Risk? What Risk? | Ep.06 - Minimize Risk, Maximize Profits

Risk? What Risk? | Ep.06 - Minimize Risk, Maximize Profits

The TCO Method ™ May 25, 2023 12:15 pm

Andy McQuade brings some stories and perspective on Risk Management in business and some ways to limit exposure during business operations.

Avoiding costs through good risk management, mitigation and avoidance practices can add up to significant savings every year – if you take the time to do it.

Why manage risk? Another step to Massively Increase Your Net Operating Income™.

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The TCO Method ™
Episode 06
Risk? What Risk? Minimize Risk, Maximize Profits
Hosted by Andy McQuade

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Welcome to the TCO Method, the only show focused on helping you massively increase your net operating income.

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I am Andy McQuade and thank you again for tuning in to this sixth episode of the TCO Method podcast.

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Today I want to talk about risk management and it has a few different I guess contexts in real estate,

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but at the end of the day your risk management profile and your appetite for risk should be determining how you do business overall.

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Where you shop, what you use, who you hire, what you ensure for and what you don’t, how you ensure all that stuff should go into risk management.

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Now smaller operators don’t necessarily have a official risk management function.

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They probably should.

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In a perfect world where you’ve got a mature org that is looking to do better, your risk management should be a job in and of itself,

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but it should also be something where it’s coordinated with other parts of your operations at the top level.

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Procurement, compliance, executive suite, all of them should have something to do with risk management and the decision making that goes on

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should have a functional business impact that’s looked at for risk management in a lot of the decisions that are made.

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The downside is that there’s so much technical stuff that can go into risk management that it becomes daunting.

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You get somebody who comes in who’s an expert at insurance and risk management and there’s a part of it in the cost of avoidance bucket that isn’t necessarily going to work as well as it should.

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Because there are products and services and practices in operations that happen that can negatively or positively impact your risk management profile at your business.

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Insurance underwriter, for example, and I’ve had a couple of them approach me about the TCO method, not the podcast, the actual consulting service that I do through my consulting firm.

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And they’ve expressed an interest in finding ways to creatively underwrite insurance because of the reduced risk that’s inherent in how we build the program.

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Every decision you make on the procurement side, it would be attempting to not just put a bandaid on something or repair something, it should be solving a business problem, it would be addressing a business challenge, it should be a finding a way to make you more net operating income.

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And what does that mean? That means doing things that are a little bit more expensive maybe on the front side.

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But that payback dividends over time because they’re less likely to fail prematurely.

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They use less resources, they use less energy, they take less maintenance and labor to operate, et cetera, et cetera.

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And it’s not just products, it services to where you’re extending the useful life of stuff, but also inherently reducing your risk of premature failure because of practices, product.

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People, et cetera, et cetera. So there’s a lot of, I guess, components to risk management that can really impact how your operation makes money.

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And it all ties into total cost of ownership, right? The TCO method.

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Ideally, you want to reduce risk, ideally, you want to control your risk and only accept things as good enough when the chance of it failing or the chance of it coming back to bite you out way the cost if it does.

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And how often do those things fail versus how long they last typically it’s a balancing act. So risk management isn’t just something where you spend a ton of money and you do everything to the best of everyone’s ability a thousand percent of the time.

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And everything works out and you never have singles blowing off of roofs, you never have sidewalks breaking up from using rock salt, you never have slip and falls on your property because all your curves are marked or you never I shouldn’t say you never have a slip and fall, you’re obviously going to because people do it on purpose, right?

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And you’re not going to be found liable because you will have been able to prove that all your salty was done correctly all your curves were more marked appropriately they’re all bright yellow they’re touched up every year like all those dumb things that go into what your insurance underwriter is going to look for when they get a lawsuit on their desk.

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Those are things you should be doing proactively to some extent.

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But there’s a balancing act there between spending the time and money necessary to do everything perfectly to the satisfaction of everyone involved in every single aspect of your business and making money.

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You can’t do everything everyone wants you to do to the to the thousandth percent of ability and spend more money than it’s going to save you over time through your risk management process.

