No Money Down Solar Leases From My Perspective.
Green Energy is not always Green Money.
The latest predator of residential homeowners are those peddling, no money down, solar leases. I get a few door to door solar sales representatives every month stating that they can reduce my electric bill by at least 75% with a no money down solar lease. Who does not want to go green, but at what cost?
We have all heard the term Predatory Lending, but there is no term of art for predatory leasing.
'Predatory Lending' Unscrupulous actions carried out by a lender to entice, induce and/or assist a borrower in taking a loan that carries high fees, a high interest rate, strips the borrower of equity in a security, or places the borrower in a lower credit rated loan to the benefit of the lender.
Why make points on an unlawful loan to a consumer to buy a product, when the government will pay you comparable incentives to legally lease them the same product? So what is the harm, green energy is good, right? Green energy is great, but leasing it may not be.
Let’s look at a real life example:
I recently had an agent representing a buyer who made a very fair offer on a home. The offer was accepted by the home owner, and the diligent buyer’s agent was doing the usual scramble to assist the buyers with their inspections and investigations. You would think that was the right thing for the agent to do, but we often forget that the standard California Residential Purchase Agreement (“RPA”) has Section 8(B)5 “Leased or Liened Items or Systems.” The RPA provides the seller with 7 days after the acceptance of the offer to disclose to the buyer any material facts known to the seller, including the presence of leased fixtures such as a solar system.
So on the sixth day, the diligent buyer’s agent received the Seller’s disclosures, and for the first time the seller’s agent disclosed that the solar system on the roof is leased, and that the seller expects the buyer to assume the lease in the sale.
Approximately two years prior, the seller signed a no money down lease to install solar panels that would produce approximately 75% of the homes electrical needs. The lease was for 20 years at a monthly payment of approximately $100, for a total lease amount of $28,000.00 with a final buyout provision of an additional $5,000.00. So the total cost of the solar system would be $33,000.00. Significantly, the lease has no discounts for early payment. To protect its interest in the solar system, the solar company filed what is called a UCC-1 lien with the county perfecting their ownership interest in the solar system.
What are the costs verses the benefits to this solar lease?
The lease itself states that the solar company is free to transfer its interest to anyone at any time, but not so for the homeowner. To sell the home, the homeowner would need to pay off the balance of the lease or find prospective buyer that is willing and able to transfer the lease into their name before taking ownership of the home.
So what is the problem?
The solar company requires a 700 plus credit score from the prospective buyer to transfer the lease. The credit requirement in itself eliminates a large number of potential buyers. Fortunately these buyers did have a credit score of greater than 700, but why would someone with a great credit rating take over an underwater lease on top of paying full value for the home?
So we investigated!
The cost of solar is going down every year. The cost of a brand new solar system that would exceed the electric usage of the home and therefore generate income for the homeowner by selling the excess electricity back to the grid would cost the new homeowner no more than $20,000.00. If a buyer did not have extra cash, but had great credit, they could just borrow some extra money and purchase a system outright.
Why own the solar system?
A leased solar system provides the buyer with minimal or no government credits or incentives.
A leased solar system cannot be included in the valuation of the home. Appraisers do not include a leased solar system in the home’s appraised value. However, the monthly cost of the lease is considered in the prospective buyer’s mortgage qualifications as it is a monthly expense which increases the buyer’s debt ratio and hence decreases his/her buying power.
So let’s look at the numbers in the lease.
The leased system currently saves the home owner about $120.00 per month in their electric bill, but the lease payment is approximately $100.00 per month. To recover the buyout cost of the $32,000.00 lease would therefore take the homeowner 22 years. So in 22 years the homeowner would actual start to save money on electricity, and at this point they would be the proud owner of a 22 year old solar system. How much is a 22 year old solar system worth? How much will it cost to remove a 22 year old solar system from your roof?
So why are companies pushing these, no money down, solar leases?
The same predatory business model has been around for a long time. This is the same basic business model that wreaked havoc in the mortgage backed securities market back in 2008. The solar company gets up front money for every solar system that they sign up, so a no money down lease option means more systems get sold. In the solar model the upfront monies come from government incentives. The solar companies insure the solar systems against loss and/or damages, so the solar company’s investment is protected, and after they have captured the upfront incentives they can sell the lease and you off to whomever they choose for the long term servicing. Until the lease is paid in full or an unwary buyer decides to assume the lease, the home is on lock down and can’t be sold.
The credit requirements to transfer the lease are often far greater than the initial requirements to provide the system, why?
The solar companies know the following facts;
- No one will want to assume an underwater lease.
- The home can’t be sold without satisfying or transferring the lease.
- The vast majority of homeowners do not keep a home for 20 years.
If they make it difficult to transfer the lease, such as by making it cost prohibitive combined with requiring a credit score above 700, the vast majority of consumers won’t qualify to transfer the lease and that means a large number of solar lease will be paid in order to sell certain homes with solar leases.
Even better, if solar prices keep dropping, no consumer will want take over an underwater solar lease and that means the majority of solar lease will be paid in full to sell the majority of homes with solar leases.
Armed with these facts, the solar companies know that the vast majority of their solar leases will be paid in full long before the maturity date of the leasing contract. So, no money down solar leases, means big money for solar companies at the expense of the unwary homeowner. Do your homework before you find yourself caught in a green energy dilemma!