Client risk profiles: the secret sauce for buyer’s agents
What is an A-grade investment property?
Every property investor has an investment risk profile that influences their decision-making. The best buyer’s agents take the time to understand each client’s risk profile before recommending a property investment strategy. Both the client and the buying agent win with this approach.
Different types of property investor risk profiles
Any significant investment, like buying property, carries an element of risk. Before we take a look at ways to identify property investor risk profiles, let’s first look at the different profile types.
A property investor’s risk profile tolerance generally falls into one of three categories:
1. Low-risk (these investments are very safe but only provide low returns).
2. Medium-risk (these provide higher returns than low-risk investments but include risk).
3. High-risk (these are higher-risk but they also offer the potential for the highest returns).
How the best buyer’s agents identify client risk profiles
Good buyer’s agents use any or all of the following tools and strategies to identify the specific risk profiles of each of their clients. They do this at the initial consultation.
- Asking open-ended questions
These are questions without just a ‘yes’ or ‘no’ answer. They require the investor to elaborate so the buyer’s agent can identify their risk profile.
During the initial consultation, the best property buying agents ask questions about each client’s financial situation, goals and investment experience. They do this to allow each individual client to freely explain their risk comfort level and their desired return on investment (ROI).
- Gathering information on the client’s financial situation
This information includes their current income, expenses, debts and assets. It gives the buyer’s agent a clear picture of the investor’s financial capacity and their ability to handle the specific risks associated with different types of property investment strategies.
- Using generic investment risk profiling questionnaires
Many buyer’s agents use investment risk profiling questionnaires. They ask a series of questions about a property investor’s attitude towards risk, their investment time frame, and their investment goals. Based on the answers, the questionnaire generates a risk profile score that categorises the investor as low, medium or high-risk tolerant.
- Using personalised investment risk profiling questionnaires
In addition to using investment risk profile questions, good buyer’s agents often include personalised questions to gain a deeper insight into each investor’s risk tolerance. These questions may delve into the client’s specific investment experiences, their emotional responses to market fluctuations, their personal financial priorities, and their family situation (for example, if they have dependent children).
- Exploring hypothetical scenarios
Some of the best buyer’s agents test the risk tolerance of their clients by presenting them with property ownership scenarios that involve different levels of risk and reward. This helps the investor understand how they would react to potential market/ROI fluctuations (for example, the risk of interest rate rises affecting their loan repayments, the risk of their rental income and cash flow being affected by a tenant vacancy period, or the risk of the market value of their property temporarily declining and affecting their loan-to-value ratio).
By discussing these hypothetical scenarios, the buyer’s agent can identify the investor’s risk tolerance thresholds. It helps to determine the level of risk the investor can handle without experiencing undue stress or anxiety.
How the best buyer’s agents use client risk profiles
Good buyer’s agents use their client’s risk profiles in three main ways:
1. They educate their clients about their profile and associated investment options
Good buyer’s agents provide their clients with clear and concise information about the relationship between investment risk and return, along with the types of risks associated with investing in different property types or locations. This allows the investor to make informed decisions based on their risk tolerance level.
2. They source property buying opportunities that match the investor’s risk profile
The most successful buyer’s agents are specialist property finders who source the best opportunities to match their client’s risk profiles, wherever those properties may be. For example, they could be interstate.
3. They encourage diversification to minimise risk
One of the best ways to manage investment risk is to diversify. Good buyer’s agents advise their clients who are building property portfolios to buy different types of properties in different locations to spread their risk. If there is a downturn in one market or with one property type (for example, a temporary oversupply of apartments in an area), then these diversified property investors will minimise their risk exposure. The analogy of “not putting all your eggs in one basket” certainly applies to property investment.
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