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So while cost avoidance has a place while compliance has a place right because they’re very closely tied.

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Your procurement function in your office or how you make your purchasing decisions from a vendor relationship management supply chain pricing products election all that stuff could be looking at everything you’re using and weighing the risk of X Y or Z.

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Now I hear from some clients who have properties in Florida in Texas they’re getting absolutely crushed by insurance increases to the point where insurance doubled in some areas tripled out of nowhere not really out of nowhere or can cost money tornadoes cost money.

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The insurance industry has been losing money in those areas for years to keep rates low and they can’t afford to do it anymore so I don’t really begrudge them for raising the prices but they’re literally a racing value from those properties because they’re decreasing the N O I by so much.

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I know a guy who lost 1.6 million dollars from an insurance increase on a property with 300 doors I think it was it is 400 I don’t remember specifically what it was the point is the more money you’re spending on things like insurance the worst it’s going to be for your N O I you need insurance.

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There are jerks out there who will sue you at the drop of a hat for literally nothing they will look for a pothole at the end of your driveway and try to twist their ankle in it so they can sue you.

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Like that is a real thing.

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You have tenants who are careless and do things they’re not supposed to be doing and will burn your apartments down you have subcontractors I worked with one.

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Who is not insured properly.

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He was working for one of my clients they were on the roof and they burned down an 18 unit building on a property with you know 400 doors.

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The property manager my client had to put all those families up in a hotel after they took them over from the red cross who gave them a place immediately the night before.

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And they had to just do that and this particular client was self insured to a certain point using a captive policy which is just.

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There was a lot of moving parts but it was very ugly for not just my client but for that contractor because they were not doing the right thing and they were not properly insured.

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So the moral of the story is you have to weigh your insurance cost against your risk and then there are things you can do that will reduce your risk profile.

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And maybe with some creative underwriting they can save you some money.

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So when you’re looking at who you use.

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You should be and by who I mean subcontractors 1099s like me I’m a 1099.

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Every single job I start I need to have a sign contract for whether it’s a proposal for an initial.

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You know overview of the business and what they’re doing and where I see opportunities right like a discovery project or whatever you want to call that.

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Or whether it’s an actual hey we’re bringing you in here’s this contract that’s 14 pages long that describes all of the legal ins and outs and what the liability from everybody is and how everybody has to play nice in the sandbox together for this project until it’s complete.

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My clients have to sign one of those.

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I provide them with an additionally insured certificate with their business name on it.

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So if I’m working with a company with 14 different entities.

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I have to get a certificate for all 14 different entities issued.

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It’s a pain in the rear but my insurance policy because this is what I do every day was was underwritten creatively to allow me to do this because I’m not a GC.

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I’m not a contractor nobody who works for me swings a hammer.

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My time on job sites is limited I have to have a million dollars in GL or whatever but my ENO my Arizona missions my business insurance my professional liability insurance whatever you want to call that for me it’s ENO is a consultant.

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I have to have certain things to work with a client contract.

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Issue an additionally insured certificate for every business entity that I’m taking money from.

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And I have to make sure that I’m getting the client a copy of my W9 to prove that I’m actually there.

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My suggestion to everybody listening is that you need all three of those things for every single 1099 you work with to reduce your risk.

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Because if they’re on the site working for you and there’s no contract and they get hurt.

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You’ve got nothing to stop their insurance company from fighting you on a claim or vice versa.

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If they don’t issue is insurance certificate with additionally insured and you don’t verify that that insurance actually exists and something happens you’re done for.

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They’re going to own everything or whoever gets hurt is going to own everything assuming that the third party causes it.

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There are there are all sorts of bad things that happen from not verifying insurance proof of business existence and having a contract that details exactly what’s going to happen in the nature of the relationship.

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They might have an I N number from the IRS but there’s nothing saying legally that they’re allowed to work in New York same thing if they’re an Nevada Wyoming or Delaware LLC or corporation.

