March 09, 2018

Real Estate Accounting: 3 Mistakes That Have Brought Agents Down

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Many facets of the real estate industry are complicated, and no exception to this is the field of real estate accounting. To achieve great success as a real estate professional, you must actively avoid common accounting pitfalls that could hinder your ability to close deals and progress your business. Taking the wrong approach to accounting can leave you scrambling for a solution and take away your attention from your professional endeavors. By gaining an understanding of the common mistakes to avoid, you can alter your accounting practices to eliminate these potential roadblocks and keep your business growing smoothly and sustainably. In this article we outline 3 common mistakes to be aware of.

1. Failing to Wait Until the Transaction Closes to Disburse Funds

Even when it seems as though all is well with a transaction, unexpected events could cause the purchase details to change or fall through at the last moment. If this situation occurs and you disbursed escrow deposits before waiting for the transaction to fully close, you could be on the line for those funds.

To keep your books out of the red, you must wait until the transaction has officially closed by confirming the exchange of keys and property registration. Otherwise, you run the risk of having to scramble to account for the missing funds as last-minute changes are made to the contract.

Ordering a reversal of the disbursed payments can take an extraordinary amount of time due to the number of steps required for that process. In addition to leaving your accounting books a mess, this situation could tarnish your reputation as a trustworthy and responsible real estate agent.

2. Lack of Separation Between Business and Personal Accounts

Your ability to accurately track your real estate company's transactions and holdings depends on meticulous record-keeping. The records should show a clear separation between your real estate funds and personal finances or you could risk making disastrous accounting mistakes.

To prevent this issue, make sure to keep all business transactions flowing through a single account and personal transactions through another. Furthermore, ensure that every single one of your real estate transactions receives a data entry line in your accounting software to prevent the risk of error in future calculations.

Commission payments, in particular, should always show up as a line item in the business records before transferring to your personal account. Make sure to backup your accounting software from time to time to prevent the loss of data that could impact your ability to track transactions for your real estate agency.

3. Incorrectly Approaching the Tax Filing Process

Incorrectly completing and filing your taxes can greatly impact the bottom line of your real estate endeavors. You must actively work within the yearly guidelines to reduce your tax burden and keep more of your hard-earned money in your accounts.

As a real estate agent, you have to decide if it will be more beneficial to file using the cash or accrual method. You can run the numbers for each scenario before filing to verify that your selected method will reduce your tax obligations for that year. However, as part of the consistency principle of accounting, whichever method you choose should be the one that you stick with year over year.

Going into the tax preparation and filing process without considering all the options can leave you overburdened by tax payments well into the coming years.

Ensure Your Accounting Techniques Help You Succeed

If heading into the accounting process seems too fraught with pitfalls to approach on your own, consider hiring an expert to help you out. You can work alongside an accounting pro to make sure your financial records and tax filing methods facilitate your success in the real estate world. You will need to partner with many different professionals as you build your real estate empire and stretch your wings to new horizons, so do not hesitate to reach out when you need to solidify your approach.