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REAA - CPPREP4002 - Student Learner Guide 1.5 (QLD)
REAA - CPPREP4002 - Student Learner Guide 1.5 (QLD)
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Table of Contents
Ethics and Risk Management ............................................................................................. 7
Ethics ................................................................................................................................. 7
Rule-based system of ethics ........................................................................................... 7
Results-based ethical system ......................................................................................... 7
Risk Management ............................................................................................................. 7
Commonalities .................................................................................................................. 8
Examples ........................................................................................................................... 8
Risk – An Introduction ......................................................................................................... 9
What is Risk? .................................................................................................................. 10
Duty, Negligence and Tort ............................................................................................. 13
Negligence ..................................................................................................................... 13
Professional Negligence ................................................................................................ 13
Negligent Misstatements ............................................................................................... 14
Breach of Duty of Care .................................................................................................. 14
Proof of Negligence ....................................................................................................... 14
Tort................................................................................................................................. 14
Trespass against Goods ............................................................................................... 15
Conversion .................................................................................................................... 15
Intentional Torts to Persons .......................................................................................... 15
Trespass to Land ........................................................................................................... 15
Public Nuisance ............................................................................................................. 15
Private Nuisance ........................................................................................................... 15
The Effect of Risk on the Real Estate Business ......................................................... 15
Decrease in the “Net Worth” of the business................................................................ 16
Prosecution / Litigation Leading to Fines and or Compensation Payments ................ 16
Loss of Licences ............................................................................................................ 17
Goodwill Value – Damage to Reputation ...................................................................... 17
Cash Flow Viability / Return on Investment / Depletion of Capital Reserves .............. 18
Physical Injury to a Person ............................................................................................ 18
Physical Damage to a Property..................................................................................... 18
Who may be affected by Risk? ..................................................................................... 18
Vendors and Landlords (Our Clients) ........................................................................... 19
Purchasers and Tenants (Our Customers)................................................................... 19
Principals, Licensees, Business Partners and Staff ..................................................... 20
Stakeholders with a financial interest in the agency .................................................... 20
Contractors, Tradespeople and Suppliers .................................................................... 21
Other Offices in a Franchise Group .............................................................................. 21
Managing and Minimising Risk ........................................................................................ 22
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The theme "Ethics and Risk Management" signifies that each of these two worthy
disciplines—risk management and ethics—depend on the other. Good risk management
requires good ethics; and good ethics require good risk management. This implies, from
a positive perspective:
• First, for an organization to manage its risks well, everyone who represents that
organization must practice good ethics.
• Second, for an organization to act ethically, everyone who represents that
organization must manage risk well.
And, conversely, from a negative perspective:
• First, an organization that permits or encourages unethical actions by anyone who
represents it is not practicing good risk management.
• Second, an organization that permits or encourages anyone who represents it to
manage its risks poorly is acting unethically.
To see why good risk management and good ethics must go together—why each needs
the other—please start with definitions of these two fields.
Ethics
Any good college text on business ethics gives a definition comparable to: any system of
guidelines for appropriate conduct toward others, aiming to comply with certain rules or
to achieve certain results in particular types of situations.
Rule-based system of ethics
This emphasizes guidelines like "Always tell the truth" or "Never steal."
Results-based ethical system
This emphasizes achieving "the greatest good for the greatest number" or directs, "Act
as you propose only if the world would be bettered by everyone in your situation also
acting as you propose." In difficult situations, different systems of ethics may condone or
condemn a specific action as ethical or unethical, especially with respect to different
groups. Some examples will be presented later in this article.
Risk Management
Risk management is a process for making and carrying out decisions designed to
minimize the adverse effects of accidental or business losses on an organization by
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reducing the number or size of these losses or by cost effectively financing recovery from
any such losses.
Commonalities
First, however, to see why the fields of ethics and risk management need each other,
consider the common ground they share. Ethics gives guidelines for appropriate actions
between persons and groups in given situations—actions that are appropriate because
they show respect for others' rights and privileges, actions that safeguard others from
embarrassment or other harm, or actions that empower others with freedom to act
independently. Risk management is based on respect for others rights and freedoms:
rights to be safe from preventable danger or harm, freedoms to act as they choose without
undue restrictions.
Both ethics and risk management foster respect for others, be they neighbours,
employees, customers, fellow users of a good or service, or simply fellow occupants of
our planet—all sharing the same rights to be safe, independent, and hopefully happy and
productive. Respect for others, whomever they may be, inseparably link risk management
and ethics.
Examples
First, for an organization to manage its risks well, all its people must act ethically. For
example, if someone misrepresents a property listed by the agency, the agency is
vulnerable immediately to liability claims and in the longer run may lose its reputation and
market share. Again, if one of an agency's executives treats any subordinate employee
unethically, that employee (and a good number of his or her fellows) may lose his or her
enthusiasm for their work, may begin to take advantage of the employer in any of
hundreds of little ways, or may simply find another job. Or if one employee discovers that
a second employee is embezzling from the organization, the second employee's failure
to report this dishonesty causes financial loss to not only the agency and to each of its
owners but, in the long run, also to those who rely on that organization for their livelihood.
Second, if an organization is to act ethically, everyone who works for that organization
must manage its risks well. The maintenance staff who takes out the organization's daily
trash must dispose of it properly, otherwise, neighbours upon whom it is dumped may sue
the organization and it, in turn, may face fines and injunctions for environmental pollution.
Furthermore, the organisation's risk management staff must be scrupulously honest in
providing information to agency’s insurers, not only to be sure that theorganization has a
good reputation among underwriters (and therefore favourable premium rates, an
element of good risk management) but also to be confident that the organization pays its
ethically fair share of the loss exposures that are pooled through insurance.
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Risk – An Introduction
Consumer behaviour relating to buying, selling and managing real estate has endured
significant changes in the past two decades. In the 1970’s and 1980’s most people bought
property once or twice in a lifetime and investing was also much less extensive. Therefore,
consumer exposure to real estate transaction risk was arguably lower.
In the 1990’s major changes in banking, technology, competition and consumer education
made real estate investment more accessible and the need to update real estate skills
more urgent.
Real estate agents need to be kept abreast of changes that affect the real estate industry
due to the rapid pace of change. The Rules of Conduct included in legislation in the states
and territories impact on minimising risks to buyers and sellers.
Recent studies have identified well over a thousand specific real estate industry risks.
Some of these risks are fairly stable; others fluctuate on a regular - or irregular - basis.
Some risks are tied to the market, while others are a direct result of the day to-day
decisions made by management.
Some real estate agencies recognise the value that can be created through proactive risk
management practices. Others limit their efforts to crisis management and insurance-
based techniques.
To turn things around, management needs to understand the universe of risks they face
and find a way to bridge the gap between crisis and proactive risk management.
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In companies where a gap exists, risk management policies and activities are often not
clearly defined, communicated, or linked to the overall strategy of the organisation.
The result: some risk management activities may be performed more than once by
different parties or in some cases not at all.
It is an accepted fact that risks are simply a part of life. Every day, we all run the risk of
being hit by the proverbial bus, suffering a catastrophic illness or having some small or
large event impacting on our finances.
Every business is surrounded by a minefield of risks and as society becomes more and
more likely to “sue at the drop of a hat”, the minefield keeps getting more and more
dangerous.
It could be argued that the risks facing a real estate agent and their clients are GREATER
than those encountered in many other business sectors due to the very nature of the work
we are involved in and the value of the assets that we are dealing with. In a financial
sense, we are dealing with HUGE amounts of money.
Most individuals have the vast bulk of their wealth tied up in the property they own, and
as a result we run risks associated with loss or damage to their properties. The possible
consequences are considerable.
Real Estate agents deal with members of the public daily. They come to our offices, we
take them to visit property in our cars, we enter their locked premises using keys they
have provided us with, and so on. All of these activities, and a host of others, have risks
associated with them.
However, these are just the obvious risks. There are a host of others, and the purpose of
this unit is to show you how to identify risks and deal with them in such a way that they
are either managed effectively, or maybe even eliminated altogether, so that as agents
we are protected, and we can protect our clients from risk.
What is Risk?
Risk can be defined as:
“The chance of something happening that will have an impact upon objectives. It
is measured in terms of likelihood and consequences.”
In its severest form, “Agency and Consumer Risk” can be defined as:-
Any activity or the outcome of any activity, which is carried out by the agency or
representative of the agency, whereby the effect on the agency or a client of the agency
would:
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It is imperative to understand that, in effect, the actions of staff are deemed to be the
actions of the agency. A Licensee is responsible for the actions of his or her people, and
if the staff members do the wrong thing, it will almost certainly be the agency which is
penalised, as well as the particular individual concerned.
It goes without saying that the more likely the situation created by a particular risk is to
occur, the greater that risk will be. Perhaps the high probability of the risk eventuating is
a bit like walking down the middle of a busy road wearing a blindfold – sooner or later,
you are going to get hit by a car!
In this unit you will learn how to Categorise Risks according to the likelihood of the risk
occurring, together with the severity of the results, if it does occur.
Thinking back to what we said in the introduction about the dollar values of the properties
we are dealing with, it is not hard to see that the consequences of a risk in our business
are very likely to be extremely expensive to fix.
Because of this, there is a real risk that the business can be dramatically affected by the
resignation or illness of just one person. The same situation can occur when a key person
goes on holidays.
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The non-availability of the information sourced from the computer programmes you use
can have a major effect on the smooth running of the office, and on the service that is
offered to clients and customers.
A loss of service increases the exposure to risk, for clients, customers and for the agency
itself.
A good reputation is hard to build, but easy to destroy. In extreme cases, bad publicity
can destroy a business almost overnight.
It is a sad fact that bad publicity can often be caused by untruths. Suppose a client or
customer feels they have been poorly treated by the agent. It doesn’t really matter
whether or not they have actually been poorly treated. Whether the agent is guilty or
innocent of the “charge”, the effects can be catastrophic. If a client or customer believes
they have been hard done by, it is easy for them to generate negative and bad publicity.
Businesses and individuals have a heavy responsibility under the overall concept of “duty
of care”. Most people do not even realise the extent of this responsibility which can extend
to emotional injury as well as physical.
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Managing risks is not just about thinking about the agency – it is the clients and customers
of the agency that allow it to operate.
• No clients – no business
• Negative publicity – reduced business
The choice for the business manager is simple – managing the risks is an integral part of
managing the business. It is not a matter of choice.