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And they’re working in New York state that they register as a foreign entity in New York.

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If the answer is no if you can’t find them on the New York state website then they’re not legally bound by a lot of things and you can get in trouble for hiring them.

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Similarly, your risk management needs taken to account what you’re using.

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That’s where my specialty kind of lies is what you’re using and why because there’s certain products and services out there that you can put into your property that are essentially guaranteed to fail and cost you more money.

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And there are certain combinations of products and stuff out there that you can find that will shorten the lifespan of one or both.

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It’s like concrete and rock salt right you have brand new concrete pavers brand new concrete sidewalks brand new concrete driveways.

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And if you’re in you know any place where there’s snow you drop straight up rock salt on there.

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Yes, the concrete should be sealed.

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I have yet to actually ever see a property management company seal concrete ever they’ll repay their their black top driveways once in a while.

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But concrete sealing it doesn’t happen.

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So it may not be a risk thing immediately.

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Let’s talk about the cost avoidance thing of having to get those fixed.

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Let’s talk about the fact that using regular rock salt if you have steel entry doors will rust the bottoms of those entry doors on your buildings you should be using fiberglass because they’re done proof and they don’t rust but that’s a sad point.

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Let’s talk about the fact that eventually that concrete will break up to a point where you’re either going to have to pay to replace it.

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Or you’re going to get that guy who walks down your sidewalk is like man I want some money today.

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I’m going to twist my ankle in this for a little while.

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So there’s there’s a number of things that could have been done to avoid that.

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And the question comes down to is my insurance company going to believe me when I say I’ve been maintaining these properly if X Y and Z haven’t been done.

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Or are they going to say we’re going to pay this but you’re going to eat this and then we’re going to raise your rates through the roof or we’re just going to cancel you outright and you’re going to move on as a high risk because now you show up on the reports as having too many claims that cost too much money to your insurance company.

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These are things that happen.

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Again, I’m not an insurance underwriter but I have had some pretty in depth conversations with some who are very interested in minimizing their exposure.

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And your own personal risk profile I know people who self insure they don’t carry a fire insurance policy they keep a bank account with a bunch of cash in it.

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84 lumber perfect example 84 lumber self insures they burn us a store burns down that comes out of their pocket to rebuild that.

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Or at least that used to I don’t know if they still do that I’m sure they probably do because it’s all about low overhead but when I was there when I was a store manager fire insurance was not a thing.

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And I saw stores burn there was a couple of them in my 11 years there that burned and Maggie wrote the check so there’s that the rest of your risk management profile your risk tolerance really needs to come down to the skill set of your team and how they’re going to look at and help you avoid risk in the field.

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Like there’s a saying there was a saying in retail when I was at depot you walk in down an aisle in a story see piece of garbage you walk past that means you accept it.

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Are your team members at your property is your maintenance guys your leasing agents your property manager themselves are they looking for exposure looking for things.

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That can fail or that will fail and cost you money.

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I don’t know they probably should be.

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Up here in New York it’s been law now to use 10 year sealed lithium battery smoke detectors.

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In every single apartment for I think since 2019 the law was passed and I delayed it until like 2020 or 2021 but anyway it’s been an effect now for a few years.

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And it still blows my mind when I walk into a property and I see 25 30 year old smoke detectors run an off nine volt batteries double a batteries or even better when the property manager wants to save a couple hundred bucks and they go online and they order.

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Battery operated you know double a nine volt battery smoke detectors from out of state and have them shipped here.

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For a couple reasons the cost avoidance thing is when you look at the life of that smoke detector useful life of the smoke detectors only 10 years.

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There’s a little radioactive disc in there that has a half life that the grades and eventually it’s just not going to work anymore when there’s a fire.

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The speaker will work.

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You push the button it’ll say hey the battery’s here I’m going to be but when there’s actually smoke that radioactive isotope doesn’t do what it needs to do to trigger the alarm.

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So anyway you have these 10 year lifespan units regardless of whether they’re battery operator 10 year sealed.

