Why are Real Estate Businesses Often Considered High-Risk?
Let’s face it. There is a financial risk of real estate business operation. Uncertain property climates, the high-value transactions, and its propensity to attract scammers all play into that evaluation. However, whether the risk is disproportionately big and how high it ranks on a list of high-risk business industries is anyone’s guess, really. A lot boils down to how the business is run, just as with anything else. And, despite the perceived risk of real estate, it certainly doesn’t dissuade people from taking the plunge into the sector. As a matter of fact, there are now more real estate agents in the U.S. than there are homes for sale, with an estimated 1.45 million realtors as of January 2021. There’s a very good reason why it’s such an attractive prospect for so many. Real estate is very profitable. It doesn’t require a particularly high initial investment, and the returns are substantial. The Internal Revenue Service (IRS) recently reported that of all Americans who declared more than one million dollars worth of income on their returns over the last 50 years, 71% were involved in real estate.
However, if you were one of the people who weren’t daunted by the risk of real estate and tried to start a business, you might’ve noticed that finding listings was a lot easier than finding a bank to support your merchant account. Traditional financial institutions are notoriously risk-averse, and will often shy away from offering you an account to process your payments. They’re bound by a strict set of underwriting guidelines that determine which businesses they can and cannot deal with. These guidelines often specify that there is a risk of real estate and other business accommodation. It likely won’t surprise you to learn that this list of high-risk business industries isn’t exactly short, and covers many sectors, in addition to real estate, that are quite mainstream. This is where you’re better off with a high-risk payments processor that enables you to make and accept payments and conduct business as usual.
There are a number of reasons why banks consider real estate businesses high-risk. We’ll discuss some of them here.
Real estate is one of the most expensive things the average citizen will invest in over the course of their lives. The transaction amounts are correspondingly high. There’s also the high risk of real estate uncertainty, and it’s hard to establish a predictable pattern of transactions. Banks hesitate to back businesses operating in this space since the high transactions also bring the risk of high chargebacks, which costs the bank liquidity and resources to process.
Upon purchase of a property, a buyer may find discrepancies with the finished article, perhaps with defects in the facade or poor material being used in the construction. In this case, they may well ask for their money back. They could also argue that they were promised something different, either by the seller or the real estate agent and may want to reverse their decision. In either case, the bank may find itself having to facilitate a chargeback or a reversal of the transaction.
The fact of the matter is that there is a higher than average risk of real estate fraud and criminality. Identity theft, misrepresentation, falsification of documents, and more are known to happen. Whether or not the real estate agent is personally involved, as someone who facilitates the transaction and gets a cut, they become party to that fraud. Banks will usually prefer not to associate with a business that’s susceptible to such dealings. Erring on the side of caution, they tend to paint all real estate businesses with the same brush.
Real estate is also an industry very prone to legal conflicts arising from disputes over property ownership. Any back and forth over real ownership of the property leads to chargebacks or the money being held in limbo indefinitely. Also, if a transaction fails to go through, for any of a number of reasons, including inaccurate bank details or insufficient balance, there could be a dispute over who retains the deposit and whether it ought to be transferred back. For banks, this adds to the risk of real estate business support.
Poor Credit Scores
A buyer may sometimes report a credit score or an income higher than what it actually is, just to secure a property. They may also have lingering debts to creditors that they haven’t disclosed. This makes them ineligible for a loan or financing options tied to the property sale, possibly leading to a dispute over the money already paid. While this risk of real estate businesses exists, it’s nothing a thorough background check and references can’t solve. It certainly shouldn’t be enough to disqualify someone from running a business of their choice.
SeamlessChex Can Help
If you’re on the hunt for a payments provider that understands your business and has experience creating value for real estate startups, consider Seamless Chex. We’re a full-service payment processor that can support any payment mechanism you’re likely to want to use, from eChecks to credit cards and ACH. We have some of the best banking relationships in the industry with over 25 banks nationally so that you can send and receive payments seamlessly from anywhere in the country. We offer rapid account approvals, regardless of real estate risk evaluations, so you can get down to business as soon as possible.
If you’d like to know more about how we can help you set up and succeed, or if you simply have more questions as to why real estate is included in lists of high-risk business industries, talk to our payment experts. They’ll be happy to guide you.