you have all of the documents associated with it in a safe location.

I’m not saying that all solar leases or residential solar systems are bad, solar feels objectively like the right thing to do for the future of our planet. It should be more accessible in America and less of a minefield for consumers to get panels installed properly and transparently.

If you’re going to sign on for a leased system make sure that you understand the nuances of the contract and you have all of the documentation readily available well before you consider selling your home. Tell your broker about the system and have them talk to their preferred lender to see if they can review the documentation before listing to determine if there are any holes or problems with it.

Or, if you can afford it, consider buying panels outright. I guess the real punchline here is you should always think twice before buying something from a stranger who knocks on your door, because you never know what you’re actually going to get.