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Managing Risks in Real Estate

The most number of consumer complaints, commission penalties, and license suspensions and revocations by far in most states, occur in the property management industry. It’s not that those property managers are being incompetent. It’s just that property management is a very transaction-intensive business. Even as a typical agent might handle dozens of sale transactions every year, a typical property manager can tackle 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. Being a property manager, you’re dealing with an owner to market and rent their property, handle rent collection and remit the money to them, as well as to manage the property in all aspects, from maintenance to enforcement of tenant rules.

That means you’re transacting with owners and tenants, repair guys, advertising companies, contractors and so on. Each of these transactions brings some risk into your business, especially financial.
This makes risk management very important. The economic survival of a property can be threatened by a huge disaster. The records kept play a huge part, as any legal action taken by others can be easily disputed if there are detailed records that oppose their claims.
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A considerable part of risk management is determining risk versus reward. Take, for example, a property with a swimming pool on it. 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 as the extra rental income it brings is far less than the insurance cost 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 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 a lot of states, six years is the mandatory period for keeping transaction records. It is best to keep them for much longer though, especially if you may do so digitally or electronically. 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. It’s a lot harder to plead your case without your own copies. Finally, in terms of email, any court action that involves a federally guaranteed loan (pretty much all residential deals), will be able to compel you to produce emails that have something to do with your transaction and communications with your customer or client.