Written by Bruce Jordan
It seems like no matter where you go, you are bound to see a rooftop sporting an impressive array of solar panels collecting those rays coming from the sun and converting them into electrical current. The story, of course, is electrical energy is fed back into the grid and the homeowner can look forward to years and years of reduced energy bills as a result of having gone green and installed the panels on the roof of the home. In some parts of the country, like Colorado, where the sun has a reputation for shining for much of the year, the use of solar panels has become prolific and very much common place.
In spite of the newfound popularity, homeowners, sellers, prospective buyers and their real estate agents would be well advised to exercise some caution when it comes to solar panel installations. They can, and often do, affect title and financing transactions, producing unanticipated outcomes for the parties involved.
In many cases, the company providing the solar panel installations is not receiving payment in full from the homeowner for the panels when installed on the rooftop. Instead, a lease arrangement is created which provides for many years of payments to cover the cost of the panel installation, sometimes as much as twenty years into the future. The outstanding payment obligation associated with the lease is then secured by a recorded financing statement or installment contract against the owner in the office of the County Clerk and Recorder. When that occurs, an encumberance comes into being, affecting the ability of the homeowner to convey title to his or her property.
Let’s assume a homeowner, who has entered into a solar lease arrangement, decides to sell the property a couple of years later, when there are eighteen years left on the lease term. With this continuing obligation, the secured lien creates a priority against any future activity, such that a new buyer might not be able to obtain a new first mortgage because the new lender will not be able to obtain a first mortgage position. The seller and buyer could then have several hurdles to navigate:
- One option would be to have either the seller or the buyer pay off the entire remaining balance due on that eighteen year leasehold — a prospect that neither had probably considered when they started the transaction.
- A second possibility might include an effort to have the holder of the lease agree to the assumption of the lease by the new buyer, and a subordination of the leasehold to the new deed of trust. Many leaseholders have minimum credit score requirements that will preclude the possibility of certain buyers being able to assume the outstanding lease.
- Assuming the holder of the lease will approve the assumption by the new buyer, some lenders have been known to require the consideration of the assumed lease payment in the debt-to-income calculation used to qualify the buyer for the mortgage financing. In such cases, the additional debt service may well push the buyer/borrower over the maximum debt ratios, resulting in denial of the loan.
The message of this bulletin is not that solar panels are a bad thing, or that houses with solar panels are to be avoided. Rather, it is important to recognize there are consequences that can flow from these sorts of arrangements which might not be readily apparent when people focus on the expected, advertised benefits of this green energy alternative. A good strategy would be to exercise caution and due diligence whether a homeowner is considering an initial installation or when a buyer and their real estate agent is contemplating an offer on a property with solar panels. It is a good time to make sure that all the necessary documentation is obtained and reviewed by competent professionals. Only after that review has been accomplished and a full understanding of the consequences has been obtained, should the parties consider proceeding.