Duty can be defined as an obligation, recognised by law, to avoid conduct that would
unreasonably risk damage to others.
The definition of Duty is flexible and courts have historically responded and adapted to
changing social values and needs, as well as the legislative requirements imposed by
various Acts and Regulations (such as the Rules and Codes of Conduct).
Under legislation, real estate agents have a duty of care to both their customers and their
clients.
Clients are consumers that have entered into a contract with the agent. Customers are
consumers that have not entered into a written contract with the agent. The agent enters
customers into contracts with their clients.
Eg: A tenancy agreement is one made between the tenant and landlord. Real estate
agents are contracted by the landlord to represent them in effecting the contract between
landlord and tenant.
Negligence
“Conduct falling below the standard established for the protection of others
against unreasonable risk of harm”.
Duty of care can be defined as taking of reasonable steps to protect others against risks
of injury that should reasonably have been foreseen. Where conduct falls below the
standard of care expected, a Breach of Duty of Care occurs. To prove negligence it is
necessary to prove that the defendant must have owed the plaintiff a duty of care. A
damages claim for negligence will not normally be successful in respect of an accident
(which could not be prevented, or which could not have been reasonably foreseen).
Professional Negligence
Property professionals are judged by standards of professional practice. In the real estate
industry, these are enshrined in the different States and Territory’s Rules and Codes of
Conduct and industry Codes of Ethics (eg. REIA Codes of Ethics).
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Negligent Misstatements
Any professional such as a real estate agent who holds him/herself out as an expert in a
certain matter is subject to a duty of care in the information, reports and advice given to
his or her clients, and to do what is necessary to protect them from exposure to
foreseeable risks.
This area of negligence is probably the most important tort affecting the property
professional as it covers “economic loss”.
Property professionals need to be careful about casual “off the cuff’ statements even in
informal social situations as the listener may be relying on the agent’s words as he will,
in all likelihood, consider that the agent is an expert on the matter.
Proof of Negligence
In law it is assumed that a person's injury (loss) was caused by the negligent action of
another party because the event was the sort that wouldn't occur unless someone was
negligent.
However, in real estate, the very fact that a party may feel aggrieved and may have a
valid claim for a breach of duty of care may be sufficient for the regulator in each state/
territory (eg. Office of Fair Trading (QLD) to consideraction against, or investigation of, the
agency.
These regulators have proven by their actions that they are willing to seek prosecutions
and pursue agencies where complaints are raised by the clients and customers of
agencies.
Tort
A “Tort” is a “civil wrong” or “wrongful” conduct or behaviour that
• Infringes the rights or interests of an individual protected by the law against such
wrongful conduct, and in turn
• Gives a right to damages for loss suffered.
A tort is different to a breach of contract or a breach of trust, and some torts, such as
assault and battery are punishable as crimes. A tort may be intentional or accidental:
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• Intentional Tort: A person who intentionally harms another will be held responsible
for the harm caused (may exclude self defence or necessity).
• Accidental Tort: Where harm may result from negligence or without fault.
• Common torts that may affect real estate agents include:
Conversion
Intentional control over a chattel, which interferes with the rights of another.
Example: A real estate agent who fails (within a reasonable time) to return a chattel
found on premises recently vacated by a tenant, could be faced with an action for
the wrongful detention of that chattel.
Example: A property manager using a guard dogs when collecting rent money,
could be considered to ‘inflict nervous shock’ on the tenant – a potential assault.
Trespass to Land
Defined as entering upon land without permission or remaining upon land after permission
to remain has been withdrawn. Placing or throwing or leaving an object upon land is also
a trespass.
Public Nuisance
An unlawful act (or a failure to discharge a legal duty) that affects the safety, health,
property or comfort of the public, or that obstructs the public in the use or enjoyment of
the public right.
Private Nuisance
Defined as when a person is disturbed in the use or enjoyment of his / her land by a
wrongful act of another, or by the escape onto the land of harmful substances or things.
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Whilst we are primarily concerned with minimising risk for clients and customers, every
risk situation has a potential effect on the business itself, the licensee, the staff,
salespeople, property managers, contractors and other stakeholders. The
consequences of the risk may have an impact on the personal safety of people, the
income and / or cash flow of the business and other stakeholders, the reputation of the
business, etc.
But bad publicity is not the only risk that can decrease the value of the business.
What happens if you lose a couple of your biggest landlords? Surely the possibility of
such a loss is a very real risk, and there is no doubt this would have a detrimental effect
on the value of the agency.
What if half the staff leave and set up in opposition down the road? Yet another risk and
the possibility of a detrimental effect on the worth of the business.
What about the legal costs you will incur in relation to any case you are involved in?
What about the income producing time you’ll lose by attending court or tribunal and
preparing all the documentation and evidence to present your case?
What about the loss of business caused by the fact that your mind is not 100% on the job
as you worry about the issue?
As you can see, the fine or compensation payment represents only one part of the
potential loss.
Think about some of the situations you may have heard about where an agent has
incurred fines or similar penalties. What might be the other costs (legal, etc.) associated
with these penalties?
Simply by looking at these two examples, it is not hard to see how EVERY risk has the
potential to damage the net worth of the business.
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Loss of Licences
Without the necessary licence or certificate of registration, you are out of a job, and/or
unable to run your agency business.
If you are the business owner, at the very least, you are going to have to employ a
Licensee in Charge if you no longer have your own licence. However, you will not be able
to work in the business, so you are effectively handing over the control of your business
to somebody else.
However, without goodwill and a positive reputation, the overall business is not worth very
much at all.
But also consider personal goodwill – the factors that ensure that agents get called in to
homes. How many individuals have damaged their personal goodwill through
inappropriate action or lack of action?
Have you come across a situation where an agent has damaged the goodwill value of the
business by carrying out some action which damaged their reputation?
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There are many risks which can impact on the return on investment – the very last point
“cash flow viability” is just one of these.
Most times, the return on investment goes to the owner of the business. However, there
can be situations where the business is financed by an external Investor.
If the return on capital is just not there, it is possible that the Investor might discontinue
his investment in the business, leading to the whole agency going into liquidation.
If a business is being “carried” by reserve funds rather than being profitably operated by
income generated by the agency, then this cannot go on forever.
Also, do not overlook the fact that liability can be PERSONAL, as well as related to the
business. People can sue individuals as well as businesses, so you certainly do not have
to be the owner of the business to suffer financial loss.
Probably the simple answer to this question is “everybody” that the real estate agent
comes into contact with, or has dealings with in the normal course of business. No
individual, company or organisation is immune from the effects of risk.
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Also, it must be realised that the effects of risk are “two way” – the agency is susceptible
to the effects of risk from the people or organisations it deals with while at the same time,
the people and organisations dealing with us are susceptible to the effects of risk from
the agency.
People who can be exposed to risk associated with agency operations fall into two
categories:
• Anyone to whom the agency owes a duty of care who may be injured or suffer a loss
as a result of an agency’s operations
• People with a financial interest in the agency.
Agencies owe a duty of care to a wide range of people who are potentially exposed to
risk as a result of their dealings with agencies.
Agents are required to ensure that landlords achieve the best possible financial return
(rent) on their investments, and that their investments are protected by selecting tenants
that will look after the property to a satisfactory standard and that proper maintenance is
carried out (that meets industry standards) to maintain the capital value and ensure its
safety.
Misrepresentation of a property could mean that a purchasers or tenants may suffer some
form of loss, whether tangible or not, and whether financial or not.
Regular and thorough inspections of properties will ensure that the legal standards are
adhered to and that additional maintenance necessary to protect the landlords’ interests
are identified.
Agencies are required to maintain their own premises, and ensure that the properties
belonging to their landlords and vendors are in a safe condition so that people entering
properties for sale or management are not exposed to risks.
Example: Think about what might happen if an open home was held at a rental
property that had an unfenced swimming pool. If the agent did not warn visitors
clearly, and an incident occurred, the repercussions for the agent as well as the
agency would be ruthless.
As real estate agents, most of our contact and dealings are with buyers, sellers, landlords
and tenants, so it is not hard to see that they represent our biggest potential for risk.
Agents spend their days working with members of the public, so the risk here is pretty
clear. What might happen, for example, if a member of the public is injured while being
taken on inspection of a property for sale where the agent has not yet completed the
paperwork and does not have a valid (or compliant) agency agreement?
Employers have a duty of care to their employees and stakeholders under Occupational
Health and Safety legislation. Employers must ensure that the workplace meets the
provisions of a healthy and safe working environment, and that risks to employees (and
visitors to the business premises) are minimised.
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Bankers, insurers, lenders, creditors and contractors all have a financial interest in the
well-being of the business. Risks to the business or clients of the business may also
impact upon the interest that these groups have in the agency. The result of a claim
against an insurance policy may result in insurance being refused in subsequent years.
Should the agency then take the risk of trading without insurance?
What if the lenders call in the loan or make an upward adjustment to the interest rate
being charged? This could cause financial problems for the agency, with far reaching
consequences for all the groups mentioned so far. Insolvency on the part of the agency
can be a substantial risk for the lender.
Think about the effect that we could have on a subcontractor that suddenly loses a large
chunk of income due to our negligence or is injured as a result of us not having followed
a procedure or warned him about the condition at the property.
Any risk that may have an adverse effect on the agency may also have a substantial
impact on trades and contractors’ income and, ultimately, their business.
However, with this group, the duty of care is two way – they owe us and our clients a duty
of care just as much as we have a duty of care towards them.
Whenever you belong to ANY group, the reputation of the group is severely impacted by
the reputations of the individuals which make up that group.
The actions of one member of a franchise group can have a direct impact by the
reputation of all the franchisees in a local or wider area. That is, one member of the group
who does the wrong thing damages the reputation of other members of the group or the
franchisor. Therefore, the licensee in charge must ensure the implementation of sound
systems and procedures that minimise the risk of this occurring as a result of lack of
knowledge, negligence, or intent.
What that means in this situation is that the negative actions of a fellow member of the
group risk impacting on you.
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Think about examples of risk that could be associated with each of the groups just
mentioned.
The Australia & New Zealand Risk Management Standard | ISO 31000:2018 provides
organisations with guiding principles, a generic framework, and a process for managing
risk. New to this edition is the inclusion of 11 risk management principles an organisation
should comply with, and a management framework for the effective implementation and
integration of these principles into an organisation's management system. Unlike previous
editions, emphasis is given to considering risk in terms of the effect of uncertainty on
objectives, rather than the risk incident.
