Predictively Avoiding Real Estate Risks: A Practical Reminder

Predictively Avoiding Real Estate Risks: A Practical Reminder

Staying ahead of a market driven by equal parts logic and emotion makes real estate a business of solid forethought with just a pinch of social awareness and luck thrown in for good measure. If you’ve ever watched a property remain unsold for a decade over a stubborn owner with their eye set on an inflated number, you know just how frustrating market uncertainty can be.

So while you can’t erase all risk from real estate, there are some straightforward steps to take that can put you ahead of your competitors without rolling the dice on wild ventures.

Avoiding the trap of aggressive bidding

It’s no surprise that many real estate bids are too optimistic in regard to investment versus return. In the 1970s, engineers from the Atlantic Richfield Oil Company showed that oil contract bidders often put in offers that highly overestimate potential profits from oil fields, a move that leads to low-profit margins that might be outweighed by simply investing that money in low-risk bonds.

While that is but a small corner of the market, it illustrates a salient point: Optimism does not always pay off. Understanding objective risk models and applying cold, rigid logic to real estate pays out more often than it fails while going off of emotional gut feelings alone can prove disastrous.

Yet it’s not just a case of investing too heavily in gut feelings. Relying on outdated notions of sure-fire profit generation can be just as damaging as chasing an emotional high. Private or off-market deals, while initially tempting due to the human desire to feel elevated above others, doesn’t guarantee the deal being offered is going to work out in anyone’s favour. Dave Scherer of Origin Investments extols the virtues of objective risk management and how data analysis at his firm showed no guarantee of profit in taking private deals over public offers.

So while there is potential value in hitting the streets and looking out for private opportunities to move property, unseen factors can quickly sink potential upsides to off-market deals.

Chasing the technology curve

More distressing is the industry’s failure to adopt technology appropriately and just how glaring an issue this is proving to be over the long term. Many real estate brokers are set in classic ways of earning revenue, which isn’t terrible in and of itself, but the inefficiencies of wholly human-driven labour are starting to show its ugly face more often than not. With as many 60 percent of capital and construction projects behind schedule with technological adaption rates as the most likely reason for these shortcomings, it’s clear that changes need to be made.

After all, falling behind schedule or a budget running beyond its boundaries is a very real risk to be managed. If only forty per cent of projects manage to hit both goals without issue it may be past time to start pointing out inefficiencies in using manual spreadsheets to track billion-dollar portfolios.

Even the smaller side of the marketplace could use a wake-up call. Homeowners and small businesses often rely on knowing someone who happens to deal in real estate when they might benefit from a more thorough look into finding real estate agents who can better serve their needs. Social connections may be more comfortable, but mixing business and friendship isn’t always a grand plan.

While the industry likely won’t adopt massive changes in technology overnight, pushing for a more responsible use of calculated risks is a fairly attainable goal for nearly any level of real estate management. If you find your projects keep lapsing over budget or unseen risks crop up too frequently for your liking it may be time to take an objective look at how you’ve been handling your accounts.

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