Most of the risk involved in real estate and, therefore, the risk we most want to learn to manage, is risk associated with real estate transactions. Transaction risks flow from principal to real estate agent. That is the case because most losses suffered by real estate professionals are losses one of the principals would suffer personally if they could not shift the loss to the agent. If there is no loss to a principal, there is nothing to shift and, therefore, no risk to the agent.
This simple insight is the key to understanding risk identification in the real estate profession. What we want to identify initially is not the real estate professional’s risks, but their client’s and customer’s risks. We want to identify all the ways a buyer or seller might end up suffering financial loss as the result of being involved in a real estate transaction. This sounds daunting, but it is actually very simple, at least initially.
Identifying transactional risks is easier on the seller’s side of the transaction. Seller’s normally do not suffer loses as the result of real estate transactions – as long as the property is worth more than the seller owes on it. That is the case because a real estate transaction reduced to its essence is the exchange of real property for money. The seller gets a pocket full of money and the buyer gets the deed to some kind of real property. If you think about it at that level, it is easy to see that it is a lot more likely there is something wrong with the property than it is there is something wrong with the money.
For identification purposes, transactional risks can be broken down into “direct risks” and “reflected risks.” Direct risks are those that flow directly from the agent’s duties and responsibilities to the client, to the public or to the Real Estate Agency. Reflected risks are those created by the agent’s principal. When the principal breaches a legal duty, their agent, though not directly responsible, may well be put at risk. Because the duties owed, and services performed, vary depending on which side of a transaction the agent is on, direct and reflected transactional risks must be identified on both the listing side and the selling side.