Risk Management for Property Managers

There is no shortage of nightmare scenarios that keep property managers awake at night: an elderly woman slips on a sidewalk outside your building; a fire in an apartment complex burns through several units; children get sick from exposure to toxic mold in one of your properties.

Serious, substantial risk is an unavoidable part of managing property. And although you can’t eliminate every possible risk, you can — and must — minimize and mitigate risk through an effective a risk-management strategy.

Identifying Risk

The first step is to know what problems are most likely to crop up at each of your properties. This includes making sure each building and unit is in good repair, and also making note of the risks that are inherent to different sorts of buildings. A slip-and-fall accident, for example, could happen anywhere, but is more likely at a shopping center than at a single-family home because there is much more foot traffic at the mall. A kitchen fire, on the other hand, is more likely to occur at a residence.

Avoiding Risk

Once you’ve made an inventory of your risks, you can eliminate some of them from the equation. Consider removing the diving board from your pool, for example. And if a tenant alerts you a problem in one of your buildings, address it immediately.

“If risks are reported to the property manager and they are ignored, the manager does so at his or her own peril,” says Marie Spodek, a real estate lecturer and consulting editor for the textbook Property Management. “Managers and owners want to remove anything that could become a problem, and that includes making repairs promptly.”

Controlling Risk

Although most risks can’t be eliminated entirely, it’s critical that you take steps to decrease the likelihood they will turn into liabilities. Examples include putting better locks on doors to deter break-ins, installing high-quality smoke alarms and carbon monoxide detectors, and putting down salt or ice melt on outdoor walkways.

Spodek also recommends establishing repair guidelines that are understandable and fair, sharing those with tenants, and then explaining why and how you addressed a particular problem (or why you didn’t). Similarly, she suggests telling tenants that their personal belongings are not protected by the owner’s hazard insurance policy, and urging them to obtain renter’s insurance.

Provide those disclosures along with or as part of the lease agreement. In fact, the lease agreement can include clauses that protect property managers and owners from some liability. However, Spodek cautions that federal and state laws will trump a lease agreement in court. So, even if a lease agreement purports to pass all the risk to tenants, courts still can find property owners and managers liable if something goes wrong, such as if adequate lighting isn't provided in a parking lot and crime is committed.

Insuring Against Risk

In some cases, no matter how many precautions you take, something will go wrong and the property owner/manager may be held legally responsible. In these worst-case scenarios, it pays to have property insurance.

You can insure your property to varying degrees and amounts: against accidents that might occur on the property, against damage to the structure itself, or both. Personal injury verdicts can result in millions of dollars in payouts, so insurance against those types of accidents is a smart move.

“You don’t want to be exposed to the risk of injury to people on properties you own or manage,” says Ben Bass, a Lake Forest, Ill., real estate attorney. “If people are using your property for any purpose, that’s enough reason to get liability insurance.”

An effective risk-management strategy is a vital component of successful property management. Not only does it make accidents less likely, but it also can help property owners and managers sleep better at night.