My most popular prior post BY FAR was dealing with form MGO or Marijuana Grow Ops. There is a lot of possible profit and potential gain for those that can afford to buy, fix, and flip them, IF you know the required steps.

This video addresses what you need to do in ANY part of the country if you want bank financing to finance a past grow op. If you want private financing, these rules don’t apply, but most people would rather pay 3.5% over 10% privately. This video blog shows you what is needed. Enjoy!

Transcript of Video Blog:

Hi, everybody, Rowan Smith with the Mortgage Centre. My most commonly hit blog topic of all time, consistently, is talking about former marijuana grow operations. So I’m going to do another one that’s going to cover a little bit more detail.

For those of you that are not in the Vancouver market, perhaps you’re in the Toronto or Ontario market where they’re not used to dealing with these things, this can serve as a guide for how best to proceed to get the best financing rates for you and your clients.

So, a former marijuana grow operation. It doesn’t just have to have been currently a grow off of the prior owner; it could have been the owner before then or the owner before that. When you buy a property, if you’re using a realtor, there’s usually a disclosure statement or something where they ask, “Has the property ever been used as a former marijuana grow op?”

If it has, and it’s in B.C. anyway, that person has to declare that it has been used as such. And why? Because a lot of times that could compromise the value of the security, which is the home, for the bank.

A lot of banks, Scotia Bank for example, simply will not do a former marijuana grow op. It doesn’t matter if you have 50 percent or 65 percent down. They’re not interested in that business, they’ll get it elsewhere, and they’ll leave it for somebody else.

The more common credit unions are the ones that are doing them. There are a couple of the big banks that will, but they require different things such as environmentals. So if you’re looking to finance a former marijuana grow, here are the things you’re going to have to understand.

You will be required to get an appraisal of that property, guaranteed. Every bank’s going to ask for it. Number two, you’re going to have to provide some sort of environmental study confirming that the property is still fit for human habitation. Now, what that means is there are two types.

There are many types of environmentals, but the most common are a phase one, or it’s the level one, and that’s an air quality test. What they are looking for is mold. Make sure there’s no toxic mold in the property, because people can bleach walls and paint them white and Killz and other stuff to get rid and hide the fact that there was a grow up on the property.

So what they do is they take an air test where the grow op was in the house, they take an air test where they grow op was not in the house, and they do another test outside as a control. They look and make sure that there’s not a massive variance between levels of mold within the property and if it’s within the tolerable limits.

The second thing is some banks are going to want a phase two, where they actually take drywall samples and samples of materials to make sure that not only is the air clean, but there isn’t chemical leeching or other possible environmental problems. Banks have to keep an eye on the fact that the property that they’re financing could represent a future environmental liability to you, the buyer…

Hi everyone,

I get calls all the time about the great deal that clients have found on a former grow op (past marijuana grow op). While these deals often sounds great on the surface, there is a lot more to getting financing on them than on a typical property. Watch this video blog as it explains the various issues and concerns that may arise when trying to finance a former marijuana grow op:

Transcription of the Video Blog:

Hey everybody,  I want to talk to you today about past grow-ops. At the Mortgage Centre we’ve been taking a lot of calls. Given our area in BC, sooner or later, every house seems like it’s going to have been a former grow op.

So what do you need to do if you are thinking of buying one?

First, if you are looking at the price and thinking, “this is a fantastic deal!” There is probably a reason.

If you read the Property Condition Disclosure Statement, which is something the selling agent is to provide you, it’s a very long list of “Is the property connected to public sanitary? Is the property connected to sewage? Has it been a former grow op? Has it been a former meth lab?” All these type of questions are on the property condition disclosure statement. The selling realtor will give it to you, and you should look on there and see what they’ve said.

If they’ve said no (to it being a former grow op) but you go there and the place has been completely gutted and there is no tenant, then it might be time to ask some questions and ask the inspector to have a look around if he has the time.

But if they do disclose it, and they tell you “yes it was a former grow op”, BUT the grow op was confined to the shed, or confined to one room in the basement to any bank looking at that:

1. There is now way to prove it!
2. Who cares where it was confined to?

The type of damage the banks are concerned with are:

1. Structural
2. Chemical
3. Air quality

So how do you make the banks happy?

