Why we pull the permits and how we share them with clients

Here’s an annoying catch-22 in which we often find ourselves in the brokerage business: Obtaining permits for a client.

To understand why, you first need to understand how important it is to pull the permits on any building before buying it.

The idea of the due diligence process conducted during the contingency period is to understand and then mitigate risk in an acquisition. One of the biggest risks, and one which is usually impossible to mitigate, is the risk of buying a property with one or more un-permitted units.*

If you buy a property like this and LAHD busts you, you will likely have to pay the tenants $7,500-19,000 to move out, then spend a few thousand more ripping out the kitchen and bathroom in the un-permitted unit(s). Worst of all, you will no longer receive rent from that unit.

This is disastrous. For example, say you buy a 4plex with $2500 / month in rent from each unit (eg $120K / year) for $1.44MM (eg 12x GRM)… a reasonable deal. If one of your units is un-permitted, the deal looks like this: $1.44MM + (say) $20k to remove the unit = $1.46MM / $90k rent = 16.2x GRM. In other words, a dumpster fire.

To avoid this kind of catastrophe, you need to pull all the permits relating to your building during diligence and attempt to verify, among other things, the unit count.

So, here’s the problem: We have a general policy at our brokerage of pulling the permits for our buyers (though sometimes, for a variety of reasons, the clients pull them themselves). 99% of other brokerages do not do this, exposing their clients to enormous risk, but protecting themselves (because this is not widely understood to be the broker’s responsibility).

But pulling the permits carries its own risks for us. If we send over the permits received from the city in an email with the text “Here are all the permits on the property”, then we’re opening ourselves up to a major lawsuit if, in fact, the city did not provide us with ALL the permits, and one of the “missing” documents ends up causing problems.

So, in order to serve our clients’ interests and protect ourselves, we’re forced to send over the permits with squirrelly legalese like: “Here are all the permits the city gave us. Please note that this set of permits may not be comprehensive and you should conduct your own research at LADBS.”

As you know, I hate language like that, but it’s the only way to square this particular circle.

*Note that there are other, less-horrific-but-still-pretty-bad things that can happen if you don’t check the permits, like finding out some bedrooms / bathrooms are un-permitted.