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And over that 10 years do you think it’s cheaper to buy a 10 dollar smoke detector and then change a battery every six months to a year and have a guy in the unit testing it all the time.

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At your expense with the risk that your tenants are going to pull the batteries out and put them in their kids toys.

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Or is it cheaper to put a unit in that’s just going to crap out in 10 years where you don’t really need to do anything to it because it’s going to start beeping incessantly when the battery dies and you will get a phone call from a cranky tenant who wants that thing gone.

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Which one cost you more over the life right it’s going to cost you the same to install a new one of either kind into a unit.

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Except for the purchase price at the beginning to get a 10 dollar unit and 20 dollar unit by the time 10 years goes by that 10 dollar units going to cost you four times what the 20 dollar unit cost you.

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Because of labor and batteries and if you’re a landlord that’s putting it on your tenant to buy replace maintain and test batteries for your smoke detectors.

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I want some of what you’re smoking if you think that’s happening because it’s got to be good.

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Nobody cares about your stupid smoke detector if they have renters insurance it’s considered a fixture required by code in your property and you’re going to own the liability if that thing doesn’t work.

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Good luck and you’re not going to win that conversation with your insurance underwriter either.

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So yeah don’t do dumb things that’s the that’s the end all be all of this episode of the TCO method.

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Don’t make dumb decisions think things through more than checking the list off for today and not worrying about tomorrow until tomorrow.

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It is a recipe for failure eventually there are plenty of people who live day to day or today never thinking about what they do today and how it’s going to impact their life tomorrow.

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I really hope those are not people who are running businesses the same way they’re running their lives.

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And if it is hey if you’re happy and you think you’re successful and you don’t care what other people think cool good on you keep it up.

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But if you’re trying to run a business and grow in scale you need to start putting things in place at the bottom level that impact everything else down the road.

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That means you need to be thinking ahead a little bit this is part of risk management whether you realize it or not because you’re talking about cost avoidance you’re talking about compliance you’re talking about how you’re managing your business and making business decisions.

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Procurement everybody’s eyes glaze over this is what I do it’s where I came from from the other side of procurement doing the sales part but I also was really involved on all the backend stuff about how companies buy.

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How they pay their sales people how they deal with warranty issues on products how they have stuff manufactured.

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That all should go into a decision making matrix of some kind hopefully involving risk management hopefully involving compliance hopefully solving business problems.

00:23:10,200 –> 00:23:11,200

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Every decision you make should be addressing a business opportunity of some kind.

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Maybe it deals with multiple so what you need to do when you’re talking risk management is understand what the costs could be if something goes sideways now what they’re going to be.

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What they could be because things going sideways isn’t always guaranteed.

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And there’s always going to be costs that you can’t predict or build for like if you’re in tornado country.

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You know there’s a chance on some level at some time that your property could get nailed by a tornado.

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I’m not in tornado country I’m in upstate New York right now.

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And we’ve had tornadoes take out houses up here it’s all once in a blue moon thing.

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It’s not a everyday risk but it still happens now in upstate New York my risk management plan on a tornado that might happen once a century and take out one or two homes is going to be zero not going to have one because it’s so remote that it’s not even worth thinking about or wasting time on.

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But if I’m in tornado country I’m going to do what I need to do to make sure that I’m minimizing whatever potential exposure I have from having property there.

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So if I have a multifamily building and I know there’s high winds from tornadoes even if it doesn’t take out my property.

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I want to make sure that I’m covered from a minimizing my cost of replacement repair standpoint.

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So even though my roof isn’t ripped off I want to avoid losing shingles I want to avoid having roof leaks from having improper flashing I want to make sure that you know I’m not going to have to be replacing chunks of sighting all the time every time there’s a high wind that comes through so there’s certain decisions I’m going to make in my you know I guess business decision matrix that is going to take into account all of those things like what kind of roofing is less.

