That place where marijuana & real estate meet

Marijuana is on my mind. In recent weeks Californians voted to make recreational marijuana legal, and I can’t help but consider the impact it might have on real estate. Here are a few things I’ve been mulling over. Anything you’d add?

44200664 - cannabis leaves on old wooden background

1) Land Value: All of a sudden land that is ripe for marijuana growing is looking pretty attractive. I’m not talking about tiny postage stamp lots in subdivisions, but rather larger-sized parcels in outlying areas. The truth is many savvy land buyers have already been making their move on large parcels in surrounding areas to Sacramento, but there are going to be more opportunities out there. I saw one listing recently where an agent said, “Good for ‘income-producing crops'” (code for pot). For further reference, here is an article discussing a “green rush” in Yolo County (people setting up marijuana businesses). 

2) Home Experimentation: I expect to see more owners and renters trying to grow their own weed at home. Some will grow a few plants, but others will aim to start a business to make some money in an economy that still isn’t all that vibrant.

3) Commercial Vacancies & Rents: If California ends up being anything like Denver, which has nearly 4 million square feet of commercial space used for cannabis production, I’m guessing we’ll see more interest in industrial properties and higher rents in certain areas. Goodbye commercial vacancies. Here is an image from The Sacramento Bee to show all the locations where pot can be grown in Sacramento. Image created by Nathaniel Levine.

pot-cultivation-map-from-sacramento-bee-in-january-2016-story

4) Disclosures: Talking about marijuana in contracts, listings, and appraisals isn’t anything new in real estate, but my sense is if it becomes more common to see pot growing in homes, we’ll need to hone our skills and consider what disclosure needs to look like. By the way, could the smell of a nearby pot farm need to be disclosed? As an appraiser I’m concerned with the condition of the house. There is obviously a huge difference between a massive grow operation with hundreds or thousands of plants and a home owner with a few plants. What I’m going to be looking for is anything that might make an impact on value or a health and safety issue – exposed wiring, over loaded plug-ins, poor ventilation, mold, etc… I’m not there to nark or judge by any stretch, but only figure out the value (and discuss and photograph anything that impacts value).

weed-sign-in-portland-sacramento-appraisal-blog

5) Advertising: I took my family to Portland last week to enjoy Thanksgiving, and it was amazing to see how much advertising there was for pot (because it’s legal there). Everywhere I turned Downtown there was another weed billboard, A-frame sign, or a green cross (the symbol of a dispensary). Please don’t think I’m dissing Portland because I love the city and can’t wait to go back. I’m just saying we might expect to see the same thing in California when it comes to advertising. Can signs impact the feel of a city or neighborhood? Will there be more signs in certain areas than others? Time will tell.

6) Marijuana Branding: I’m waiting for more in the real estate community to go public with their MJ branding. Last month a Sacramento law firm announced its marijuana practice. Ironically one of the partners has the last name Kronick, which is oh so close to Chronic. Anyway, there is still available shelf space for weed branding such as “Marijuana Realtor”, “Cheebah Appraiser”, and “Mary Jane Lender.” I’m kidding. Sort of.

7) Loans on “Grow” Properties: Some lenders don’t want to lend on properties that are being used for marijuana growth (keep in mind this likely doesn’t mean just a few plants). Here is some direction from a certain bank I sometimes work for when it comes to this issue. This unnamed bank sent out a message to its appraisers regarding grow houses:

####### Bank is currently unable to lend on any property with marijuana grow operations. The marijuana industry is state regulated and ####### Bank is federally regulated. Therefore, we are not in a position to lend to borrowers with income from that source nor can we lend on properties with active marijuana grow rooms or facilities. 

If you encounter a property with an active marijuana grow operation, please take at least one descriptive photo, complete your inspection of the property then cease work on the file and immediately contact your ####### Bank Appraisal Coordinator. Please do not attempt to quote ####### Bank lending policy. We will take care of that and you will, of course, be compensated for the time you’ve already invested in the appraisal.

I hope that was interesting or helpful.

Questions: Anything to add? Did I miss something? What impact do you think the legalization of marijuana might have on real estate? If you are located in a state where marijuana has been legal, what advice do you have for Sacramento? I’d love to hear your take.

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Starbucks cups and price per sq ft

I was in line at Starbucks and then it hit me. The perfect analogy for price per sq ft in real estate. While ordering my Grande drip with no room, I began to wonder how much I was paying for each ounce. Maybe that means I’m a geek, but was I really getting the most bang for my buck to buy a Grande (medium)? Or should I go with a Venti (large)? Take a look at the image below to see how price per ounce works at Starbucks, and then let’s consider a real example of this principle in real estate.

