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Recently, more and more of our borrowers have been encountering headaches and delays because a property they are trying to buy has a solar system. If you are a real estate investor purchasing a home with a solar system, you need to be on high alert for potential issues from the get-go. Some of these issues can be quickly resolved. In fact, you might not even notice them – your title company will quietly handle them. Others might be a literal death knell for your transaction. The challenge of those solar systems is that you will never know which one is which – until you dig deeper.
The Fundamentals of Solar System Ownership
Like many things in life, including your car and your home, a solar system can be purchased or leased. If the system is purchased, it might mean that the homeowner paid for it upfront. It also might mean that though they technically own it, they financed it through a loan, and that loan is outstanding. Either way, a homeowner is responsible for maintenance, repairs, and any upgrades. In return, that homeowner benefits from any incentives, tax credits, or rebates associated with owning a solar system, potentially leading to significant savings and a greener future.
When homeowners lease a solar system, they enter into an agreement with a solar company to use the system for a specified period, typically 20 to 25 years. They don’t own the system but make payments to the solar company for the use of the electricity generated by the panels. The solar company is responsible for maintenance and repairs during the lease term. While the homeowners may not receive the full benefit of incentives, tax credits, or rebates, they also avoid the upfront costs and maintenance responsibilities associated with owning a system. However, it’s important to note that they are locked in the contract for a specific time and cannot just return the system wherever they want, potentially limiting their flexibility in the future.
What Different Types of Solar System Ownership Mean to Real Estate Investors
The seller owns a solar panel
If the seller owns a solar panel, they might own it free and clear, meaning they bought it in cash or repaid any loans they had in the past. If the solar system is owned outright, you are in luck. All you have to do is ask the sellers to initiate a transfer of ownership from them to you. It’s an easy process, often done by an app. However, only the seller can start this process. Make sure the process is complete before the sale date so you don’t have to chase the seller around.
One of the worst-case scenarios is when the seller owns the system but has a loan on it. There are typically two ways to handle such loans. One way is for the buyer to assume the solar system loan. While the assumption is possible, it’s typically not easy because the buyer needs to meet the lender’s underwriting criteria. We spoke to a couple of lenders specializing in solar system financing. Qualifying for their loan appears to be more challenging than getting a Fannie Mae loan. Stringent debt-to-income requirements and minimum scores of 680 were just the tip of the iceberg. Several lenders will offer no financing for real estate investors, rendering the whole transaction impossible.
The second way to handle properties with an outstanding solar system debt is to have that loan paid off at closing. Whether it’s possible or not depends on the numbers as well as buyers’ and sellers’ motivation to cooperate. If the loan balance is insignificant, one of the parties to the transaction might choose to pay it off, or the parties may agree to split the costs. However, the outstanding balance can be too high for either party to absorb. One of our borrowers had no choice but to walk away from an otherwise high-profit transaction after learning that the sellers had a $25K loan on their solar system.
The seller leases the solar system
In our experience, the lease assumption is significantly less complicated than the loan assumption. As one of the solar system companies explained, the process is similar to transferring utilities from the old owner to the new one. The only exception is that the electricity in your home is generated not by a nuclear plant, hydropower plant, or wind turbine but by the solar panels attached to your roof.
How to know an investment property you are interested in has a solar panel
Visual Inspection
One apparent tell-tale sign is the solar panels on the roof. As soon as you see them, ask your agent to find out more information about the system and the details of its financing.
A lien on the property title
If the seller had purchased a solar system by financing its cost with a lender or is leasing it from the solar energy provider, there will be a recorded lien against the property title. Such lien is often referred to as UCC-1. Technically, UCC-1 liens don’t make claims against the real property as a mortgage or mechanic lien would. They only encumber the solar system physically attached to the structure. For example, if a mortgage lender forecloses on the home, the UCC-1 lien would prohibit the lender from taking ownership of the system.
However, for all practical purposes, they must be handled as all other liens against the property. The seller needs to provide a clean title devoid of any title defects. That means that all existing liens must be removed before the transfer of ownership or paid at settlement.
Real Estate Investor’s Steps to Smooth Transaction Involving Solar Systems
Request and Review Existing Solar System Contracts
As a real estate investor, it’s essential to understand whether the solar system installed on the property of your interest is owned outright, financed with a loan, or leased. This information is not public and cannot be easily verified by your agent, title company, or lender. It can only be requested and shared with you by a seller. Fortunately, there are systems that make sharing such information easy. Typically, the seller contacts their solar company and initiates the transfer of the solar contract. The solar company sends all the pertinent information, including terms, conditions, and pricing, to the buyer, who can review, approve or decline it.
If the Seller Financed the Solar System Purchase and You Are Willing to Assume Their Payments, Make Sure You Qualify
As we discussed above, the assumption of the loan is not guaranteed and not easy. We’ve recently had a transaction where the sellers and the real estate agents communicated that a solar system loan can only be assumed in a personal name. Since the contract was about to be signed in the name of our borrower’s LLC, it presented a hurdle. Can we potentially switch the entire transaction to a personal name? Alternatively, can a property be bought in an LLC’s name, but the solar system loan issued to the new owner under his personal name?
We got clarity only when we contacted the solar system financing company directly. All these personal name / LLC configurations were a moot point since the real obstacle was that this particular solar system financing was strictly for primary residences. A great challenge to the property listed as “sold as is” and “investor special.”
Allow Time for UCC-1 Liens to Be Removed From the Title
For practical purposes, the UCC-1 liens are handled as any other cloud on the title: they must be removed before the purchase occurs. Different solar system companies might have different procedures for handling their liens when it comes to real estate transfers. It’s our understanding that some of them remove them for closing and then place them right back, while others use an assignment mechanism that keeps them on the title. Your title company will handle those nuances. What you need to know is that clearing these liens off the title might take extra time.
Technically, delivering a clear, marketable title is the seller’s responsibility. If your transaction is delayed because of a UCC-1 lien, the seller cannot rescind the contract or pressure you to sign an extension that you find unreasonable. In fact, it puts you in the driving seat. Settlement delays due to title defects can be used to negotiate lower prices and more generous seller’s help. Talk to your real estate agent about how to best leverage such situations.
Take a Lead on Investigating the Solar System Arrangement
Solar systems are a relatively new element of real estate transactions. As such, many real estate agents, title companies, and lenders are not aware of how they can potentially impact a real estate transaction, especially when a property is distressed and is being purchased with a hard money loan. If your real estate agent had only one transaction where the solar system transfer was uneventful, she could simply assume that all solar contracts can be transferred simply and easily. We now know that solar energy contracts come in a multitude of forms and shapes, each affecting the real estate transaction differently. This is why you, as a real estate investor, should take the lead in understanding the type of arrangement between the solar system provider and the current owner and how it will impact both your purchase and the future resale of your investment property.
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