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Accounting for Real Estate

With the financial pressures on real estate agents and brokers in today’s highly competitive marketplace, comprehensive and accurate financial reporting systems are essential for your business’s long-term success and stability.

Real estate transactions are complex, and executing them properly requires specialized knowledge and training. Today, there are over 3 million active real estate licensees in the United States, according to the Association of Real Estate License Law Officials (ARELLO). Most real estate professionals are independent contractors who are affiliated with an independent or franchised brokerage firm. There are currently more than 100,000 brokerage firms operating in the United States, according to the latest data from the U.S. Census Bureau. With so many agents and brokers vying for deals, access to real-time financial data can help differentiate your agency and give you a heads-up about recent market trends, new business opportunities, and potential threats. Whether you specialize in helping first-time homebuyers navigate this milestone purchase or spend your time negotiating complex corporate contracts, accurate, timely financial data can help you make the business decisions necessary to thrive in the real estate industry.

Businesses that help people buy, sell and lease real property, whether independent or franchised, face unique operational and financial challenges.

Fast-paced and competitive, the industry offers an opportunity for people with limited financial resources to become entrepreneurs. However, real estate professionals typically work long hours, and their workweeks can often be unpredictable. Cyclical and seasonal fluctuations in local real estate markets, limited inventory, and turnover among licensed agents and assistants are ongoing challenges that can increase workloads and cause cash flow shortages.

Managing the accounting side of real estate businesses can become a nightmare without bookkeeping and accounting expertise. Just like buyers and sellers of properties tend to underestimate the skills required to negotiate real estate transactions, some business owners may attempt to keep their own books. But do-it-yourself bookkeeping and accounting can lead to costly errors, diminished profits, and missed business opportunities. So, many real estate professionals turn to external specialists for help with their unique operational and financial reporting challenges.

That’s where Padgett comes into play. We specialize in providing bookkeeping and accounting services for real estate professionals. We can help manage the financial side of your business, allowing you to focus on negotiating deals for your clients, marketing properties, building your reputation and local referral network, staying up to date with the laws and licensing requirements in your state, and landing new business.

Among other things, a well-designed accounting process can help agents and brokers:

  • Make informed business decisions;
  • Maximize profitability;
  • Track commissions and other operating expenses;
  • Evaluate marketing budgets; and
  • Comply with applicable labor and tax laws, as well as the financial requirements of state licensing agencies and franchise agreements, if applicable.

To learn more, reach out to your local Padgett office

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Outsourced bookkeeping

Bookkeeping can be time-consuming for real estate professionals. Our real estate specialists can handle these administrative chores for you. The use of a trusted specialist in real estate bookkeeping gives you the peace of mind of knowing that commissions, operating expenses, technology investments, and other financial transactions will be recorded in the appropriate general ledger accounts with detailed, accurate descriptions.

We can help you establish separate bank accounts for your business to avoid commingling your personal and business records. We can also set up a chart of accounts, so you won’t lump all operating expenses into one category, as well as implement monthly reporting processes to help you identify and fix operating problems before they spiral out of control.

Maintaining separate, organized records will alleviate headaches when it’s time to prepare your year-end financial statements and income and payroll tax returns. If your real estate business operates as a general or limited liability partnership or a limited liability company with multiple owners, effective bookkeeping throughout the year will also make K-1 form preparation easier.

Preparation of monthly and year-end financial statements

Comprehensive financial statements include three reports: 1) the income statement, 2) the balance sheet, and 3) the statement of cash flows. These provide an overview of your business’s financial health.

We can issue financial statements for your real estate business that comply with U.S. Generally Accepted Accounting Principles. Alternatively, independent agents and small brokerage firms may prefer to issue cash-basis or tax-basis financial statements. We can help you determine what’s appropriate for your current situation, including any financial reporting requirements called for under franchise agreements (if applicable).

Interim operating reports

Year-end financial reporting isn’t enough for most real estate businesses due to the cyclical and seasonal nature of the industry. Effective accounting requires analyzing financial performance on a regular basis to maximize profits, identify operating inefficiencies, and pivot as needed. Interim reporting can also help you identify the need for a line of credit to temporarily cover operating expenses. We can identify key metrics to help agents and brokers monitor financial performance on a real-time basis using monthly flash reports.

  • Gross sales commissions;
  • Pending commissions;
  • Commission splits by agent/broker;
  • Desk fees;
  • Active and expired listings by agent/broker;
  • Sales volume/number of closed transactions by agent/broker;
  • Number of properties sold/leased;
  • Market share of local listings;
  • Average days on market;
  • Sale prices vs. list prices;
  • Median sales price;
  • Net profit per transaction;
  • Average marketing and selling cost per transaction;
  • Earnings before interest, tax, depreciation and amortization (EBITDA); and
  • Available cash balances.

Cost control

Managing operating costs is essential to making money in real estate. Rising costs can quickly erode your profits. Costing studies can help you evaluate what’s working — and what’s not. This can help reduce the need to combat inflation by other means, such as taking on additional debt, cutting staff, or postponing necessary technology purchases.

