It was Helen Keller who captured the subject of risk succinctly when she said, ?Security is mostly a superstition. It does not exist in nature, nor do the children of men as a whole experience it. Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure or nothing? (The Open Door, 1957). Risk and reward are two inseparable aspects of human existence. A life devoid of both would be a dull, uninviting and unsuccessful life. Everything you do in life is to a certain extent an analysis of the risk or the reward. When faced with a decision to exploit an opportunity, if your sense of fear of risk is greater you will be paralysed by inaction or what is otherwise referred to as ?analysis paralysis?. However, if your sense of reward is stronger, you are likely to jump into action because you don?t want to miss the benefits. This fact is true in real estate investment as well as in other areas of life.
Successful real estate investors are not reckless or thoughtless individuals who accidentally made it. In fact, most of them are knowledgeable and usually take calculated, intelligent risks. Avoiding risk is a practical impossibility but learning how to manage risk is smart. Blaise Pascal came up with a formula known as Pascal Wager, which he used in determining whether a belief or risk was worth accepting. He applied his Wager to the question of whether it was worth it to believe in God. He concluded that it was because the reward of being right ?getting into heaven ? far outweights the consequences of being wrong. This delicate but deliberate balancing act is very necessary. In real estate investment, risk analysis involves weighing the benefit and the risks and acting intelligently.
Real estate investment, like life itself, comes with its own associated risks and these risks are events that could bring harm or loss to an investment. A risk is that probable event that could lead to depreciation of the value of your property or outright loss of your investment. The existence of such factors should not discourage you from investing but rather use the knowledge of risk analysis and management that we are examining to help you secure your investment.
The primary risk in real estate investment in Nigeria is the possibility of falling into the hands of fraudsters. Fraudsters sometimes attempt to sell a property to you that does not belong to them. This could be eliminated by you engaging the services of professionals to help you investigate the title to the property you seek to purchase and to ensure that all the documents you need from the seller are prepared, signed and collected.
Another possible risk you may face as a real estate investor in Nigeria is government or political risk. Because of the wide ranging power of the executive arm of government and fluidity of functions, the government could acquire private land but the land so acquired must be for public purposes. Unfortunately, there are several instances where government has acquired private land for ?public purposes? and ?development control? only to turn around and allocate to other individuals to use for their own private projects. Some have experienced their Certificate of Occupancy revoked by a new government due to the fact that the owner does not belong to the same political party. This kind of policy inconsistency is a major discouragement to investors. However, be that as it may, whenever you are planning to purchase a land in an area, engage professionals (e.g. Surveyors) to confirm whether or not the land is under acquisition by government or could or could not be sold.
At other times, after government has acquired family lands and compensated the appropriate families, some of the traditional land owners still go ahead to sell portions of those lands to the unsuspecting public. Many people purchase such lands and begin to build without government building approvals. The implication of this, as many have painfully learnt, is that when government decides to take possession and pull down the structures on such lands, such a purchaser will not be compensated by government.
It is also important to note that some areas have already been acquired or building developments in such areas already restricted. For instance, land under the power cables should not be built upon. Many are flaunting this law but should the government decide to enforce such regulations, several people would be affected.
There are also financial risks involved in real estate financing. If you decide to use a bank loan to buy a property, you need to be aware that what we call ?mortgages? here in Nigeria, is technically a commercial loan. Ideally, a real estate/home loan should be a single-digit interest loan, but what we currently have are double ? digit commercial loans. Although, the government established a National Housing Fund (NHF) single ? digit ? interest loan that could advance a contributor up to N25m, many have not been able to access the loan due to bureaucratic bottlenecks and red tape. Some who have accessed the loan have had to apply for a bridging loan at commercial double-digit interest rates in order not to miss their desirable property.
Consequently, it is important for someone who is just starting out in real estate, to avoid this unhealthy burden or to use it for a very short term in order to avoid the huge carrying cost or high interest rates. An investor could explore other means of financing that are less burdensome such as personal savings, group savings and co-operatives.
Culled From:The Punch
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