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Risk Management in Real Estate

By far the highest number of commission penalties, consumer complaints, and license suspensions and revocations in most states, are connected to property management. It’s not that property managers are ineffective. It’s just that the business of property management is very transaction-intensive. Though your typical agent might do a dozen sale transactions yearly with a purchase agreement and related documents, the typical property manager can do hundreds of smaller transactions.

Just because they’re smaller doesn’t give these transactions less importance, and it doesn’t decrease the risk entailed in doing them. As a property manager, you deal with an owner to market and rent their property, collect rent and remit the cash to them, apart from managing the property in all other aspects, from implementation of tenant rules to maintenance.

Doing this means you’re transacting with owners and tenants, repair companies, advertising agencies, contractors and the rest. Each of these transactions brings some risk into your business, especially financial.
That means risk management component is extremely important. The property’s economic survival can be threatened by a big disaster. Record-keeping plays a huge part, since any legal action others may take can be easily disproven if there are detailed records that dispute their claims.
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A considerable part of risk management is determining risk versus reward. Let’s take, for example, a property that comes with a swimming pool. The property manager and owner must balance the value of the pool and the risks it brings. When a risk is identified, there are three ways to address them:
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Avoidance

The pool will be removed because the additional rental income is a lot less than the cost of insurance or the risks involved.

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 will plan for issues, keep files and records of all activities, and constantly assesses these functions to find out if change is needed.

Documents and Email

In different states, you only need to maintain transaction records for half a year. However, it is best to keep them for longer, especially if you can do it in electronic format. For sure, if any of the parties has a claim and someone wants to sue you for something that occurred earlier than six years ago, they will still be holding their document copies. If you’ve already destroyed your own copies, it would be much harder to plead your case. Lastly, in terms of email, whatever court action that involves a federally guaranteed loan (pretty much every residential deal), can force you into producing emails that are related to your transaction and communications with your customer.