A guide to risk management in real estate
Feb 17, 2022
A guide to risk management in real estateThe real estate market is uncertain and features a vast and diversified risk portfolio. There are myriad moving parts in the industry, including the climate, government regulations, properties, tenants, employees, clients, and investors. Leaving any of these parts unprotected could result in costly errors, lawsuits, or a ruined reputation. And without the right strategy and technology, it’s nearly impossible to manage all of these risks.
To actively manage risk, you need to pair an understanding of the industry’s inherent risks with technology. A risk management platform can help your residential or commercial real estate business navigate unstable market conditions and an evolving risk landscape.
What does real estate risk look like?
Real estate professionals face a risk environment far more complex than most other industries. External forces like market change can fluctuate the value of the assets under your purview significantly. By understanding the various types of risks present in the industry, you can build a risk management strategy to better avoid and mitigate them.
- Legal risks include lawsuits for wrongful eviction, breach of contract, or failure to comply with local or federal laws. Property managers may also be sued by tenants who claimed they were injured on the property due to negligence. Without proper precautions in place, legal risk can be costly and damaging to your reputation.
- Market risks are caused by current economic and financial conditions (such as supply and demand). These conditions impact the profitability and success of the real estate market. While market risks are out of your control, paying attention to key indicators and trends can help you weather fluctuations.
- Property risks refer to property damage caused by people, including vandalism, accidental damage caused during construction work, or stolen equipment. Another example is open houses, which present opportunities for a range of risks. During open houses, real estate agents need to maintain an environment that ensures both visitor safety and property security.
- Environmental risks refer to property damage caused by natural disasters, weather, or fires. While some geographic areas are more prone to natural disasters than others, no location is exempt from bad weather, so it’s impossible to avoid purchasing property without some form of environmental risk.
How to create an effective risk management plan in real estate
There are three principal risk management approaches in real estate: risk avoidance, risk control, and risk transfer. Risk avoidance means avoiding risk at all costs (e.g., limiting exposure to higher-risk partnerships). Risk control involves creating a plan to actively mitigate potential risks (e.g., safety measures during an open house). With risk transfer, real estate agents and brokers understand that certain risks are inherent. So, instead of trying to avoid these inevitable threats, agents and brokers shift responsibility to a third party (e.g., insurance providers).
Understanding the various approaches to risk management is important, but you also need the right technology to pair with your strategy. With a risk management platform, you can:
- Gain a better understanding of the market with AI insights. To incorporate risk control into your real estate risk management strategy, you need a risk management platform with artificial intelligence (AI) and data analytics. An AI-powered platform can improve forecasting and modeling capabilities. This ultimately provides you with a benchmark of expected cost and duration of a claim in an already volatile financial market.
- Store information in a centralized and secure location. In the event of lawsuits or legal action, you need proper records of contracts and financial documents. Instead of wasting time pulling information from disparate sources, a risk management platform allows you to store this information in a central repository for easy access. Centralized storage also helps ensure better security of sensitive data as well as compliance with local, state, and federal laws.
- Create best practices to monitor and mitigate risks. Streamline workflows and implement best practices with a risk management platform. This solution can also measure and score reports from property inspections and evaluations to highlight red flags and risk patterns. By continuously monitoring for risks, you can identify potential threats before they happen and create a response plan to minimize negative impacts.
Prepare for real estate changes with technology
Whether you’re a real estate agent or investing in real estate, you need to be prepared to manage the industry’s risks. It’s time to upgrade your best practices and invest in digital risk management technology. With a risk management platform, you can better monitor risks and incorporate the three main real estate risk management approaches into your strategy — saving time, money, and reputation.
Learn more about how you can better manage real estate risk with Aclaimant’s insight-driven workflow solution.