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Risk and reward
작성일 : 2010-01-21. 조회수 : 970.

Risk and reward

 

Controlling risk is an essential part of property management

 

by Bob Demson, CPM Emeritus

 

Risk management is a prevalent part of our lives. We are constantly faced with decisions involving risk, like determining the best route to get to work with the least amount of traffic, or what to eat in order to keep our risk of poor health at bay. But risk goes well beyond affecting our personal lives. The state of Iowa recently paid $6.7 million to settle lawsuits last year because of accidents on state properties and misbehavior of state employees. The state is taking steps to reduce its exposure to lawsuits by trying to identify risks and by training employees, according to information in the media.

 

Risk, of course, affects us in the property management business, too. We manage risk in a variety of ways, namely through risk avoidance, risk retention, risk control and risk transfer.

 

Avoidance involves eliminating the source of risk: If we have a swimming pool on our property, which is a risk, we fill it in to avoid the risk. Managing risk through resident or tenant retention involves retaining the risk and dealing with it: If all our competitors have pools, it is then worth it for us to have a pool. To control risk in the pool scenario, we would focus on fencing, self-locking gates, signage, regular inspections and maintenance. Finally, we could transfer some of the risk by carrying liability insurance.

 

As property managers, our biggest job in risk management is controlling risk, lessening the exposure of our client to risk and knowing when to transfer some of that risk to insurance. Controlling risks certainly starts with a physical inspection of a property and considering numerous circumstances.

 

What is the condition of driveways, parking areas and sidewalks? Do door and gate locks function properly? What is the condition of emergency lighting, fire extinguishers, fire sprinkler systems and alarms? Is an emergency evacuation plan in place? Do leases clearly spell out tenant and landlord obligations, and are they reviewed with new and renewing tenants?

 

After reviewing all areas of a property for risk, determine what to transfer to insurance and how much insurance is essential to carry. A good insurance agent, who is knowledgeable about your property type, is invaluable. Make sure tenants are aware of the insurance they need to carry on their personal property and the liability they are responsible for.

 

Additionally, be able to suggest the minimum and umbrella liability a client should carry. Know the property insurance amounts that should be carried and what is considered excluded coverage in the general policy. The exclusions will indicate the amount of additional coverage needed in the overall insurance package purchase. In counseling your client, weigh the amount of deductibles versus the cost savings and determine the best choices for the property.

 

Risk management is not just about buying insurance. Our job as property managers is to know the possible risks at our properties and how to deal with each one. When we have done all we can to ameliorate the risk, we must carefully determine where to transfer the balance of that risk.

 

Bob Demson, CPM Emeritus (rdemson@cox.net), is president of R/A Consultants Inc. He is an independent real estate consultant.

 

  Journal of Property Management, Nov/Dec 2007>

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