Is it going to be a problem for a loan if the appraiser sees pot growing at a house? Well, it depends. Like many things in real estate, it’s not always a simple answer. Here are some things to consider.
Different opinions: There isn’t one definitive opinion appraisers have on how to handle cannabis, so seeing pot growing at a home can potentially be dealt with in different ways depending on the appraiser and the lender.
Not an agricultural specialist: Many appraisers don’t want to be put in the position of identifying plants, so some say, “I can’t tell if it’s Ficus or cannabis. I’m not an agricultural specialist. I don’t need to mention roses or peaches, so why would I call attention to a different plant?” Of course to be fair, roses and peaches aren’t federally illegal, so this might not be a perfect comparison.
It’s personal property: Some appraisers say, “It’s personal property, and it’s not my job to discuss personal items belonging to a seller or Borrower. I wouldn’t mention cottage cheese in the fridge or a Lambo‘ in the garage, so why would I mention a specific plant?”
Not a code enforcement officer: An appraiser in residential real estate shouldn’t be expected to confirm legality or count plants. Appraisers are not there to tattle, judge, or explain code.
One plant vs. farm: Let’s be real. There’s a difference between having a few plants for personal use and a full-fledged cartel “grow house.” Remember, it is never legal to use a residential house for a commercial cannabis operation. Yet here’s an honest question. How many plants are acceptable for a federally-backed loan? Is one too many? How about five, ten, or fifty? Ask a loan officer and see if you can get a definitive answer.
Bouncing the ball: When seeing “alternative agriculture,” an appraiser might email a photo to a lender client and say, “Hey, I saw some plants at the property. How would you like for me to handle this?” The appraiser in this case is bouncing the ball of liability to the client and allowing the lender to give direction. It is the lender’s decision and loan anyway, right? Some lenders might choose not to do the loan and other times appraisers might be asked to blur photos that clearly show a certain type of plant growing. In other cases lenders have asked for plants to be removed, so they might instruct the appraiser to make the value subject to removal of plants. The reality is most lenders have been silent about cannabis so far, but some smaller banks have been clear they won’t do loans with cannabis on site.
Would the loan have closed?: Here’s a question running through my mind. If I would have included a photo in my appraisal of cannabis growing somewhere on the parcel or in the house, would the loan have closed? Even if I personally think it’s no big deal to grow, if a loan only closes because I chose to ignore something that I knew would (or could) be an issue for a client, is that more liability for me as an appraiser? I know, it sounds like I’m overthinking the issue, but I’m actually doing critical thinking. This isn’t a statement on how appraisers should think. I’m only saying it’s a viable question to ponder in the midst of an emerging market.
Closing Thoughts: Will it be an issue for the loan if there is cannabis growing? Honestly, there are many moving parts. I’m not trying to be frustrating, but it probably depends on the lender, how the appraiser handles it, and maybe even the number of plants. In short, this green issue is not black and white (sorry). Of course if there is obvious moisture or electrical damage associated with growing, then we can all agree that’s going to be a problem. The truth is some escrows with cannabis simply aren’t going to close since it’s an ambiguous world right now in lending due to the disconnect between federal and state law. Yet to be fair lots of people grow cannabis and they’re still getting loans. So clearly a few plants isn’t killing deals all the time either.
I hope that was interesting or helpful.
Questions: Did I miss something? Appraisers, how do you handle this? Lenders and Realtors, anything to add? I’d love to hear your take.
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Great post with lots of angles. I think most lenders would have a problem if the appraiser identifies pot growing due to conflicts between federal and state laws. I have seen at least one lender mention a policy on pot plants in the engagement and ask appraisers to stop working on the assignment and identify if they see pot growing. That puts the appraiser in an awkward position due to the reasons you stated and some appraisers might even feel unsafe to call out a potentially shady operation.
Thank you Gary. That is definitely an awkward situation and safety is a big deal. This is a very real issue facing appraisers in the field, and we can feel the effect of the disparity between federal and state law. I don’t like that appraisers are in this place right now of having to decide whether to mention something or not or even consider safety.
