Real Estate Commission Audit
A client referred me to a colleague in California who was in need of a database review. After speaking with the potential client, I recommended that we move forward with a reconstruction in their AppFolio database, instead of a financial re-migration. Afterwards, we would engage in monthly reconciliation services to ensure they're staying on track and support internal controls.
-Reconstruction: this method examines the properties, owners and tenants where there may have been accounting errors. By zeroing in on such issues, the database owner can easily assess what happened to cause the error and resolve directly. This method also maintains all financial history for all parties involved. Con: This is more costly and requires a higher level of expertise in trust accounting and experience with AppFolio. Depending on the amount of diagnostic issues and how long it has been since the bank accounts have been reconciled, a reconstruction can take anywhere between a 1-4 weeks.
-Re-Migration: this method involved the engineers/migration specialists of AppFolio. They coordinate with an appointed person to literally wipe all financial history and import accurate data. Any balance issues will be allocated to a non-managed "corporate" property within the database. This allows the database owner to start with a clean slate and resolve any balance issues as a collective, instead of individually. There is a fee AppFolio collects to complete a re-migration and can typically take about 2-3 weeks to complete, depending on the size of the database. Con: All property and tenant ledgers will be completely wiped.
I completed the reconstruction and 30 months worth of reconciliations for both trust and escrow accounts in about three weeks. I was able to identify all property ledger issues, brought them to the client's attention with recommended resolutions and coordinated with the auditor from the Real Estate Commission. I also provided clear instruction to avoid such issues in the future.
The most common issue was security deposits that were deposited into the owner trust account, then disbursed to the owner instead of allocated/transferred to the tenant escrow account. By doing this, it put the escrow account in a cash deficit compared to the broker's liability. When the tenant was moved out, AppFolio created the transaction to move the funds from the tenant escrow account into the owner trust account to either refund the tenant or forfeit to the owner. Without properly checking the cash vs. liability, the property now held a negative cash balance in the escrow account.
A year later the same auditor returned to review the client's progress on how they are managing owner and tenant funds. The client passed the review with flying colors and requested that they maintain their current processes.
The client was pleased with the results, the payment flexibility to complete the reconstruction and the ongoing service SFL provided. Knowing that a reconstruction was a higher cost, the client values the financial data remaining intact/accessible vs the cheaper option of zeroing out ledgers.
Where we are today: The client is still engaged with SFL for reconciliation and year-end reporting services. He knows that when I reconcile his accounts each month, if he/his team has made an error in regards to cash vs liabilities, I'll be quick to point it out, make the adjustment and provide him with any actions for follow-up.
Happy Ending! He can sleep at night and kept his broker license.
PM Accounting Spine: Year-End Check Up
Have you considered the health of your "PMA Spine"? Not to get all serious on you, but if something as simple as your Chart of Accounts (GL Accounts) is cumbersome or too lean, you may want to consider a healthier process.
Skipping into the end of the year, year-end reporting is the end result of all the work you've completed throughout the year. Were you eating too much fatty foods, or well-balanced diet, or severe fasting?
Frankly, it's pretty sad that a single piece of paper titled "Year End Statement" and an IRS Form 1099-MISC is the culmination of 365 days of accounting processes. Clients/owners may not see the years worth of experience, employee/vendor turn-over, late nights working with tenants to pay their rent through the COVID crisis and ensuring you're managing your clients' funds properly.
Base Line: Your Chart of Accounts is literally the directive to how all funds are treated on a single property. How income is reported, how liabilities are managed and how rent proceeds are spent on property expenses. There are items that you need to consider when it comes to trust accounting and IRS reporting.
GL Accounts operate by GAAP standards. I understand that NARPM and some databases like to specialize such methods, but at the end of the day, a CPA and the IRS are reviewing the end results of your work. Why not make it easier for your client by providing a clean, clear and concise year-end statement?
-INCOME: Anything the tenant pays is income. Period. No exception. Repeat that. Anything the tenant pays to the owner is classified as rental income (Box 1 Rental Income on F1099-MISC). Period, no exception. Don't like it, take it up with the IRS.
If the tenant owes to the management company, it is also classified as income, just to the management company.
-EXPENSE: Anything the property pays to the management company or vendor is an expense. I think you get the idea.
