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Think that Former Grow-Op is a Deal? Think Again.

General Tim Hill, MBA 13 Nov

Whenever I get a call from a Real Estate Agent or client asking me about obtaining mortgage financing for a former grow-op the first thought that comes to my head is, “Why would anyone want to buy a former grow-op?”. This blog post was written not only to explain the process of obtaining a mortgage for a former grow-op, but also to present some opinions on why you shouldn’t.

How will I know the property I’m buying is a former grow-op?

In British Columbia, the property disclosure and/or MLS® listing will indicate the property has been a former grow-op. Not all provinces in Canada require a property disclosure. Use a Real Estate Agent who can research the property and help find out if it was a former grow-op.

Where can I get a mortgage for a former grow-op?

The truth is, not very many places. This is part of the reason I always encourage clients to avoid buying a former grow-op.

Over the past few years the majority of lenders in Canada no longer finance former grow-ops. There’s a good chance that if you walk into your local bank branch they’ll turn you away. There is only a handful of lenders left that will even consider lending on a former grow-op and for the most part are made up of local Credit Unions.

Since there are fewer mortgage financing options for a former grow-op, be prepared to potentially pay higher rates at origination and renewal. Make sure you thoroughly review the terms & conditions of the mortgage and make sure they fit with your current and long-term goals for the property.

While you might be getting a “deal” on the purchase price of a former grow-op, you may find it ends up costing you more in the long run since you are pigeon-holed into one lender.

When will a lender loan on a former grow-op?

Lenders will only provide financing to a former grow-op if it has been fully remediated. In British Columbia whenever a property disclosure and/or MLS® listing indicates that a home has been declared a grow-op, lenders will require a satisfactory Phase 1 Environmental Assessment and a re-issued occupancy permit by the applicable municipality.

If you are thinking of purchasing a former grow-op, the listing Real Estate Agent should have both on hand. Ask to see them. Without both a satisfactory Phase 1 Environmental Assessment and occupancy permit in place you will not get a mortgage.

How does buying a former grow-op affect value?

In this video Calgary Real Estate Agent Kelley Skar explains how purchasing a former grow-op will affect value of your home should you decide to sell. Since former grow-ops were once a hazard to the surrounding area they can contribute to a decline of the market value of the property.

Kelley mentions in the video that the home doesn’t need to be disclosed as a former grow-op. While this is the case in certain provinces in Canada, in British Columbia sellers are required to complete a property disclosure and this information is fully disclosed so all potential buyers will know it is a former grow-op.

Since a former grow-op is stigmatized, you will find less buyers interested in the property in the first place. Something else to consider is that it will be more difficult to find a buyer for your property since many people want to port their mortgage when they are purchasing a new home. There’s a good chance that these potential buyers can’t port their mortgage to a grow-op since their lender won’t finance them.

Should I have other concerns when buying a former grow-op?

Absolutely! Since the property was once used for criminal activity you need to aware that your property may still be viewed as such by other criminals, and you may be more susceptible to home invasions and break & enters.

Still want to buy a former grow-op?

Hopefully you will give it a second thought after reading this blog post, but if you are still wanting to buy a former grow-op, get in touch with me and we can discuss further. I can make sure you are pre-approved at a lender that finances former grow-ops and get you in touch with a Real Estate Agent that has experience with these types of properties.

Update: February 12th, 2013

After publishing this post I was contacted by Patrick Johnstone, an Environmental Geoscientist experienced in managing contaminated sites issues in British Columbia. Patrick is also a New Westminster resident and you can find him on Twitter (@NWimby) and his blog over at NWIMBY (New Westminster In My Back Yard).

His comment offers a far more technical insight into buying a former grow-op so I have posted it below.

The production of illicit drugs (grow-up, meth lab, etc.) is considered a “Schedule 2 Activity” under the BC Contaminated Sites Regulation (“BC-CSR”). This means that any property where these activities took place are subject to a bunch of screening measures that would normally only be applied on commercial or industrial properties where activities “likely to cause contamination” took place. So the house is now in a classification with gas stations, machine shops, coal mines, etc. Illegal grow ops and meth labs are one of the very few “Schedule 2 Activities” that commonly take place on residential-zoned property, and therefore the only time most residential landowners would encounter the BC-CSR.

From a Provincial legislation side, if you go to the City to request a Demolition Permit (or a Rezoning, Subdivision or Development permit) for a property where there has been Schedule 2 Activity, the City is required to get a Site Profile from you outlining the site history, and send that to the Ministry of Environment prior to issuing a permit. The Site Profile must be filled out by someone knowledgeable of the site history, and if the presence of a illicit drug operation was disclosed to you on the Property Disclosure form, you must relay this information forward (or risk defrauding the governmenta bad idea). At the very least, this is a 2-week inconvenience while the Ministry decides your property is no risk and releases the Permit. At the worst, the Ministry may “freeze” the permit, preventing the City from issuing any approvals until the property is cleaned up to the Ministry’s satisfaction.

The Phase 1 Environmental Site Assessment will not likely provide this assurance to the Ministry. The actual report required is a “Stage 1 Preliminary Site Assessment”which is a slightly expanded Phase 1 ESA that has all the bells and whistles required by the Provincial Regulation.

For an urban grow-op scenario, this report will cost anywhere between $1,500 and $3,000 depending on the Environmental Professional you hire and their thoroughness. Even this report is just a table-top survey of the property history with a site visit to assess conditions; it will not test for the presence of contamination.

If that report comes back saying there is no reason to suspect any environmental issues, the homeowner may send that to the Ministry, and they “may” release your permits. If, however, this report suggests that there is evidence or a high probability that polluting substances were spilled in the soil, or a septic field exists where chemicals may have been dumped, or there is any other reason to suspect contamination (e.g., stressed vegetation, oil stains on a gravel patch, etc.), the Ministry would request a “Stage 2 PSI.” This stage involves drilling a couple of small holes in the yard, putting some soil in a bag and groundwater in jars to send off to the lab for analysis. Even if no contamination is found, you are lucky only paying $15,000 or more in investigation costs. If contamination is found (those gangsta guys poured their leftover glycol out the back door instead of depositing it in a regulated landfill!) you will be headed down a real rabbit hole. It can take tens or hundreds of thousands of dollars, and more than year, to complete investigations and perform the cleanup required to get permission from the Ministry to redevelop your land.

The only way to be sure your former-drug-house property is not going to cause you contamination issues down the road is not to have an “Phase 1 ESA” in hand, but a “Determination” letter from the Ministry stating that the site is not contaminated, or a “Certificate of Compliance” from the Ministry stating that the site has been cleaned up to the Ministry’s satisfaction, and no longer is considered contaminated. It is important to note that both of these Ministry documents arrive with a series of “Schedule B Conditions” which must be adhered to for the Determination/Certificate to be valid, and may reduce your enjoyment of your land.

This is just a little peek into the window of the BC Contaminated Sites Regulation. I would not suggest anyone get involved in purchasing a piece of Contaminated Land until they fully understand the CSR, or (much better) get the advice of a Qualified Environmental Professional to advise if/how they will need to interact with the Ministry in order to get their potentially-contaminated land cleaned up, or cleared of the legislative stigma of a “Contaminated Site.”