Managing and minimising risk is a 4-step process, and we’ll look at each of these in turn:
Identifying that a risk actually exists is the first step in managing and minimising risk. After
all, if you don’t know about it, you cannot do anything about it. If you are an employee,
don’t think “This is for the business to worry about. It doesn’t apply to me”. Sure, there
are certain risks which are only applicable to the business, but there are many which still
apply to you as an individual.
Most of these “individual” risks involve your dealings with customers and clients.
However, they also involve matters like your personal safety and the safety of your
colleagues and all the other people you come into contact with on a day-to-day basis.
The risk management process involves identifying consumer and agency risks, and the
likely source of each risk.
To take a few simple examples to get you thinking along the right track
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Example 1: Suppose you are taking a prospective buyer out in your car to look at
a property for sale. You have an accident where the prospective buyer is injured and
then realise that your car registration and third party insurance has lapsed because
you forgot to renew it.
How likely is it that the injured party is going to say something along the following
lines from their hospital bed?
“Look, don’t worry about it, Tom. I don’t mind paying all the hospital and doctor’s
bills myself. And as far as compensation is concerned, I’m not really worried about
the fact that I cannot work for months or that I am in such great pain”?
Example 2: Suppose you have just purchased a new phone and phone charger.
There is no spare power point near your desk, so you plug it in across the corridor
to the other side of the office. Your buyers come into the office to discuss the
contract, and as you lead them to the meeting room, one of them trips over the cord
and hurts themselves on the corner of a filing cabinet.
Are they going to be as understanding, like the buyer in the car accident?
Example 3: You have informed a potential seller that they will have no problem in
getting $850,000 for the sale of their property. As a matter of fact, you wrote this
amount on the Sales Agency Agreement.
Now, when you did this you knew you were being a bit “optimistic” – as a matter of
fact, you knew there was very little likelihood the property would sell for anything like
this figure. They would be lucky to get much more than $750,000.
You told the vendors what they wanted to hear because it got you the listing. You
can always get them down to a more realistic figure as time goes by.
Anyway, on the strength of your assurance, these people have now committed to
the purchase of another property, and your listing is no closer to selling than it was
two and a half months ago.
The sale of your listing is vital to their being able to complete on the new purchase.
Their solicitor has just contacted you and asked you to justify the $850,000 you said
the property was worth.
These are just three examples, but they should give you the idea.
If you are the licensee of the office, then not only do you need to look at “personal” risks
(like the ones just mentioned) as they apply to you but you also need to look at them from
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the business’s point of view as it is almost certain that both the business and the
individuals (you and your staff) have what might be called a “joint and several liability”.
There are a myriad of risks associated with the business of real estate. We will be looking
at some of these in this unit. It will be up to you to establish the risks that you face and
that your clients are exposed to as part of your assessment for this unit, and establish
your own action plans to manage and minimise the risks.
One way of identifying potential risks is to look at the activities conducted in the different
business and operational areas within a real estate agency:
• Property Management
• Sales Department
• Agency Administration
By looking at and breaking down the activities conducted by each of these, we can start
to see that there are many areas of risk that could affect one or more of the groups
mentioned previously.
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The lists above are designed to provide an overview of the multitude of operations that
have the potential for risk. These are by no means complete, but hopefully will start you
thinking about just what can go wrong, and how easily things can go wrong if they are not
given the attention they deserve.
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2. Business Management
• Occupational health and safety
• Financial management
• Insurances
• Bank account management
• Public liability
• Trust account management
• Security of business records
• Security of premises
• Technology
• Client databases
• Copiers and computers
• Company vehicles
• Software
• Fixtures and fittings
So far, we have looked at “Internal Risks” – risks where we have a measure of control
over the outcome and can affect the severity and consequences (control, minimisation
and management will be discussed later in this unit).
There are other internal risk areas, and also a number of External Risks, where the
agency, or its staff and management may have less opportunity to affect the outcome,
severity or consequences of the risk occurring.
Natural Events
When you turn on the TV and see whole overseas cities being devastated by
earthquakes, or towns in Australia being equally devastated by floods or drought, it is not
hard to imagine that the occurrence of these natural events are going to have a substantial
impact on real estate activity and value of properties.
Not only that, but consider those clients and customers that are mid-way through a
transaction. What happens if a buyer’s new property is destroyed prior to settlement?
How easily does the economy, and financial circumstances impact on agency business?
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What happens if interest rates rise substantially or the country enters a period of recession
or even depression? We even hear of the real estate marketplace going into hibernation
until the results of forthcoming elections are known.
What would happen to the property investment market if the tax benefits available to
investors were abolished suddenly as a result of a new political or fiscal direction?
Intellectual Property
Intellectual Property is “material” you have developed to use in the business.
Example: Let’s suppose that you have developed a very successful marketing
campaign that is giving you a definite advantage over your competitors. What
happens to this advantage if the competitors “steal” your ideas and begin to use
them themselves?
At the same time, intellectual property includes the information a real estate agent “carries
around in his or her head”.
That's great, except what happens when that person leaves an agency? They can't simply
'empty their head' of all that information and knowledge when they go, so the risk is that
the agent can then use that intellectual property outside of the business in which they
gained it.
Some agencies may ask staff to sign a 'confidentiality agreement' that prohibits them from
divulging any commercial information once they cease employment. When an
experienced agent leaves one agency for another, it is not uncommon that his or her
clients to follow.
What actions could a licensee take to minimise the risks associated with the loss of
Intellectual Property if a salesperson leaves their employ.
Changes in Technology
Real Estate agency practice is becoming more and more “technology driven” – Think
about the impact that the Internet has had on business. What happens if an agency is
either not up to speed in regards to the current technology and / or cannot adapt quickly
to the next technological development which might be just around the corner?
• How has the advancement of technology impacted on the real estate industry?
• What other changes do you expect to see in the immediate future?
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All businesses are at risk of criminal activity by staff. It could be argued that real estate
businesses are more at risk than many others because of the high dollar value of the
“commodity” in which we deal.
Franchise Agreements
Franchise Agreements (if applicable) also set out certain standards of ethics and
behaviour that a franchise owner and his or her staff must meet. If they fail to meet these
standards, it is possible that the office will lose the rights to trade under the franchise
name.
This can have a serious impact on both the turnover of the business as well as the value
of the business if it was to be sold. How could a franchise agreement represent a potential
risk to an agency practice?
You will have contracts in place for your office lease, cleaning, signboards, maintenance
etc., and all of these factors have the potential for risk to the agency and business.
What procedures are there in place to monitor the comings and goings of staff and
contractors on the premises?
How should you deal with staff leavers and the keys issued to them?
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There are many things that can go wrong in regard to the security and safety of the
landlords or vendor’s home and possessions.
It is not too hard to image the degree of risk involved in letting unknown people wander
through somebody’s house at an open for inspection.
• What procedures are in place to manage the security of client’s possessions?
• What procedures are in place to manage the safety of staff and visitors to the
properties?
• What policies are in place to manage the contractors and inspectors that will need
to visit the property during the course of the sale?
• How do you manage the keys to the property?
• Do the owners have appropriate insurance against physical risks to people on their
premises?
• Under what circumstances may keys be released to buyers/tenants and
contractors?
• How do you know who you are really releasing keys to?
• What procedures and policies are in place to secure the keys to properties?
Agents should use as many sources as possible to gather information about potential
risks to be aware and to make contingency plans to minimise or eliminate the risks.
This course will look in detail at some of the risks typically faced by agencies and their
clients, customers and stakeholders.
Luckily for agents, much work has already been done in the area of identification and
analysis of risks, and a great deal of information exists.
The following are sources of information that agents can access easily to gain knowledge
to identify and analyse business and operational risks:
• Your State’s Real Estate Institute:
• QLD: REIQ www.reiq.com.au
• Your State’s Office of Fair Trading (or equivalent)
• Industry newsletters and journals
• Franchise newsletters & information
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In addition, the media (who frequently portray the industry in a negative light) are a source
of information. Their reports can act as a trigger to identify situations that may occur in
your agency as well.
Once you have identified that there is a risk, the next step is to ANALYSE it.
Having said that risk is all around us, it is going to be impossible to address EVERY area
of risk at once. Such a task would simply be too big.
As a result, you need to be able to start with what we will call the “Biggest Risks” first.
We said before that you cannot tackle everything at once, so the place to start is
addressing those risks which: -
Have the highest probability of occurring and have most severe consequences. Let’s
illustrate this with a couple of (perhaps extreme) examples to illustrate the point.
Example: Suppose you have (or are) a new salesperson who really does not
understand how to put an estimated selling price on a property by carrying out a
Comparative Market Analysis and producing this information in a documented form.
Being new to the industry, they are very keen to secure their first listing and are likely
to say anything to win the listing.
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Forget for a moment that the above scenario should not happen in the first place. Proper
training and supervision should ensure it is avoided – however, look at the situation as a
case study to illustrate a point.
Using the “Likelihood / Consequences” concept, then it would seem that the probability
of the risk occurring is high and the consequences are severe. So, this is one of the risks
you would need to address as a matter of urgency.
The Risk Matrix is a document that can be used to visually represent the concept.
The example above would probably be a 4/4 on the matrix.
4
High
1 Low
1 Low 2 3 4 High
Priority
1
Priority
2
Priority
3
Priority
4
Here is another (perhaps also extreme) example for the purpose of illustration.
Example: You have a very good system in place to ensure that your Professional
Indemnity Insurance is paid when it is due. Not only do you rely on the renewal
notice coming from the Insurance Company, but you also have recurring tasks in
your office electronic diary four weeks before the renewal is due, three weeks out,
two weeks out, one week out and the due date. In addition to this, you have similar
notes in your personal diary which you carry everywhere with you.
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As a result of all this, the risk of you not renewing the P.I. Insurance is pretty low.
However, while the likelihood is low, the risk would be high. Imagine a claim being
made against the office when the P.I. insurance had lapsed.
The above scenario would be a “1/4” on our matrix. There is little chance of it happening,
but severe consequences if it did.
Go back through your workbook and now think about the risks you identified, and assign
a risk rating to them. If you are working with others on the same unit, discuss your findings,
and perhaps why you may disagree.
