Accounting Considerations for Realtors
By Courtney Barbee Posted March 21, 2019 In accounting
I’ve been housebound for nearly a week with the flu. While no one enjoys the flu, being stuck at home alone, when I already don’t feel well, is torture for an extrovert like me.
Of course, unless you already know Craig and I, most people don’t think of accountants as extroverts. No, the most famous extroverts of the small business world would probably be realtors.
But although realtors are known for being outgoing, high-energy, good-looking charmers, there is actually far more organization of paperwork and attention to detail involved in their job than most people realize. And though their bookkeeping can generally be fairly straightforward, there are always certain issues which can pop up to cause unexpected complications.
Needless to say, given our location in one of the most rapidly-growing metropolitan areas in the country, we work with a ton of realtors. Over the years, we’ve identified a few areas of their accounting which require a close eye.
Tracking Expenses
graph expensesThe real estate market giveth, and the real estate market taketh away. Few people can make money as quickly as a realtor in a booming economy. However, when times are slow, that fountain can dry up completely. That makes having a great system of tracking expenses of crucial importance.
Now, there are varying schools of thought on how one should go about paying for things but the argument largely boils down to: paper or plastic.
Since marketing and networking are two of the primary expenses in real estate, it can be easy to overspend, particularly as lunches, coffees, and referral fees add up. Those who study the psychology of spending advocate paying in cash or writing checks, as it has been proven that you spend less money doing so (because you physically observe the money leaving). However, cash and checks are an accounting nightmare.
Cash requires that you keep and organize receipts, which are prone to get lost, torn, smudged, or, in a best-case scenario, dumped in a box for your beleaguered accountant to sort through later.
Checks are not much better. For starters, realtors are busy people, and their handwriting reflects that. (I say this as someone whose own handwriting resembles an EKG readout.) It can be difficult for a bookkeeper to interpret to whom a check is made out (though you eventually learn how to translate your clients’ handwriting over time). Furthermore, both cash and checks come with 1099 implications (should the vendor meet the other criteria).
On the plastic side, debit and credit cards offer the benefit of easily tracking expenses, and cutting down on time and manual entry for bookkeeping purposes (without having to save stacks of receipts). Also, you get the benefit of avoiding the 1099 dilemma. However, for an undisciplined spender, swiping the card can be a far too easy, frequent reflex.
In my opinion, the best solution is to make use of debit cards, but to keep a close eye on your financial reports, and to analyze trends from month-to-month, so overspending can be corrected.
Paying Yourself
toy house and coinsAs we mentioned, the real estate market can be unpredictable, making it hard to pay your #1 employee (you). Many agents, particularly if they work independently, opt to structure their business as a sole proprietorship (sometimes with an LLC), and pay themselves only with Owner’s Draw. This works very well for simplicity’s sake, but you still have to pay quarterly estimated self-employment taxes (to avoid a hefty tax bill at filing). And these can be very hard to measure because, again, of the “estimated” part. Pay too little, and you’ll have to pay more at the end of the year. Pay too much, and you may be cash-poor until you get that tax return several months later (particularly if the housing market experiences a downturn).
To protect against this, some realtors establish an S-Corp and pay themselves as employees. This has the benefit of allowing you to pay in withholdings all year whenever you’re paid, and allows your salary to be treated as an expense of the company (as opposed to solely balance sheet activity). However, it does necessitate a payroll service (we strongly discourage filing your own payroll, for time and liability’s sake), and there is a balancing act in finding the right amount to pay yourself in salary as opposed to distributions (and different tax implications with both). It also means that, instead of a simple Schedule C, you’ll need a corporate return filed in addition to your personal return.
Generally, when your business begins to net roughly $50K per year, it’s wise to look into an S-Corp conversion.
Branching out in Real Estate
realtor giving keysProbably because so much “go-getter” spirit is required to succeed, most of the established realtors I know are entrepreneurs at heart. And since real estate is already in their blood, many try their hand at other areas of it, such as investment properties, property management, and land development.
The problem, of course, is that all of those have much more complicated accounting.
In particular, property management can be dangerous, as it involves trust accounts, and the strict rules which surround them. Not only must careful accounting be done to show proper revenue recognition and relief of trust liabilities, but the physical money itself can’t be left in interest-bearing accounts, nor co-mingled with other funds. (If you were to compare a real estate commission audit to a home inspection report, commingling of funds would be along the level of black mold.)
Obviously, I don’t say this to imply you shouldn’t expand your portfolio of services. However, it’s very important to understand the financials of the business you’re building in advance of building it, so you can have everything set up ahead of time. That way, you can protect what you have already worked so hard to grow.
Some of the most caring, hard-working people I know are realtors, and, like all business owners, it’s so very important that their financials are managed well. If you know of a realtor who could use some of this advice, please feel free to share it with them. (After all, who doesn’t know at least ONE realtor?)
