The title of this article Risk Management – A Tool to Increase Profits. This title was selected because, all too often, real estate and mortgage practitioners view managing risks in a negative way. The goal of each practitioner should be to make a profit. To maximize profits means proactively doing things that will increase the bottom line, not take away from it. Any activity or practice that exposes a one to potential financial liability has the ability to lessen profits.
A risk is an exposure to the chance of an injury or loss. A “chance” refers to the probability that the unwanted injury or loss will occur. The practice of real estate and mortgage brokerage is subject to a great deal of risk because it involves compliance with a number of laws and regulations that, if not properly followed, could create a liability. It also involves a number of technical considerations that require diligent execution. Due diligence (paying proper attention and displaying reasonable care) is the key to managing risk.
Potential licensee liability may be found in many situations. This article will introduce you to the elements of a comprehensive strategy to minimize risk.
Each real estate or mortgage practitioner should attempt to minimize liability exposure by developing a plan for risk management. The plan should include the following elements:
The starting point is to educate oneself to the potential risks that may influence the practice of real estate or mortgage lending. This means to gain as much knowledge as possible about the practice, along with a working knowledge of the laws and rules that govern it. The practitioner, on an ongoing basis, should keep up with changes in law, industry standards of practice, and technology. As a dynamic industry, change is present. Methods and ways of past practice can often lead to liability. It is up to each practitioner to subscribe to trade journals, in which many articles relating to current real estate practice are discussed. In addition, a licensee should continually seek out continuing education and other education opportunities that address issues relating to current practice.
Risk anticipation refers to identifying typical or potential problems that may arise in a real estate or mortgage transaction. Once identified, the practitioner should establish a strategy, or implement a set of procedures, to ensure that the anticipated potential problems do not arise. Some examples of risk anticipation and strategies to deal with that identified risk are as follows:
- Documentation and record keeping – In order to minimize risk, good record keeping and transaction documentation practices are essential. Once a problem has appeared in a transaction, a practitioner will often be asked to justify an action taken or not taken. Memory of specific details relating to a transaction naturally fades with time and becomes unreliable. Contemporaneous notes, or written observations, created at the time an event occurred are usually regarded as reliable evidence of what actually transpired. In fact, in the event of litigation, contemporaneous memoranda or notes are given a great deal of evidentiary weight. Practitioners should keep a file for each transaction or potential transaction, and include in them notes about any activity conducted with respect to any client or prospect. Because a practitioner cannot anticipate potential problems that may arise in the future regarding past actions, good documentation of actions is always a good first line of defense against liability allegations.
The following are suggestions for developing defensive record keeping practices and procedures:
- Document all sources of information received
- Keep a telephone log that summarizes all business calls
- Keep an electronic file of all e-mail communications
- Keep a complete transaction file that includes documentation relating to disclosures, disclaimers and notes relating to relevant activities
- Keep dated records of the types of housing each prospective buyer asked to view, the types of housing options offered (manufactured, single family, condominiums, etc.), and all other services provided if a real estate licensee.
- Send the seller written updates about showing activity, as well as feedback relating thereto if a real estate licensee
- Indicate on all correspondence who is receiving copies
- Use confirmation letters to shift the burden of response to the other party
- Keep a complete record of all loan programs presented to a borrower if a loan originator
- Disclosures – If a real estate licensee, agency disclosure, disclosure of conflicts of interest, seller’s property disclosures, environmental hazards disclosure, and many others are required by law. A licensee should be aware of all required disclosures and make them in a timely manner. If a loan originator, all of the required transaction disclosures must be made in the proper format and within the time limits prescribed by law.
- Disclaimers – While a real estate licensee is qualified to engage in and advise clients about marketing and purchasing of real estate, many issues in a real estate transaction may arise that are outside of the expertise or permitted practice of the licensee. In these cases, the licensee, by written disclaimer, should advise the seller or buyer that such issues are outside of the expertise of the licensee and that the issue should be presented to a qualified professional for an opinion or resolution, such as an attorney or accountant. While a mortgage loan originator is qualified to engage and advise clients about their loan products, they should not engage in offering advice outside of their expertise or mortgage practice. For example, a mortgage loan originator should not give advice about the tax implications of a specific loan transaction.
- Documenting information provided by a seller or buyer or borrower – The seller or buyer or borrower may provide the practitioner certain information or documents, which the practitioner should keep. If verification of information given to the practitioner is required, the practitioner must do so and should keep records of such verification.