Legislative Risks
What are my Legal Obligations? What particular piece of legislation deals with each area
of risk? What does the legislation require me to do? Are there any ethical obligations,
over and above the legal obligations, that I need to take into account?
Various pieces of legislation set out the “Rules and Regulations” under which a real estate
business operates.
It is absolutely imperative that you understand the various Acts and Regulations affecting
real estate agents in your State or Territory, the requirements of these Acts and
Regulations and how the consequences of not complying with the requirements of this
legislation represent some of the most severe risks a business faces.
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In addition, each State has Residential Tenancies Legislation that sets out the rights and
responsibilities of tenants and property owners/agents (landlords). The scope and
operation of residential tenancies legislation focuses on landlord obligations to the tenant,
tenant obligations to the landlord, tenant rights with respect to the property and the
termination of tenancy, the rental bond scheme and the Tribunal arrangements.
Both the real estate and tenancies legislation across the various states is remarkably
similar – although the wording may be different and the explanations different, the sense
and meaning are mostly the same, which ever state or territory.
The key points in real estate legislation that need to be fully understood from a risk
management perspective are:
The other area where unlicensed trading can occur is where an agent carries on activities
in an area where they are not correctly licensed. For example, specific licences may be
required to act as a Business agent or a Stock and Station agent. It is not only the
Licensee and Salespersons Certificate holder that must be licensed. There is an
obligation on the corporation to be licensed to trade as well, and if that licence expires
then the agency will be trading illegally. If a salesperson or licence holder becomes
disqualified then they have an obligation to inform the licence holder within 5 days of the
disqualification and cease trading. The consequences are the same as unlicensed
trading.
Conflicts of Interest
Agents commit an offence if they act as agent for the buyer and seller of the same land
at the same time. Real estate agents have a duty at law to act in the best interest of their
clients. They also have responsibilities towards their customers.
So, a conflict of interest arises when your personal interests are in conflict with the interest
of your clients and customers.
For example, let’s suppose that you have a property listed for sale. The owner of the
adjoining property has contacted you and said that he wants to buy the property because
he can then amalgamate the lots and build units. He says he will appoint you as the selling
agent for the units if you help him buy the property you have for sale. While this does not
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yet represent a conflict of interest, it sure has the potential to do so. You need to be able
to identify this as a potential risk.
Misleading Advertising
Agents may commit an offence if they publish an advertisement knowing that, or being
reckless about whether, the statements in the advert are false or misleading; or omit
anything without which the statement is misleading.
Also, if you provide, or expect to provide a benefit to anyone else in connection with the
sale of the property, again, this must be disclosed.
Examples of relationships
• A family relationship
• A business relationship
• A fiduciary relationship
• A relationship in which a person is accustomed, or obliged, to act in accordance
with the directions, instructions, or wishes of the other
Beneficial Interest
Consumers expect the agent that they contract to undertake his or her duties fairly and
openly to achieve the best result for them. Legislation prohibits real estate agents and
their employees from obtaining or being connected to the obtaining of a beneficial interest
in the sale of a property.
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Failure to make these points clear will leave agents open to criticism and action by the
client / customer in the event that the agents is wrong (whether intentionally or not).
False Representations
An agent commits an offence if the agent dishonestly misrepresents the price of the
property to the seller, the buyer or in an advertisement. If the representation is dishonest
according to the standards of ordinary people, and the maker knows it is dishonest.
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For example, we know it is recent sales and current competition that will determine how
much a particular property will sell for. What the vendor wants, or needs has little to do
with the selling price.
Equally, the same concept applies in property management where it is the marketplace
that will establish how much a particular property will rent for.
Now, the most effective way of doing this is IN WRITING – people tend to believe and
understand more of what they see than what they just hear. A Comparative Market
Analysis (for both sales and rentals) is the most effective way of presenting the realities
of the marketplace in a format that our clients and customers will easily understand.
Contract Documentation
An agent commits an offence if he offers residential property for sale without all the
necessary documentation available in the office for inspection by prospective buyers.
Also, if he implies that a property may be available for sale, invites an offer to buy a
property, or indicates that someone may be willing to grant an option to buy a property
that is also an offence.
Secondly, the agent may only amend basic information on the contract for sale and may
not insert special conditions. He can only exchange contracts if authorised to by the
lawyers or parties to the contract and cannot charge a fee for that service. In Queensland,
where agents prepare the contract for sale, the risks are even greater. Not only is the
preparation of contracts a major risk area, but the way in which they are presented is
significant.
In Victoria, a Section 32 needs to be prepared before sale and made available to potential
buyers. Failure to provide this or providing one with false information, is a criminal offence
that can result in being fined. (Section 32 will be covered in a later unit CPREP4105-Sell
property (Release 1))
Presenting the contract in the wrong order and the buyer may have the opportunity to
rescind, to the detriment of your client. A huge risk if your client has purchased a property
elsewhere on the strength of the sale you have supposedly made.
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By the very nature of the business we are in, substantial amounts of money pass through
the trust account. The more money involved, the greater the temptation and opportunity
there is for defalcation.
As we all know, licensees have the ultimate responsibility for moneys in the trust account
and must have comprehensive systems in place to ensure that everything is done to
secure the funds.
One of the basic requirements with these systems is that the one person is not solely
responsible for all activities associated with the trust account.
Record Keeping
A licensed agent must record the material details of every transaction conducted keep
the record for a statutory length of time. This applies to both Sales and Property
Management transactions. Failure to do so represents a risk, especially if a substantiation
made at the point of sale cannot be adequately justified later.
Agency Agreements
Agency agreements also known as an “appointment” or “authority to act” must be in
prescribed format and include specific wording. If any part of the agency agreement is
incorrect, not completed where it should be, or does not include the right names, then the
agreement may be considered void, and the clients may escape paying agency fees in
the event of a transaction occurring.
Failure to do so renders the agent open to investigation, fines, and potentially puts clients
and customers at risk.
Unethical Behaviour
There are thousands of definitions of what is ethics – here is just one of them.
“Principles of right or good conduct, or a body of such principles, that affect good
and bad business practices”
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The key to this definition is the words “right or good conduct” – you see, unethical does
not mean unlawful. Something can be within the law, but that does not necessarily make
it morally right.
Consumer Protection
The Consumer and Competition Act 2010 and The Fair-Trading Acts regulate business
behaviour. The main principles of Consumer Protection are outlined for reference in the
Appendix 1 to the notes.
The objective of the Act is to promote competition and fair trading and providing for
consumer protection. The Act encourages fair and ethical competition and efficiency in
business which results in a choice for consumers in price, quality and service.
There are two main parts of the Competition and Consumer Act 2010 concern consumer
protection and restrictive trade practices.
The Act sets out the ways in which the personal information of an individual is to be dealt
with and the rights of individuals to control access to and the accuracy of their personal
information.
The Act defines “personal information” and includes information or an opinion about an
individual whose identity can reasonably be determined from the information or opinion.
It includes any material about a person that also reveals their identity.
Anybody that collects information from individuals must make the individual aware of:
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The personal information must not be disclosed to someone other than the individual
unless:-
• The disclosure is directly related to the purpose for which it was obtained, and the
authority has no reason to believe that the individual would object to the disclosure;
• The individual is reasonably aware, or has been made aware, that the information
is usually disclosed to the third party.
If the information is shared with another authority, the authority must do everything
reasonable to prevent unauthorised use.
Anti-Discrimination Legislation
Every state and territory in Australia has its own anti-discrimination laws which may have
slight variations and may also differ from the federal legislation.
Many types of discrimination are against the law. The laws dealing with discrimination are
designed to give everyone an equal opportunity.
This Act applies to discrimination on the ground of any of the following attributes:
• Gender;
• Sexuality;
• Trans-sexuality;
• Relationship status;
• Status as a parent or carer;
• Pregnancy & breastfeeding;
• Race;
• Religious or political conviction;
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• Disability;
• Membership or non-membership of an association or organisation of employers
or employees;
• Age;
• Profession, trade, occupation or calling;
• Association (whether as a relative or otherwise) with a person identified by
reference to an attribute referred to in another paragraph of this subsection;
• Spent conviction within the meaning of the Spent Convictions Acts
Under legislation it is the duty of employers to ensure the safety at the workplace for all
parties, not just for employees but for any person who is at the workplace.
The employer is required to identify hazards and assess risks arising out of the activities
of persons, not just employees, at work and to put in place a system which either
eliminates or controls the risks.
It would be impossible to list all the potential risks associated with real estate Business
Management, but here are some of the main ones:
After all, the basic role of an agent is to serve as a “communication channel” between
people – between buyers and sellers – between landlords and tenants – between
EVERYBODY associated with a real estate transaction.
There have been literally thousands of books written, and hundreds of training
programmes developed, on the topic of communication. Poor communication is said to
be the cause of every problem in the world, ranging from the racial and religious
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intolerance, wars and terrorism, divorce and even the fact that parents cannot talk to their
teenage kids.
So, communication is a wide-ranging topic, far too wide for us to address in detail here.
Real estate transactions (of every type) have a lot of emotion attached to them. They
represent big financial decisions, usually made at a time when people lives are in turmoil.
Marriage, job transfer, financial loss, financial gain, divorce, births and deaths are
common reasons for people becoming involved in real estate transactions, so it is not
hard to see why many of them are very emotional when they are dealing with us.
High emotion levels can be real barriers to effective communication, so make sure you
are specific in what you say.
Try and avoid expressions like “soon” when you are asked “how long?”
What is meant by “soon” to one person might be very different to what is meant by the
same word to somebody else.
Also, effective communication requires you to know what you are talking about. You have
probably heard the expression “speaking with confidence”. Knowing what you are talking
about is what this expression means.
Now to the importance of training – real estate is a profession. There is no such thing as
a “Born Doctor”, a “Born Concert Pianist” or a “Born Mathematician”.
Neither is there such a thing as a “Born Real Estate Agent”. Like every other professional,
the real estate agent has to be trained.
If you do not constantly train, you are going to make errors. Making errors results in the
negative aspects of the risks we have been discussing.
You need to understand that the requirement for training is ongoing. Training is not a “one
off” event – it’s a bit like the laundry; it doesn’t stay done.
Everybody has a story about situations they have been involved in where they have
encountered poor communication skills and poorly trained staff.
Think about situation outside the real estate industry. What situations have you
encountered where you have been affected by lack of effective communication skills and
poorly trained staff? How do you think the actions of staff have affected their business?
