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Managing Risks in Real Estate

The most number of consumer complaints, commission penalties, and license suspensions and revocations by far in most states, occur in the property management industry. Not that those property managers are being inefficient. It’s just that the business of property management is very transaction-intensive. Even as a typical agent might handle dozens of sale transactions every year, a typical property manager can tackle hundreds of smaller transactions.

The fact that they’re smaller doesn’t make such transactions less important, and it doesn’t lower the risk involved in doing them. If you’re a property manager, you’re dealing with an owner as you market and rent their property, collect and remit their rent, and handle practically all other aspects of property management, from implementing tenant rules to maintenance.

This means you’re transacting with owners and tenants, advertising agencies, repair guys, contractors, etc. Every one of these transactions bring some kind of risk into the business, especially those related to financial functions.
This makes risk management very important. The property’s economic survival can be threatened by a big disaster. Record-keeping plays a significant part, with any legal action taken by others being easily disputed by existing detailed records that contest their claims.
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A large component of risk management is determining risk opposite reward. Take, for example, a property with a swimming pool on it. The property manager and owner should balance the pool’s value with its risks. After a risk is identified, it should be addressed in one of three ways:
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Avoidance

The pool will be taken out because the cost of insurance or the risks involved are greater than the extra rental income.

Control

Retaining the pool is possible with the installation of a coded lock and fence to keep small kids out.

Risk Transfer

The most usual manner of dealing with risk is to buy insurance to transfer the risk to the insuring company. A good property manager plans for problems, keeps records of each activity, and keeps assessing these functions in order to determine if change is needed.

Documents and Email

In different states, you only need to maintain transaction records for half a year. It is best to keep them for much longer though, especially if you may do so digitally or electronically. Most probably, if any of the parties may have a claim, anyone who intends to sue you for something that happened six years and ten days ago will still have their document copies on hand. It’s a lot harder to plead your case without your own copies. Finally, when it comes to email, any court action that involves a federally guaranteed loan (almost all of our residential deals), can force you to produce emails connected to the transaction and communications with the client.