The Importance of Property Risk Forecasting

Article

Key Takeaways:

• Property risk forecasting is essential for individuals and organizations involved in commercial and residential real estate transactions.
• A comprehensive tool is necessary to provide crucial information about the potential risks of a property, enabling informed decision-making.
• Property risk forecasting is valuable for a wide range of stakeholders, including lenders, financiers, insurers, attorneys, investors, buyers, sellers and government entities.
• A property risk forecasting tool should be detailed, accurate and easy-to-use, with interactive visualizations.
• With the growing complexities in the real estate market, including environmental and natural hazards, property risk forecasting is becoming increasingly critical for individuals involved with real estate management and transactions.

Purchasing real estate is a significant investment that requires careful consideration and thorough due diligence. Until recently, the procedure for performing due diligence required numerous steps and was time-consuming and expensive. The potential result of not performing some form of due diligence may be missing risks, leading to costly and far-reaching consequences for buyers and investors.

Who should be concerned and why?

So, who should be concerned about property risk? The answer is simple: anyone who is involved in buying, selling or financing real estate properties should be concerned. There are three main groups of people and organizations that need to be concerned about property risk: commercial real estate users, residential real estate users and governmental/municipal users. Each of these groups has unique needs and concerns surrounding property risk. Commercial real estate users should be concerned about environmental due diligence, while residential real estate users should be concerned about environmental concerns and the disclosure of natural hazards. Governmental/municipal users have to be concerned about risk mitigation, resiliency, sustainability and development opportunities.

How do you begin to address property risk concerns?

Making informed decisions about the real estate you’re considering means understanding the potential risks involved. Both professionals and general users need an all-inclusive tool to help understand the potential risks involved in buying, selling, managing and financing real estate. This tool should provide a report that outlines the risk factors associated with a specific property, allowing users to make informed decisions to minimize or mitigate risk. This tool is essential for real estate investors, lenders, brokers and property managers alike who need to quickly and accurately ascertain property risk to forecast and make quick, informed decisions.

Who will benefit from property risk forecasting?

Commercial Real Estate Lenders – Lenders can use property risk forecasting to determine if historical regulatory record keeping has identified a property with potential environmental concerns early in the loan process. This helps conservative lenders screen potential loans, while more risk-tolerant lenders can consider lending options. Additionally, traditional lenders and banks often require a Phase I ESA as part of the loan process. Forecasting can help these banks evaluate the level of property due diligence necessary early on in the loan process and can help to set realistic expectations on the ease or complexity of environmental concerns. This can accelerate the requirement for an ESA completion sooner in the process if the loan deal appears favorable based on other qualifying criteria. In essence, performing an environmental screen early in the loan process will save time and make the research process easier.

Private Financing/Shadow Banks – Many private financiers either do too much, such as conducting a Phase I Environmental Site Assessment (ESA), or nothing at all. Risk forecasting can save these lenders time and money by screening before going to a full Phase I ESA. It helps them avoid inheriting a cleanup site and prevents an already risky deal from becoming even riskier.

Commercial Insurers – Actuaries in larger insurance companies normally have access to extensive internal databases, but the process is not necessarily automatic or easy-to-use. Property risk forecasting is the best solution for start-up and medium-sized commercial real estate insurers who don’t have the capacity to maintain such detailed and up-to-date databases.

Commercial Real Estate Attorneys – Real estate lawyers currently must search through multiple sources for information. Property risk forecasting provides a one-stop search where they can identify potential legal roadblocks, making their research more streamlined.

Commercial Real Estate Investors, Buyers & Sellers – Commercial real estate professionals often only turn to potential environmental issues as the last step in the due diligence process. This can lead to losing leverage and having deals fall apart. Property risk forecasting can help these professionals screen properties early on, saving time and money, and provides information to help negotiate property sale negotiations.

Residential real estate professionals and homeowners – As an increased number of homeowners are taking a more active role in evaluating risks associated with their investments, the ability to quickly screen for environmental risk has never been easier and more affordable.

Municipalities – Cities and counties (municipalities) are becoming more aggressive in documenting and record keeping due to the influx of new residents and the need to become continuously aware of environmental concerns that may affect their constituents. Forecasting provides high-speed analysis that helps municipalities keep up with the growing demand for information. From a value proposition, being able to know what risks are in a community allows municipalities to be better equipped to minimize risk and identify opportunities.

What is in store for the future of real estate risk?

The real estate market is continuing to evolve and is becoming increasingly complex, especially with the rising threat of environmental and natural hazards. As a result, real estate professionals need to assess risks associated with each property they are considering. A thorough and user-friendly risk forecasting tool can offer real estate professionals precise information on the hazards connected to each property of concern.

Recent natural disasters, such as the wildfires in California in 2017, have shown just how devastating the impact of natural hazards can be. In response, California enacted the Natural Hazards Disclosure Act, which requires residential real estate sellers and brokers to disclose if a for-sale property lies within one or more state or locally mapped hazard areas. This highlights the need for real estate professionals to have access to up-to-date information about the risks and hazards associated with each property in question.

The process of conducting property due diligence is a significant aspect of purchasing a residential and commercial property. Anyone involved in buying, selling or financing commercial real estate properties should be concerned about property risk and understand the risks associated with each property they are associated with. Property Risk Forecasting as a service is designed to provide users with a comprehensive report of a property’s risk, facilitating informed decision making, a benefit to commercial real estate lenders, private financiers, traditional lenders, commercial insurers, real estate attorneys, investors, buyers, sellers, states and municipalities and others.

Introducing RiskFacts: On-Demand Property Risk Forecasting

RiskFacts provides a comprehensive view of the risks associated with real estate, incorporating data from over 2,000 environmental government database listings, FEMA 100-year flood mapping, federal wetland mapping, as well as a myriad of state map layering. Future risk pillars, including the natural risk index, US census data and environmental justice indices, will allow even greater screening capabilities. This makes RiskFacts a valuable search tool for real estate professionals, providing a comprehensive picture of the risks associated with a property. The platform also integrates with federal programs to streamline the risk assessment process, saving you time and money. With its up-to-date information, RiskFacts provides a crucial tool for risk evaluation in the ever-changing real estate market.