Why Accounting For Real Estate Agents Is So Important
You studied hard to pass the Sales Persons' or Brokers' course. You got your license and now you're in business. Except, you don't know anything about accounting for real estate agents!
Don't panic. Here's a quick guide that will get you started in the right direction.
Should You Hire an Accountant?
The simple answer is yes, as soon as possible. An accountant can help you get organized about things that happen over time. So the sooner you get squared away, the greater the rewards will be in the long run.
There are many terrific reasons for hiring an accountant. Starting from the beginning, an accountant can help you develop a business plan.
You may think that real estate is a kind of "typical business" where you already know the business plan. You might think that your broker is going to just tell you what to do. There is some truth to both of these statements, but you had better not bank on it!
As a real estate professional, there are all kinds of different business plans. You could focus on a particular area or a particular kind of media. Are you in residential real estate, commercial or timeshares?
In any case, there will be different requirements and different tax implications for different business plans. Your accountant can help you design the best technical business plan for your approach. This should be one of your first steps before you actually start making transactions out in the wild.
Key Components of a Real Estate Business Plan
Even if you are a first-year sales agent, you should create a business plan. Your accountant will help you do it. Create the business plan according to typical standards for a small business.
In other words, call a section the "Executive Summary." Not "Strategic Plan" or anything else. The specific phrase Executive Summary will be expected whenever a professional looks at your business plan.
There are many resources on the internet to help you create a business plan. It's pretty standardized, and you don't need to look at resources specific to real estate. You are a "small business," and information in that general category applies to you.
Here are the typical parts of a real estate business plan.
The executive summary is a short summary of the rest of the business plan. Describe who you are and what kind of business you are in, what kind of real estate you are doing (commercial, residential, etc.), your mission or vision statement, the reason you are making a business plan, and the company name and location plus your specific relationship to the company (are you an agent, an owner, or an affiliate?).
If you do not own the company--for instance, if you are a sales agent--make that very clear in this section.
Products and Services
What kind of real estate business are you in? How do you collect money from the client? Do you offer escrow?
Explain the market you plan on selling in. Do you plan on selling in a specific geographic area? What is the demographic breakdown of the area you plan to sell?
What are the schools like in those areas? What have been the recent price differentials in that area, and compare all that data to national and historical trends. Be sure to do your homework.
Strategy and Implementation
How are you going to execute your plan? What kinds of commisions do you plan on charging the client? How are those commisions broken down?
What are your expenses going to be? How do you plan on paying for those expenses?
Organization and Management Team
Who is on your team? Don't include people in this section without their explicit permission.
Financial Plan and Projections
How much money do you need to operate for the next year? Where do you plan on getting that money?
What if sales are worse than expected, and costs are higher than expected? What sales volume do you need to make, to not go broke?
Your Lawyer and Your Accountant Are a Team
There are many situations when lawyers and accountants are actually part of a team. This is a service large firms and small partnerships offer. But you can make your own team as most lawyers have no problem working with most accountants.
This is another reason to handle your real estate broker accounting early on in your business's development. Get a lawyer and get an accountant, give them each other's phone number. They can coordinate with each other and often good things can happen, even for a small business.
Both of these professionals can offer advice on what kind of legal your business should become. If you're a sales agent, you're generally considered a 1099 contractor. If you're setting up a brokerage, it can be an LLC or even a legal corporation.
The bottom line is that you want the right hand talking to the left hand. Get your lawyer and your accountant together on the phone at least, so that they both know what the other is doing.
A huge part of bookkeeping for real estate is the software that you use. This can either make your life a breeze or a nightmare so choose wisely. Once again, this is something a real-life accountant can advise you on. Think this through up front and you will compound the benefits gained from using good software.
Good software integrates directly with your financial institution and your accounting system. There are many systems on the market that all basically do the same thing. One good solution is to find an accountant first and go with the software package they are familiar with.
Be aware that many commercial platforms for small business have "extensions" or "plugins" that are specifically for real estate professionals. Check with your provider to see if something like that is available on your platform.
Realtyzam is a cloud-based real estate accounting software platform specifically designed for the real estate business. It comes setup already with templates for listing fees, brokers fees, commisions and other popular real estate transactions
Realtyzam is available for Android and iOS and both desktop and mobile-based devices. There is no flat fee as it's a monthly subscription fee pay model.
Xero is a cloud-based account platform that allows you to manage and integrate your accounts remotely from anywhere. This is one of the best programs for real estate professionals because it links directly with your accountant's software. If you have an expense, you just enter it once, and it's done.
This is a big time saver. You don't need to consolidate anything at the end of the year, it's already entered and shipped right over to your accountant. They take the data and collect it for your tax returns.
Another great feature of Xero is that you can use Quickbooks with it. You don't have to, the Xero platform has everything you need, but if you're already on Quickbooks, no problem. There is a handy import tool that can handle any kind of standard input.
Xero is a monthly service as well. Ask if your accountant can offer a free subscription to Xero.
Quickbooks Self Employed
If you are a sales agent, you may not need all the complex tools available in products like Xero. Quickbooks Self Employed is a great bookkeeping package that helps you keep personal and business expenses separate, and generate reports and tax forms at the end of the year.
This is a simpler type of package, and you can do this if you have an accountant or not.
Real estate agent bookkeeping is a relatively straightforward process. You're not reinventing the wheel, you're employing a tried and tested business model. That's why it's important to get advice from an experienced professional.
It's really a factor of how big an organization you are developing is, which will determine if you need a full-time bookkeeper or not.
The general rule for real estate is a company of ten people or more needs a full-time bookkeeper. Less than that, and you can get away with only using digital products.
You have to keep track of your expenses and costs. The easiest way to do this is to develop a system to record everything, and then just commit to using it. You could collect physical receipts or you can collect them using some kind of software, it's up to you.
Your software suite will integrate with your accounting software and create a pretty good bookkeeping platform, especially for a very small business.
Accounting for Real Estate Agents
Get yourself straightened out in the beginning, and you'll do great in your real estate business. Accounting for real estate agents isn't much different than accounting for any small business, but it's different enough that you need experienced representation to make progress.
By streamlining your new accounting process, you can get back to doing what you do best: selling real estate! Check out our blog for more information on small business accounting.