It can be a frightening experience to realize that, after all the time you have spent getting your license, you wouldn't know how to write up an actual sales agreement should someone walk up to your desk and ask to buy a specific home. I didn't. The reason is that the offer to purchase form you studied for your license exam may bear little resemblance to the one that is used in the real world. Fortunately for me, there was about a twenty-four-hour period between the time the young couple decided they wanted the property and the time they made their formal offer. I spent that time frantically going over closed-deal files and preparing to write the actual offer to purchase. The amount of printed information on that form that I had not really read (or understood) before was astonishing. I also relied very heavily on the experienced salesperson on the staff who had agreed to be my "big sister." Most agents who have been in the business for a while remember the paralyzing experience of getting started and are more than willing to help you out. I strongly recommend that one of your first projects be to go over the offer to purchase form used in your area very, very carefully.
BECOME A PROFESSIONAL
Become active in your local chapter of the National Association of Realtors, and investigate its professional education offerings. The one with which you will be initially concerned is the Realtors Institute, which is composed of three individual courses. When you successfully complete all three of them all, you earn the right to use the term GRI (Graduate Realtors Institute). It is a designation that is recognized by others in the profession. Try to complete it sometime during your first two years. The course material will be helpful in your job, you will start to get a wider perspective of the profession, and you will meet energetic and career-minded professionals from other offices and other cities. The contacts will be invaluable in establishing your professional network, so cultivate and keep track of them.
While I was researching this subject I logged on to several state Realtor organization's websites to get an overview of their GRI offerings. Here's the GRI course descriptions I found at the Texas Association of Realtors web site (www·texasrealtors·com). GRI 1: Ethics and Liability (8 hours); Contract Forms (8 hours); Contract Procedures (8 hours); Finance (8 hours). GRI 2: Prospecting (8 hours); Seller Services (8 hours); Buyer Services (8 hours); New Homes (8 hours). GRI 3: Investment and Taxation (8 hours); Property Management (8 hours); Technology Tools (8 hours); Goals and Productivity (8 hours). Were I a new agent in the Lone Star State I would do my best to attend these sessions and earn my GRI.
You will also be inundated with offerings of real estate-oriented seminars and lectures. Most will be extremely well researched presentations given by individuals who are professional in every sense of the word. But beware, some are high-hype sessions given by people with monumental egos whose main goal seems to be to impress you with their superstar status. Until you have been around for a while, you might want to stick to the Realtors Institute offerings.
ORGANIZING FOR UNCLE SAM
There are at least two excellent reasons for knowing as much as possible about federal, state, and local income taxes and for arranging your business and personal affairs with taxes always in mind. First, a substantial portion of your income every year for as long as you live (and beyond) will be subject to taxes. Second, those to whom you provide professional services will expect you to know something about the subject. There are substantial income tax consequences involved with every real estate transaction. You need to understand basic concepts well enough to be able to discuss them intelligently, and to be able to recognize those questions you need to refer to a professional who specializes in taxes.
Tax time can be a genuinely mind-numbing nightmare if you have not planned ahead and kept informed. Here are some suggestions:
- Know who you are. Although your initial license may say "salesperson" (or some sort of "broker" if you're in a single license state), you are really a self-employed entrepreneur who owns and runs a small business as a sole proprietor. Maybe it is only a one-person small business, but it is a small business nonetheless. You need to develop a total business plan with specific goals and strategies and a profit-oriented, no-nonsense philosophy in which you know your rights and obligations regarding taxes.
- Learn as much as you can on your own. You can get a good basic overview by simply reading official IRS publications, which you can get free at your local IRS office. Better yet, log on to www·irs·gov. It's an incredibly helpful site, loaded with an abundance of information. The resource to start with is IRS publication 17, "Your Federal Income Tax". Next, get a copy of IRS publication 334, "Tax Guide for Small Business," which discusses a variety of tax issues that will be pertinent to you.
There are many other useful resources. Most likely your best resource for tax information as it relates to real estate is the web site of Vernon Hoven, CPA - www·hoven·com. His book The Real Estate Investor's Tax Guide would be an excellent addition to your library. It's updated frequently.
One final tip, relating to the IRS Web site I cited above: if you know how to navigate it, you can actually ask the IRS questions and get real answers! I've done it. In the past couple years, personal tax issues have arisen for which I was unable to find an answer. I sent e-mail inquiries through the IRS site and received clear answers signed by a real person. Just go past "frequently asked questions" to the "comments" section. "Comments" include questions, so fire away. In both instances, the answers I received saved me money.
