Anyone in the Real Estate game knows that it is critical to consider most of the major forces that will decide the best direction to take your investments towards. It is also a must to keep in mind what the risks are when attempting to analyze and project how those forces will affect you. For this, a viable insurance and business structure will always help you in case something goes wrong.
Causes of risk in Real Estate
In real estate the risks exposures can come from many directions, there are so many factors that have to be taken into account; some are errors in decision-support, and others are totally external to you. It is worth noting that real estate risk cannot be completely eliminated, but rather managed so as to be able to bail out problems without much loss.
Those who depend on you can be divided into:
-Inaccurate Data: The real estate market is deficient, there is data, but there is nothing to support that data as fully trustworthy. There is no government body that monitors and reports all conditions and transactions. Therefore, the data on lease rates, occupancy levels, operating expenses, etc. are based on “good faith” self-reports. But having said that, there are a number of sources with information that can always be valuable.
Fee-based data vendors: Companies such as CoStar, REIS, and RCAnalytics. dominate this section where nationwide bookies collect and sell information.Commercial Brokers: In the local market, there are vendors who are always aware of the trends and can also sell their private information. Companies such as: Colliers, Coldwell Banker, Cushman & Wakefield, Grubb & Ellis, Jones Lang LaSalle, Integra.
-Unreliable models: Real estate investment depends on understanding the market and having your own crystal ball by your side. There are many tools today that can help you make a better decision. But what is not taken into account, are the externalities in these deals, therefore not everything is statistics in this market. That’s why it’s important to approach trends with motivational analysis behind the transactions. And in the end, realize if the risk justifies the application of a certain model in the dynamics of the current market since many times the statistics become invalid.
The unforeseen risks can be divided into:
-Changes in Real Estate Law: The value of a property depends in large part on the controls that the government makes to maintain it as a competitive market, a concept known as “Residual right to use”. Some changes may be gradual or cyclical, while others are structural and instantaneous.
-Changes in the competitive environment: Most real estate products remain static, but changes in business models can dramatically affect their value. For example: Innovations: New technologies and logistics models can highly affect local market needs, making some facilities obsolete, and create a shortage in other spaces.
Globalization: Thanks to the growth of globalization in the past decades, unexpected global political or economic events can have a major impact on the local economy. Some of these changes may last forever, while others are cyclical.
Risk management process
It is a decision-making process. It starts with a problem statement or strategy statement. This statement must specify the tolerances that will be given to the risk in order to establish a positive way of acting. After devising control and procedure within these controls, an analysis should be organized to measure the effectiveness of this procedure, taking into account the cost/benefit. Once this is done, and with the problems and procedures identified, they can be added to the risk management plan. Finally, these plans are monitored to determine if the right decision was made or what can be improved.
You can always hire someone of trust and experience in managing and correctly interpreting risk for your investments. That could give you the desired results, but stay on the lookout for our next article where we’ll discuss ways you can implement plans to be able to cushion all the risks.