Once a potential problem has been identified as one that could lead to liability, steps should be taken to control the risk. It is important to deal with any complaint, or potential complaint if discovered, before it turns into litigation. This means early communication with the potential complaining party to minimize the issue. Usually, a complaint that is not dealt with in its early stages tends to take on a life of its own. Because the complaint is not dealt with, the aggrieved party becomes emotionally angry. As time moves on, opportunities for settlement become less possible. Eventually, an attorney may be contacted and the problem will take on a new life. Risk control means simply addressing an issue when it first arises by attempting to find a solution as soon as possible. The ultimate solution or settlement may seem expensive. However, a settlement made where liability is likely to occur is much cheaper than risking litigation. Even if the practitioner wins the litigation, the legal fees and costs to achieve the win may far exceed the settlement amount, which could have been agreed to early on.
Shifting risk from the practitioner to another party is a desirable strategy to minimize risk. A classic example of risk shifty is in the event a real estate licensee is involved in a car accident with a client in his or her vehicle, if the licensee has the required auto liability coverage the risk is shifted from the licensee to the insurance carrier. A licensee should have a review of all liability insurance policies to make sure that coverage is adequate.
|For example, the minimum liability coverage requirements required by state law may be inadequate if a business passenger is seriously injured. Increased policy limits or umbrella liability policies should be explored.
The risks covered by traditional liability policies only address injuries to persons or property caused by the insured. These policies do not cover actions undertaken in the course of a professional activity, such as real estate or mortgage practice. To cover these risks, errors and omissions insurance is available. A practitioner should understand policy inclusions and exclusions. For example, violations of antitrust law are usually excluded from policy coverage, while negligent misrepresentations may be covered.
Another way to shift risk is to direct a client to seek professional advice or counsel relating to matters outside of the practitioner’s expertise. This may include referring a client to seek the advice of an attorney, accountant, financial advisor, structural engineer, home inspector, pest inspector, or environmental analyst.
Every real estate or mortgage brokerage should adopt written policies and procedures that define the company’s agency representation policies, competitive practices, fair housing guidelines, personnel policies, communications policies, documentation and record keeping policies, and a statement of the company’s overall commitment to the ethical and legal practice or real estate. Once adopted, these policies should become part of each licensees every day practice and enforced on a consistent basis.
The Internet provides a real estate licensee or mortgage loan originator with many opportunities to promote his/her services. Due to the low cost of disseminating this information, along with the relative ease with which large numbers of individuals may be contacted, the Internet has become a very popular promotional and communication tool, as well as a valuable method of doing business. However, this technology also creates a number of risks that need to be identified.
- Privacy Issues – A great deal of personal and confidential information may be transmitted to a licensee over the Internet, and then stored on that licensee’s computer. Such sensitive consumer information may include social security numbers, bank and credit card account numbers, credit histories, loan histories, private communications regarding property wants, needs, and other financial concerns.
Any practitioner receiving and storing such information on a personal or office computer must make substantial efforts to protect it. Among the things that should be done are:
- Assess the risks to the information collected and stored, both online and offline.
- Implement reasonable policies and procedures in key areas, such as employee screening and training in the collection, handling, and disposal of personal information.
- Implement simple, low-cost, readily available defenses to common Web site attacks, or implement reasonable measures to prevent hackers from gaining access to your computer network.
- Employ reasonable measures to detect and respond to unauthorized access to the data.
- Provide reasonable oversight for handling personal information by service providers, such as third parties employed to process information and assist with transaction closings.
- Take measures to prevent theft or computers. (Example: Do not leave a personal computer on the front seat of a car in a parking lot. Put it in the trunk.)
- Comply with rules regarding advertising – A practitioner disseminating unsolicited information concerning real property, loan products or marketing through the Internet or electronic mail is engaged in advertising, and all rule and regulation requirements relating to the offering of such products or services must be complied with.
- Comply with rules regarding disclosures – A practitioner using the Internet or electronic mail must also make all required disclosures regarding identification of licensee status, information about the practitioner’s employing broke, etc.
The bottom line – by managing your risks, your practice will be more profitable.
Thanks for reading this OnlineEd tip on Risk Management! Stay tuned to our newsletters, as we’ll bring you another risk management best practice next month!