- Work your business plan-and document your efforts. The key to keeping good records is to establish a basic system and stick with it. Central to this is the maintenance of your daily planner. Jot down or log on the computer all appointments and meetings, thereby substantiating your general level of activity. Take the planner with you when you use your car and record all your mileage and transportation activity. An envelope in the glove compartment for gas credit card receipts will reduce the clutter. Another large envelope that you keep in your desk drawer marked Business Receipts-Year XXXX will also be useful. As you expand your activities, you will need several large envelopes, each to contain receipts for specific functions. My wife and I bought a software program last year to put our taxes on and I'm now transitioning from my "envelope" strategy to giving her all of my receipts to enter into a tax file on the computer. Be advised, however, that no matter how sophisticated your computer software, keep the written documents.
Pay for everything by check or credit card so that you will automatically have a receipt. If you pay cash, ask for a receipt, and make a note on the back of it indicating what the item was for. If it is not possible to get a receipt or if you forgot, jot down the amount, the date, and the purpose in your planner or on a piece of paper and put it in your business receipts envelope.
- Know your legitimate business expenses. As the sole proprietor of your own business, you will be filing a "Profit or Loss From Business" schedule with your federal tax return. The critical thing to remember here is that your business expenses are deducted from income. I admit this is oversimplifying a very complex subject, but basically if you have an annual gross income of $65,000, and you incur expenses necessary to conduct your business in the amount of $10,000, you will pay taxes (including state and local income taxes as well as Social Security and Medicare) on the net-$55,000. The key is that your business expenses must be legitimate and you must be able to prove them.
Let's say that, through ignorance or faulty record keeping, you fail one year to claim legitimate deductions in the amount of $2,000 and your tax bracket is 28 percent. You will pay Uncle Sam $560 more in federal taxes out of your own pocket than he deserves or expects-but there is no case on record where he has turned it down. But wait . . . What about Social Security and the other taxes I mentioned? Together they could easily add another 20 to 30 percent. That means that the $2,000 in deductions you forgot to take could cost you $1,000 or more! As they say, a thousand here and a thousand there adds up in a hurry.
The checklist shown in Figure 4-1 provides a general guide to expenses commonly incurred by real estate professionals. As in all information pertaining to incomes taxes, you need to verify everything for yourself by referring to current IRS material. The checklist is simply designed to help you set up an accounting system of your own and to aid you in recognizing those areas in which deductions might be permissible.
- Get professional help. If you develop the uneasy feeling that you are about to get in over your head, seek professional assistance. I did that my first year in real estate and never regretted it. As you generate more activity, your business affairs become more complicated. An old war horse (his term for himself) in my office put it this way: "Doing your own taxes makes about as much sense as doing your own surgery. Get a pro." My personal preference is a certified public accountant (CPA) who has extensive experience in working with real estate agents and real estate investors. Scout around before you choose, ask for referrals from other successful agents, and discuss fees ahead of time. When a CPA quotes you an hourly rate, it could result in a mild case of cardiac arrest; but with computers, they can get a lot done in a short period of time, particularly if you present them with well-organized basic information. The idea is that they will actually save you money and, equally as important, keep you out of trouble. Understand also that (as is the case with attorneys) when you call your CPA with a question, you will likely get a bill for the advice.
Even if you hire a CPA, you will still need to be an active participant in the process. In his words, here is how Albert J. Aiello, a nationally recognized CPAwho specializes in real estate taxation issues, suggested I make the point to you: "Would you leave all your health concerns up to your doctor? Of course not! It's your health and your taxes and it is up to you to take care of it. Professionals such as doctors and CPAs are there for periodic review and the more difficult problems. You have to take care of everyday matters." As an added note, Albert at one time was a licensed real estate professional.
- Be scrupulously honest. The tax authorities are fond of saying that they don't want you to pay any more tax than necessary. Be assured, however, that they will not tolerate it if you pay anything less-either through ignorance or intent. Even if honesty were not the best policy (and it is), it is incredibly foolish to incur the wrath of the federal (and/or state) government. Don't complicate the issue by using your own style of creative tax accounting. There's an old military adage that goes: "choose your enemies wisely". You do not want the IRS as an enemy. If it's creativity you want, secure professional counsel and then decide upon a course of action that suits your tolerance for uncertainty.