A Dummy’s Guide to Risk: It’s Often Easy to Identify, but Much Harder to Quantify
Risk is one of those elements of the real estate world that, more often than not, is viewed from the rearview mirror. In many ways, it is similar to hearing a big thump while driving down the road. The first thing you do is look into the rearview mirror to see what you’ve just hit (hopefully it’s nothing more than the neighbor’s dog that’s been keeping you awake for the past two months).
Risk is defined by three simple questions: What is it? Who owns it? What are you doing about it? The answer to the last question is, in turn, a byproduct of the answer to the first two questions.
While some risk variables are more obvious than others, it is quite rare for parties to disagree on what adds risk to a particular situation (for either an individual asset or portfolio). In many ways, it is not unlike the Supreme Court Justice Potter Stewart’s comments regarding pornography, noting that it was difficult to describe, “But I know it when I see it.” One party may l