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In property management, you are looking after the interest of both the landlord and the
tenant. To effectively do this, there are a hundred and one duties, large and small, trivial
and important, that must be undertaken.
If you have well thought out and documented processes and procedures in place, nothing
will get overlooked.
These practices and procedures might include, check lists, diaries, computer
programmes, etc.
At the same time, the delegation of duties amongst the various staff members is clearly
defined. Not only do these practices and procedures ensure nothing is overlooked, they
also allow the tasks to be done in the most effective way, thereby saving valuable time.
The alternative is to simply “make it up as you go” – hope you remember to do something,
hope that people do what they should do and hope nobody finds out how stupid and slack
you really are. Identify some of the risks to the business of not having adequate office
practices and procedures.
Simply put, the licensee is responsible at law for the actions of the staff. If they do the
wrong thing, either intentionally or otherwise, the licensee will also bear the
consequences.
There is little more than needs to be said in relation to this risk. However, it is almost
without exception, one of the biggest ones a Licensee faces.
What do you think the consequences might be in the licensee in charge failed to the
actions of staff with respect to trust accounts and other office procedures and ensure that
they understand their risks?
Very few licensees would be brave (or should that be silly?) enough to employ a person
with a track record like that. However, many do take on people without doing everything
in their power to ensure they are making the right choice.
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In order to “save time”, they fail to carry out intensive and exhaustive interviews. They fail
to check references provided. They take everything said by the applicant at face value
without checking. They fail to get a second opinion about the candidate from a trusted
and experienced associate. They think “well the candidate has this or that problem, but
we will fix that”.
And after all that, they tend to take on the best of a bad bunch.
And on and on it goes. They put much more effort into choosing and negotiating on a new
car than they do on employing the right sort of person for their business.
Now, taking all these factors into account and considering what we said earlier under the
topic of “Inadequate Supervision”, a Licensee who fails to approach the recruitment
process in a totally professional manner is just asking for trouble.
Many times, our clients and customers have a limited understanding of all the factors
affecting real estate.
How often do buyers blame the real estate agent for the fact that properties have gone
up or down 10% in price over the last 12 months? How many times do the sellers blame
the agent for the fact that they cannot get $XXX XXX for their home? – After all, this is
how much they need to complete the purchase of the new home they want to buy. The
same concept holds true in property management.
From the tenant’s point of view, it surely must be the agent who is to blame for the fact
that improvements or renovations work they would like done on the property they are
renting is not being carried out. They have no conception that it is the owner of the
property who will not authorise the repairs.
Equally, it is sure to be the agent’s fault that the property has remained vacant for the last
few weeks, despite the fact that the owner wants $XX per week more than comparable
properties are renting for.
The agency profession is very much about being able to resolve conflict.
Having recognised this as a major risk area, it is imperative that all in real estate are well
trained in this area.
When have you had to use your conflict resolution skills to solve a problem?
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In nearly every office, the running of the whole business, be that the sales, property
management or administration side of the business, are totally dependent on computer
programmes and their data. The loss of data is a major risk faced by agencies.
Ever notice that if the washing machine at home breaks down, then the fridge and the
stove usually go out in sympathy? You can almost certainly guarantee that if you lose
access to the data, it will happen at the most inconvenient time.
Disaster recovery is a process whereby your technician carries out a “test” to ensure that
he or she can get your programmes and the data up and running again in the event of a
catastrophic computer failure, fire or theft of the hardware.
It is very important that this disaster recovery exercise is not left until a catastrophic event
occurs. Imagine what would happen if the computers WERE stolen (for example) and you
found out then that the backups have not been working properly!!
How would you do your work tomorrow if you arrived at the office and there was no data
in your software systems?
Have you ever experienced a “disaster” situation? What was the outcome?
You may even have heard of O’Toole’s comment on Murphy’s Law which says
Having looked at a number of key areas of risk to both agencies and consumers, you will
probably have identified several areas of risk that may apply to you personally, or which
you have experienced.
There are probably many more that will crop up in your real estate career in the future,
that no-one has yet experienced.
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Now that you have analysed the risks and used the Risk Matrix to establish which risks
to address first, it is time to take action to Manage and minimise the risk.
Options for minimising risk are: -
• Avoiding the risk – by not getting involved in the action that results in exposure to
that risk. For example, not listing a new property where the developer had been
recently sued or bankrupt.
• Reducing the consequences and likelihood of the risk – by implementing systems
and procedures that minimise its occurrence e.g. enforced holidays to minimise
incidence of fraud; security passwords on computers.
• Transfer the risk – by shifting the risk. For example, taking out insurance, using
disclaimers and disclosures - Giving another party the opportunity to take
responsibility for the risk.
• Finance the risk – by bearing the cost associated, should the risk occur.
• Retain the risk - by accepting the risk because it has low impact and rare in terms of
likelihood.
Using the risk matrix, you classify this as a “2/4” – the likelihood of a staff member
forgetting to process the application is not all that high, but the consequences if they
do are severe.
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Because of the relatively small amount of commission to be earned, and the fact
that you can direct clients and customers to other places where they can obtain the
Insurance cover, you may elect to avoid the risk altogether by not getting involved
in this line of business in the first place.
If you are taking cash from your tenants, then minimise this practice. In today’s
environment, there are many alternatives to cash. Direct debits, credit card payment
and even cheques are a much safer proposition than cash.
In actual fact, most risks associated with an agency business will need to be addressed
in this manner.
Short of closing down the business altogether, most risks simply cannot be addressed in
any other way. They are simply part and parcel of agency practice, to the point where the
agency just simply could not function if the risks were avoided altogether.
The work you will have to do in the short term to formulate policies and procedures will
be rewarded over and over in the longer term by both less exposure to risk and the ease
in which new staff can be inducted into your office.
A similar concept in regard to saving time also applies to existing staff, meaning they can
refer to the policies and procedures documentation rather than having to run to the
licensee every five minutes.
Written procedures that may assist in reducing the impact and consequences of risk could
include:
• Trust account management
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Non-compliance due to ignorance of the law is no excuse. Staff working in an agency will
be at various levels of skill and knowledge.
For this reason, it is important that individual training programmes for each person are
prepared. These can be used to arrange appropriate training and monitor staff’s
performance to ensure that the skills and knowledge they should have established in the
training are adopted in the work environment.
Specialist advice
Part of managing risks in real estate is to be able to recognise when the agent has
reached the limit of his or her knowledge, and specialist advice may be required.
Very often, agents get themselves into trouble because they feel that they need to have
an answer for everything and start to make assumptions.
Developing a network of professionals in other property related fields such as, but not
limited to; the statutory body who enforces the act, relevant industry association groups
and legal practitioners who specialise in that field, is an important part of building your
reputation in the local area and provides you with access to specialist advice should you
need to call on it. Remember, every time you speak to one of your networks about their
specialist professional, it represents a business opportunity for them.
From a risk management perspective, it is far preferable to acknowledge that you do not
know the answer to a question or the solution to a problem and seek specialist help. Not
only are you doing the right thing for your client, you are minimising the risk of a
misstatement and building your skills and knowledge at the same time.
However, if you identify other risks associated with either yourself as an individual or the
operation of the business or risks to consumers, you might elect to use insurance to
transfer the risk.
On our risk matrix, this might be a “2/4” a risk, but not an extreme risk. However, the
consequences could be pretty severe.
As a result, you might elect to transfer the risk by taking out Income protection
insurance.
Another possible way of transferring the risk might be by using legally binding contracts.
Example: You may be considering allowing a valuer to work out of your office in
return for payment for the use of your office “services” (office space, receptionist,
phones, photocopying, etc.) together with a percentage of the income earned from
the valuations.
You would certainly want to have a legally binding contract in force where the valuer
agrees to indemnify you and your office against any actions that may arise in relation
to the valuation business.
At the same time, effective risk management would require you to ensure that the
valuer had (and continued to have) whatever insurances would be required to
enable him to honour the commitment made in the contract, should the need arise.
Establishing and operating a real estate business involves a great personal and financial
investment. A strategic risk management program can assist to actively protect abusiness
and proper insurance is part of this program. Adequate insurance cover will
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enable a business to resume trading in the event of a disaster or a liability claim against
the business.
Risk management is a systematic process for identifying and evaluating loss exposures
facing a business, and then selecting and implementing appropriate strategies to deal
with each exposure.
There are many different types of insurance for business which can be grouped into three
main areas:
• Employers liability or Workers' Compensation
• Property/assets insurance
• Public/product/professional liability insurance
The exact insurance that a business may be required to hold – or may choose to hold –
are dependant, to some extent on the business structure. The section on insurances in
the Appendix 2 to these notes summarises the insurances required and available to real
estate businesses.
For example, the way that technology is advancing, there is every likelihood that your
hardware will be out of date in a few years and will need to be replaced.
Putting aside money specifically for the purpose of upgrading the computers would be an
intelligent way of addressing the risk.
A further example would be to employ 2 part time employees on flexible rotas in place of
employing one full time person. This would then provide that there is cover available for
holidays and sickness and ensure that there is continuity of service or cover.
The cost of such employment would be higher for the employer, but the additional costs
would be financing the risk of errors and lost business through reduced staffing.
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To benefit clients and customers it may be too inconvenient or lead to a loss of businesses
to manage that operation or business practice any other way.
For instance, in a lower socio-economic area many tenants may be part of a ‘cash
economy’ rather than using electronic banking facilities, cheques, and credit / debit cards.
Therefore, to stop accepting rent in cash may be counterproductive for the agency and
lead to more problems than the risk it is designed to eliminate).
In other words, you make a value judgment that it is worth “taking the risk”.
To decide on the best option for controlling each risk, agents should systematically work
through the possible options until a suitable risk minimisation strategy is found. The
strategy could in fact be a combination of options e.g. Reduce (as much as possible) and
then Retain (the remaining risk).
• Avoid the risk. Can the risk be avoided? If not, go to the next option. If the risk could
be avoided, what would be involved? Is this feasible? Perhaps it is not feasible
because it is too costly.
• Transfer the risk. Is this possible? Is it feasible? Is insurance an option? Can the risk
be transferred by contract? Can all the risk be transferred or only some of it? What
can be done about any residual risk if not all the risk can be transferred?
