FNMA no longer allows income approach in developing solar panel adjustments

[S3Will]

For years, I've been using PVValue.com to assist in developing the income approach for determining the positive market value of the lifetime energy savings for a solar panel system. As of 9/4/2024, FNMA doesn't allow this as the sole approach, they want a market based approach. In Oregon, 2.2% of homes have solar systems, which makes developing a market based approach from sales data nearly impossible. How are you handling this?

https://singlefamily.fanniemae.com/media/39861/display Page554 under Energy Efficient Improvements

An energy-efficient property is one that uses resource-effective design, materials, building systems, and site orientation to conserve nonrenewable fuels. Special energy-saving items must be recognized in the appraisal process and noted on the appraisal report form. For example, when completing the appraisal report (Form 1004), special energy-efficient items are to be addressed in the Improvements section in the Additional features field. The nature of these items and their contribution to value will vary throughout the country because of climactic conditions, differences in utility costs, and overall market reaction to the cost of the feature. Some examples of special energy-efficient features may include, but are not limited to, energy efficient ratings or certifications, programmable thermostats, solar photovoltaic systems, solar panels, low-e windows, insulated ducts, and tank-less water heaters. Appraisers must compare energy-efficient features of the subject property to those of comparable properties in the Sales Comparison Approach adjustment grid. Appraisers may augment the Sales Comparison Approach in evaluating any impact (either positive or negative) to the value of energy efficiency improvements with either the income or cost approach; however, appraisers cannot adjust the value of the property

- on a mechanical dollar-for-dollar basis based on equipment and installation cost, or the discounted present value of expected cost savings of the equipment over the useful life of the equipment; or

- solely based on the cost or income approach. The appraiser must also analyze the market reaction to the energy efficient feature.

 

[J Grant]

I rarely make adjustments for solar panels, I reconcile on the upper range of value, though on occasion, when a clear price /market reaction exists, I will adjust for solar panels/system

It is just too hard to prove any market reaction in a sale price in many cases and that is what MV is based on -

 

[Meandering]

Texans who installed solar panels are met with mounting debt and damage to their homes​

Texans are finding out that getting their home fitted with solar panels can come with huge bills, roof damage and even scams. Experts say solar is a huge investment that may not work for everyone. You have to put in a lot of money upfront for the potential of lucrative rewards down the line.

 

[Terrel L. Shields]

How are you handling this?

Obviously...they want you to lie. No step for Skippy...

 

[Dublin ohio]

In Oregon, 2.2% of homes have solar systems, which makes developing a market based approach from sales data nearly impossible

The bolded above is telling you something

 

[George Hatch]

I don't think appraisers should be using a DCF app unless they know how DCF analysis works and understand what this app is actually doing and where they need to alter the inputs.

You can't convert an income into a value indicator without using either a factor (like a GRM/GIM) or a rate of return (as in cap rate or discount rate).

We already know that the contributory value varies by locale and sometimes varies by price range. Moreover, we always have to consider the possibility that those rates are subject to change in that local over time and from one year to the next; so the rate that worked in a bull market might not work in a bear market. Or as the market participants become more socially enlightened as to the talking point that this is WWIII for the planet and we've only got 9 more years before we all burn up.

The "variable" of those factors and rates means that you can't use "the list" for those factors or rates; you have to extract them from actual sales. And you're never going to get enough income data in the SFR markets to figure out what the GIM was or what the discount rate was for that transaction.

The irony there being that if you can identify some "have-solar" sales data then you don't need an income analysis; you can just use direct comparisons between the haves and their respective have-nots to see what those buyers actually did.

The question of value doesn't hinge on what the market participants SHOULD do if only they were as smart as the appraisers; but what the market participants ACTUALLY do.

 

[Tom4value]

First off, the vast majority of solar systems are leased. They are not part of the real estate so why even give it value?

Second, for those few that are owned, look at J Grant’s post; from the “Sunshine State” and still can’t get enough data to support an adjustment. I am in MA, not known for our sunny weather but still looks like Arizona next to Oregon! I can’t get any data that I would feel comfortable supporting an adjustment.

