Real estate risk management: How to avoid common threats
Real estate agents are responsible for helping clients find their dream home. But between open houses, private showings, and contract agreements, real estate agents face a variety of risks on the job.
What would happen if a client suffered an injury during an open house? Or if a dissatisfied buyer sued you over a claim that you omitted information that might have deterred them from buying a property? These risks and many others could have a costly impact on your real estate business.
Fortunately, having a solid real estate risk management strategy helps protect you from these unforeseen events. You can also invest in real estate insurance policies for valuable financial protection from lawsuits and other claims.
Which strategies should I consider in my real estate risk management plan?
Whether you work independently or for a real estate agency, creating a comprehensive risk management plan can help mitigate the financial consequences of events such as:
- An injury during a showing
- Breach of contract
- Ethics violations
- Accidents while driving for work
- Data breaches
- Housing market volatility
- Employee injuries
- Damaged or stolen business equipment
A crucial component of the real estate risk management process is business insurance, which can protect your income and your career if something unexpected happens and you’re found responsible.
Here are number of risk management tips and strategies you should look into:
1. Create a safety plan for open houses
Competitively priced homes in desirable neighborhoods are bound to draw large crowds at an open house. That increases the chance of accidental injuries or property damage.
To avoid these risks, consider creating a safety plan for open houses. If you’re staging the home, make sure to leave plenty of space for prospective buyers to move around, and keep a close eye on children. Scan the house for hazards before showing it. For example, it might have an icy walkway, exposed wires, or a loose rug that someone could trip on.
You should also encourage potential buyers to look with their eyes, not their hands. If a client picks up a glass vase and drops it, or pulls down a fence when checking for wood rot, you could be held responsible for the property damage.
To protect yourself from the financial repercussions of these claims, it’s important to have general liability insurance. This policy covers bodily injury and property damage claims, including your legal fees and a settlement with the other party.
2. Review contracts with a fine-toothed comb
Clients can sue real estate brokers and agents for all sorts of reasons related to contracts. For example, if you fail to disclose a contingency of a sale, or the seller’s concession statement is unclear, you could run the risk of a lawsuit.
To avoid client lawsuits, make sure you’re doing your due diligence. Double check your contracts and consider having a colleague or real estate lawyer review important legal documents before you send them. You should also have your client review the contract to catch any errors before it’s too late.
If you find yourself in a legal situation with a client, having errors and omissions insurance (E&O), also known as professional liability insurance, is valuable. E&O insurance protects you against financial losses if a contract error or inaccurate information negatively impacts a client.
3. Prioritize transparency and communication
Certified Realtors must follow a code of ethics and professional guidelines as outlined in the National Association of Realtors (NAR) Code of Ethics and Standards of Practice. If you accidentally or intentionally violate the code, it could prompt a homebuyer or seller to sue you.
To avoid ethics violations, aim for complete transparency with clients in all aspects of a transaction, and make sure both the buyer and seller have all terms in writing. Communicate effectively and listen to your clients’ demands. Don’t exaggerate or make promises that you can’t keep. Additionally, make sure to disclose any known defects or hazards that might impact a buyer’s decision.
As a Realtor, following the Code of Ethics is one of the most important parts of the job. Even if you have a comprehensive business insurance portfolio, no policy will protect you if you violate a code of ethics.
4. Get the right insurance for business driving
Real estate professionals are frequently on the road traveling to open houses, client residences, or their brokerage’s office. But if you rely on your personal auto insurance policy, you might not be covered if you get into an accident while driving for work.
As part of your real estate risk management plan, you should purchase the right type of insurance coverage. If you use your personal car to conduct business, you may need hired and non-owned auto insurance (HNOA). If your brokerage owns the car that you drive for work, it should be covered by commercial auto insurance.
If you’re involved in an accident, hired and non-owned auto insurance and commercial auto insurance will pay for any injuries or property damage that you caused. Without the right type of insurance, you could be responsible for paying legal fees, medical bills, or property repairs out of pocket, which can get very expensive.
5. Be careful when handling client information
During a real estate transaction, you will need to collect and store sensitive data, including your client’s financial information and Social Security number. If you’re storing this data digitally, it could be susceptible to a data breach.
- Use a secure document-sharing platform to send and receive contracts and documents that contain personal information.
- Choose complicated passwords for all work-related accounts and emails.
- Set up two-factor authentication whenever possible.
- Use antivirus software and firewalls on your work computer.
- Avoid doing business over public Wi-Fi networks.
- Don’t click on links or email attachments from unknown senders.
Because data breaches are increasing in frequency, it’s a good idea for Realtors to have cyber liability insurance. This policy can cover expenses related to a data breach, including lawsuits, client notifications, and data recovery.
6. Keep tabs on current market conditions and trends
The housing market changes constantly, which can cause significant variations in your business and your income. Insurance can’t protect you from a housing market crash, but you can take steps to protect your real estate business from volatility.
Make it a priority to stay up to date on current market conditions by following a few key indicators. These factors are typically signs of a strong buyer market:
- Robust annual appreciation
- Low inventory levels
- A brisk pace of sales
- Properties selling for more than the list price
On the other hand, these conditions often signify a cooling real estate market:
- Year-over-year price depreciation
- Sluggish sales
- Frequent price cuts
- Rapidly rising inventory
Check out NAR’s research and statistics page where you can find monthly reports with the most recent data on the U.S. housing market, as well as quarterly reports for metropolitan areas. Your state’s official Realtors’ association may also publish monthly market statistics, and you can access hyperlocal data through your area’s multiple listing service (MLS).
Finally, don’t forget to keep an eye on national and state employment reports, as job markets can affect consumer sentiment and demand for real estate.
7. Protect your employees with workers’ compensation insurance
Being a real estate agent is often physically demanding. For example, you could get injured moving heavy furniture before an open house, or get sick after exposure to asbestos during an inspection.
If you own a real estate company and have at least one employee on staff, you likely need workers’ compensation insurance. Workers’ comp is legally required in almost every state, whether you have one employee or a team of 20.
Workers’ comp reimburses your employees for their medical bills and lost wages if they get hurt or sick because of their work. Most workers’ comp policies include employer’s liability insurance, which covers your legal costs if an employee blames you for their injury or illness and sues.
8. Don’t neglect your office and business equipment
Real estate agents usually work in a dedicated office space, whether it’s rented or owned. In your office, you probably have furniture, computers, servers, and paper documents or contracts. If something were to happen to your property, like a fire or a break-in, you could take a big hit financially.
Fortunately, it’s possible to protect your office and your business property from these types of situations. First, keep an eye out for fire hazards, like frayed cords or flammable materials near a space heater. Place fire extinguishers strategically around the office and check to make sure smoke alarms are functioning.
You might also consider installing a security system, which would notify you or law enforcement if there’s a burglary. If your office contains sensitive documents, in particular client information, keep them locked away in a secure file cabinet or storage room.
If something happens to your office space or business equipment, a business owner’s policy (BOP) will cover your losses. This policy combines general liability coverage with commercial property insurance and it’s cheaper than purchasing both policies separately.
Manage real estate business risks with insurance from trusted providers
Having the right insurance benefits real estate agents immensely. Not only does small business insurance protect your business financially, but it also shows your clients that they are covered should anything unexpected happen.
Protect yourself by completing Insureon’s easy online application today to compare real estate business insurance quotes from top-rated U.S. carriers. Once you find the right policies for your business, you can begin coverage in less than 24 hours.