  • Commission splits and salaries;
  • Self-employment, payroll, and income taxes;
  • Benefits and health insurance premiums;
  • Office rent, desk fees, and home office deductions;
  • Transportation, travel, and meals;
  • Marketing and advertising;
  • Utilities, cell phones, and internet service;
  • Insurance;
  • Office supplies and maintenance;
  • Professional membership dues;
  • Continuing education and training; and
  • Furniture and equipment depreciation.

In today’s competitive markets, real estate professionals rely heavily on technology, such as smartphones, laptops, websites, software, scanners, printers, drones, cameras, and lockboxes. Items that are used in the current accounting period or have nominal value may be expensed immediately as office-related expenses. However, for accounting purposes, more expensive items that you’ll use for several years can’t be deducted in the accounting period in which you purchase them. Instead, these pricier items must be capitalized on your balance sheet and gradually expensed over their useful lives.

Our real estate accounting specialists can help you evaluate plans to invest in technology purchases and upgrades. We can also handle the accounting for these assets and help you claim valuable tax breaks, including Section 179 deductions and bonus depreciation.

Commissions management

Real estate professionals earn their money from the commissions received when deals close. Customarily, commissions are paid by sellers or lessors, and they’re negotiated upfront. Agencies with only one salesperson keep their share of gross commissions. However, they may have to pay referral fees for leads from other agents or firms. In addition, major franchises may charge a percentage of each commission received by their franchisees.

Commission arrangements are more complicated for brokerage firms with multiple agents and brokers who work with clients. In addition to paying referral and franchise fees, brokers need to compensate salespeople who work on transactions. Compensation structures for real estate agents can vary widely.

Agents agree to split a percentage of gross commissions on transactions they’re involved in with their brokers, based on the level of support provided. Percentage splits can also reflect the volume of business the agent brings in, allowing highly productive salespeople to negotiate better splits.

Some agencies allow salespeople to keep their entire commission, and instead charge a “desk fee.” These fees can be significant, depending on the type and size of the office space. However, experienced salespeople may prefer to pay fixed desk fees because their income potential is unlimited.

These compensation models include agents who receive a salary, rather than a commission, and those who pay a set fee per transaction to the firm. Some firms combine these models by paying agents a base salary and providing a small commission percentage for each transaction they close. These models generally appeal to newer and low-volume agents.

Turnover among salespeople is a top concern for real estate brokerage firms. A competitive compensation structure can help a broker attract and retain top-notch sales agents. When evaluating commission splits, agents will weigh the services that the broker provides, as well as the expected number of prospect leads and their quality. They might accept a smaller commission split if they expect to receive a large number of high-quality leads.

Our real estate accounting specialists can help agents and brokers assess their compensation arrangements. We can determine whether your current setup is competitive compared to other real estate businesses in your area. This analysis can help agents negotiate more favorable arrangements and help brokers restructure their programs to improve the morale and productivity of their sales teams.

Budgets and forecasting

Historical financial results may be used to project how your real estate business will perform in the future. We can prepare budgets and forecasts to help determine whether you have the office space, technology, and staffing to meet future demand, as well as identify competitive threats and growth opportunities in your local market. These reports can also be useful when applying for bank loans or bringing on new salespeople and assistants.

Throughout the year, we can compare your actual results to your budget. This analysis can ensure your monthly commissions and operating costs stay on track. Major deviations may require revisions to your original budget or corrective actions. It’s always better to find out this information early, rather than to wait until year end!

Financial benchmarking

The purpose of accounting for real estate professionals should extend beyond compliance with lending, tax and franchisor reporting requirements. Most agents and brokers want to know how they measure up against competitors. Benchmarking can help you evaluate your operating costs, market share of local listings, and the competitiveness of your compensation programs.

We can provide industry benchmarking data, based on your local demographics, size, and specialties, such as those provided by the National Association of REALTORS® (NAR) and your local real estate association. These benchmarks can be compared to your financial results to determine operational strengths and areas for improvement.

Accounting software selection

Effective bookkeeping and accounting for real estate require an investment in accounting software. There are several reliable bookkeeping and accounting solutions for real estate businesses that vary in capabilities and cost. Automated software enables you to pull, analyze, and sort financial data quickly.

Many accounting solutions are cloud-based, allowing remote access while you’re showing properties to clients or making cold calls from your home office. Cloud-based systems can simplify data sharing and document retrieval, allow for paperless storage, and provide automated backup of financial records in case your office network goes down or becomes compromised. We can help you select a program that’s appropriate for your real estate business.

If you already have accounting software in place, it may be time to review it. For example, software that you selected when you started your real estate business may no longer be appropriate or a new product may have become available that’s a better fit for your current needs. We can help you assess your current software and evaluate alternatives to ensure you’re utilizing accounting software to its full potential.

We encourage you to contact us with any questions.

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