Mitigating Third-Party Risks in Real Estate: A Comprehensive Guide for Underwriters and Lenders

The Nature of Third-Party Risks in Real Estate

It’s no secret that real estate comes with several inherent risks. Adding a third-party vendor makes operations more complex and riskier, especially when dealing with loans, property inspections, valuations, and financial institutions. 

While smaller organizations have fewer third-party vendors, as your business grows, so does the number of vendors you work with. Indeed, even onboarding backup vendors increases the number of potential attack vectors and increases your vulnerabilities. 

The third-party vendors you partner with to close deals pose risks in several ways, including:

  • Cybersecurity risk – As more deals happen through digital platforms, information security is critical. A vendor with less than adequate cybersecurity practices can lead to a data breach, which leads to leaked customer data, reduced trust, and financial loss. 
  • Operational risk – Outages related to your third-party vendors can translate into disruptions to your business continuity. 
  • Legal or compliance risk – Real estate underwriting has countless rules and regulations. A third party’s failure to remain compliant means legal and financial penalties, especially in financial services.
  • Reputational risk – The vendors and organizations you work with must engage in ethical behavior, or you risk tarnishing your public image. This reputational risk extends to fourth-party and deep supply-chain organizations. 
  • Financial risk – Partnering with service providers or vendors that have wildly different priorities can result in economic impacts. For example, an inspector that takes weeks to file reports can prevent the closing of deals. 
  • Organizational risk – The actions of your third-party partners can prevent you from achieving strategic objectives. 

The impact of the 2008 financial crisis still weighs heavily on the minds of real estate lenders and underwriters. Public perception is still weary, and the increased risk of a cyberattack grows with each passing year, causing business leaders to re-evaluate their risk exposure.  

Luckily, there are strategies, technologies, and habits you can implement to reduce your third-party vendor risks. We cover these best practices and how you can leverage a TPRM program to gain the visibility and confidence you need to manage risk. 

The Role of Underwriters and Lenders in Managing Third-Party Risks

Outsourcing is a popular business strategy to bring specialized experts onto the team without investing in in-house positions. And while a third-party risk management process is crucial for business success, there are few consistent industry standards for the practice. 

Some organizations have entire departments dedicated to third-party risk assessment, while others have only a handful of people invested in risk mitigation. Regardless of your organization’s size, underwriters and lenders play a vital role in this process. 

As an underwriter, your role is to protect the interest of lenders, which includes financially, reputationally, and digitally. That means engaging in vendor risk management, risk assessments, risk scoring, and generating risk profiles. 

Lenders must establish benchmarks and risk appetites that guide how the business interacts with third parties. Stakeholders also need access to reports to address issues with critical vendors before they impact business operations. 

Best Practices for Effective Third-Party Risk Management in Real Estate

Although there is no way to eliminate third-party risk, there are actions you can deploy to safeguard your security posture. These best practices start the moment you begin onboarding new vendors and continue until off-boarding. The strategies include the following: 

  1. Analyze – Evaluate a new vendor’s security ratings through third-party risk assessments. Compare risk scores with your organization’s risk tolerances. Make a detailed analysis of a third party’s operations, financial capabilities, and priorities.
  2. Engage – Meet with third-party leadership, complete questionnaires, and identify security threat response policies. Ask questions and follow up with claims to ensure integrity.  
  3. Remediation – Assign remediation tasks using a third-party risk management program. Use an automation tool to avoid missing emails or spreadsheets. If remediations aren’t complete, don’t move forward with contracts. 
  4. Approve – Senior management makes the final decision to onboard. Complete service level agreements (SLAs) and outline contractual terms. 
  5. Monitor – After vendor onboarding, continue to monitor performance and risk to make up-to-date decisions. 

Even if a vendor starts out wonderful, a third-party relationship can sour quickly, making thorough due diligence crucial and continuous motoring throughout the lifecycle mandatory. Additionally, in industries like real estate and financial services, having a contingency plan or backup vendors is a common practice and highly recommended by legal experts.  

Leveraging Technology in Third-Party Risk Management

Manual entry, spreadsheets, and other archaic third-party management methods introduce increased risk and decreased visibility. Our modern age demands technologically savvy organizations to eliminate unnecessary risks and protect sensitive data. 

Investing in a third-party risk management software program can bring benefits that far outweigh the initial costs. Here are just a handful of advantages you can see with a risk management platform:

  • Reduced long-term costs – While a new software ecosystem costs money upfront, the long-term payoff is well worth it, thanks to streamlined dashboards, automation, and due diligence. 
  • Improved compliance – Maintain regulatory compliance through repeatable workflows designed to ensure completion and accuracy.  
  • Reduced risk – Automated onboarding, risk scoring, monitoring, alerting, and real-time reporting provide stakeholders with improved decision-making capabilities. 
  • Greater visibility – Gain unparalleled insight into your vendors’ vulnerabilities and performance. This clarity improves third-party relationships and builds confidence in business leaders.

One of the most significant obstacles of third-party management is the need for more visibility, which often plagues C-suite leaders and board members. A risk management program can help communicate effectively with senior leadership to address priorities and potential challenges. 

Another massive issue leaders face is the lack of centralized data. As businesses grow, managing third-party vendors becomes more difficult as their numbers increase, and business leaders need a tool that scales with the company.

That tool is a risk management platform. Blooma’s comprehensive commercial lending software is that tool and more. It features pre-flight functions like market analysis, stress testing, and document processing. 

Likewise, obtain third-party appraisals, obtain credit approvals, and run background checks from the same platform. And after closing, the loan servicing and payment tracking capabilities make portfolio management seamless. 

Managing your third-party vendors is only a fraction of what the Blooma software can accomplish. The entire platform makes it possible to close deals within hours while mitigating the risks constantly present when partnering with a third party.  

Better Manage Your Third-Party Risk with Blooma 

Real estate is a risky business, yet the potential upside is limitless. Throughout the underwriting and loan origination process, your organization likely works with several third parties, with each one representing a more significant portion of overall risk. 

Through due diligence, technological automation, and constant evaluation, you can improve your security posture and reduce your third-party risk. Reducing your risk isn’t just good for business; it protects you against regulatory penalties, reputational damage, and financial loss. 

Investing in a technological platform is one of the best ways to reduce risk. Blooma’s one-stop program assists underwriters and lenders in mitigating risk, closing deals quickly, and streamlining their operations. Check out a demo to see how Blooma is CRE’s best friend!   

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