I think you are right about lenders having a problem with it. I actually taught a class last year on the emerging trend of cannabis in real estate, and a loan officer handed me a referral before class started. His company was not able to do a deal because the owner had a barn with “alternative agriculture”. In a room with 50+ real estate professionals including loan officers, nobody could take this on. It was a slam-dunk refinance ready to go.
SUCH a great post and great thoughts … you’re not overthinking, you’re voicing / writing the thoughts that many of us are thinking about … you hate to be the buzz kill, but nothing is worth the risk of our “known” not being disclosed. This isn’t high school, being the uncool kid, this is our livelihood and our business.
Thank you so much Heather. This is something I take seriously and I really want to think critically about it. With legalization we are bound to see more growing in homes too, so we have to think through this issue. The federal and state government being on opposite sides here is really putting real estate professionals in an awkward place.
If I may add my two cents worth, as a layman. If one were to set aside, for a moment, concerns regarding Federal and/or State laws, and look at purely the physical aspect of this case – unless the plants are in anyway causing deterioration to the improvement or other structures, wouldn’t it be the same case as a property having a pet odour issue? It should go away with the Seller, and hopefully so should the pot! Other than that, if the underwriters do have any reservations with cannabis being grown, then that should be made explicit in their Guidelines.
Hi Shree. I like your common sense approach. I think lending needs to be infused with common sense in coming time, and it would be fantastic to see lenders come up with some sort of guidelines. Something has to give eventually. Appraisers definitely need to look for any damage as you said too, and probably not overthink this issue. Though the interesting thing about growing these types of plants indoors is whether there is any damage that is not seen such as chemicals in the walls. This is where I would say the issue is different from pet odor or other types of plants. If not grown properly indoors, there can certainly be some damage to the home. The thing is local code in most places around Sacramento mandates indoor growth for recreational or medical use, so this is a reality we have in our marketplace that is likely only going to grow. Thus lenders are going to need to be more clear about what they expect appraisers to do.
Several years ago I appraised one of Cheech Marin’s (of “Cheech N Chong” fame) properties in Malibu. On acreage, near the water – with pretty good growing conditions. I was a little disappointed not to see any “medicinal” plants. The house was a bit of a party palace with fully stocked bars but no sign of anything illicit. O well, still fun.
Ha, that’s great Mike. Thanks so much. Sounds like an amazing location. Acreage in Malibu near the water? All good things. 🙂
Ryan, all great points. And for those of us that aren’t in California there are still valuable things we can take away. For example, if it’s not pot or cannabis it could be something else questionable that needs further research or explanation. Also, this “emerging market” as you call it begs the question – What’s next? Will our state be the next to allow recreational marijuana use? Is there something else on the horizon coming that 20 years ago we would have never imagined? We need to be prepared to know how to handle these situations and provide proper disclosure and analysis.
Thanks Jacob. I appreciate you saying that. This issue might sound irrelevant to people in other states, though it’s wise to pay attention. Right now there are nine states where cannabis is legal (for both recreational and medicinal purposes). There are close to 30 states where medicinal marijuana is legal too. Whether others agree with this or not, we are seeing a legitimate trend. I’m not an advocate by any stretch either, but I’m absolutely paying attention to this market. For any onlookers, here is a recent map of where cannabis is legal. http://www.businessinsider.com/legal-marijuana-states-2018-1
You are right too about keeping our eyes open about something else. We do need to be prepared. Thanks again Jacob.
Nice job Ryan. I think the bigger potential problem is with Title Insurance. I spoke about this last month at our office meeting. Title companies have started adding verbiage to exceptions to their policies. This is exact verbiage from a title report received this week.
“Note 1: Notice: Please be aware that due to the conflict between federal and state laws concerning the cultivation, distribution, manufacture or sale of marijuana, the Company is not able to close or insure any transaction involving land that is associated with these activities.”
If title company wont insure, lender will not lend.