For my personal (not appraiser) take is this. Solar panels are like EVs, too new to calculate a long term affect. For EVs, we know that batteries eventually need replacing. Cost will be far more than the worth of the car. For solar panels, when they need replacing, will it be before or after you need a new roof? Ugh!

My point is ol’e Tom is not the only genius to think of this. Buyers do too. Back to appraiser Tom, there are too few buyers out there saying, “yes! I will pay more for solar!” to derive an adjustment.

 

[Tim Hicks (Texas)]

National data says in increases the value of the home 2-5%. They also say the average system is $15-20,000 and I never see one for less than $50,000. Last week, 35 panel system with no batteries for $55,000 and they still get a electric bill. Their solar salesman says they probably need more panel$. The week before it was 30 panels on a double wide manufactured home for $50,000. I had one manufactured home sale in the entire county with owned solar panels and it was lower than all my other sales. I have seen $70-80,000 systems and a Tesla roof is north of $100,000. Typically, what I do is I do a search for owned solar panel home sales in various neighborhoods and look at what the exact same size homes without solar panels are selling for. Gee, exactly what Fannie Mae says to do! It really does run 2-5% more in value, usually on the lower side, but I put the exact data and process I used to determine the percentage adjustment in the grid in my comments on the sales comparison. I also include some owned solar panel home sale in the sales comparison even if it takes distance to present a similar property.

 

[Terrel L. Shields]

between the haves and their respective have-nots

the vast majority of solar systems are leased...and still can’t get enough data to support an adjustment.

That is the crux of the problem. Too few transactions. So, the few sales you have will vary so widely based upon the size of the solar panels, the orientation of the building, and the electric rates - By the time you've done enough sales and adjustments according to the system to be meaningful, you've expended 80 hours time. So, you pick one, which is as likely as not being simply impacted by randomness and call it good. Is it? Probably not. in fact, after doing all the math of analysis you likely are still creating a random number generator.

 

[George Hatch]

There are exceptional appraisers, of course, but most other appraisers who have not taken an Income Cap course will not have enough exposure to building or using a DCF or a long form Income Approach to understand what this app is and isn't doing.

I took a 21hr greenie appraiser course a couple years back where the CR-licensed greenie advocate instructor ran everyone through the use of this app, and he was clearly in over his head and didn't know what he was talking about WRT certain aspects of this app. But I was apparently the only non-SFR appraiser in the room so nobody else noticed - they all took his presentation at face value. That's what concerns me about appraisers using a black box app (of any type) that they don't understand. They literally don't know what they don't know. Starting with how to extract rates or GRMs from an SFR market. I can't do it (lack of income data for these in the market) so I know nobody else can do it otherwise they'd have mentioned it in their instruction.

The written COURSE INSTRUCTIONALS they used in this course said you can't find sales so apps like this are the only way to develop a value opinion involving one of these installs. While he was droning on about can't use an SC, I ran up my MLS and found several recent comparables for one of the case study properties in their presentation. It took me just a few minutes to identify an adjustment factor between recent remodel/flip condition homes of otherwise similar attributes in that neighborhood vs this pedigreed home in the case study. Not hard or time consuming at all. Less than 10 minutes because after all, I did have to read through a number of listings and flip through their pics to find sales in otherwise similar overall condition.

If you don't have directly comparable properties for your SC you can still do a supplemental analysis to identify the adjustment factor using other sales in other areas that sold within the last couple years. You're not looking for direct comps for your SC, you're just looking for the supported adjustment factor that you can import for use with the have-not sales in your SC. It's not hard to include "solar" in your MLS query and get a bunch of listings to look through to identify the installs which are owned and not leased. From there you can find their respective comps. So if I find a have-solar (owned) in a property on the other side of town that sold 2 years ago that's still recent enough and proximate enough to identify the difference in pricing between that outside sale and its respective comps from that time period.