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5 Ways Real Estate Professionals Can Manage Risk

Jun 9, 2013

Posted by

Ted Devine

Since 2011, Ted Devine has served as CEO of insureon, the nations leading online insurance agent for small businesses. Prior to joining the insureon team, Devine held top leadership positions with Aon Read more

In real estate, the stakes of a single transaction are almost always high, which means real estate business owners face unique challenges when attempting to keep revenue steady. The feast-or-famine cycle of income can be stressful and exhausting – and unexpected glitches in your plans from forces beyond your control can cause a financial catastrophe.

Luckily, as a real estate professional, there are several steps you can take to minimize the negative impact that external forces can have on your day-to-day business.

Minimize Your Risk Exposure to Keep Revenue Steady

Just as a real estate transaction requires the precise alignment of several parties (and possibly planetary bodies), risk management demands that you attend to several facets of your business simultaneously, including the following:

1.  Choose the right business structure.  Real estate professionals who operate as sole proprietors or partnerships should be aware that their personal assets might be subject to seizure in the event of a legal settlement against their business. In other words, if your business is found liable for damages in a lawsuit but has insufficient funds to cover those damages, the court could come after your personal assets (including your home, car, savings account, and retirement funds). To avoid seizure of your personal assets, you have two main options: first, consult with an attorney and tax professional about a business classification that makes sense for your finances. Second, invest in appropriate business liability insurance, which will cover the legal costs (including attorney’s fees, court fees, and settlements or judgments) associated with any lawsuits brought against your business.

2.  Establish and follow standard procedures in all transactions.  When an exciting and potentially lucrative opportunity arises in the real estate world, it’s often tempting to act quickly and worry about the details later. But doing so can cause you to skip important steps, forget essential verifications, or otherwise compromise the viability of a transaction or the financial stability of a client. Establishing standard operating procedures for the various types of transactions your business conducts – and seeing to it that you and your employees actually follow those procedures – can help you avoid the nightmares that accompany missed deadlines, lost verification documents, and other potentially costly blunders.

3.  Keep careful records (including waivers).  When you’re dashing from one property to another and meeting with several clients consecutively, it’s all too easy to conduct business verbally, entering into agreements with buyers, sellers, brokers, and contractors. To ensure that someone you work with doesn’t deny or forget a key conversation you had about terms or conditions of a transaction, keep meticulous records of all communications. Luckily, doing that today is much easier and more convenient than it was even five years ago. With a standard smart phone or tablet, you can record conversations, send immediate follow-up emails confirming oral agreements, take photographs to document the condition of properties, and more.

Of course, recording information meticulously is only half the battle: in order for your records to be of use to you in the event of a lawsuit, it’s essential to have a filing system that allows you to access information quickly and easily. In addition to documenting basic data about the properties and clients you deal with, consider documenting peripheral conversations and interactions with your clients. If, for instance, a client decides to skip a property inspection despite your advice, have them sign a waiver (and keep a copy of it!) to prove that you were not negligent in your advice.

4.  Consider settling out of court. Even the most meticulous real estate professionals are faced with legal challenges of their work from time to time. While a lawsuit alleging that you didn’t perform your job correctly can be emotionally and intellectually draining, keep in mind that it is often more a reflection on the person who initiated it than it is on your work. If and when you are faced with a lawsuit, consider the benefits of settling out of court.

Even if you have not done anything wrong and are unlikely to be found liable for damages in a court of law, you may be able to save yourself time, energy, and money by settling a claim. True, this can feel like a “loss,” but when you consider the cost to your business of dedicating hours upon hours to building a legal defense, appearing in court, and testifying on your own behalf, you may find that it makes more sense to write a check and go back to serving clients.

5.  Use checklists. A 2009 study found that surgeons who used checklists in intensive care settings were able to reduce the fatality rate of their patients by almost 50 percent. Why? Because having a list of everything they needed to do kept them from forgetting steps when things became complicated, critical, or hurried in the operating room. Even though being a real estate agent does not involve life-and-death situations, you can likely reduce your incidence of mistakes by creating and following checklists for every transaction you facilitate. In a high-stress profession that demands adherence to deadlines and timely filing of paperwork, checklists can make a world of difference.

Risk Management Bonus: Business Liability Insurance

While the above risk management techniques can go a long way toward ensuring the stability of your real estate business, they won’t help much for situations beyond your control – just as placing your hands at 10 and 2 won’t guarantee that you are never in a car accident.

To protect your business against the incidents beyond your control (which include devastating storms as well as legal actions), it’s wise to invest in business liability insurance. Depending on the flow of business, small real estate businesses may have very little in the way of a cash cushion, and liability insurance can make the difference between solvency and bankruptcy when an unanticipated heap of expenses lands on your plate.

While no two businesses are identical, most real estate professionals benefit from three major types of business insurance:

  • General Liability, which protects against basic business risks, including injuries and property damage to third parties. It also shields your business against claims that your advertisements or marketing materials are libelous, slanderous, or in violation of copyrights.
  • Errors and Omissions, which protects you in the event that a client claims your professional advice led to a financial loss.
  • Property Insurance, which protects your business premises, equipment, and gear against loss, theft, and damage. Because of their low risk profile, many real estate professionals are able to combine Property and General Liability Insurance into a discounted Business Owner’s Policy.

Managing Risk in a Growing Business

One final word about managing risk in real estate: as the housing market recovers around the country, real estate professionals are poised to grow their businesses rapidly. While this is wonderful news, it also means that many real estate business owners will be introducing new risks to their businesses on a regular basis. To ensure that your business is protected for the work it does today (and not simply for the work it did when you founded it), make assessments of your risk profile a regular part of your business plan.