Keys for Managing Real Estate Risk
With great profits come great risks. Few industries know this better than the real estate industry. If you take the proper steps to prevent errors, satisfy your clients, and implement safeguards against legal claims, you will be able to maximize your revenue while managing risks at your real estate firm.
The key is creating and implementing a process for risk management. In any good risk reduction program, there are five steps:
- Identify
- Analyze
- Evaluate
- Treat
- Review
Real estate firms that follow thorough risk management procedures are more prepared to face risks and prevent them from escalating.
Identify Risks
Your errors & omissions (E&O) insurance coverage could be more expensive if you fail to identify or minimize your real estate firm’s risks.
Internal Risks
You and your employees should avoid the following business practices, which raise red flags and increase your likelihood of receiving a legal claim:
- Non-standard forms—Your local real estate board approves the language used in all real estate forms and contracts. If a relevant form exists, use it exactly as-is. Any changes will increase your risk of a lawsuit, because they may be misinterpreted as attempts to deceive.
- Casual advice—Your expertise is real estate, not law. Don’t give legal advice to your real estate clients and associates, even in casual conversation. Any claims you make during the course of your real estate interactions could implicate you if the client suffers a negative outcome after following your advice.
- Inconsistent record-keeping—Concrete evidence of all interactions and transactions is invaluable. Log the time, date, nature, and outcome of every client interaction in order to prove your innocence if any clients make a false claim.
- Failure to secure signatures—Make sure your clients sign off on all important documents. If they consent to the terms of your transactions, they cannot claim you deceived them or failed to inform them about potential risks.
External Risks
The sources of external risks are beyond your control, but you can still minimize their impact with accurate analysis and careful preparation. Make sure you take steps to protect yourself from the following external risks:
- Unhappy clients—Real estate transactions are business as usual for you, but they’re major events in your clients’ personal and professional lives. If you don’t make a positive impression on everyone who works with you, it will be easier for your clients to blame you for disappointing outcomes and unexpected expenses.
- Unlicensed and uninsured associates—Before you recommend an inspector, surveyor, contractor, or lawyer, make sure they have current professional licenses and their own E&O insurance coverage. If they don’t, you may become financially responsible for any mistakes they make.
- Poor construction or property management—Property owners face additional real estate risks, and some of them may find a way to blame you. Installation errors, insufficient maintenance or security staff, inadequate fire and carbon monoxide protection, and other problems could cause issues for you months or years after your sale is completed.
- Economic fluctuations—It’s not your responsibility to anticipate market changes before they occur. However, your clients are more likely to file claims if their property unexpectedly loses value shortly after the sale. Keep this in mind for your own risk assessment purposes. Invest in professional journal subscriptions, follow real estate news, and use your own experiences to make informed predictions.
Analyze Risks
Every real estate firm faces unique types of risk. Enforce a concrete risk analysis strategy to quantify the following elements of each potential risk:
- Likelihood that a risk will become a reality
- Existence and enforcement of official policies to reduce risks
- Potential financial consequences of each risk
- Level of reach risk
Evaluate Risks
After you have completed your analysis, weigh your risks against your rewards. Are risky activities (such as selling debilitated properties or working with new contractors) worth the potential profits? Your risks are only acceptable if the cost of managing them is less than their potential negative impact.
Treat Risks
Unless you make an effort to minimize your risks, detailed assessments won’t have a tangible impact on your financial obligations or professional reputation. Take the following steps to reduce your liability risks and improve your ability to meet your clients’ needs.
- Implement a detailed customer service policy—Keep your clients happy (and therefore less likely to file lawsuits) by holding yourself and your employees to high standards of customer service. Introduce incentives to go above and beyond, solicit feedback, and maintain relationships by following up after transactions.
- Maintain detailed, accurate records—Maintain a consistent and accurate log of all professional interactions, secure signatures for every important form, and back up digital copies of your documents.
- Hire a real estate attorney—Hire a legal representative who specializes in real estate law to review your records and files. They can also help you identify and eliminate existing liabilities.
Monitor, Review, and Report
After you implement ways to treat existing risks, you must ensure their effectiveness by continuing to monitor, review, and report these treatment strategies. After you identify liabilities or high risks within your business and take steps to address them, don’t assume the risks are gone. New internal and external risks may develop at any time, and current strategies won’t be effective unless you make a continuous effort to improve upon them.
Risk Management for Real Estate
Errors and omissions insurance is an excellent defense against liability claims, but it cannot prevent them. E&O policies cover many of the costs associated with defending yourself and paying damages, but if you want to pay lower premiums and avoid the stress, time, and money involved in E&O claims, it’s important to prioritize your risk management strategy.
No real estate firm is immune to liability claims, so remember the key elements of an effective risk management procedure: identify, analyze, evaluate, treat, and review. By following these steps, you can form and enforce your own risk management policies for your real estate firm’s success.
