Understanding the Pearl Solar Equity Calculator as a Sales Tool

Pearl Certification’s Solar Equity Calculator is the industry's first tool to calculate discounted cash flow using certified contractor data, National Renewable Energy Laboratory (NREL) software to calculate solar production numbers, and an API to Freddie Mac’s 30-year mortgage rate. The Pearl Solar Equity Calculator^SM is designed to equip homeowners, contractors, and appraisers with the resources they need to accurately capture the value of a photovoltaic (PV) investment.

As the only tool to account for such a range of factors, the Pearl Solar Equity Calculator is a game changer when it comes to showing the value of a PV system to homeowners. However, in order to leverage this tool accurately and appropriately, we need to understand the methodology used to calculate the results.

Calculating PV System Value

First, we should levelset on the intended use of the Pearl Solar Equity Calculator, which is to provide homeowners with the documentation they need to ensure their PV system receives the appropriate equity value when they sell or refinance their home. Appraisers hold the keys to the valuation kingdom; they assign value to a home and its included assets — including a PV system. There are three methods an appraiser typically uses in the valuation of a home:

1. Comparables: In this most commonly used method, appraisers assess the final sales price of properties with characteristics similar to the property being evaluated. Per Fannie Mae, appraisers are expected to consider all factors that affect value when conducting their comparable analysis. For example, if appraisers find that comparable properties with PV are selling for a premium, the appraiser can assign value to the PV system of the home being evaluated.
2. Cost Approach: Unlike comparables, the cost approach method does not depend on the active market to determine the cost of the property or its assets. Rather, the appraiser considers the cost of the land and the cost of construction, minus depreciation. For instance, an appraisal utilizing this approach would consider the cost to rebuild the PV system currently on the home, with the same or similar equipment and then subtract the estimated depreciation to assign an appropriate value.
3. Income-Based Approach (Discounted Cash Flow): The income-based approach values a PV system based on the calculated dollar value the PV system will generate from the day it is installed through the end of the power production warranty period. This approach looks at the total future cash flow benefits that the homeowner will receive from the PV system over its useful life and calculates what the value of those future benefits is at the moment in time when the calculation is performed. The Pearl Solar Equity Calculator uses this approach to estimate the amount of equity a PV system can bring a homeowner.

When Comparables Don’t Exist

Now that we have a better understanding of the methodology, why does Pearl utilize the discounted cash flow method? Great question! Appraisers can use any of the aforementioned methods to assign value to a home. With the comparables approach, the appraiser must take into account the sale price of recently sold, comparable homes in the same market. This method only works for homes with PV systems if comparable homes in the same market with a PV system have sold recently. If the appraiser sees that homes with PV are selling for more than similar homes without PV, they can use the Pearl Certification Report and the equity calculation in the report as a resource to help determine how much value the PV system adds to the home.

If PV is relatively new to the market or the appraiser cannot find comparable homes with PV that have sold recently, they can consider the discounted cash flow amount provided in the Pearl Certification Report as an alternative basis for assigning value to the PV system.

The Pearl Solar Equity Calculator provides homeowners with supporting documentation when advocating for an increase in equity value during their sales or refinance transaction. Alternatively, without this calculation, the homeowner would have little recourse if the appraiser fails to appropriately quantify the value of the PV system.

Explaining PV Value to Your Customers

Homeowners know that a PV system will cut down on their electric bill, but many overlook the value that a PV system adds to their home. Studies have consistently shown that homes with solar sell for more than comparable homes without them. Be sure to communicate to your homeowners that high-performing features, such as solar, do indeed increase a home's value, when documented correctly.

If the high-performing features are not documented correctly, the homeowner could lose money on their investment. Simply put, the high-performing features need to be made visible and effectively presented so appraisers and lenders can properly value the home. The Pearl Solar Equity Calculator provides that documentation for a PV system.

Sales Price Versus Equity Valuation

A common question we receive from our elite Pearl Network Contractors is, “Why is the solar equity valuation different from the sales price of the system?” In short, the sales price of the PV system has no influence on the equity valuation. As discussed earlier, the equity calculator utilizes the income-based approach, which is largely dependent on the homeowner’s current electricity rates. It does not include the added costs associated with financing the project, for example. When generating an equity valuation, it is crucial that you utilize the homeowner’s base/generation electric rate, rather than the “all-in” electric rate. Doing so will ensure that we present an accurate valuation estimate to be used during the appraisal process.

Regardless of the dollar amount calculated by the Pearl Solar Equity Calculator, your customers are receiving an unmatched value from you as an elite Pearl Network Contractor. Understanding and leveraging this very powerful tool will allow you to finish the kitchen-table conversation that your competitors simply cannot. Now go forth and give your homeowners the value they deserve!