• Finance the risk. Is it possible or feasible to cover the financial consequences of the
risk? What are the potential benefits? Is the cost offset by the benefits? Perhaps there
is some residual risk after selecting another control option that needs to be covered?
• Retain the risk. Be clear about the possible impacts for the agency and other people
before deciding to retain a risk. If this option is unsuitable, reconsider the other options
and act on the best option.
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After taking the appropriate action to minimise and/or manage the risk, it is imperative
that you apply appropriate ongoing monitoring measures to ensure that the risk is
managed. Something that was not a risk yesterday, may be a risk today.
Example: On a normal day with nice weather, the agency welcome mat may not be
a trip hazard. However, on a windy day, with the wind blowing the welcome mat edge
up, creates the potential for clients and customers and even staff to trip over the mat
as they walk in the door. Therefore, this risk now needs to be managed.
Here are some approaches you can take to help you monitor the risk environment:
1. Develop a Suggestion Book system, where ideas to improve the operational systems
are recorded and actioned upon.
2. Develop an Audit Record Book, to record failures in the system and breaches in
systems and procedures – not to be used as a system to discipline staff members, but as
a record that there was a failure, and that action was taken to ensure that that failure did
not recur.
3. Create and implement a Complaints Register (if this is not already in place as a result
of state legislation). Analysing complaints will quickly identify where consumers feel that
risks exist and problems with agency operation and practice lie.
4. Create a Risk Register, to record potential risks, risk assessments, and the monitoring
process.
Monitoring of the risks and ongoing review are essential to ensure the relevance and
effectiveness of the risk management process. Through the monitoring and review
process, identification of other risks previously not dealt with may become apparent.
These can be analysed and appropriate measures implemented to minimise or eliminate
their occurrence or impact should they occur.
Any new risks should be identified, recorded and analysed so that appropriate control
measures can be put in place to eliminate or minimise the potential impacts for both the
agency and the people who deal with it.
On-going monitoring can occur as part of regular team meetings where risks and their
management are highlighted.
Up to date research on what is happening in the industry will highlight risks that other
agencies are encountering. A decision can then be made regarding relevance of the risk
to the agency and what action should be taken to address it.
This brings us back to the start of the risk management process – identifying risks and
the consequences of risk.
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There is no point in attending training to learn about risk management if all you do is go
back to the Office and resume doing (or NOT doing) exactly what you have been doing
before.
Rather, it is imperative that you use your new found knowledge to identify and develop
Policies and Procedures to minimise risk, both to yourself as an individual as well as the
Office as a whole.
You now have the information that you need to do this, so here is your road map for
managing risk in your agency.
Select one of the risks you have identified in this workbook that is relevant to you, and
your work. Make sure it is an area in which you have a sound working knowledge.
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Negligible – 1 2 3 4 – Severe
Explain how you or your office can Avoid, reduce, transfer, finance, retain.
minimise the risk?
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Consumer protection covers a wide range of topics including, but not necessarily limited
to, product liability, privacy rights, unfair business practices, fraud, misrepresentation, and
other consumer / business interactions.
Every day real estate agents deal with vendors and buyers, landlords and tenants, as well
as tradespersons, media companies, suppliers, etc.
Each of these is either a consumer (in the eyes of the law) or involved in the supply of
goods or services to a consumer.
Consumer
A consumer is a person who acquires goods or services from a trader. However, if the
goods or services purchased are to be used in manufacturing, for resale or for repairing
other goods, the person is not considered to be a consumer.
The main parts of the Competition and Consumer Act 2010 that relate to the property
industry are:
• Restrictive trade practices
• Unconscionable conduct
• Consumer protection & Unfair practices
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They are low-cost, accessible and independent decision-making bodies for resolving
consumer and industry related disputes and reviewing administrative decisions fairly,
quickly, economically and (usually) more informally that the court system.
Typically, these services look after residential tenancy matters and disputes between
landlords, tenants and agents, and in Strata and community title developments as well as
other consumer disputes.
This is one reason why class actions (where groups of people with the same case
collectively bring an action in court) improve the chances of success in civil court actions.
• Future representations
• Misleading and deceptive conduct
• Misleading or Deceptive Advertising
• Unconscionable conduct
• False representations
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Future Representations
Agents are often asked questions relating to the ‘potential’ of property. When responding
to these questions the agents must be aware that the consumer may be influenced by the
information. Therefore, agents can only ever give the history of the property and the
current selling potential that is the agreement term (typically three months).
Therefore, courts apply a test called the reasonable person test, which, as the name
suggests, examines whether a normal, average adult, with unimpaired mental capacity
would have willingly and freely considered the situation to be “reasonable”. The tests the
courts apply will examine how a reasonable person would behave in transactions. For
example, if an agent gives real estate advice to a consumer, a ‘reasonable person’ would
think that the real estate agent knew what he was talking about. Therefore, if the
information is unchecked or cannot be substantiated the onus is on the agent.
Often when an outcome harms or impairs the consumer it is due to misleading and
deceptive conduct. Real estate agents complete Registration and Licensing courses that
explain inappropriate conduct therefore the defence that no harm was meant is
unacceptable.
Disclaimers or terms and conditions contained in “fine print” will NOT necessarily correct
a false or misleading representation. Agents have a duty of care to ensure that the
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information they provide is accurate and correct. Very often, agents rely upon statements
made by their clients in respect of the details of property being listed for sale or lease.
Even though your client is the one who is responsible for providing the information, it is
likely that any action taken by a dis-satisfied customer would involve you and your agency.
Your responsibility, therefore, is to check all the facts carefully – that is everything that
can be verified.
Unconscionable Conduct
Unconscionable conduct refers to conduct where one person (the trader) unfairly takes
advantage of another (the consumer).
The following elements and factors are typically present in unconscionable conduct:
• One party to a transaction suffered from a disadvantage in dealing with the other
party.
• There was a material difference in the bargaining powers of the parties and the
difference was evident to the stronger party
• The stronger party took unfair advantage of its superior position to obtain a benefit.
• The stronger party used undue influence, pressure or unfair tactics
• The consumer did not, or could not, understand the language or documentation
used
The concept of unconscionable conduct means conduct contrary to good conscience, and
courts will make a decision based upon the facts and circumstances of each individual
situation.
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This practice is known as ‘puffery’. This is permitted and will not contravene the Act as
long as they are not misleading. These statements could not (and would not) be assumed
to be believable by a ‘reasonable person’.
However, statements such as:
“Can never be built out”
“Rural Views forever”
• Verbal communication
• Diagrams
• Written communication
• Photographs
• Advertising
• Brochures & Flyers
• Other promotional material etc.
Additionally, the conduct of the agent, either by doing something or not doing something,
could easily be considered to have been a representation.
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It is possible for an agent to be in breach of the Act for the things that they don't say, as
well as for the things they do say.
Characteristics of Land
Care should be taken when making statements about features and characteristics,
because they may be of special importance to a purchaser.
and others similar to these have potential to be misleading. The shops may well be 5
minutes away, but how? By car? Bus? Walking? And if it is 5 minutes' walk? Is that 5
minutes for a fit 25yr old or a 75yr old with a walking stick?
What about the stone’s throw? How big is a stone? Who is it to be thrown by – the fit 25yr
old or the 75yr old?
There are too many variables for these statements to be factual.
Use of Land
Statements about the potential or permitted use of land or buildings must take into
account any legal restrictions which may affect the property. These may include:
• Zoning and planning requirements
• Restrictive covenants
• Easements and rights of way.
Statements about the permitted use of land under anticipated regulation should not
mislead potential purchasers into believing that the regulation has already been enacted
or is a foregone conclusion.
Facilities
Claims that services such as sewage, gas and electricity will be connected to land, should
be made only after approval for the connection has been given by relevant authorities
and funds have been made available to connect the services.
It is also important not to make misleading references to the progress of proposed
facilities such as:
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• Shopping centres
• Transport and other infrastructure
• Sports grounds or facilities
• Golf courses etc
Facilities pictured in advertisements and signs should actually exist. Otherwise, reference
should be made to the fact that they are proposed and suitably qualified as to how much
progress has been made towards their completion.
When advertising the price of goods or services, the total cash price, including GST, must
be revealed to the consumer.
GST applies to fees and commissions payable under agency agreements, as well as
certain Commercial Leases, land transactions and Land and Building contracts
The full price payable, including any commissions, charges, or postage and handling must
be shown. It is not enough just to show initial deposit and instalment payment amounts,
which may result in consumer confusion.
Bait Advertising
Goods or services must not be advertised at a specified (not necessarily a 'special') price
if the trader cannot provide the goods in reasonable quantities for a reasonable time.
‘Reasonable’ is dependent upon foreseen circumstances including:
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• Season
• Economic variables
• Targeted market
• The expected life of the advertisement
Example: Advertising “26 blocks from $230,000” when only one block is available
at that price and the next lowest for example, $270,000 - would be considered to be
bait advertising (enticing consumers to enquire at the lower price).
Real estate agents advertising a price range will need to make sure that the advertising
is updated as sales occur. It would be misleading to continue to advertise as above after
all the cheaper blocks had sold.
Harassment or Coercion
A corporation (or its servants or agents) in relation to the supply of goods or services
cannot use physical force, harass or coerce consumers. This extends to the account
receivable practices.
Example: Phoning a vendor every day to try to persuade them to accept an offer
that they have already rejected. Also, repeatedly threatening a customer with force
if they do not pay their bills or rent is considered harassment.
Referral Selling
Referral selling means providing a rebate, commission or other benefit in return for the
consumer giving the corporation (or person) the names of prospective customers or
otherwise assisting the corporation to supply goods or services to other consumers. This
is prohibited both by the Competition and Consumer Act 2010 and Fair Trading Act 1995.
The practice is anti-competitive and has serious implications for small businesses. All
work that a service provider refers to another, that may result in a benefit or reward being
paid (however small) must be disclosed, preventing complaints such as collusion,
incorrect advice or unfair practices.
Other examples are situations where real estate agent makes referrals to solicitors,
finance companies, tradespersons etc, where they may receive a “kickback” fee or a
share of the profit.
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Secret Commissions
A secret commission is any financial or beneficial gain made by an agent to which they
are not entitled such as a gift or consideration given or promised by a third party (eg.
purchaser) which may influence the agent from acting in the best interests of the vendor.
Only one contract (whether written or verbal) can be entered into at a time for one
transaction - hence the term “conflict of interest”.
