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Managing Risks 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 those property managers are being incompetent. It’s just that property management is a very transaction-intensive business. Although a regular agent might do tens of sale transactions per year with a purchase agreement and associated documents, the regular property manager may do 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. 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. This means you’re transacting with owners and tenants, advertising agencies, repair guys, contractors, etc. All of these transactions inject some type of risk into your business, especially those which are related to finances. Risk management is, of course, extremely important. The economic survival of a property can be threatened by a huge 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 maintain a balance between the pool’s value and its risks. When a risk is identified, there are three ways to address them:
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Avoidance The pool will be removed as the extra rental income it brings is far less than the insurance cost or the risks involved. Control The pool is retained but a coded lock and fence will be installed to keep the area off limits to small kids. Risk Transfer The most common way of handling risk is to purchase insurance so that the risk is transferred to the insurer. 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 several states, you only have to keep transaction records for six years. 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. 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.