Real estate audits are stressful, and they are especially problematic when you are unprepared. For this reason, it’s important to be one step ahead.
Whether you run a large real estate brokerage or a small one-person office, putting appropriate systems in place for proper recording, compliance, and record-keeping practices is key to property audits.
For complete peace of mind, we recommend going above and beyond your state’s requirements. This will mean less stress and no more last-minute rushing around to prepare for these routine audits, even unexpected ones.
You can also continue operating as usual before and during the audit, rather than wasting time preparing files and financial records.
In this article, we will explain what real estate audits are and how you can prepare for them. We’ll also provide a comprehensive checklist for you to follow to make your audit less of a headache.
A real estate audit is a check conducted by an external party to ensure your brokerage and business practices comply with all relevant regulations.
External real estate audits focus on the firm’s finances and transaction management processes, systems, documents, and records.
From a financial standpoint, auditing verifies all incoming and outgoing cash during the audit period. This includes revenue generated from sales, as well as outside investments.
The audit process also confirms that property-related transactions adhere to real estate regulations where you do business. You must be able to prove that this is the case, which means your record-keeping has to meet the required standard.
| 💡 Pro Tip: Leverage Transaction Management Software to Stay Audit-Ready Use an online transaction management system to avoid potential compliance breaches and ensure you’re audit-ready. Look for features such as transaction history logs that automatically track who reviewed each document and when. |
Real estate system audits typically cover a set period, usually a single financial year. An auditor gathers all the relevant supporting documentation and then checks that everything is as it should be.
An auditor may ask questions, make additional requests, or require you to address any discrepancies. For example, if you have installation charges on your asset listing but they don’t appear in your return, you might receive a supplemental tax bill as part of your property tax audit.
The way a real estate audit works differs depending on your state. However, most follow a similar structure. This is how the real estate audit process tends to work:
The length of an audit period depends on the size of your brokerage and the audit findings.
There are plenty of things you can do to help an upcoming audit run smoothly.
It’s a good idea to run internal audits of your real estate business regularly before you are audited externally. This is for several reasons:
Ensure that you understand exactly what they require and when the deadlines are. Clarify any steps you are unsure about.
Effective communication ensures that both you and your auditor understand the scope, objectives, and requirements of the audit. This communication helps avoid misunderstandings during the audit process.
Once you know what the auditors require, start gathering the key documentation as soon as possible. This will give you time to organize everything ahead of the deadline.
| 💡 Pro Tip: There’s No Need to Worry about Misplaced Documentation With a real estate transaction management system like Paperless Pipeline, documents are easily accessible, and you won’t have to worry about lost or misplaced paper files. |
As mentioned earlier, unexpected audits may be performed, usually due to potential complaints. If you’re aware that a client is unhappy with your services, speak to the relevant agents or property managers to proactively resolve issues before they escalate.
Let relevant employees know about the audit and explain what they need to do to help things go smoothly.
Alerting your staff ensures they understand the importance of the process and the need for their cooperation. This will ensure they help you gather the necessary documents, provide information promptly, and facilitate smooth interactions with your auditor.
If you detect violations during your internal audit, you may avoid punishment by taking steps to mitigate financial oversights or highlighting steps that you will take to ensure they don’t happen again.
Remember that the audit team is there to ensure you understand how to comply with applicable laws and regulations. They aren’t there to catch you out unless you’ve done something wrong intentionally.
The best way to pass an audit is to ensure you stay on top of what’s required and not wait until your deadlines loom. Here are some best practices to ensure that this is the case:
A series of regulations govern each property transaction, which you must follow to avoid financial or compliance risks.
Transaction checklists help ensure you and your agents follow each of the steps on every sale.
Your checklist should include all the steps to take, the supporting documents to collect, and the timelines for each task.
Writing down the steps makes it far less likely that you will miss a key task. If you use an electronic checklist, you can even set up reminders to ensure nothing gets forgotten.
Requirements for everything, from generally accepted accounting principles to professional ethical standards change over time. Ensure that you are taking steps to keep your internal controls up-to-date.
Record-keeping requirements differ by state, but it is a common requirement for firms in the real estate industry to store transaction records for at least three years.
The exact details of the required documents you must keep vary, so be sure to check the regulations in your area for this.
However, it’s common to have to keep track of everything related to your transactions, from advertising to legal documents and client communication.
You can store these documents electronically or physically in many states, but keep in mind that some regions still require you to keep hard copies.
Many brokerages choose to go paperless with robust transaction management software when given the option. Doing so makes it easier to access, search, and collect documents. You’ll also save a ton of space in your offices.
| 💡 Pro Tip: Make Record-Keeping Simple Paperless Pipeline stores transactions for ten years from creation, making record-keeping easy. Every plan includes unlimited storage, and we provide our customers with free monthly data backups for local storage options. |
Having incomplete, outdated, or inaccurate financial and transaction records can result in penalties when you’re audited.
Ensure that you regularly update and reconcile your records to ensure accuracy. One way to do this is to use reliable accounting software and maintain detailed transaction logs.
You should implement and adhere to robust internal controls, ensuring that all your transactions are properly authorized and documented. Failing to establish or follow internal controls and procedures could result in issues when you’re audited.
Withholding information or providing incomplete responses to your auditor’s requests can extend your audit unnecessarily and result in penalties for your brokerage.
Instead, you should be transparent and provide full, accurate information. If there are gaps or issues, explain them clearly to your auditor and provide context.
You should ensure that all your policies and procedures are clearly documented, consistent, and regularly reviewed for relevance and accuracy.
You need to provide your staff with regular training to help ensure they remain compliant. Make sure you hold training sessions on compliance, internal controls, and proper record-keeping practices.
Paperless Pipeline’s transaction management software helps ensure you are always prepared for an audit. It includes features that will keep you one step ahead, including:
1. Document review: Check that your documentation is complete and up-to-date.
2. User permissions and visibility: Keep your documents secure and quickly allow auditors temporary access when required.
3. Transaction history: Provide auditors with a comprehensive list of all transactions within specified timeframes.
4. Transaction ledger and log: Keep details of who has paid you and when, especially if you manage separate accounting ledgers.
5. Backups and downloads: Ensure that no critical information is lost and quickly access old files to email or print.
If you’d like to avoid the stress of being audited and ensure you’re always compliant and on top of things, choose Paperless Pipeline. Our purpose-built software not only automates your transaction management process but also keeps you audit-ready at all times.
Sign up for a personal demo today and discover how Paperless Pipeline can help you prepare for your next audit.
