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Risk management isn’t a sexy topic, but it’s something that you need to think about as the owner of a property management company. Making mistakes while managing – or not managing – your risk will keep you up at night. It could also result in lawsuits, huge fines, and even the loss of your business.
We asked Kathleen Richards of PM Made Easy and The Property Management Coach to talk through this topic with us.
If you haven’t thought about risk management before, this information is for you.
If risk management has been in your back burner for a while, this information is also for you.
Introducing Kathleen Richards
Most of you probably know Kathleen, but we asked her for an update on what she’s doing now.
Kathleen sold her property management company in 2017, and before doing that she became a certified business coach. She launched Property Management Coach and then bought LandlordSource, which has recently been re-branded and newly launched at PM Made Easy. She helps property management business owners figure out what they need, and one of the things they always need is risk management.
What Does Risk Management Mean for Property Managers?
Risk management means covering all your bases. The property management industry is very litigious. So, you need to manage the risk that’s present in the properties you’re managing, and you also need to manage your own risk as a business owner.
As a property manager, you have risks associated with accounting, hiring employees, and how you do business. Mitigating as much risk as possible is crucial to the success of your property management business.
Common Property Management Risks
1. Regulatory Compliance
Would you believe that some property managers start a business in states where licensure is required, without being licensed?
Often, they don’t even know that they need the license.
So, your first risk could be this simple. Do you need to be licensed as a property manager in the state you’re in? Find out, and if necessary, get licensed. Moreover, make sure you read up on the laws and regulations related to property management in your area. Each state can have different rules, and these regional or state specific rules are subject to change by the regulatory bodies. So make sure you are always up to date with new laws and any changes.
2. Risks associated with owners, tenants, and vendors
You have to screen owners as carefully as you screen tenants. Working with bad owners is a huge risk. You don’t want to work with owners who don’t care about their own risk, because that only increases your risk. Perhaps a new owner who wants to work with your company has a vendor who they’ve been working with for years. But, the vendor isn’t licensed or insured. You shouldn’t use that vendor, no matter how confident your new owner is in the work. It introduces too much risk.
Kathleen was once an expert witness in a court case where a tenant asked an owner if the tenant’s friend could trim some trees on the property. The owner agreed and the tenant’s friend fell off the ladder, shattering a hip. That friend had no insurance and sued the owner. The property owner absolutely should have known better than to let that tenant’s friend climb on a ladder while at the property. This was a huge and unnecessary risk that cost the owner a lot more than it would have cost him to hire a professional company.
Another example from Kathleen’s personal experience involves marijuana. It’s legal in California but it’s not legal federally. So, when she discovered a tenant was growing marijuana, she discussed the risks involved with the property owner. The property owner didn’t really care, but Kathleen didn’t want to take on the risk of what could happen with drugs – even legal drugs – growing in the back of the property. The tenant had kids living in the property as well, and Kathleen could not live with herself if anything happened to those kids because of the drugs being grown in the property. So, she ended her contract with that owner and invited him to manage the property himself.
There are a lot of risks associated with your owners and your tenants and your vendors. You have to think about the potential consequences and weigh the risk.
3. Fair Housing Risks
In property management, the risk of violating fair housing laws is always present. Your employees need to understand every detail of the fair housing laws. Make sure they read policies and sign off that they’re understood. Send employees to trainings. Give them reading material. Continually train them on fair housing. From service animals to discrimination, fair housing can be scary. There’s so much that can happen.
Here’s an example. A property management company didn’t have a receptionist; property managers were responsible for answering the phones. A prospect called to ask about the various properties that were available for rent, and the property manager who happened to pick up the phone spent a lot of time discussing the available homes. The phone call ended. That caller was a tester, or an attorney who makes calls like this to try and find property managers who violate fair housing laws. So the tester called back, this time speaking with a foreign accent. A different property manager answered the phone and instead of spending time discussing the properties as the other manager had, directed the caller to check out the available homes on the website.
This resulted in a lawsuit. It doesn’t matter if there was discrimination or not; two presumably different tenants were not treated consistently, and that’s a problem. Now, that management company has a receptionist who handles all incoming tenant phone calls.
Another extreme situation occurred when someone asked a property manager if 10 people could move into a two-bedroom property. The property manager advised that 10 people were too many. She used the guidelines of two people per bedroom plus one extra person. But, a discrimination lawsuit was filed and that property manager lost her business. Not only did she lose her business, she now has this complaint on her record with the Department of Real Estate.
A well-trained staff is required to manage your fair housing risk.
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Risk Management Issues You May Not be Thinking About
You’re running a business, and many of your biggest risks will be accounting and employees.
