Every major investment has its level of risks, and there is no exception when it comes to real estate. While real estate investments offer a relatively lower risk compared to stocks, it is important to understand that no investment is entirely risk-free.
To maintain this low level of risk, investors need to understand what they entail before venturing into the investment process. For the purpose of this blog post, we identified four (4) common real estate risks.
Real Estate Risks
Real estate risks can be referred to as potential damaging factors that can diminish the rewarding values of a real estate investment. It could be a physical or monetary factor affecting the real estate property.
Physical real estate risks include property structure, location, size, etc. while, monetary real estate risks include liquidity rate, cashflow returns, etc.
Legal Risks:
These risks occur as a result of investors overlooking critical legal details that validate transactions in the investment process. There are legal terms that need to be reviewed by a knowledgeable legal practitioner and make adjustments if needed. These legal risks include:
- Title Issues; imagine buying a property from a party who has no legal right to transfer ownership of the property. This confirms the ownership of the property and the right to transfer it. It will also state if there are any defaults, liens and claims on the property.
- Zoning regulations; There are legal rules that apply to the permissible development of land in certain locations. It is important that an investor who wants to buy residential land does not buy in a commercially zoned area and vice versa.
- Property disclosures; the property seller is legally obliged to clearly disclose every important detail in the contract. If this is not done, it might cause contractual disputes, especially if the investor is unaware of this legal fact.
Transaction Risks:
These are unpredictable and potential negative factors that can hinder real estate transaction processes. Real estate transaction risks include:
- Time constraints; unexpected delays in closing deals.
- Financial reason; this could be lack of funds to transfer ownership and complete the transaction.
- Market conditions; it could be in fluctuation of market prices or the exchange between demand and supply.
Negotiation Risks:
This is possible when the property buyer or seller fails to meet the right terms in the property exchange process. Real estate negotiation risks:
- Not hiring a professional real estate agent to help negotiate for the best offer.
- The buyer being unable to counter the seller’s offer favorably and vice-versa.
- The buyer or seller accepts unfavorable terms in a deal.
- Making a poor offer or accepting a low-ball offer by either of the parties can result in significant financial losses.
- Rushing into a deal without carefully considering all the terms and conditions can lead to long-term regrets and financial difficulties.
Pricing Risks:
This has to do with the overall appraisal of the property and the valuation of its worth.It is important for both parties to know they are not overpaying or underpricing a property. It could be;
- The buyer is paying more than the fair market value of a property.
- The seller is selling a property for less than its true worth.
- Unexpected changes in market conditions that can impact property values.
Conclusion
The major purpose of this blog is to help intending real estate investors increase their chance for a successful real estate investment. A good understanding of these risks will help you prepare counter measures and make informed decisions. Another important factor to consider is hiring a professional real estate consultant who can guide you through the entire process.
At Sterling Homes Limited, we provide real estate consulting services for individuals and small syndicates. Through individual counsel or group seminars, you will learn the step-by-step procedures and safeguards that lead to a high cash flow investment. We facilitate these sessions as well as the management of your investment, with a team of professionals.