What you need to know about cannabis and real estate

With the legalization of cannabis that came into effect earlier this month, many people are wondering what this means for the residential real estate industry.

We asked three experts to weigh in with their thoughts on this controversial topic – Romana King, a personal finance writer, a real estate expert and speaker; Don Campbell, senior analyst with the Real Estate Investment Network; and Ryan DeLuca, Supervisor of Training and Compliance at the Calgary Real Estate Board.

Here is how they responded to some key questions:

What impact do you think the legalization of cannabis use will have for homeowners in the future?

King: The answer to this really depends on how far into the future you look. In the near-term, I think the legalization of cannabis is going to wreak a bit of havoc on the real estate industry. We still don’t know if mortgage lenders and insurers are open to changing their policies when it comes to homes used for grow-ops – and a grow-op used to be anytime a plant or more was found growing in a home. Quite often, the number of lenders and insurers willing to take on a former grow-op as part of their book of business was quite small; this meant that buyers of grow-ops often had to work with private or mono-lenders willing to take on more risk. Eventually, the number of lenders willing to take on former and current “within legal limit” grow-ops will increase, but for now, we’re in a bit of grey area.

Campbell: Cannabis smoking and production, just like other odors such as cigarette smoke, pets, uncleanliness, will impact the saleability of a property, which will then lead to having to sell it below market potential and in most cases take more days on market. Part of the inspection process from buyers will have to be a specific disclosure question of whether marijuana has been grown in the property and where specifically in the home it was.  

DeLuca: Right now we don’t know. There hasn’t been enough time that has passed for us to gather any statistics or notice any trends in terms of the complaints that are coming in. Anecdotally based on what other people in connected industries say – mortgages, insurance – they’re not expecting any massive shift in property values or a sudden increase in issues with properties.

Romana King

What impact will a home that has had a cannabis smoker in it have on its ability to sell?

King: Just like tobacco smell, pot smells are still not considered favourable to buyers, so any home with a pungent, or sweet, smell is sure to get a lower asking price than homes where smoke doesn’t permeate every room. The difference today is that pot smokers won’t be trying to hide their habit anymore.

DeLuca: Any time you’re smoking something that’s potentially a carcinogenic that could leave a smell in a home. When you have a heavy smoker or a heavy cannabis smoker, there’s the yellow stains on the wall. There may be some cosmetic damage caused to the property just from the smell of the smoke and it’s going to be up to a buyer if that hasn’t been repaired prior to listing a property. A buyer’s going to make a decision as to whether they want to buy that property or whether it’s worth the asking price considering they may have to do some remediation work to re-paint the walls and get that smell out of the house, tear out carpet, change floors, things like that.

Don Campbell

Same question but for those homeowners who are cultivating some plants?

King: Before the legalization of cannabis, growing pot in your house could prompt your insurance company to cancel or refuse payout on an insurance claim. That’s because insurance contracts are typically null and void if an “illegal” offence takes place. Now, homeowners don’t have to risk hiding their habit to protect their home. That said, I still anticipate a grey zone: A time period where insurance providers are slow to amend policy language and responses. Get caught with a claim during this “grey zone” and you could be in for a frustrating time.

Campbell: Be prepared that in the future, buyers will want a disclosure statement about if, and specifically where in the home, the cultivation took place – also to manage your expectations regarding the limiting factor it may provide for some buyers.

DeLuca: The legal recreational limit is four plants and there’s no restriction on the size of the plants and there’s no restriction on the number of times that plant can be harvested. Very few people are going to build significant hydroponic operations for four plants. It’s just not cost-effective for recreational use. That’s going to be a bigger issue when it comes to medical cannabis . . . You may have to have special ventilation to deal with damage from humidity. There’s going to be some alterations you may have to make as it relates to the amount of electricity you’re going to be using.

Do you think the value of a home will be impacted due to its location near a cannabis retail outlet?

King: Wow. This is the million-dollar question. In short, yes, but only because of the legal requirements for where those outlets are allowed to set up shop. For instance, cannabis stores need to be a certain distance from schools. We already know that proximity to schools — particularly well-regarded schools — drives up housing values. That means homes that are not in close proximity to schools won’t appreciate as aggressively and, if a cannabis store opens up, may see different retail behaviour in the area. Now, will cannabis stores impact values, we’re not quite sure, but the best litmus test will be how Markham, Ont. real estate values hold up compared to its neighbour, Metro Toronto. Markham has banned any cannabis store within its city boundaries. If real estate values start to escalate, then the market has spoken and it’s telling us that cannabis stores are bad for property values.

Campbell: Not any more than its proximity to traffic. That will be the main factor.

DeLuca: That’s going to be what we call a stigma meaning it’s going to depend on a purchaser’s individual perception of living in a neighbourhood where there is a retail location. Some people are going to care. Some people aren’t. The city is being really careful in terms of where they’re allowing these locations to pop up. So there’s restrictions in distances from schools and parks. So people who do have some sort of apprehension around living near a cannabis retail location can look for areas within a neighbourhood that are maybe farther away. But people have to remember that zoning bylaws can change at any time.

Anything else I didn’t ask you about that you would like to mention?

King: There’s been a lot of discussion about the impact of pot stores on neighbourhoods and property values. I think it’s important to understand that the impact isn’t just because it’s a pot store. Liquor stores are also bound by certain standards, and regulatory rules, and, on the whole, these retail outlets do not have a negative impact on property values. Other factors still have a much stronger impact on property values: such as proximity to transit, schools and community amenities. Just because cannabis is legal doesn’t mean buying a grow-op is a good idea, Houses were not built to support small or large scale horticulture businesses. The reason why grow-ops were frowned on by lenders wasn’t just because pot was illegal but because the business of growing pot can wreak serious havoc on a home’s structural foundation. Buyers need to be sure that any business – pot or otherwise – doesn’t damage the integrity of a home’s structure.

Campbell: We are, as a country, entering uncharted waters with these new rules. The impacts mentioned above are only the tip of the iceberg. The other impact on the market will be the currently hidden unintended consequences and we all need to be aware that there will be some.

DeLuca: Just the fact that someone is growing four plants does not automatically trigger a disclosure requirement from a seller. So a seller doesn’t have to volunteer information that they grew four cannabis plants. So if buyers are curious and they want to know, they need to ask the question. They can’t expect that the seller is going to volunteer the information.

 

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