Greg, thank you sincerely for sharing. This fits perfectly with what I’m saying here. On a related noted, I understand if some in the real estate community take an approach that says, “Hey, this is personal property, so it’s not my business.” Yet title companies are not wanting touch these properties, so clearly it’s a big deal. I have seen this verbiage, but I do wonder what some of it means. Does this only involve cannabis planted in “land” as mentioned above? I don’t know how the word “land” is being used in this context, so it could be a synonym for the parcel or it could be technically talking about plants that are literally in the soil. Is there a cutoff for the number of plants? Is one plant too many? I’m open ears if anyone has insight. Thanks again Greg.
Hi,
I live in California. Our lender wouldn’t give us a loan on a property since Cannabis was growing on it when appraised. I said it’s not ours and is probably gone by now. They said it didn’t matter. Once it’s seen the feds won’t lend on it. The appraiser asked if he could take a pic of the plants. The owner said no. The appraiser then said it’s not for the appraisal. It’s for me. So she said ok. He used it. Then they have a room that used to be used for growing. It doesn’t have one plant growing in it. The lights are on the ground. He called it a marijuana processing room. Is their anything I can do to get the loan through ? We can get a different house. But we love this one. Thank you
Hi Todd. Thanks for reaching out. I appreciate it.
There is likely nothing you can do with this particular lender because the decision has been made. I’m assuming you are trying to buy this house (sounds like it). Anyway, if you want the house you’re probably going to have to use a different lender who is coming to the table without baggage from the past. Right now cannabis really freaks some lenders out and they literally won’t touch a property that has plants growing. I’ve heard similar things with title companies too.
The reality is there is no one black and white rule that applies to every lender unfortunately. We are living in gray times.
My advice? If you are buying this house, it’s probably going to be easier for the loan if cannabis is not on site. I am not saying to deliberately hide anything or commit fraud somehow. All I’m saying is appraisers for loans are asked to take photos of every room and seeing these types of plants is going to be a deal-killer for many lenders. So on a practical level if you want to obtain financing on this property it’s likely going to be an uphill battle with the presence of cannabis. So it’s probably best for there to be no evidence of cannabis or cannabis production – however that is worked out.
Let me know if you have any questions. Best wishes.
I live in Colorado, I just got denied on my refinance loan because of my home grown operation. I grow in my outdoor barn, in the barn I have a grow tent. I grow with LED lights and have a recirulation system with a filter for any odors. My wife was home when a couple came to do the appraisal. They were 45 min late which my wife said that was fine. The went through the house, then asked to she the barn which was locked. She opened it up which I would of as well. He took a picture of the front of tent, then acually turned on the grow lights which isn’t good for the plants. He opened the grow tent and took a picture of the bottom of the two plants. Then he went to the garage and asked if the access to the attic opened, “which my wife offered to move the car and allow him to look inside of the attic”. He denied and put on the reported the the attic access couldn’t open from an object on it’s way. Both of my kids are home, my wife goes out of her way to have them look at the attic, they denied and wrote on the appraisal that we had to get it fixed. I then get denied my loan from ROCKET MORTGAGE because of two plants. I would have no problem removing the grow tents if that was an option.
Should I find a new lender and remove the plants?
Hi Sean. I’m so sorry to hear that. I think your story perfectly highlights the uncertainty in lending. I’ve done quite a bit of speaking about the cannabis trend and I have asked loan officers to raise their hand if they can lend when cannabis is present. Sometimes they do raise their hands, but then I ask them to clarify how many plants is acceptable. How about 500? No way. What about 10? Or what about 1? Nobody EVER has has a definitive answer because there isn’t one. Thus there is always an element of uncertainty here because of that. While there are some lenders who might be able to get it done, if cannabis is present, it just might not happen. So should you move the plants? That’s up to you. But if you want a loan, it’s going to improve your chances if there are no plants present. I suppose the one redemptive factor here is mortgage rates may have gone down since your refinance, so maybe you can get a lower rate. Good luck Sean. Keep me posted if you have any follow-up questions.