Example Of Essay On Risk Management Plan Purchasing And Renovating Home For Resale (Flipping)

Type of paper: Essay

Topic: Risk, Management, Business, Risk Management, Strategy, House, Project, Commerce

Pages: 6

Words: 1650

Published: 2020/12/12

Introduction

House flipping has its own advantages. Most importantly, there seems to be great potential in business, especially in terms of making profits. The profits can be viewed under two key categories. The first type of profits comes from a quick purchase and the reselling of undervalued property. The other groups of profits result from the fact that one can renovate a house and resell it for increased price. Besides the profits, the social aspect cannot be ignored. Most especially, working for oneself can be highly motivating and satisfying (Barta 1).
However, house flipping also comes with major risks. These risk include: overpaying for a house; the likeliness to underestimate the level and cost of repairs required; underestimating the holding time; overestimating the reselling value; overpaying the contractor before the completion of a sufficient level of work; as well as the likeliness to underestimate the costs of buying and reselling. These risks could easily nullify the main benefit, profits (Johnson 1).

Risk Management Planning

Risk management plan is not exactly about the specific risk management interventions. Rather, it is a general framework that facilitates risk management in a business. In this respect, the business or organization acknowledges and anticipates risks and outlines key aspects associated with the other three areas of risk management. This includes listing all the possible risks that the business or organization could face, deciding what levels of risks they are (such as low, medium and high based on the potential impacts that is/they could have on the business), and deciding what strategy to adopt in risk management: proactive (that is, avoidance or mitigation strategies) or reactive (that is, acceptance or transference strategies) (AIRMIC 7; Melone 1).
For this particular case, the risk management involves both proactive (before risks happens) and reactive (after risks has happened) strategies. The best idea is to prevent risks from occurring or keeping their impact under check. As AIRMIC (6) notes, it is always more effective to prevent the likeliness of a risk than waiting to repair the damage. However, it is also important to be realistic about the ability to do that. In this particular case, avoidance strategy would be too hopeful. The real estate industry is highly dynamic and uncertain. Moreover, the challenges of accurate costing means that it is never possible to make the ‘perfect’ decisions. Therefore, looking to avoid risks altogether would be unrealistic. As such, the plan here is to mitigate risks and/or their impacts.
Mitigation strategy focuses on reducing the likeliness and/or the consequences of a risk to an acceptable level. This involves taking action before the risks actually happen, which would reduce the likeliness of the risks happening. For example, using licensed contractors (who have valid workers’ compensation policies) will help avoid various potential liabilities.
On the reactive dimension, there are transference and acceptance strategies. Acceptance is important. It involves response to the risk item with a contingency plan when the problem occurs. This will involve ensuring work is done ahead of time to enhance the success of the contingency plan.
However, transference is also important. This is about shifting the ownership of the risk(s) and its/their consequences to a third party. An insurance cover can help cover the cost of the risk item. However, another option that can work is entering a fixed-price contract, which means that risks are transferred to the performing party.
The general implication here is that there are many risks that the business may experience. While, the general goal is to mitigate risks and/or their consequences, the choice of specific reactive response to adopt should depend on the type of risk. On that note, acceptance and transference may be used.

Risk Identification

Risk identification is about determining the potential risks or risks that are already affecting the business. This involves monitoring the project regularly for risks, and managing the identified risks. Effective monitoring for risks involves: moving the high risk items to the issues matrix, which are to be assessed regularly; including risk section in status report and identifying necessary resources for likely risks; regularly evaluating risk management plan to identify new risks; and undertake constant reassessment of risks and reevaluation of risk management plan (AIRMIC 13).
Risk identification also requires the involvement of all people who have a stake in the project (stakeholders), including contractors. In this respect, the all the stakeholders should be informed about what constitutes risk and how to identify it. Finally, they should know how to report to the owner or management. But the stakeholders should only be involved in the identification of risks, but also assessment.

The risks associated with this particular case include:

The likeliness to underestimate the level and cost of repairs required
Underestimating the holding time
Overestimating the reselling value
Overpaying the contractor before the completion of a sufficient level of work
Likeliness to underestimate the costs of buying and reselling
Qualitative Risk Analysis
Risk analysis focuses on the potential impacts of the identified risks. In this regard, the risks are placed under various categories that help understand them better, including how prioritize risk management (including what to start with and what to focus on later). These categories of risk identification may include:
The probability of occurrence: frequent (occur occasionally and will continue to be experienced unless the owner or organization takes appropriate action); likely (could occur less frequently is the owner or management corrects the process); occasional (these occur sporadically); seldom (these are less likely to occur); and improbable (highly unlikely to occur).

Area of impact: cost; scope; schedule; and performance or quality

The level of potential impacts of the risks on the project: catastrophic (likely to lead to the collapse of the entire project); critical (may not bring the entire project down, but it still hurts that most important parts of the project; moderate (hurts the project but can be corrected quickly); minor; and negligible.

Risk Response Planning

Risk response is where the project gets to deal with real problems. These problems may result from the implementation process, but also from the macro-environmental factors from the wider market (AIRMIC 15).
There are important issues related to the house flipping business that should be remembered. Most importantly, flipping house for profit depends on speed. In other words, the idea is to have the house sold soonest. The longer it takes to sell (the holding time), the more is decays and demands more repairs. It is, therefore, important for the owner or organization to focus more on selling fast, not maximum profits. As long there is profit made, the owner/organization should let go and move on to the next project.

Conclusion

Although flipping houses comes with many risks, it can lead to good profits for those who know what the business is all about. Most importantly, this involves accepting that there are risks involved, taking time to know and understanding those risks, and having in place an effective risk management plan and strategy. In this case, strategy focuses more on mitigation (as a proactive strategy). Reactive strategies would involve transference and acceptance strategies.
In closing, this paper was too limited in scope to discuss all the risks associated with flipping houses. However, most importantly, it provides a framework for basic understanding and management of risks.

Works Cited

AIRMIC. A Structured Approach to Enterprise Risk Management (ERM) and the
Requirements of ISO 31000. 2010. Web.
Barta, Patrick. ‘Flipping’’ Property can be Risky Business. The Wall Street Journal,
Feb. 22, 2003.
Johnson, Danny. The Absolute Best Way to Reduce Your Risk When Flipping House.
Bigger Pockets, May 15, 2013. Web.
Light, Larry. How to Flip a House. Yes, Even in 2012. Forbes, Sept. 21, 2012. Web.
Melone, Linda. How to Get the Right Insurance for Flipping a House. NetQuote, 2015. Web.

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