First off, a lot of banks just won’t do it. Period.  A former grow op that says it? It dies immediately.  An example of this is Scotiabank. On the flip side of that, some of the smaller credit unions: Westminster, Coast Capital, and these guys, they WILL do former grow ops, but they’re going to insist on a slightly higher level of underwriting. So what I mean by that is they are going to look much harder at that property to make sure it is still solid. For certain, they are going to want a full appraisal. That’s number one. Number two, some of them, or most of them, are going to want a phase one environmental study. It’s simply air quality testing. So what they do is they go in, they take a sample of the air from the outside, a sample of the air from the room that had no grow op in it, and a sample from the air from the room that had the grow op. As long as their isn’t mould or contaminants found in those samples, and typically there isn’t, unless it was a massive operation where they smacked out the walls, and had chemicals running all over the place and had high humidity and water mould running all over the place, then if that’s not the case, and if it was just confined to one room; especially if it was confined to the shed, or confined to one single room, then it’s not going to be a problem.

The thing is: YOU are going to have to pay for it. The buyer. And it’s probably going to take you, you know, five days to get it put together.

So if you are looking to buy former grow op, first, get an extended subject removal period. You are going to need more time to get the paperwork put together. If it’s a good deal, there is probably a good reason for it.

Second, know which lender you are dealing with. Don’t expect to just walk into your bank and get approved for it. Some of the other banks, CIBC for example, will require a phase two environmental which includes drywall testing and material testing to make sure that their isn’t within the walls, within the ceiling, and all this. It’s much more extensive and takes generally ten days to get the results back. A couple places will do it faster if you pay more, but NOBODY does it overnight.

So, if you’re thinking of buying a former grow op, come talk to me. It’s Rowan Smith from the Mortgage Centre. I’ve done these a ton of times, and I have a lot of experience to help guide you and avoid the heartache of finding something that is so cheap and so perfect, but you can’t get a mortgage against it.

Until next time…

Past Marijuana Grow Ops

This article is in no way to be construed as legal advice expressely or implied. The information contained herein is the product of personal experience. You must get independent legal advice if you wish to proceed in the business of buying and/or selling a former marijuana grow operation.

Marijuana grow operations (MGO) are an increasing problem in the Vancouver (and Fraser Valley) area. The Vancouver Police estimated at one point in 2005 that there were between 10,000 and 14,000 active MGOs going on at any one time in the locale. As a means of combating MGOs, various cities have taken different measures. For example, various ‘Green Squads’ have been set up with the mandate of looking into things reported by concerned citizens, tips, and official reports and complaints.

You may be thinking that it is a profitable business to get into by buying homes that were previously MGOs, fixing them up, and reselling them. However, the process is far more complicated than this, and could lead to significant legal ramifications that are currently unclear in this business climate.

What makes it so difficult? Consider some of these facts: A marijuana grow operation will often alter the wiring and power in a house to help power the enormous number of massive bulbs that aid in the growing of the plants. Many larger operations will use 15 to 20 (or more) large bulbs rated at 1000 – 1500 watts each. This can result in a power requirement of 30,000 to 50,000 watts. As a result, massive use of power can result in power theft or supply alteration. The most common thing that an operator will do is to use ballasts to boost the power coming into a house. Normally, around 10,000 watts will come into a house, and using ballasts, it can be boosted to nearly any requirement. Of course, these alterations are rarely done ‘to code’ using proper equipment and techniques, and as a result, significantly increase the risk of fire and remediation. A recent study found that MGOs are 24 times as likely to catch fire as a normal residence due to the poor wiring, abundance of oxygen and nitrogen that result from the fertilizers, and modifications done to the home.

Another major problem is that of humidity. Normal humidity levels are around 30% – 50%. However, ideal growing environments for MGOs will require around 80% humidity. Increasing humidity in a home covered in drywall inside is not a science. Little protection is afforded the walls and structures aside from the negligible effect of vapour barriers behind the walls. Oftentimes, the humidity will exceed 80% and could climb as high as 90% resulting in massive growth of mould and mildew (including toxic black mould).

“Remediation” is the process whereby a contractor goes into a past MGO and removes all the apparatus and fixes up the home. There is currently no data available as to the long term effects of mould or toxic black mould on humans, but it should be noted that the consequences are almost surely bad.

Furthermore, as there are no standards for remediation, who can properly say whether a house has been cleaned out properly or if it presents some health risk? There is no way to answer these questions! This could pose the potential ‘home grown’ restoration expert substantial potential liability. There is no way of putting a dollar figure on this potential liability because no one knows the effects that past MGO mould and other chemicals have on people. The data simply does not exist! As a result, this type of investment poses a substantial risk and lenders are increasingly hesitant (if not totally against) lending against a property that was a past MGO.

