The 3 Tiers of a Property’s Risk Management Strategy

The 3 Tiers of a Property's Risk Management Strategy

 

With property operations, every day the sun sets and rises with the risk of incurring vacancy losses, bad debt, collection and concession losses, and more.

“Do you have a risk management strategy?” It’s one of the top questions asked of property management companies, and many organizations mistake risk mitigation for risk management.

If your company is only engaging in risk mitigation, or the proactive reduction of risk you’re willing to take on, you’re missing out on two-thirds of a comprehensive risk management strategy. Here’s why:

  • There’s a risk of a kitchen fire or accident at the property, a result of a careless resident. You can’t calculate that risk and mitigate an accident or even the behavior of your renters.
  • There’s a risk that a new renter isn’t even the person that’s referenced on the credit application. You can’t calculate risk and mitigate what you don’t know about a prospective renter.
  • There’s a risk that a renter will skip out on the last few months of their lease, leaving you with bad debt. You can mitigate this risk, but at what cost to your occupancy?

The inherent risk that comes with property management is real, and even unlucky at times. We all know the unfortunate stories of accidents, theft, fraud, and more.  A colleague told the story of a resident golfer’s unfortunate timing while working on his swing one summer morning near the parking lot. While using plastic practice balls to reduce the risk of breaking a window, the resident was about to make contact when the sprinklers came on. Instead of striking the ball, the club hit squarely on a sprinkler head, sending a geyser in the air and dousing the interior of a convertible.

Because a renter’s insurance policy wasn’t in place, the renter was on the hook for a few hundred dollars of damage to the sprinkler system and cleanup of the car.

Other stories – and they are out there – spin more complex tales of big fires started by residents and fraudulent identities that cost apartment managers thousands of dollars in bad debt. Catastrophes like these can put properties in compromising situations if a risk management strategy isn’t in place.

Risk management sometimes gets confused with mitigating risk, which is reducing the impact of an event or cause that can’t be avoided or covered by another party. Risk mitigation really is one component of the greater risk management approach, which provides solutions for not only mitigation, but avoidance and transference of risk as well.

It’s a three-pronged platform designed to protect property operators and owners against economic loss that erodes gross revenue and net operating income (NOI) resulting from property damage, fraud and collection and vacancy losses resulting from traditional security deposit procedures.

In simpler terms, a good risk management strategy means you avoid as much risk as possible, transfer what risk you can to renters, and protects the property against the remaining inherent risk.

First: risk avoidance

The best way to protect yourself against risk is to not let it in in the first place! The primary way to avoid risk is by employing robust screening, complete with fraud prevention. Identity fraud is growing, especially with greater online leasing adoption.

Now more than ever, property management companies are vulnerable as applicants attempt to deceive your team throughout the leasing process. Falsifying documents is becoming more common place, as are synthetic identities.

Avoid taking on risky renters with a platform designed to stop identity fraud. Traditional screening tools – credit and criminal reporting – aren’t good enough any longer. Advanced technology that incorporates identity verification and fraud prevention is essential. Look for platforms that can also prevent fraud, even for existing residents, with a direct integration into the property management system.

And finally, the best way to avoid renter risk is to know past rental history. Simply knowing whether a renter, despite a credit or criminal score, has paid their rent to previous properties can help you avoid the risks of bad renters and ensure good renters are welcomed.

Second: risk transfer

Transferring the risk of residents who cause damage to their units is something that many property management companies are practicing as normal course of business. The onus is transferred to residents via mandatory renter’s insurance programs to cover renter property damage, whether accidental or intentional.

Renter’s insurance isn’t new – but ensuring compliance with mandatory programs can cause headaches for your property team. You shouldn’t have to spend valuable time tracking down non-compliant renters, and you shouldn’t need to scramble to temporarily cover non-compliant or vacant units from risk.

Effective risk transference tools handle non-compliance seamlessly and automatically, communicating directly to non-compliant renters, informing the property of program violations, and issuing temporary gap coverage for the unit, all without direct intervention from the site team.

Given the rising costs of building and maintaining properties, who can afford to risk an asset because of something that generally is out of the property management company’s control?

Third: risk mitigation

Once you’ve avoided and transferred the risks that you can: mitigate what you can’t. Mitigating risk is all about reducing the impact or damage with a proactive strategy. Major league baseball players mitigate the risk of getting beaned by a pitcher by wearing a helmet, and while it’s not always perfect, it’s saved many athletes from worse damage.

On occasion, renters will pass screening checks, maintain renter’s insurance throughout their lease, and still incur more property damage than their security deposit amount.

Or, good potential residents will be faced with insurmountable cash deposits required at move-in – and choose to look elsewhere, negatively affecting your occupancy.

Mitigating the risk in the balance between occupancy and bad debt can be solved with a security deposit alternative to supplement or even replace the traditional cash deposit.

With a security deposit alternative in place, a pool of funds is available to the property, effectively balancing good actors with the actions of bad ones. Non-refundable to renters, a security deposit alternative lowers the cash required for a deposit without stripping the protection of pooled funds to mitigate risk to the unit or property.

We’ve all heard it: stuff happens. And when you least expect it, well, there it is. And so, too, is an effective risk management strategy with the latest technology designed to avoid, transfer, and mitigate risk – without additional workload on your team.

As the business of renting apartments gets more competitive and complex, protecting assets from unfortunate events – and amateur golf swings – is becoming more important than ever.

Ready to learn more about risk management? Download our free eBook here.

 


Contributing Editor, Property Management Insider
President, Ballpark Impressions, LLC

author photo two

Tim Blackwell is a long-time publishing and printing executive in the Dallas/Fort Worth area who writes about the multifamily housing and transportation industries. He has contributed numerous articles to Property Management Insider, and worked as a newspaper reporter in the D/FW area. Blackwell is president of Ballpark Impressions, and publishes the Cowcatcher Magazine. He is a member of the Fort Worth Chapter/Society of Professional Journalists.

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