Risk Management for Realtors

Risk Management for Realtors

Google “Real Estate Risk Management” and you will get several articles claiming that there are x number of ways to manage risk. For the purpose of this article we are going to narrow it down to three strategies: Accepting the risk, Sharing the Risk or Transfering the Risk. There is another thing I see Real Estate Agents do on a regular basis: They reclaim the risk. I know, that sounds absurd. Let me explain.

The Origin Story of The Home Inspector

Once upon a time, a real estate salesperson told a buyer not to worry about a giant crack in the foundation of the home they were buying. It turned out to be a major structural issue that costs tens of thousands of dollars to fix. The buyer sued the agent and the agent lost big. They advised their client on the suitability of a structure and they had no business doing so. They accepted a huge risk and it came back to haunt them. They were found to be negligent.

Accepting the risk turned out to be a terrible idea. A new industry partner was born: the Home Inspector. 

That’s the short version of the story. I’ve heard it repeated at home inspection conferences for years. Home Inspectors are a tool that real estate agents use to transfer risk during the sale of a home. So what do I mean they are reclaiming the risk?

  1. Sharing the Risk

In many real estate markets, home inspectors get the bulk of their business from agent referrals. When an agent refers their client to their favorite home inspector they are sharing the risk. As a home inspector, I absolutely love this risk strategy. I do not discourage it. Everyone, please share the risk with The BrickKicker.

  1. Transferring the Risk

It is more common for agents to give out a list of 3 or more home inspectors to transfer the risk. Some agents will put them in alphabetical order to make sure they are not showing preference. (By the way, the first person on the list has an 80% chance of getting the job but only if they answer the phone or return the call within 8 minutes.) Most agents do this because their brokers require it but some (mistakenly) believe it is required by law. As a risk management tool, they are transferring their risk. (They are really transferring it back to their buyer. More on that later.)

  1. Reclaiming the Risk

So far, so good. Our agent has shared or transferred the risk that the home they are selling their client has a material defect that could result in a lawsuit. What happens next? The agent reclaims the risk. Here are a few ways they do it:

  • Telling their client not to attend the inspection or to show up at the end.

Real Estate Agents may not think it’s worth their time to attend a home inspection but their buyers definitely should. When buyers don’t understand the inspection process, the limitations the inspector had and what the inspector did and did not do, liability is going to creep back in. If the inspector told them not to come, that is on them, but an agent does not want to encourage their client to minimize their due diligence.

Sometimes home inspectors have this preference. They don’t want a buyer to slow them down or get in the way of the inspection. Again, let the home inspector add liability if they want. Frankly, it’s a dumb thing for a home inspector to request. Clients that are present understand the home inspection process and its limitations.

  • Interpreting report findings instead of deferring back to the inspector.

Agents are frequently called on to interpret report findings for their clients. That doesn’t mean they should. If a buyer thinks something is a big deal and their agent does not, they should both lean on the inspector. An agent that minimized the issue is inviting trouble. Evaluating signs of structural movement or determining if something is a theoretical hazard is beyond the expertise of a real estate profession. 

  • Referring to inspectors that are unqualified and/or uninsured.

Georgia does not license Home Inspectors and they probably never will. For this reason, Agents should make sure the inspectors on their list are qualified. Like any industry operating in a state without licensure, the home inspection industry can become flooded with self-proclaimed inspectors because the barrier to entry is minimal, if any in addition to the number of “online schools” that provide a certifications. This industry is supported by two major associations, each with the basis of helping inspectors offer the best inspection possible. The BrickKicker – Georgia has aligned it’s vision and expectations with the American Society of Home Inspectors (ASHI), the pioneering association into this industry and strong advocate for proper practices in the real estate realm. ASHI Certified Inspectors have taken the National Home Inspector Exam (in a testing center, closed book, and not in their PJs) and had a national background check, among other things. ASHI meet the requirements of almost every state that has licensing requirements.

E&O (Errors and Omissions) Insurance is also a must for a home inspector that makes an agent’s referral list. A good E&O policy should also provide referral indemnity to protect the referring party if they are named in a lawsuit. (That is the ultimate tool for transferring risk.)

One comment

  1. Thanks for sharing this intelligent insight into the reasoning behind using a home inspector. Not only is it informative for Realtors and agents but also very good information for why a buyer should always get a home inspection by a qualified inspector with appropriate training. After many years of looking over various inspection reports, I am definitely aware that there is a difference in quality from inspector to inspector. And I certainly agree the buyers should attend the inspection to ensure they are not only getting their money’s worth but also to have a clear understanding with the inspection process. Thank you.

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