RISKS OF REMEDIATION

As discussed above, the effects of exposure to mould are not yet known. When cleaning out a former MGO, contractors and/or the owner are likely exposed to the mould in great quantities. Furthermore, the ballasts often contain power for long periods of time once the power to the home has been cut off, and therefore, the remediation must be done in a very specific and technical manner by trained professionals. Taking apart the electrical apparatus within the house is often a delicate and dangerous business. Lastly, the massive use of chemicals such as fertilizers, insecticides, and bleach (to hide and kill black mould), results in an environment that is very dangerous to work in.

In summary, the risks are
1. Exposure to toxic mould which carries an unknown risk
2. Exposure to vast amounts of chemicals from fertilizers and insecticides
3. Exposure to a dangerous electrical apparatus that contains power long after the supply of power is cut
4. Potential exposure to booby traps set by the prior owners to keep out competitors

The risk doesn’t just end with the physical damage or injury. The potential for long term financial damage is also acute. For example, many major banks are so leery of lending against these properties, due to the host of unknown factors, that they will not even entertain the concept. For example, Genworth will currently not insure any mortgage on a house it knows to be a past MGO. For a more concrete lender example, having spoken with Scotiabank, they will not entertain the idea of lending against a property that is a former MGO, and they are surely not the only bank that holds this dim view of the idea.

There are some lenders that WILL lend against a former MGO, but they will often place many conditions on any such financing arrangement.

TIPS FOR SUCCESS
The purpose of this report is not to say that this isn’t a very profitable business for you in which you cannot make a lot of money. It is profitable, and you can make a lot of money. If you decide to go ahead with the project despite all these warnings, there are a few things to keep in mind:

1. Disclose, disclose, disclose! Do not attempt to hide the fact that the property was a past MGO. Honesty is always the best policy. You do not need the legal problems that this will bring your way in the long run. When your realtor lists your property they legally have to disclose if it was a past MGO. Failing to do so could result in legal challenges if it later becomes known.

2. Do not try to escape scrutiny by doing a private, non-MLS sale, with a quick close. Lenders (and the authorities) see this all the time, and it does not fool them. They are aware of what is going on. In fact, private sales with a quick close and no subjects are often subjected to the most scrutiny as it clearly appears that something is being withheld or hidden. As a result, you can expect extra investigation by the potential lender.

3. Do not try to avoid disclosure requirements by putting an addendum onto the Contract of Purchase and Sale and keeping the clear truth out of the main form of the contract. Although this might avoid liability for the buyer and seller (and I say might), it will not prevent the bank from calling the loan and demanding payment immediately if they catch wind of the deception (and/or legal charges).

4. Try to purchase the house in cash and finance the project yourself without the use of a mortgage. If you need a mortgage on the subject property, you should not be in this game. If you cannot arrange financing any other way, talk to a broker about the possibilities of using other forms of financing or structuring the deal so that everything is done above board and legally.

5. Do not try to get a quick close if you are doing this project! Make sure the closing date is at least 2 months down the road to allow for the bank to get an environmental analysis done on the property (if they ask for it). Doing otherwise is a risk that you must be willing to accept yourself. I strongly recommend against it.

6. Disclose, disclose, disclose!!! It cannot be stressed enough. Deception will land you in court or bankruptcy proceedings!

If you DO decide to move forward keep these couple of points in mind:

1. You will be required to get an air quality analysis done before any bank will approve you. This takes from 72 hours to several days depending on the demand, and will cost up to $1,000 or more if the lender demands a “phase 2″ environmental analysis. ALL lenders demand some form of environmental analysis or air quality analysis, so build this into your timeline and your budget.

2. You will be required to get a full appraisal of the property at a cost of around $250 with photos of the inside of the property so the lender is assured of the quality of the property they are taking as security.

3. Once the work is completed, you still need to disclose to potential buyers that it was a past grow-op, although you can mitigate the fear this causes by providing air quality and environmental analysis documentation UP FRONT when the property is listed so that potential buyers are put at ease that all is legal and above board.

IN SUMMARY
This articleis not to be construed as legal advice. I am not a lawyer, nor do I represent that I know the state of the law. However, I am a Mortgage Specialist, and I can tell you what the banks will and will not accept in the realm of financing a past MGO as I have been involved in countless past grow-op transactions (or attempted transactions) and can assist you in navigating these waters.