-REIMBURSEMENT: Is the tenant refunding the property/owner/management company for an expense? Reimbursing for utilities that were not transferred in time? For a disposal repair because the tenant keeps dumping rice into the sink? Yes? You guessed it, it must be classified as income, not a reduction of the expense.
-PREPAID RENT: Sometimes a tenant will pay January rent on December 31st at 11:58pm. Per IRS regulations, this is considered rent but is held as a liability until the income is used for the period it is intended. Property owners loath prepaid rent because they feel they're paying more taxes on income they haven't collected yet. However, they'll be reporting 13 months of income one year, then the following year they'll report 11 months. It all evens out eventually, but the last thing you want to do is omit prepaid rent on the year-end statements and IRS forms.
I recommend all property managers send out an PSA to their owners requesting that they update you if they've moved in the last twelve months, if there are any new owners of the property, a new percentage split or in some cases, if the owner has passed and a new owner is responsible. I also recommend that they educate their owners on what the IRS is expecting you to report and what it could potentially look like. Directing them to the IRS Publication 527 can help alleviate a lot of redundant questions later.
We're in the 21st century now and the Postal Service is not as quick as an email. Requesting that your owners receive their year end statements and IRS form electronically will allow them to have access to it 24/7/365 and they don't have to wait for it to show up in the mail. Let alone, the cost of the forms, envelopes and postage could be allocated to a truly happy hour!
Don't Skip Leg Day
Anatomy of the human body has twelve parts. As we all know, the heart and brain are the two most important organs in our bodies. However, the heart can function without a brain, but the brain cannot function without the heart.
There are three types of muscles in our bodies:
-Skeletal: attached to the bones to promote movement
-Smooth: walls around organs for function
-Cardiac: pumps blood to the heart
What does property management have to do with our muscles? Great question! At least we now know you have a brain and a heart that is functioning properly! 🙂
All three muscle groups work in harmony in property management as it does in your body.
-Maintenance = Skeletal function. Ensuring that your clients' properties are well maintained and cared for promotes tenant loyalty and timely rent. A renewal fee costs a lot less than a turn-over. Preventative maintenance and semi-annual HVA/C inspections could save your owners thousands of dollars.
-Financial = Smooth function. The proper use of your clients' funds equates to what kind of food you put in your body. Vendors who are reliable and cost effective shows your owners you have a good relationship with the entities that manage their property. If you have a vendor who is costly and does not perform their job well, it can leave a bad taste in your mouth and a sour look on your owners' year end statements.
-Referral = Cardiac function. Without the two muscle functions above, your name will not be at the top of your clients' referral list. The stress of maintenance and tenant turn-over could put your management company at risk for a cardiac arrest.
Obtaining in-house maintenance techs, make-ready specialists, along with a tenant / owner liaison, and an accountant who specializes in the demands and thanklessness of property management is almost like winning the lottery; or physique mega-millions!
If one area is lacking, you're skipping leg day! What does your work-out look like? How is your diet? Are you taking your vitamins and seeing your doctor regularly? Or is one area in poor health and could use a boost?
In closing, class, don't skip leg day! All three muscle groups are equally important to the functionality of your company.
Why "Sage Scholarch" as a blog title?
Sage is more than a last name. It represents wisdom that one already possess, but does not seek. Scholarch is Greek (Athenian) for the Dean of the University.
The purpose of the articles that will be presented here are for educational and entertainment purposes only. I will always recommend that you speak directly with your tax or legal professionals.
Credentials: My background, beyond the quick quip in the "Meet Rebecca" link, is heavily saturated in property management accounting (also known as trust accounting) specifically with the use of AppFolio since 2008. Before diving into trust accounting, I have a BS in Business Administration:Accounting and over 15 years of bookkeeping and accounting experience.
My team is located here in lovely Austin Texas and we are grateful to provide such services to clients nationwide. SFL's growth has been generated organically from referrals. We really like our clients 🙂
SFL is a full-service accounting firm. What does that mean for you? It means we provide financial services for all corners of your company and individually. And when you call the office, you talk to a human who can help you! Our processes may be technical and embedded in the interwebs, but we still serve our clients the good ol' fashioned way.
I hope you stick around. Class will begin shortly!