Pot & Real Estate

If you were a fly on the wall in a room full of REALTORS® when the topic of marijuana & real estate came upthese are some of the things you would hear...

I had one, totally renovated, was raided 10 years back, full home inspection, air quality tests, even infrared imaging and not one A lender would provide a mortgage. Very pretty house, good quality reno. 
Even B lenders are declining mortgages on former grow ops, even if the property is completely re-mediated. I only know of one lender - other than private lenders- that will do a grow op at this point in time and they will put you through the ringer.
Legal is legal RIGHT? So tell that to my client who leased 2000 sq feet in an Industrial Mall to a legal grow op... RBC called his mortgage, only about a 40-50 % ltv but he had to come up with $600,000 to pay them out.

Soooooo, you can imagine my surprise when I read THIS article by another  REALTOR® suggesting it would be a good idea to steer clients towards purchasing former grow-ops because they can get a "deal" on them. But if you look at the real-life examples above,  it's an uphill battle. Sure, I've heard about the odd "unicorn" deal that actually goes through, but that would be the ultra ultimate in exceptions to the rule.

With the legalization of cannabis just a few short months away, it feels like there are still so many details to be ironed out, especially when it comes to understanding the potential fall-out on real estate.

When pot is involved, one of the biggest & most difficult issues to overcome is financing. Lenders are all about risk management, especially the "big 6" institutions who tend to take the position that they don't need to take on the less than desirable properties or mortgagees. They're looking for the cream of the crop & all the rest can look for alternative options...and don't let the door hit you on the way out!

When a live deal goes in front of a lender there are many things that they look at when deciding whether or not they're willing to lend on it - the buyers' financials, the house itself, the neighbourhood, their own internal policies - and if it's an insured mortgage then CMHC or Genworth have their own criteria that need to be met as well.

Stigma is the key concept to understand here.  A property can be "stigmatized" by any number of things....by being too close to something "undesirable", by having something undesirable happen in the house itself, like a violent act, or an illegal one, or even an environmental issue affecting the land that the house sits on.

I sold a property last year in an "emerging" neighbourhood in Central Oshawa. Great entry level home & it sold in multiple offers. The appraisal that the buyers' lender ordered had a LOT to say about the neighbourhood & treated it like a defect in the same way that they made note of some issues with the foundation. The lender felt that the neighbourhood was stigmatized & didn't want any part of it. Luckily for my seller clients, the buyers were able to get an "exception" from their lender & the financing went through & the house closed.

That was just a neighbourhood issue that needed an exception - lenders take a really hard line when it comes to former grow-op homes. These properties are stigmatized with a capital S! Re mediated or not, and even if it was rebuilt - yes you read that right, even if you tear the house down & rebuild it from the ground up - the stigma is attached to the address & can last forever when it comes to lending on that property. Also there is no Statute of Limitations on disclosure in Ontario so regardless of how many years have passed it always needs to be discussed if the property is being sold.

We need to deal with the bank rules on these places. I sold a "grow op" where the tenant was caught before any damages to home, all signed off on by municipality, required no remediation, but stigmatized, and banks wouldn't touch it.

The issue is, safe by who's guidelines? Until the big 6 agree it's also safe, home-growers might as well put money through the shredder. Same result. 

I think we can all understand the dangers to a home that has been used to grow pot in it. We hear about them on the news - police in hazmat suits bringing out hundreds or thousands of plants, electrical systems altered, mold, tons of damage to the interior etc. But what about the "little guy", the one who has a license to grow pot for medical purposes? They're getting caught up in this as well even though what they're doing is legal. Bottom line is, the lenders don't care.

I had a client who grew over 200 plants, did everything 100% by the book and when it came to selling he was SOL. Now, I haven't searched records, but if it hasn't happened yet, we will see a case where someone legally allowed to grow for medical purposes will challenge a bank on discrimination. An important side note for those worried about grow ops, you need to change the pre-printed clauses and remove "illegal" as for many growing or those who have grown in the past, it is 100% legal.

The banks take the stance that..Just because it is legal it doesn’t mean that I have to lend my money and accept a mortgage on it . Be careful advising your Clients , this is a new business with new legislation.

So there's the disconnect right there, in that last quote. Our various levels of government are famous now for not involving ALL the stake-holders in discussions around important legislation like this one. "Unintended Consequences" was the tagline for real estate in 2017 & perhaps will continue to be in 2018 as we see the impacts that stress-testing uninsured mortgages have on the real estate market & the faster than expected slow down of the economy. Until the big banks get involved in the discussion, look at changing their policies, that disconnect will continue & leave a lot of homeowners in big trouble.

More to come on this topic...stay tuned for Tenancy, Insurance & Valuation issues when it comes to Pot & Real Estate.

Have a fabulous day!