An agent is only entitled to one fee from one transaction. A secret commission is also a
fee or commission received outside of the original contract; this practice is illegal under
the Criminal Code Amendment (Theft, Fraud, Bribery and Related Offences) Act 2000. At
state or territory level, the law is usually included in the relevant Real Estate Legislationand
Codes of Conduct.
Where Consumers believe that there has been a breach of the acts, their first line of
complaint is normally through their state’s Office of Fair Trading. Where appropriate the
regulator will seek to prosecute, or will advise the consumer to take action in the Tribunal
or the Civil Courts.
Publicity of Breaches of the Acts Courts can order that the person involved in the breach
to give information to the public, a person or a group of people. Courts may also order
that the person publish advertisements about the breach.
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Appendix 2 – Insurances
Insurance enables risk transfer and risk sharing. Through insurance and the implemented
business policies for risk minimisation, businesses can minimise the significant financial
burden that ensues in the event that a risk is realised. Insurance companies facilitate the
sharing of risks with many others by pooling the many individual businesses wishing to
transfer risks from themselves to the pool.
Provided that the pool is large enough, actuaries can estimate the number of claims likely
to arise. In this way, a general premium, or rate, can be applied to each policy, taking into
account the specific risk of an event occurring.
Every business has its own set of risks which require pro-active implementation of risk
minimisation strategies. Compulsory insurances exist under legislation which every
business is required by law to take out. Risks associated with non-compulsory insurances
also need to be identified, analysed, minimised or eliminated to avoid financial disaster.
Recent studies have identified well over a thousand specific real estate industry risks.
Some of these risks are fairly stable; others fluctuate on a regular - or irregular - basis.
Some risks are tied to the market, while others are a direct result of the day-to-day
decisions made by management.
With so many identified risks, an agent needs to decide which risks can be managed
effectively through insurance; which risks can be managed through implementation of
effective policies and procedures; and which risks the agency is willing to tolerate as their
impact and likelihood is not great.
Risk management requires more than merely taking out an insurance policy. Pro-active
risk management strategies need to be implemented to support insurance policies - The
goal being to avoid the likelihood of the risk occurring, and the necessity of a claim in the
first place.
Additionally, where non-compulsory insurance is not taken out, the related risks need to
be identified and analysed to enable the formulation of policies and procedures that are
continually reviewed to ensure those specified risks are managed and minimised.
In order to formulate risk management strategies and the associated policies and
procedures, a Risk Needs Analysis needs to be devised to identify each risk area. Once
each risk area has been identified, it can then be assessed in terms of likelihood and
consequence.
This will enable management / business owners to establish which insurances need to
be in place, and the company strategies, policies and procedures to effectively deal with
risk likelihood.
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Business Insurance
Business Insurance refers to insurance policies that cover business needs.
They are designed to protect businesses against events that may affect operations,
profitability and cash flow. We will consider business insurance in the context of the 3
main types of business structures for a Real Estate Agency:-
• The sole proprietorship / sole trader
• The partnership
• The proprietary limited company
A sole trader should have life insurance on their own life that will form part of their estate
on death. Should a sole trader die, the business passes to the executor of the will who is
responsible for ensuring the business is either passed on to the beneficiary (s), or sold to
satisfy the business’ debts.
Apart from Life Insurance, a number of other insurance opportunities are available for the
sole trader’s consideration, including:-
• Superannuation for the sole trader
• Superannuation for any employees
• Keyman insurance for any key person on the sole trader’s staff
• Disability income cover for the sole trader and / or key staff
• Business loan insurance to cover borrowings
• Business overheads cover
• Buy / sell coverage for staff to buy out the sole trader
Partners are jointly and severally liable for each other’s actions. Each partner is equally
responsible for the partnership’s management, and any one person can bind to others to
legal and other commitments with or without permission of the other partners. There is
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usually a written partnership agreement setting out the terms of the partnership and the
rights, duties and liabilities of the partners.
On the event of death of a partner, the partnership comes to an end, unless otherwise
agreed in the partnership agreement, and their share of the business passes to their
beneficiary(s). The beneficiary(s) should be stipulated in the original partnership
agreement (buy / sell agreement).
In addition to life insurance, there are several business insurance opportunities for funding
the buy / sell agreement and keyman insurance, including:-
• Personal superannuation for each partner
• Superannuation for all employees of the partnership
• Additional keyman insurance on key employees of the partnership.
• Disability income insurance for the partners and / or key staff
• Business loan insurance
• Business overheads cover
A single person (or any number up to 50 people) may form a private company.
Shareholders have limited liability, limited to the unpaid portion of the value of the shares
they own. A company can sue or be sued and enter into contracts in its own right.
As companies are legal entities in their own right, they do not depend on the continuing
existence of shareholders. The death, retirement or withdrawal of a member will not
terminate the company and may not even require the reorganisation of the company’s
operations.
The liability of the company’s shareholders is dependent on the nature of the company,
but generally, shareholders will be liable only to the extent of the capital they have
contributed to the company.
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There are insurances that, no matter what business structure is chosen, are important for
managing real estate specific risks.
1. Compulsory Insurances
There are 2 compulsory insurances for all business owners:-
• Public Liability
• Motor Vehicle Third Party
In addition, if the owner of the business has employees, they must also take out Workers
Compensation.
This covers all amounts that the insured becomes legally liable to pay in respect of
property damage caused as a result of an accident involving the insured vehicle. The
policy will also pay the costs incurred in defending legal action.
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• Professional indemnity
• Business overhead insurance
• Disability Income Policies
• Building & contents
• Crime Policies including burglary
• Cash (including cash in transit)
• Glass breakage policies
• Comprehensive motor vehicle
• Loss of Data
• Business Interruption insurance
• Crime policies (including burglary)
Workers Compensation
Workers compensation covers employers if an employee or contractor is injured while
performing their duties.
Professional indemnity
Liability of a professional extends not only to the client, but to any others who might rely
on a statement or advice made by the professional.
Many professional bodies require a practitioner to have professional indemnity insurance
as a prerequisite to obtaining a practising certificate.
The policy is ideally suited to small businesses and professional practices that have a
significant reliance on a key person to raise revenue for the business, and where the
revenue would be lost if that key person was ill / injured and unable to work.
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Plate Glass
This normally covers all fixed internal and external glass. It does not normally cover
movable glass. The policy may also cover the cost of replacing any signage or decoration
that may have been on the broken glass. For external glass, the policy would usually
cover the cost of temporarily covering an opening caused by breakage.
General exclusions
Most motor vehicle policies have a number of exclusions, for example, coverage only if
the vehicle was being driven with the owner’s consent and if the driver holds a current
drivers licence, and covered neither if the driver’s blood alcohol level is in excess of that
permitted by law, nor if the vehicle was carrying a greater number of passengers than if
is designed to carry.
Excess
Most policies have an “excess”, being the amount to be paid by the owner in the event of
a claim. For example, if the damage caused by the accident is $4,000 and the excess is
$300, then the owner must pay the first $300 and the insurer will pay the remaining
amount.
Loss of Data
This type of cover is quite important for businesses that rely on computerised records,
e.g. financial planners, real estate agents, accountants. If a claim is accepted for theft or
damage to computer equipment, and data stored in that computer is also stolen or
damaged, the insurer will pay for restoring or retrieving the lost data.
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Damage to Property
If business premises are damaged and business income lost because of this damage,
the insurer will pay for loss of business income.
Burglary
Designed to protect the insured against theft.
Money
Covers the loss of cash but may have exclusions such as loss by armed guards/vans
(covered by their own insurance policies), loss from a safe where the key or combination
is kept on the premises, loss from accounting errors, and theft by an employer.
Embezzlement
This type of policy covers losses that may be incurred from any theft, embezzlement, or
misappropriation of funds by employees, and covers both money and goods. Usually,
there is a small excess to discourage claims for small, but sometimes frequent losses.
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Like all investments, risks associated with property used as an investment vehicle for
realising financial gain can be defined as the potential of achieving an unfavourable or
unexpected return.
The level and likelihood of the risk has a direct correlation with the return. With a long
term strategy, property is perceived as a low risk investment. It follows that banks will lend
more money, over longer periods of time, at lower interest rates for property than for any
other investment.
Although some investors have made money on property in the short term, it is crucial that
clients understand that this is not the norm and that property investment needs to be
viewed as a long term strategy.
Despite the fact that property investment, when viewed as a long term investment
strategy, is perceived as a low risk investment, a lack of consumer knowledge about the
risks that do exist can become problematic for the real estate agent who sold the property
if they do not ensure that clients are aware of potential risks and provide strategies for
their minimisation.
The objective of any investment strategy is to maximise returns for the least amount of
risk. Understanding your client in terms of their risk tolerance level and the risks that they
identify as having the greatest impact on their situation will enable you to provide risk
minimisation strategies where possible.
Investors interpret the impact of various risk factors in different ways. While one investor
perceives the risk of losing capital as the greatest risk, another may perceive the risk of
not receiving an appropriate level of income or not receiving a desired level of growth as
the greatest risk.
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Young Investors:
Typically aggressive and seek higher risk investment because they generally have less
money to invest, no dependents, and lower incomes. As such, they want to create capital
gains as quickly as they can because they feel they have everything to gain and little to
lose.
Children are likely to have moved out of home and the mortgage is likely to have been
paid off. Being close to retirement, these people have do not have the time for a long term
strategy and don’t have time to start again if things don’t work out. Therefore, they have
the ‘most to lose’.
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One of the many roles involved in selling an investment property is to match the investor’s
perception of risk with their need for return and ensure the option(s) provided are in line
with the investor’s risk tolerance level.
Not all risks can be minimised, but when dealing with investment clients an agent needs
to ensure that their client is not only made aware of the potential risks but is also aware
of which risks can be minimised and how they can be minimised.
Should an agent not provide the associated risk knowledge to their investment clients,
they leave themselves open to complaints with the regulator and potential litigation.
The returns from an investment may be affected by different types of risks, which could
be classified as follows:-
Risks from the business and market environment: including the volatility of interest
rates & inflation rates; changes in supply and demand for accommodation which may lead
to a high vacancy rate; risk of tenants damaging the property; risk of tenants vacating with
rent due and unpaid, etc.
Risks from political and legislative changes: including changes in tax laws; changes
in permissible land uses or an area becoming affected by transport authorities etc.
