When a house with solar panels on the roof is put on the market, there are times when a buyer who was close to making an offer becomes less responsive after reviewing the solar contract. This is a scene that appears more often than expected in Southern California listings.

If the panels were purchased outright, the situation is straightforward. The problem arises with homes that have solar installed through a lease or PPA (Power Purchase Agreement). In this case, the owner of the panels is not the homeowner but the solar company.

From the buyer's perspective, purchasing the home means also taking over someone else's equipment and a long-term contract. The reasons for hesitation can be summarized into four main points.

The first is that the buyer must pass a separate credit check from the solar company. To take over the lease, most companies require a credit assessment.

The criteria for passing vary by contract with the company. For a buyer who has just barely received mortgage approval, the additional credit check can be a burden.

Moreover, this assessment usually occurs in the latter part of the transaction. The process involves exchanging documents only after the lender's approval, so if there are issues here, the entire timeline can be disrupted.

The second reason is that the lease payments are counted as debt during the mortgage assessment. Fannie Mae guidelines generally require that lease payments be included in the DTI (debt-to-income ratio).

There are exceptions. If it's a PPA where only the actual electricity used is paid for, that portion can be excluded from the DTI. However, if there is a non-electricity portion mixed in, that amount will be calculated as debt.

In today's high-interest environment, even a few percentage points difference in DTI can affect the approval amount. This is a realistic reason why buyers may feel burdened by the monthly solar costs.

The third reason is the appraisal value. Under the same Fannie Mae guidelines, leased or third-party owned panels are not included in the home's appraisal value.

Sellers may easily think that the solar installation has increased the home's value, but leased panels are not considered part of the home for appraisal purposes. This gap often becomes evident during price negotiations.

The fourth reason is the contract terms themselves. Lease agreements often include clauses for annual payment increases.

Industry comparison data frequently mention increase rates ranging from 1.9% to 2.9% per year. When compounded over a period of more than 20 years, the later payments can differ significantly from the initial ones.

The longer the remaining term and the more increase clauses there are, the more time buyers will spend calculating the numbers. I would also carefully review those figures.

There can also be issues on the escrow side. Solar companies typically register a document called UCC-1 to publicly declare ownership of the equipment.

This document is generally explained as not being a lien against the home itself. However, if it appears as an exception item on the preliminary title report, lenders or title companies may require clarification.

To resolve this, approval or release documents from the solar company are needed, and the speed of processing depends on the company's circumstances. This is why it is advised to set a generous closing date or include an extension clause.

In California, there is also the variable of net metering. Systems that applied for grid connection after April 15, 2023, are subject to the net billing rate (commonly NEM 3.0), which significantly reduces the credits received when selling excess electricity compared to before.

Systems connected prior to that maintain the existing net metering conditions for 20 years from the connection approval date. For buyers, knowing which category their home system falls into is quite important information.

In 2025, a controversial bill, AB 942, was proposed that would transfer the current rate plan to new owners when a home is sold. However, in July of that year, the state senate energy committee voted 9 to 4 to remove that provision.

So, what should sellers prepare? The first thing to do is to pull out the contract and check the remaining term, monthly payments, increase rates, transfer conditions, and early repayment amounts.

Depending on the contract, there may also be clauses requiring advance notice for a certain period before the transfer. It is safer to obtain written confirmation of the transfer process and buyout amount from the solar company before listing.

There are usually three options. The buyer can take over the lease as is, the seller can settle the remaining balance and transfer it, or the cost can be adjusted in the price or credits.

If in the SCE area, it's also good to prepare the last year's electricity bill history and generation records. Showing buyers the actual savings in numbers is more persuasive than explaining it verbally.

If the contract terms are complex or ambiguous, it's best to directly confirm with the solar company, escrow, or title company. Also, ask your listing agent if they have experience with solar properties.

In my opinion, hiding lease solar details is detrimental. Properties that disclose contract details from the start and clarify the buyout amount are less likely to be heavily discounted in negotiations.

The issue is not with solar itself, but with the unorganized contracts. Preparing documents a few months before listing the home is the most reliable preparation.