by Michele Newbern Gillis
Staff Writer
Identifying and managing risk is different in each part of every real estate transaction.
The Commercial Real Estate Women of Jacksonville brought in three speakers last month for a panel discussion of risk during the purchase of land, construction of the project and property management after the project is built.
“If you don’t have risk, then you probably don’t have much reward,” said Melissa Gross-Arnold of Lewis, Longman &Walker, who moderated the panel discussion held at the Marriott Southpoint. “But those of us who are smart enough to know how to manage the risk, can tolerate more and more of it. The more risk we have, the better the reward.”
Kate Clifford of Strategic Sites discussed the risk involved in writing contracts.
“At the end of the day it is about getting paid for the services that we render professionally and competently,” said Clifford. “That is one of the first risks that we as brokers run into. As a broker, we might be representing a buyer, a seller, a landlord or a tenant. It is really important that up front we identify what our role in the transaction will be.”
She said they need to identify what their role is in the transaction, who they are representing, what is the scope of work, who will be paying them and when will they get paid.
She said it is also important when you find yourself working outside your expertise, to call in a professional to help.
“When I get beyond my personal threshold of knowledge or competency, I turn to my attorney,” she said. “I frequently engage an attorney to help me, not to help my client, on my nickel. I think that is very important. We have great exposure to do great damage to a transaction by being a little too bold. I think all brokers should have a go-to person for advice and counsel.”
Clifford said she also thinks it is important for all professionals to carry Error & Omission Professional Liability insurance.
“I am amazed at how many real estate brokers do not have this insurance,” she said. “I think it is imperative, although in the 10 years I have been in business, I’ve never had to use it, but boy do I like knowing it is there.”
Once a transaction is defined by a contract, a lot of brokers feel that now it is in the hands of the attorney to get it closed, but Clifford said that is not true.
“I consider the management of the transaction one of the most valuable things I do as a Realtor,” she said.
Clifford said one way she manages risk is to create a closing timeline.
“As soon as I have executed a contract, I complete a timeline which identifies all the critical steps and the dates by which they must be completed,” she said. “It identifies all the critical parties and information on paper. Once that timeline is completed, I send it out to the buyer, the seller, both attorneys and the other Realtor. I ask them to read through the timeline and make sure everyone agrees on the dates. I want to make sure we all understand who is responsible for doing what. I tell them if they have a problem with it, to call me and let’s look through it. Sometimes we find there are contradictions in the contract and if you find it in the first day or two of the contract, it can usually be fixed. But, if we wait until the due diligence or inspection period, quite often it doesn’t get fixed and you are more likely to have your transaction go sideways.”
Once the timeline is approved by all parties, Clifford puts the dates on her calendar to remind her to do what she needs to on the right date. If she is not responsible for a certain duty, she will then make sure whoever is responsible has in fact done so.
“As a broker, I think my greatest risk is damaging my client and I take it very seriously,” said Clifford. “I also think that you have to make sure the things you do don’t damage your reputation. By following up on details and staying on top of your transaction, all of those things can be prevented.”
David Hamilton of Elkins Constructors discussed managing construction risk.
“Construction is a very risky business,” said Hamilton. “One of the first things we need to do is to define the risk. Risk is potential for loss.”
That loss could come in several forms including financial loss and time loss from schedule delays, damages, extended general conditions or loss of opportunities.
“Those who have anything to do with the condominium market are aware of the long-term liability that goes along with the construction of condominium projects,” he said. “Reputation could be a loss. You are only as good as your last project.”
He listed several sources of construction risk that included unforeseen conditions, unanticipated costs, schedule delays, poor subcontractor or vendor performance, accidents, mistakes from human error, difficult owners or project visibility.
“The next step we do is to identify the risks because each project has a totally different set of risks,” he said. “We look at the ‘what if’ analysis. What if something were to happen, what would the risk be?”
Once he has identified the risk, he develops a strategy to manage the risk.
“In managing the risk, one of the first questions we need to ask ourselves is who owns the risk?” said Hamilton. “Is it an owner risk? Is it a subcontractor risk? Is it a general contractor risk? Is it a bonding company risk or is it an insurance company risk?”
Then he said they look at the compensation considerations.
“Every deal that we get into, we look at as risk/reward,” he said. “If an owner is requiring us to take a risk, we need to be rewarded for that. If there is very little risk, then won’t receive very much reward.”
Hamilton said with the contract terms and conditions, you can identify, eliminate, allocate and manage a lot of risks.
“Insurance coverage is very important,” he said. “You need to know what your insurance coverage will cover and what it won’t. If you as the general contractor agree to some schedule, quality standards and insurance requirement, you need to make sure that the appropriate subcontractors have the same type of coverage in their contract.”
Hamilton explained how schedules can cause an extreme amount of risk; therefore, contractors need to make realistic schedules to help manage the risk. He also said it was important to have a penalty and incentive clause in the contract.
Other issues he discussed concerning managing risk were safety, permit and statute compliance systems and procedures.
“One of the hurdles we have in construction is keeping up with all the requirements including OSHA requirements, storm water requirements, and statutory limitation requirements,” said Hamilton. “We have an in-house attorney just to keep up with all the requirements. Kate said she has a very close relationship with an attorney and I would also recommend you do that.”
Other ways to manage risk are to pre-qualify subcontractors and vendors, accurately profile owners and their mold expectations and project contingencies.
“It is very important to have open and direct lines of communication with everyone involved in the project,” said Hamilton. “An early risk is a risk. When you have identified the risk it is now a problem, it’s no longer a risk. Develop a strategy, allocate the appropriate risk to the appropriate party and follow up with a plan.”
Barbara Freeland of Lockwood Freeland Realty discussed the risk involved in being a property manager.
“The first thing I have to do as far as risk is concerned is to verify that the tenants have the property listed on their insurance release,” said Freeland. “I have to verify that the owner is listed as an additional insured. Many tenants don’t realize that the loss of their personal property will probably not be covered by the landlord’s insurance.”
She explained that damage to the tenant’s personal property is not the landlord’s problem.
“A water cooler on the fourth floor overflows on a Friday night and no one knows it until Monday morning. Computers are ruined, everything is ruined, but it is not the landlord’s fault,” she said. “The landlord is not responsible for this, the tenant is responsible.”
She said she had this same scenario happen to her and the way they worked it out was the owner paid the deductible for the tenant, so everyone was somewhat satisfied.
Freeland also said all vendors need to be properly insured and show the owner as an “other insured” so everyone is protected.