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Risk Mitigation When Purchasing a House

The real estate market is currently quite well-developed. However, buying real estate from a legal point of view is a very complex procedure and requires careful preparation before its implementation. In the event of an error when checking a home, the excitement of buying a home can turn into drama with endless litigation, property disputes, and loss of money. Mettling and Cusic (2019) note that most buyers do not pay enough attention to such an important factor as considering the risks of such transactions. Thus, purchasing a home entails many risks, the successful management of which can avoid problems and bring satisfaction with the buying. In this regard, such types of risk mitigation as risk avoidance, risk sharing, risk reduction, and risk transfer acquire special significance.

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Avoidance is the best loss control tool. It is because, as the name suggests, the buyer avoids risk entirely. If the loss prevention efforts were successful, then the probability that a loss will be incurred is zero. Thus, it is a means of completely eliminating the threat. For example, a person wants to buy a house, but real estate prices have been unstable lately. There is a financial risk that the buyer may spend a large amount of money on the purchase of housing. Having assessed the risks, a person may decide to avoid buying and wait for prices to stabilize. Therefore, in this case, risk avoidance involves the refusal to purchase a house. In turn, Adams (2019) affirms that avoiding a well-defined risk is one of the best ways to mitigate it. For example, it is worth refusing to buy a property with a pool or hot tub to avoid unintentional drowning lawsuits. Thus, in some cases, risk avoidance is a good way to eliminate it.

One of the risk-sharing methods is to contact a competent real estate agent. According to Adams (2019), real estate transactions are delicate and require a lot of effort and knowledge, so it is necessary to turn to real estate professionals for help. Thus, it is recommended to purchase a house with the help of specialists. An agreement concluded with an agent that regulates the company’s obligations in providing intermediary services will help share the risks. It is noteworthy that it is worth contacting trusted, competent real estate specialists since the consequences of a rash choice fall on the shoulders of the client himself. Thus, buying a house with the help of a real estate agent is a good way to risks mitigation. In turn, risk reduction involves adopting measures to reduce the likelihood of damage or the severity of its manifestation. For example, high debt can backfire when a house is purchased through borrowing. According to Mettling and Cusic (2019), a down payment increase may be applied to mitigate this risk. While this will require more cash up front, it will reduce the funding amount and lower payments.

It is often impossible to foresee certain circumstances in advance and fully study the property’s legal history. Adams (2019) asserts that the most common risks covered by insurance include errors in processing the necessary documents for the transaction and fraud on the part of the seller. Transferring certain risks is another way to protect yourself and is often used in addition to other mitigation strategies. Risk transfer involves the transfer of influence and risk management to another entity. In this case, insurance is a good example. Home buyer’s insurance provides coverage against loss of ownership or other real rights to real estate if the transaction is found to be illegal due to events that were not known to the buyer at the time of purchase of the home.

Despite the impressive list of risks that can arise while purchasing a home, there are common ways to mitigate them. Firstly, when purchasing an object, it is imperative to calculate and analyze all possible risks in advance, and only based on this make a decision. Secondly, it is necessary to familiarize yourself thoroughly with all title documents since, in such situations, there are no trifles. Thirdly, it is recommended to exercise full control of the process both during the conclusion of the transaction and in the management of the object itself after the acquisition. The contract must be concluded directly by the buyer personally or by his authorized representative. Mettling and Cusic (2019) note that managing a facility remotely carries more risks than in-person control. Fourth, insurance is one of the classic methods of risk management. If there are any doubts, or if the buyer does not have the necessary knowledge, it is recommended to resort to the help of a professional real estate agent so that the transaction is as safe as possible.

Therefore, the buyer is the most vulnerable party when buying a house since this person faces many risks. In this regard, such types of risk mitigation as risk avoidance, risk sharing, risk reduction, and risk transfer are of particular importance. In the case of buying a house, risk avoidance involves avoiding a purchase, which may be appropriate in a situation of price volatility or the purchase of a home that is characterized by a certain risk, for example, the likelihood of flooding. In turn, risk sharing involves contacting a competent real estate agent, who, together with the buyer, shares the responsibility for managing any risk. Risk reduction reduces the likelihood and consequences of risks. Risk transfer is associated with the transfer of responsibility for risk management and can be presented in transaction insurance.

References

Adams, A. (2019). Tips, tricks, foreclosures, and flips of a millionaire real estate investor. Wiley.

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Mettling, S., & Cusic, D. (2019). Principles of real estate practice. Performance Programs Company.

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