Accountant vs. Bookkeeper
Many business owners would answer yes to the accountant question. However, we believe it is much more nuanced than this, primarily because of definition misunderstanding.
“Accountant” is an interesting and commonly misconstrued term. A brief Google search reveals this definition: “a person whose job is to keep or inspect financial accounts.” However, the tasks of a bookkeeper are commonly and inaccurately absorbed into the role of an accountant. Googling “bookkeeper” reveals the following definition: “a person whose job is to keep records of the financial affairs of a business.”
In essence, while a full-time CPA is not required for a small business, a bookkeeper is. What are the primary differences? Surprisingly, most people would be hard-pressed to explain the varying roles. Both positions are crucial to different stages of the accounting process, with sometimes overlapping work. Bookkeeping is part of the accounting process. Below, we’ll piece apart each unique role:
Bookkeeper
Bookkeepers are trained to record, classify, and organize a business’ regular financial transactions. This includes sales, payroll, bills, mileage, PTO, and unforeseen business expenses. Instead of focusing on analytics, bookkeepers emphasize organization and accuracy. If a bookkeeper performs his or her job well, the accountant should be able to pick up and finish the accounting process without returning with a plethora of questions.
Accounting
As mentioned, accountants pick up where bookkeepers leave off, building on the provided information. Accountants will review financial statements then move to the next steps, including analysis and interpretation. Returned financial statements allow the organization to make financially-informed business decisions.
Why Do You Need a Bookkeeper?
As mentioned, while a full-time CPA is not a small business requirement, a bookkeeper certainly is. Small businesses require the expertise of a bookkeeper for three primary reasons. Firstly, bookkeeping provides a reliable performance measure. Secondly, bookkeeping is a requirement due to taxation. Thirdly, while bookkeeping can be done by a business owner, most do not have the time or training to complete bookkeeping tasks well.
The Importance Behind Bookkeeping
Corporate Financial Institute explains the importance of bookkeeping:
Proper bookkeeping gives companies a reliable measure of their performance. It also provides information on general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical. Many small companies don’t actually hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.
Taxation
Beyond the importance of their position, bookkeepers are essential due to the existence of taxation. Every individual and organization has a responsibility to the IRS. If an organization wants to stay in business and conduct commerce, certain responses, documents, and taxes must be provided. Without taxation, bookkeepers would be unnecessary. Profit and loss documentation, run-off balance sheets, cashflow analysis, etc. would be useless, thus eliminating the need for a bookkeeper’s expertise.
Organization
Most importantly, bookkeeping is essential, because many business owners do not have the expertise or time to complete bookkeeping tasks. If you are a business owner who currently completes bookkeeping tasks, or relates to the following questions, it may be time to hire an outsourced expert.
Are you too busy categorizing transactions to emphasize selling or business development?
Are you falling behind on collecting accounts receivable?
Are you falling behind on client invoicing?
Do you keep bills and receipts in vulnerable areas, such as in a shoebox under your desk?
Do you have too many accounts to glean valuable, actionable insights for your business?
Does tax season bring about unhealthy levels of anxiety? Do you play catch-up every year to get your books in order?
Do you spend over five hours monthly on bookkeeping activities?
Are you largely unclear what, exactly, you are spending and making?
Identifying an Ideal Bookkeeper
An excellent bookkeeper will perform all necessary accounting tasks at a fraction of the cost of a full-time CPA. The bookkeeper can hand over the work to a CPA who will complete the process without many questions. In the architecture industry, an architect plans, designs, and reviews the construction process of buildings. An architect pays careful attention to the aesthetic and functionality of the building, also adhering to all legal demands. However, the architect does not carry the blueprint to completion. He hands it to the contractors, who follow the blueprint to build the structure. The contractors, however, do not design the building.
The relationship between an excellent bookkeeper and a CPA can be viewed similarly. The bookkeeper plans, designs, and reviews daily financial happenings. When all information is passed to the CPA, he only needs to execute. Finding an organization with complementary teams provide the greatest value.
https://www.forbes.com/sites/theyec/2020/08/18/why-should-you-have-an-accountant-for-your-small-business/
FORBES.COM
Council Post: Why Should You Have An Accountant For Your Small Business?
Post: Fear of failure. Failure is one of the most common fears entrepreneurs face. It’s a fear that could cause decision paralysis. But, the best way to get past the paralysis and fear is to focus on the idea that failure is not final. Remember that we all can fix a mistake or create processes to avoid mistakes. CTA: Do you have processes set in place that help your business run efficiently?
https://askthemoneycoach.com/2020/01/six-reasons-not-hiring-a-part-time-bookkeeper-is-a-big-mistake/
ASKTHEMONEYCOACH.COM
Six Reasons Not Hiring a Part-Time Bookkeeper is a Big Mistake | The Money Coach