Starbucks cups and real estate - by sacramento appraisal blog

Big Point: The larger the cup, the less you pay for each ounce of coffee. Or we could say it a different way. Smaller cups of coffee tend to cost more per ounce. This is interesting, but it’s not really surprising because it’s merely an example of economies of scale, right? We see this principle all the time when buying bigger or smaller items, yet it’s easy to ignore when it comes to housing. So let’s take a look at all residential home sales from last month in Sacramento County. Do you see a similarity with the coffee?

image purchased from 123rf by sacramento appraisal blog - price per sq ft example

Big Point: The larger the house, the less you tend to pay for each square foot. Or we could say it a different way. Smaller homes tend to have a higher price per sq ft compared to larger homes. This is a principle we see when looking at county-wide data, but it’s also something we tend to see by neighborhood (assuming we have enough data). Just like coffee costs less per ounce the more you buy, it tends to cost less per sq ft for the more house you buy. That’s the big idea.

Be a Great Explainer: I love this analogy. Maybe it’s partly because I’m a coffee fanboy, but in truth talking through price per sq ft is hands-down one of the most relevant conversations to master in real estate. I hope the next time the topic comes up with a client, maybe you’ll think about using Starbucks cups to explain how price per sq ft tends to work in a neighborhood. For a refresher post you can read 5 things to remember about using price per sq ft in real estate.

Question: What drink do you order at Starbucks?

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Can two separate lots be included in one appraisal?

Can an appraiser include two lots with separate parcel numbers in one appraisal? Maybe, maybe not. This might seem like a random issue that almost never comes up, but I’ve seen it twice very recently, and I just finished an appraisal like this. Thus it’s important to know how to navigate the issue when it does arise. I hope this helps give some context, and I welcome your comments below.

Scenario 1: NOT GONNA HAPPEN

John owns a 2200 sq ft home on a half-acre lot, and when he bought the house 10 years ago he also bought a one-acre lot next door so he could have extra space. Each lot has its own parcel number. Now John wants to sell, and he plans to sell both lots together to fetch a premium for having a 1.5 acre lot. Can he do that?

Answer: What John has are two separate lots. He can try to market both properties together, but an appraiser is not going to value them together. Why? Because the lots are not legally bound together. Since each lot can be sold, developed, and financed separately, they will also be appraised separately.

Lot 1 and 2 example B by Sacramento Appraisal Blog

Scenario 2: GONNA HAPPEN

Imagine Anna owns a 2000 sq ft home that technically has two lots that are being sold together. The main house has a lot of 0.50 acres, but there is also a lot at 0.40 acres that legally cannot be sold separately from the main parcel with the home on it. Years ago the neighborhood was subdivided, and this smaller 0.40 acre lot became landlocked. This smaller lot is not buildable, and it is even recorded in the legal description and the preliminary title report.

Answer: In this case it is legit for the appraiser to include both lots in the appraisal because the lots are legally bound together and together they present the highest and best use of the property. An appraiser would appraise this as a home with a 0.90 acre parcel. In short, since these lots belong together, they are sold together, and appraised together.

Lot 1 and 2 example by Sacramento Appraisal Blog

FYI: Fannie Mae Multiple Parcel Requirements (Seller’s Guide B2-3-04):

  • Each parcel must be conveyed in its entirety.
  • Parcels must be adjoined to the other, unless they comply with the following exception. Parcels that otherwise would be adjoined, but are divided by a road, are acceptable if the parcel without a residence is a non-buildable lot (for example, waterfront properties where the parcel without the residence provides access to the water). Evidence that the lot is non-buildable must be included in the loan file.
  • Each parcel must have the same basic zoning (for example, residential, agricultural).
  • The entire property may contain only one dwelling unit. Limited additional non-residential improvements, such as a garage, are acceptable. For example, the adjoining parcel may not have an additional dwelling unit. An improvement that has been built across lot lines is acceptable. For example, a home built across both parcels where the lot line runs under the home is acceptable.
  • The mortgage must be a valid first lien that covers each parcel.

Look Mom, CBS did another story with me: A couple weeks ago I wrote about gentrification in the Oak Park neighborhood. After reading my post, a reporter from CBS Sacramento reached out to do an interview. I feel very honored, so I wanted to share. Click the image to view the story.

cbs 13 - 2

I hope this was helpful.

Questions: Any thoughts, stories, or insight ? Agents, have you sold something like this? Appraisers, did I miss anything? I’d love to hear your take.

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The Twilight Bus in Galt: A Photo from the Field

One of funny things about real estate is I get to see what’s in style with kids these days. The posters on the walls of teenage rooms are like an education in pop culture. I constantly run into Justin Bieber, Miley Cyrus, and definitely characters from the Twilight series. Anyway, I came across a “Twilight Bus” while snapping comp photos in Galt a couple of days ago and this definitely caught my attention.

Oh the things I see. What do you think?