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Risk Assessments In Real Estate Investment

Written by David Kopec on Monday, 09 February 2004 6:00 pm

Whether we do this on a conscious level or not, we all evaluate each of the environments that we occupy.

Potential homes might be evaluated in terms of their amenities, communities might be evaluated by how well they fulfill our needs, and stores or recreational environments might be evaluated in terms of their prestige.

Given the truth that each of us evaluates our environments, it should not come as any surprise that one of the more influencing evaluations is that of risk. Risk, however, has different meanings to different people.

For most men, the evaluation of risk is with regard to real estate concerns in the form of financial stability. Most men will want to feel secure in their real estate investment and will evaluate environments in terms of that financial stability. Most women, on the other hand, will tend to evaluate environments in terms of potential bodily threats. Most women will look for environmental clues that support their notion of personal safety. An environmental risk assessment is usually a hierarchal categorization within the human brain; meaning financial concerns first, followed by personal safety second, or visa versa. When working with a buyer in selecting a home, the agent should be aware of the environmental risks in that area and be prepared to address those risks with their client.

So how does a Realtor evaluate one's concept of risk without performing a psychological evaluation? The answer is listening more and speaking less. Listen to what you're clients are saying. Are the majority of their words referencing the school system, the neighborhood, or threats from Tornados?

For example, I once had a client on the East Coast who asked me to do some community assessments in the San Diego area. Their reason was because they planned to move to the San Diego area, but because they did not know area very well they employed my help them find a community that would best satisfy their needs. Because I am not a Realtor, nor dependant on a sale for my livelihood, they felt that I could give them good unbiased information that they would later use when they decided to bring in the services of a Realtor.

As we went through my initial intake assessment, I quickly realized that one of the predominating concerns for the wife was the loss of their pet. Wanting to know more about, and where this risk ranked for the couple, I developed more targeted questions. When the couple realized the information that I was eliciting they were genuinely shocked that I was able to identify their fear of losing their pet. Without going into great detail, their environmental risk concern was fast flowing traffic near their home, and this evaluation of risk ranked in the top ten of their concerns. Therefore, as part of the community profile that I composed for them, I included data that evaluated the risk potential of harm deriving from traffic. This was done by analyzing traffic volume, traffic speeds, and reviewing area accident data.

While the above is an example of an individual risk assessment, Realtors can develop their own broad-based risk assessment, which will help them direct their client to the best home.

Because my areas of specialty are San Diego and Palm Springs I will use San Diego as my example. The first thing that I would do is to list the broad-based environmental concerns that one may or may not consider. San Diego, like much of the Sunbelt cities is plagued with urban sprawl, which means greater risk of heavy traffic and congestion. Recently, the San Diego area received international attention due to the fires that swept through the area, which means that this risk will most likely play a role in the minds of many people. San Diego is also widely regarded as a military city and with the relatively recent terrorist actions; many may conclude that San Diego would be a target of a terrorist action. Also, California has a long standing and well deserved reputation of having high real-estate values, so one risk might be buying in an over-inflated market or over-extending oneself in an attempt to relocate to the area from some other part of the country. The last risk that I will include here is the risk of Earthquakes, which California as a whole is notorious for having.

As one can see from the above list, I took global concerns that effect most people and then relayed them back to the global perceptions of San Diego and Southern California as a whole. What I would do from here is rank these concerns based on relative importance to the client. For example, if one's predominate concern was a terrorist act, I would eliminate Coronado Island from their list of potential communities because Coronado Island has a big military base on the island, and has a high population of retired military personnel. Likewise, if traffic was ranked as a primary concern I might exclude the community of La Jolla because of the difficulty getting in and out of that community. If financial limitations were of concern I would then exclude both of these communities because of the average value of homes in these areas. As for the risk of fires, both Coronado Island and La Jolla rank low for fire risk; Coronado lower than La Jolla.

After understanding the global risks, I would then look to individual notions of risk. Does the client suffer from Agrizoophobia (the fear of wild animals), Aeroacrophobia (fear of open high places), or Coimetrophobia (fear of cemeteries) just to name a few fears? If my client indicated having one of these fears I would know to exclude properties or communities that either abut a wooded/wilderness area, located on top of a hill or cliff, or in places where a cemetery was in or around the obligate path to the home. While I have only listed three fears that individuals might possess, there is a pantheon of fears that many people harbor, most of which many people do not want to publicly disclose. This is why it takes an insightful professional to identify those fears and work within them. Understanding an individual's concept of risk potential, which tends to derive from fears, will enable a Realtor to locate the home that will inspire the greatest level of satisfaction for their client.

Understanding how humans interpret the world around them is an intricate component of any profession that concerns itself with the human-environment experience. Those in real estate know this fact all too well because they are selling an ideal; and, a big part of that ideal is the enhancement of desires (such as a good education for your children) and the minimization of perceived risk.

As a Realtor, understanding these risks is an important part of the profession. While one's notion of risk is individual and dependant on prior experiences, risk is probably the strongest motivator for or against a major purchase such as that of property. Therefore, a Realtor who can obtain the skills to assess and address their client's notion of risk will not only increase their credibility, but more importantly will increase their profit margin by decreasing the time spent looking at property that scores high on the individual's perception of risk potential.

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