Property managers face a wide variety of risks in their work, and a study by Deloitte found that risk management is now one of the top three concerns held by property managers. As their portfolio grows, so does the number of property and tenant risks. A potentially overwhelming amount of information has to be effectively managed and used. There are legal risks every step of the way, as well as the general market exposure that almost every organization has to overcome.
In any risk scenario, there are three possible strategies: avoidance, control, and transfer. Risk avoidance is refusing to take part in an action that is viewed as too risky. For example, a property manager may decide to not purchase any property with a pool to avoid associated risks. Risk control is taking action to minimize or mitigate against a risk, such as conducting regular inspections to prevent the development of substantial physical damage. Risk transfer involves shifting responsibility for a potential risk onto another party, such as an insurance company or a tenant. Property managers can use a combination of these strategies to combat their various risks.
Physical Property Risk
Whether a property manager oversees a few small houses or a billion-dollar property portfolio, there will always be the risk of physical damage. Furniture breaks, paint gets scratched, and exteriors wear down over time. There’s little a person can do to prevent this entirely; however, there are several options available for risk control.
The most obvious solution is to transfer the risk to an insurer. General liability insurance protects an organization against property damage, among other things. Many property managers also suggest or require that their tenants obtain their own insurance to protect stolen or damaged goods and cover the cost of damages resulting from the tenant's negligence.
In addition to insurance, property managers should take regular steps to identify small physical issues before they become large ones. For example, periodic inspections will allow management to monitor high-risk areas such as spaces subject to mould growth or external balconies. Keep detailed records of these inspections, including photographs, to identify whether areas are worsening over time or in case they are ever needed as defence for a claim.
Maintenance and repairs should be conducted by qualified, contracted personnel. As working with external parties creates a risk in and of itself, be certain to assess the capabilities of the team before allowing them to begin work on a project. Repairs should never be conducted by the property manager or the tenant unless proven fully qualified. There are a number of steps to determine whether a contractor is a suitable choice, as seen in this article by the Federal Trade Commission.
Tenants arguably present the largest risk to property managers. In fact, the Canadian Real Estate Wealth Magazine calls selecting the right tenant "the most important step in the real estate business", and offers the following steps to avoid negative experiences. A single manager may be responsible for hundreds of tenants, with their organization overseeing thousands. Tenants can span from a single individual to a multi-million dollar organization.
If a tenant is injured on the manager’s property, they may claim negligence and attempt to take legal action. In addition to having insurance coverage, property managers can lower the likelihood of incidents through regular inspections and maintenance. Tracking all incidents and performing trend analysis will also prove useful in identifying problem areas. Diligent record keeping and careful contracting can prevent the property manager from being held responsible in court. For example, if the property manager can prove that they took action to keep the property safe, or made appropriate recommendations for the tenant to do so, their liability will be limited.
Tenants are also a financial risk to a property manager. Ideally, this risk can be avoided through careful selection of tenants permitted on the property. However, no matter how carefully potential clients are vetted, it is likely that at some point a property manager will have to deal with one that does not take proper care of the property or refuses/is unable to pay rent. Again, a detailed contract prepared by a strong legal team will hopefully allow the property manager to recover any lost income.
Property managers have a lot of information to handle at any given time; for example, contracts, lists of residents, rent rolls, incidents and claims, maintenance tasks, costs, and so on. It’s challenging to simply manage all this data; even more so to view it in a format that allows timely action.
Without an effective system, it’s likely that sometimes, things will be missed. A contract clause may be overlooked, a claim handled improperly, or a deadline forgotten until it’s past due. While these issues are typically minor, it may only be a matter of time before one costs a significant amount of money. It’s also important to have easy access to information about an incident in case it turns into a claim, even if it happened a number of years ago.
Today’s property managers require a system that can store, organize, and analyze all this data for them. It should be accessible from on-site, provide notifications and reminders, and encourage collaboration across the organization. ClearRisk’s cloud-based Claims, Incident, and Risk Management software provides a secure platform for all relevant information. It is fully customizable, can be accessed from any Internet-enabled device, and provides reporting and analysis to improve a property manager’s performance day-by-day.
As in any other industry, property managers are subject to risk from the external market. The performance of the economy impacts a number of factors that can affect property managers.
When the economy is trending downward, individuals and households tend to lower disposable income as they save for tough times ahead. This might mean that they will wait to move into a new house, or purchase a cheaper one than they otherwise would have. The property manager may have a difficult time making sales in these times. Also, if responsible for retail tenants, a manager may encounter some that find it more difficult to pay rent as household spending decreases. This is particularly true for luxury items and large purchases, such as vehicles.
Inflation and interest rates also present a risk for property managers. When these are unfavourable, they may have a harder time bringing value to potential tenants and entering into new contracts.
To mitigate this risk, property managers should try to maintain a diverse portfolio. This will ensure that if one particular industry is performing poorly, they will have enough sales in other areas to balance the loss. Investopedia thoroughly explains this tactic as well as others that can be used to reduce market risk.
Legal Conflict Risk
In addition to the areas mentioned above, legal risk can arise for property managers in a number of other ways.
Obtaining property and determining ownership is a complex legal process, particularly in parts of Canada where buyers or their lawyers are expected to independently trace the title throughout the years, such as in Newfoundland. If a property manager purchases a piece of property and their ownership is questioned, a lengthy and costly legal process may result. They must ensure their legal team is experienced and performs all necessary due diligence to minimize this risk.
Property managers must also be careful of what they say to potential tenants throughout the renting process. Tenants should be encouraged to have their own evaluations of the property performed, not just rely on those conducted by others in the past. Any type of statement that could be viewed as misleading must be avoided. For example, a property manager could say “the previous tenant enjoyed this street as he found it very quiet” instead of “this is a very quiet street”. An Australian real estate association provides an excellent guide on avoiding claims using disclaimers and other methods.
Finally, while all property managers undoubtedly assess and sometimes reject potential tenants, they must be sure that they are doing so for a valid reason, not due to assumptions based on a person’s background, family status, or similar factors. Careless action may result in being accused of tenant discrimination. A logical and objective application review process, as well as tenant discrimination insurance, can help property managers control this risk.
Risk management involves finding the most effective ways to avoid, control, and transfer risks. Property managers can use any of these strategies depending on the situation. Through insurance and careful processes, most risks can be minimized.
No matter the type of risk, an excellent Risk Management Information System can prove extremely beneficial in both financial and reputational arenas. For more information on ClearRisk’s solutions for property management groups, visit our product page or contact us today.