Risk taking is always driven by choices and decisions made by individuals. One must not mistake risk taking with gambling. Differentiating between gambling and risk taking is important because the former is a chance that you take whereas the latter is an assessment. If you have assessed the situation before and you always decide to proceed with the risk.
Risk-taking involves in-depth analysis, planning, and an understanding of the potential outcomes from the choices that are made. Successful and seasoned risk-takers typically do not dive into the unknown blindly, but instead, they weigh the potential benefits and the possible downsides. They also prepare contingency plans accordingly and remain adaptable to changing circumstances while combating the weight of risks.
Being specific to the real estate industry, the key areas involving significant risks are property, industry or market, financial, legal or regulatory.
Market risk being the most common, is based on factors like economic downturn, oversupply of properties, or a shift in demographic trends. To manage market risk, investors should conduct complete market research before making any investment decisions. Market analysis with a feasibility study, consisting of well researched current and projected trends, demographics, vacancies, and absorption rates of the target market are important.
Financial risk occurs when there is a down turn in the real estate market. Real estate player generally takes a risk that he would be able to sell off 60 % of his stock within half the period of his completion of work. When he is not able to achieve the sale, he is stressed because he has to use his own funds or generate private funds or depend on construction finance. To mitigate financial risk, an initial financial and projection analysis is important.
Legal Risk known as regulatory risk, refers to the changes in the laws and regulations that may influence and affect the real estate market or specific property. Tax laws, building regulations and codes, environmental regulations, area- zone law are some of the factors that impact property owners and the real estate market largely.
Most important risk that a real estate player has to take is in assessing the original title of mother deed of the property. The best of titles can be the worst of the titles. By this I mean, titles that seem to be very clear may be tailored ones. In depth study of the flow of title, local enquiries, checking up in local courts if any legal issues exist, which do not reflect in EC are most important.
Negligence and its impact on risks: Negligence in risk-taking arises from a failure to recognize or properly assess the risks involved when decisions are made. Negligence can also arise from having a culture that looks at short-term results without considering long-term consequences of the risks taken. Risk can be judged as intelligent or negligent only when one can strike the right balance keeping in mind the potential consequences or the setbacks that will follow.
Staying informed, diverse investments, contingency plans and seeking timely professional advice are key strategies to navigating through the risks that are involved in real estate industry.