Risk Management in Real Estate Property Management

Businessman rolling giant dice on salt flats.
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Administration and risk management is a critical component of real estate property management. The record-keeping function must be carefully managed and, the greater the level of detail, the better the likely results.

In most states, by far the greatest number of consumer complaints, commission penalties and license suspensions and revocations are related to property management.  It's not that those licensees doing property management are dumb.

 It's that it is a very transaction intensive business.  While an average agent might do  a dozen sale transactions a year with a purchase agreement and related documents, the average property manager might do hundreds of smaller transactions.

The fact that they're smaller doesn't make those transactions less important and it doesn't reduce the risk involved in doing them.  As a property manager, you're contracting with an owner to market and rent their property, collect the rents and remit them to the owner, and to manage the property, from maintenance to tenant rules enforcement.

In doing this, you're transacting with owners, tenants, repair companies, advertising media, contractors and others.  Each and every one of these transactions introduces some risk into your business.  It's not necessarily a lot of risk in each case, but it is cumulative.

The financial functions are by far the most likely to create problems for the broker.

 Financial functions involve:

  • the marketing & financial function requires records of expenditures and income, as well as tax records, advertising invoices and more,
  • tenant management involves records of all their requests, rental payment history and rules violations, and
  • facility maintenance & repairs require maintenance schedules, repair records for warranty, and employee and subcontractor personnel records.

    The risk management component is of course very important. A large disaster can threaten the survival of the property economically. The records kept are a part of this, as any legal action taken by others can be thwarted if there are detailed records that refute their claims.

    A part of risk management is determination of risk versus reward. A good example is a hot tub or swimming pool on the property. The property manager and owner must balance the value of the pool with the risks incurred. When a risk such as this is identified, there are three ways in which it can be addressed:

    1. Avoidance - The decision can be made to remove the hot tub or pool, as the additional rental income is not worth the cost of insurance or the risks involved.

    2. Control - If the hot tub is retained, perhaps a coded lock and fence would be installed to keep out younger children.

    3. Risk Transfer - The most prevalent way of dealing with risk is to purchase insurance to transfer the risk to the insurer.

    The successful property manager will plan for problems, keep excellent files and records of every activity, and continually assess these functions to determine if change is necessary.

    Documents and Email

    In many states, you're only required to maintain transaction records for six years.

     However, it is advisable to keep them longer, especially if you're allowed to do so in electronic format.  You can bet that if any of the parties may have a claim, someone who wants to sue you for something six years and ten days ago will still have their document copies.  It's much more difficult to plead your case if you've already destroyed your copies.

    When it comes to email, any court action involving a federally guaranteed loan ( pretty much all of our residential deals), can compel you to produce emails related to the transaction and communications with your customer/client.  There are numerous ways and software products to save related emails, but read some of the articles here about Evernote, a solution for many reasons.  Here's how to handle email using Evernote and your Gmail archives.

     Modify to fit your email solution.

    • Set up automatic forwarding in Gmail of every email to or from your customer/client.
    • They go into a notebook in Evernote for the transaction.
    • A couple of weeks after closing, pull up all of those emails in Evernote and print them in chronological order to a PDF file.

    Since PDF files are searchable, you can quickly pull up any email someone may want with keywords.  It works quite well.