Minimizing risk means understanding human emotion
The term ‘Risk Management’ in real estate often brings three things to mind: have good insurance, have a great attorney, and document everything in writing. It would have been easy to just focus and write about those three things, but you can find that anywhere.
As an active real estate investor since 1999 and having been involved with well over 1,000 real estate transactions, I want to offer another perspective on risk management. We all know there is no way to eliminate risk, so the goal is to minimize it as much as possible because unfortunately in this business it is not if something is going to go wrong, but when, and what happens when it does. So, when things go south how do you minimize that risk?
Real estate investors believe they are in the real estate business but are they really? Let us challenge that thinking! Regardless of your investing strategy, everyday you work with homeowners, home buyers, contractors, tenants, vendors, etc. What do they all have in common? They are all human. So, are you really in the real estate business, or are you in the people business?
Why does that matter and what do people in your business have to do with mitigating risk?
Almost every lawsuit or insurance claim is filed because a person got upset with something that escalated into the lawsuit or insurance claim. Almost every time that issue could have been resolved and prevented from escalating to where it did.
Why did the situation escalate? Why was it not resolved prior to it escalating?
Human beings are emotional! When emotions are high logic is low.
When you understand you are in the people business, then you put the systems in place and have the skills needed to help control those emotions and minimize your risk.
The first general rule of any people business is to under-promise and over-deliver. Sounds obvious and simple enough but unfortunately in the real estate world it is extremely rare. If you are working with private money, give them better returns than expected. On your timelines, cushion extra time and finish early. On any job, do more than expected.
Why is this important? It is difficult to get upset when you are getting more than you were promised. This strategy alone drastically lowers your risk.
However, more importantly this really comes into play when things eventually go south. If you have been over-delivering to someone for a short while but then something goes wrong, are they more likely to forgive the situation? Of course they are! I cannot tell you how many times this has saved my butt when something happened outside of my control that caused me to not deliver as I should have.
Another way to help control human emotions and therefore lower risk is to take formal communication skills training. I know this may sound crazy, but these skills will drastically lower your risk. For example, in corporate America most of the complaint departments go through extremely specific training on how to handle emotionally upset individuals.
Do you know the four steps to overcoming any objection? As much as I would love to go into detail with them here, that would be an entirely different article, but by simply following these steps you have the ability to remove emotions from any situation that goes south and then come to a logical conclusion. The steps are:
- Repeat and Isolate
- Empathize (turn the table)
- Benefit to why
- Soft close
You can find more information on how to overcome objections as there are multiple trainings available on the topic. Simply doing this alone will remove a lot of risk to anything escalating in cases where insurance or attorneys are needed.
That is just one example of the many skills that can be learned. These skills can be used with sellers, buyers, contractors, tenants, and vendors any time there is a potentially emotional situation and help lower your risk. Simply remove the emotions from the conversation and then come to a logical win/win resolution.
Another way to lower your risk with people is to ensure you have proper systems and training in place. Strong systems and training ensures things are done the same way each time and there is little to no miscommunication.
For example, be sure to have a checklist with every item that the contractor is supposed to complete (system) and go over it thoroughly BEFORE they start the project (training). They understand they will not be paid until every item is completed and they agree up front. This ensures straightforward communication, helps keep confusion to a minimum, and lowers your risk.
If you want to drastically reduce your risk, you must first believe that you are in the people business rather than the real estate business.
Then you set up your business to always under-promise and over-deliver protecting you for when things do eventually go south. Be sure to take the time and effort to learn great communication skills to help remove emotions in times of need. Be sure you also have strong systems and training in place to ensure no miscommunication. Each of these steps will lower your risk, but combine them all and your risk will reduce significantly.