Risk On

Risk On

Risk On

Since I dropped out of law school right before I applied, you shouldn’t consider anything I ever say to be legal advice. Ask your attorney for that sort of advice. Ask me for real world real estate advice. Now that we’ve attended to the business of disclosure, we should discuss the concept of risk in a residential real estate transaction. We know what the term “risk on” means. The stock market people use this term sometimes, and it’s said to imply an increased appetite for purchasing risky assets. In the contest of the stock market, that would be the purchase of equities. This makes some sense to most of us, and when we hear RISK ON we generally understand that our stock portfolios are likely up on the day. Mine will be down, but that’s just my own miserable fate. Still, the concept of risk is something that is understood when it comes to equity purchases but not well understood when it comes to residential real estate purchases.

In spite of consumers not understanding the concept, the play over the last several years has very much been to invite risk. The risk in residential lake-house real estate includes the side bonus of immense and measurable personal satisfaction, but there is still risk. If you bought the perfect house and you’re sitting on your perfect pier under a perfectly cloudless July sky, you’re still engaged in risk. The risk is that the house drops in value. That the neighbor sues you because your pier is a foot too big, and that someone falls in your driveway and sues you for not fixing that widening crack. The day feels perfect, but there is still risk everywhere. Owning real estate is risk.

The current market is full of risk, but the market is also full of buyers who wish to avoid risk and sellers who wish to do the same. I have an increasing number of market participants on both sides of the transaction wishing to eliminate their risk. I’ll sell my house if I can buy that, and if that sells then I won’t sell. I’d like to buy a new house, but there seems to be some runoff on the lawn and I really don’t like that. I’d sell my house but I wonder if I’ll ever be able to buy back on the lake? All of this is risk. It’s residential risk, but it’s there. Real estate is risk.

The goal throughout any transaction is to limit risk, which is why we have attorneys and title insurance and surveys. We should look to avoid risk, wherever possible, but is any real estate transaction risk free? Let’s say you’re selling a home and you have a short term lease lined up. The closing is August 1st and your lease was scheduled to deliver you a $10,000 payday between August 7th-14th. Your buyer wants to pay you $3,000,000 for your home (a home that was worth $2,000,000 five years ago), but you really want that $10,000 lease income. Your buyer won’t move the closing date, because he has a very important birthday party to host at the new lakehouse on August 3rd. Do you blow up your lease to sell August 1st? Or do you keep the lease and lose the buyer? We know what any sane person would do, but what happens when you lose the lease and then you lose your buyer because your well doesn’t pump and your septic doesn’t drain? What happens is you dabbled in the risk of a real estate transaction and you lost.

As we move throughout 2021, risk will be a concern, as it should always be. There will be market risk, and there will be transactional risk. If you buy a house today and tomorrow another home comes to market that you’d rather have, you engaged in risk and lost. But if you buy today and nothing comes to market for the next six months, and while other buyers are wishing for inventory you’re sitting on your pier, well, then you won. Successfully managing risk has made many of my clients heaps of money, and in a real estate transaction the process is different but the goal is the same. If you’re trying to move to a real estate conclusion, be it by buying or selling, there is risk in the movement. Understand the risk and pursue the goal, but do so with appropriate caution. What’s the appropriate level of caution? I suppose it’s different for everyone, but it involve acknowledging the risk without letting it paralyze you.

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