00:25:28,200 –> 00:25:57,200
Roofing is less prone to taking damage from hail and high winds what kind of flashing or what contractor is out there that does a good job on roofing that can keep leaks from happening when there’s a 70 mile an hour wind hitting me when I have sighting done what kind of sighting isn’t going to rip off in the wind and blow away is that really cheap super thin vinyl junk sighting from home depot going to survive or is it going to get ripped off and.

00:25:57,200 –> 00:26:26,200
I’m going to have issues leasing units because property doesn’t have the curb appeal it’s supposed to and how am I going to book a contractor to get in everybody’s busy and they’re paying more than I want to pay because I have 500 units and 36 buildings and you know these other guys are individuals and they’re just going to pay through the nose high margin for insurance calls like there’s a ton of things that happen that you need to take into account.

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Now in most again most not all but most don’t have a plan or mature function to deal with looking at stuff in a granular fashion that breaks down okay this is the specific item I want to use because it addresses this on risk management it meets the curb appeal that I need.

00:26:53,200 –> 00:27:14,200
Costs this so it’s within my budget it repairs easily so my maintenance outlay is low it doesn’t need repair frequently so it reduces having to take service calls which also reduces my maintenance outlay all of these things can increase your NY.

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And maybe if it’s the right thing and you can build a case that you’re using enough of these systems on a property.

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And then go it over time with a reduction in maintenance and service calls and whatever you can show your insurance underwriter that this is what you’re doing and why you can reduce your outlay potentially not every insurance company is going to play that game.

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And everybody right now is shopping insurance because they’re all getting host and there’s not a single company out there that double their triple their prices that’s going to be like I’m sorry I made mistake I’m going to put you back to what you were paying in 2019 yet that’s not that’s not going to happen.

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So yes you’re going to lose enough and I want to damage your property value if you’re in commercial multi family at least in those areas.

00:28:01,200 –> 00:28:19,200
So some of the numbers aren’t going to work this week in the news they were talking about lawsuits starting to happen now because of syndicators not meeting their promises when they were advertising their investments and not properly informing their clients of the risks.

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And it’s going to get real ugly for those people real fast if this first set of lawsuits goes through and doesn’t get shot down on a technicality.

00:28:28,200 –> 00:28:36,200
And then the bulls eyes going to be on all these other syndicators that maybe did the same thing.

00:28:36,200 –> 00:28:42,200
So good luck to them not my problem looks good for my house.

00:28:42,200 –> 00:28:55,200
So in other news risk management isn’t everything but you do need to make sure that there is some sort of function somewhere.

00:28:55,200 –> 00:29:18,200
The TCO method bakes it in because every single decision that you make using the TCO method is going to weigh risk management on some level it’s going to rate way compliance it’s going to weigh cost avoidance it’s going to weigh reducing your maintenance and overhead it’s going to weigh reducing your utilities reducing waste saving time.

00:29:18,200 –> 00:29:36,200
And it takes practice and it takes unfortunately some sort of granular knowledge that a lot of people just don’t have because again you can be a really strong operator and still have no idea that there’s a difference between product day and product b other than price.

00:29:36,200 –> 00:29:47,200
If it wasn’t the case there probably wouldn’t be so many junky crap products on the market because no one would buy them anymore.

00:29:47,200 –> 00:30:05,200
Make good decisions one of those would be to subscribe to this podcast to follow it on YouTube download it tell your friends leave a review I would love it if people would start leaving reviews on Apple podcasts.

00:30:05,200 –> 00:30:17,200
Each episode gets downloaded and listen to right now I think this is episode six or averaging about 25 per episode it would be really cool to see those numbers double.

00:30:17,200 –> 00:30:27,200
We’re working on some social media stuff to get that to happen but I hate social media you’ll probably hear me say a lot on the show I hate social media.

00:30:27,200 –> 00:30:45,200
But anyway I hope you all have a great rest of your week when this show comes out it’ll be Thursday the 25th of May my kid turns 10 on Friday the 26th oh my lord anyway wish me luck it’s going to be an interesting weekend.

00:30:45,200 –> 00:30:50,200
Enjoy your memorial day I will see you all on.

00:30:50,200 –> 00:31:08,200


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