Risks associated with off the plan purchases: Some investors have been known to
incur substantial losses and gains by purchasing a property for investment purposes in a
buoyant market off the plan, hoping to on-sell it just before or on settlement and achieve
growth by just paying the 10% to exchange, either via a cash deposit, line of credit facility,
deposit bond or bank guarantee.
If the market remains buoyant at the time of completion, the investor can make a profit,
keeping in mind that CGT will be calculated at 100% of the gain if the property is not held
for at least a year if it was purchased after the 20th September 1985.
However, if there is a change in the market by the time completion occurs, and they
cannot settle on the property and therefore have to sell, substantial losses are a major
risk. Should the Agent, during the sales process, be carried away by wanting to close the
deal and not inform the client of this risk, they can be held liable for the losses, particularly
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if the client is led to believe by the Agent that due to market buoyancy, they will make a
profit.
Clients could minimise this risk by ensuring that they are able to settle on the property,
should this be the better option at completion. They would therefore need to gain Finance
Approval in Principal before exchanging contracts.
Having said that, there is always a risk of the investor’s circumstances changing by the
time the property is ready for settlement. If, for example, an investor exchanges on a
property off the plan that will not be complete for 18 or 24 months, and during this period
the investor loses their job, they would not be able to gain the finance to settle.
Consequently, they would need to sell the property before it has had time to increase in
value and suffer losses.
Therefore, the risks associated with off the plan purchases are both market changes and
changes in the investor’s personal circumstances.
When an investor borrows funds to invest in property, sometimes the income derived from
the investment does not meet the interest expense of borrowing to pay for and maintain
the investment.
This shortfall is tax-deductible under current legislation, and can be claimed at the end of
the financial year in an individual’s tax return.
Alternatively, a tax variation may be applied for, which allows less tax to be deducted from
earned income by the ATO throughout the year. The significant advantage of the tax
variation form for the investor is cash flow.
The tax deductions may not eliminate the investors need to contribute additional funds on
a monthly basis to meet the cost of borrowing for the investment. The amount contributed
by the investor will depend on their tax bracket, the value of allowable deductions, and
the rental income achieved.
The risks associated with this strategy relate to a client’s inability to maintain the shortfall
if, for example, interest rates increase during a time when the market is down.
That is, investors must have sufficient funds to cover any capital loss incurred should they
be unable to maintain the shortfall and they need to sell the property during a time when
the market is down.
If they try to sell at this time, they may incur a loss after the loan repayment, the selling
costs to the agent, and the set up costs including loan costs and stamp duty on the
purchase.
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Fixing the interest rate at the time of purchase can minimise the impact for the period the
interest is fixed. However, it may not be a good time to fix the interest. Some investors
hedge by fixing the interest on a proportion of their borrowings.
When does the negative gearing strategy not work for an investor?
Although the negative gearing strategy may be appropriate for many investors, there are
instances when it is not effective. Examples of these instances include:-
• If the investor’s taxable income is already minimised through other tax deductible
investments and work related expenses.
• If the investor is close to retirement, or for whatever reason is planning to stop
working in the near future and their income is going to drop substantially.
• If they are an overseas investor or an ex-pat that does not earn an income in
Australia.
• If they cannot afford the shortfall between the incomes they receive from rent and
tax benefits, and the amount they need to contribute on an on-going basis for the
long term.
A caution regarding fixing interest rates: Clients need to be made aware that if they want
to refinance or have to sell during the fixed rate period, they may have to pay ‘break costs’
which are sometimes substantial.
Generally, the longer a property investment is held the less the risk of making a loss if it
has to be sold. This is because of the capital gain made on property over the medium to
long term.
The purchase costs associated with buying real estate (such as stamp duty, solicitors
costs and loan costs) and the selling costs (agents, marketing and legal fees) mean that
an investor who has to sell before accruing growth on the property may make a loss.
The only way to minimise this risk is to ensure and recommend that the investor holds
onto the property for the medium to long term. Therefore, affordability in the medium to
long term, taking into account all property investment risks involved, is crucial to the
success of the overall strategy.
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This is of course assuming that the investor is not a speculator or trader in property, but
even these clients need to be made aware of the risks associated with the strategy they
employ.
If a client’s goals include retiring in the next couple of years or ceasing to work for any
reason and therefore having to sell the property soon after purchase due to cash flow,
then property investment may not be their best investment option.
Some clients perceive that the cheaper the investment property, the less they need to
outlay and therefore the more growth they will acquire. Although the initial outlay may be
less when investing in an area that is ‘undesirable’, the holding costs may be much greater
due factors such as vacancy, inability of achieving a reasonable yield.
This, in addition to not achieving as much capital gain as in an area that is desirable for
both tenants and owner occupiers, could mean that the investor does not achieve their
investment goals. An area that has high demand will often achieve a higher return,
irrespective of the purchase price. On occasion clients need to be made aware of this.
One of the concerns of an investor is not gaining a quality tenant who will look after their
property and pay the rent on time. This risk is made greater if the investment property is
an older run-down property in an area of limited demand where unemployment is higher
than average and affordability is low.
Steering your clients into an area of high demand and into quality properties will reduce
the risk of an undesirable tenant. Also, recommending that your client takes out Landlord
Insurance to protect against damage to the property and loss of rent should this occur is
also crucial.
All investors have one main goal; to achieve the greatest possible return on each dollar
invested. The property is an investment vehicle. Some older properties that have a lot of
period character can be very appealing, but are they the best investment? Will they
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achieve the best possible return? In comparing an old property to a new property, an
investor needs to take into account the following:-
• Tax benefits in the form of non-cash deductions on new properties, such as
building depreciation and depreciation allowances for fixtures and fittings.
• If the property requires renovation due to its age, it will either mean an outlay by
the investor to renovate or refurbish,
• Newer properties with new appliances and fixtures are usually easier to rent being
more in demand and can attract a higher yield.
• Older properties can require higher maintenance costs. New properties still have
their warranties is place.
The cumulative cost of all the above usually means that the newer the property, the
greater the return for the investor. Purchasing a quality property, both in terms of the
building and the fixtures and fittings, will maximise the claimable depreciation (and attracts
a quality tenant, increases the rental return and, makes it easier to rent).
An agent who makes their client aware of these factors will not only increase business by
gaining referrals and repeat business, but will also minimise the risk of their client not
achieving their investment goals
When a property is purchased in more than one name, for example in a husband and wife
situation, it can be purchased as either ‘tenants in common’ or ‘joint tenants’. In a joint
tenant situation, the ownership is 50 / 50.
There are situations, however, where this strategy may become ineffective. If the property
is purchased as tenants in common with, for example, a 90% ownership by the higher
income earner and 10% ownership by the other owner, and the higher income earner
ceases to earn taxable income, the tax benefits will be diminished. This may lead the
investors to having to sell the property due to cash flow difficulties.
Agents need to alert investors to the possible risks associated with a tenancy in common
purchase and recommend that they discuss the purchase with their accountant prior to
entering into a contract. Their accountant will probably make them aware of the risks.
However, an agent acting responsibly would also make them aware and encourage them
to discuss it with their accountant.
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If an investor has borrowed to fund an investment (or occupied) property, loss of income
due to illness or disablement, can be insured against using income protection insurance,
which will minimise the impact. If income loss is due to death, life insurance will minimise
the impact. An agent should recommend that a client talks to their insurance broker or
financial planner to assess these broader risks.
However, if the loss of income is due to retrenchment or a client deciding to leave, the
impact can be substantial on cash flow, not only for their own home but also for
investments. As mentioned earlier, not all risks can be eliminated or minimised, and
retrenchment resulting in loss of income is one such example. Clients need to be made
aware of this risk when purchasing a property for investment purposes.
Risk of vacancy
There are only two reasons that a quality property in a quality location remains vacant for
an extended period:-
• The managing agent is not doing their job
• The rent sought is too much for the market
An agent needs to ensure that clients price their rent to the market, and, in fact, if the
market is tight at the time a tenant is being sought, drop the rent $10 or $20 below what
the market is dictating to ensure a tenant is secured.
Investors can be made aware that by holding out for that extra $20 per week which results
in another week’s vacancy would mean a greater loss than just dropping the rent.
A diversified investment portfolio provides a hedge against one market dropping in value.
If an investor’s home and investments are in the one area, and if that market, for example,
changes demographically, all their investments may be affected. By diversifying into
different areas and different States will minimise the impact of changes in the market.
In addition, land tax can have a substantial impact on return. Land tax is a State tax
payable on the unimproved land value of investment properties (the value of the land only,
excluding any structures or improvements on the land such as a house). Each Statehas its
own threshold and land tax scale. If an investor owns any property that is not theirprincipal
place of residence they may be liable to pay land tax. This includes property thatdoes not
earn any income.
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The amount of land tax payable depends on the combined value of any taxable land
investors own or have an interest in. Land owned interstate is subject to the Land Tax
laws in the State where the land is situated.
Since land tax is a State tax, clients can diversify their investments by investing in other
States. Diversification is a known and recommended sound strategy for investment in
general as clients spread their risks and don’t have ‘all their eggs in the one basket’.
Again, an Agent needs to make their clients aware of the implications of land tax and
recommend diversification if required.
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To avoid misconceptions about the service you are able to provide, clients need to
understand your role, the areas you are qualified to assist them with, and the areas that
require the services of other industry specialists.
It is important to ensure clients understand the extent and limitations of the service you
are providing and disclosures and disclaimers are signed by the client to demonstrate
their understanding that any advice given is only general and does not take their personal
situation into account, and to seek the advice of other industry specialists where required.
The services you are able to provide as a Real Estate Agent selling investment properties
include the following:
Property options based on research that are within their capabilities (following
consultation with other industry bodies and/or based on [unverified] information provided
by the client).
• Explanations of the mechanics involved in purchasing investment properties based
on specified assumptions.
• The general impact an investment property may have on their situation based on
the information they provide and on market assumptions.
• Methods for minimising associated risks e.g. insurances; factoring vacancies;
fixing interest rates if appropriate, etc.
• Research reports and statistics supporting the investment.
• Details of the targeted properties in terms of location, site plans, floor plans,
proximity to facilities and amenities, etc.
• General knowledge of finance products and general finance strategies.
• General knowledge of tax issues and tax minimisation strategies.
Any information or possible strategies shared with a client can only be general in
nature and clients need to understand and sign-off on this to avoid the possibility
of litigation.
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