1. Internal Risk Management Issue: Accounting
If you’re not comfortable with accounting and all the financial risks that are present, hire a good bookkeeper. Get someone who understands property management software. Hire a virtual assistant who can specialize in accounting. Make sure there are checks and balances in place that protect you from things like embezzlement.
2. Internal Risk Management Issue: Employees
Employees come with risks, too. Make sure you have a manual of policies and procedures that documents your expectations and the requirements of your company. You can’t have an employee who drinks alcohol while at work because what if that employee is in an accident?
Kathleen knew a real estate agent who did property management for a company that didn’t allow family members, vendors, or employees to rent the homes that the company managed. That makes sense. But, the real estate agent went ahead and rented a home to himself and his family. Then, they stopped paying rent. So, the employer had to evict those tenants and it took two years of court appearances and lawsuits.
Be mindful of the internal risks as well as the external risks.
A Framework for Mitigating Risk in a Property Management Business
Step 1: Identify your risks
Maybe you’re doing a property assessment and you notice a cracked driveway where it would be easy for a tenant to trip and fall. Or, the plants outside the front windows are so high that it would be easy for a predator to hide there. You’re going to check the property for carbon monoxide detectors and other things that increase or reduce risk. Then, you’ll present these risks to your owner, and let them know what actions they need to take.
Identify the risks in every aspect of your business.
Step 2: Analyze the risks
Your next step is to analyze the size and strength of the risk. How often will this risk potentially happen? Maybe you require your owners to carry at least half a million dollars in liability insurance. If you have an owner who refuses to have a policy that large, will you continue to work with the owner? You need to analyze the risk. Or, perhaps an owner won’t want to add you as an additional insured to their policy. Analyze the size of this risk and the severity of what would happen if something went wrong. You need to know how much of a risk you’re working with.
Step 3: Create a plan of action
Then, based on your evaluation of the risk, you need a plan of action that will allow you to move forward.
You’ll have to document everything, and you’ll need a process in place to address each risk. Once you have that process in place and everything is documented, review your risk management system and plans. You may need to make adjustments. You may need to add processes. Update and renew your risk management system constantly. It has to be current.
Assess and balance the risk. Remember what’s at stake: fines are severe and you can lose your business.
Risk Management Blind Spots and Accountability for Property Management Companies
Small property management companies have a lot of operational risks to deal with. There is an urgency to set up the accounting and employment systems properly to protect themselves. Larger companies with 1,000 doors or more, or companies that have been around for a long time have different challenges when it comes to risk management. They can become complacent. If they’ve done something a certain way for 10 years and nothing bad has happened, they’ll have a hard time seeing why they should change things.
But, if you’re using a lease from 10 years ago, there might be terminology in there that’s actually illegal today.
As your company grows, you start delegating more. Make sure your employees are following the standards you’ve set and the processes that are in place to keep you safe from risk. Audit your risk management systems every year.
Many brokers don’t realize that they’re ultimately responsible for everything happening in the company. They need to be signing off on a lot of forms. If an employee forgets to hand a tenant the lead disclosure booklet, the broker will be the one who answers for that mistake. You need a process. You need a checklist. You need to check everything off that list.
This is a blind spot for big companies. Make sure everyone follows your policies and procedures and protections.
If you’re a corporation, make sure you’re doing your minutes and reporting them with your taxes. Don’t open yourself up to additional risk.
Your property management company is a business, so act like a business.
Large companies have entire departments dedicated to risk management. You may not have those resources, but you can take the risk management process just as seriously. Increase your insurance products. Buy cyber security insurance. Take out a bond on your bookkeeper so all your cash balances are covered. Get a rider on your E&O insurance that covers fair housing. Increase your insurance for vehicles or buildings.
It’s a cost. But, you have to protect yourself.
Waiting until something goes wrong is stressful and expensive. In property management, 99 percent of what we do is fully anticipated. You know you’ll collect rent every month. You know you’ll have to perform maintenance on your property. You know there’s a potential for people to get hurt there.
Anticipate the risk and put processes in place that define how the situations are to be handled.
Think about first responders who go charging into burning buildings. They do it calmly and professionally. Why? Because they practice these situations all the time. They have a Plan A and a Plan B and a Plan C. If something happens, they have a process.
This is risk management.
Don’t lose sleep and don’t find yourself in reaction mode. It’s easier to invest your time and energy on the front end.
The key takeaways you can do right now:
- Prepare yourself.
- Do a complete risk management audit.
- Be curious and ask questions.
- Think about what a judge would say in every situation you find yourself.
Thanks to Kathleen and to our listeners. If you have any questions about what you’ve heard about property management risk on our podcast this week, contact us at Fourandhalf. We can put you in touch with Kathleen and help you grow your property management company.