Property Audits: What Are They And How To Prepare for One

Real estate audits are stressful. 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 controls 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 less 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 records.

In this article, we will explain what real estate and property audits are and how you can prepare for them.

What Is a Real Estate Audit?

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 property 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
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 keep track of 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 everything is as it should be.

An auditor may ask some questions, have additional requests, or require you to address any discrepancies. For example, if you have installation charges on your asset listing but they don’t feature in your return, you might receive a supplemental tax bill as part of your property tax audit.

How a Real Estate Audit Works

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 Department of Real Estate—which is the department tasked with regulating real estate licenses and other system audits—will contact you when it is time for an audit.

An auditor will be assigned to your case. This person will tell you exactly what you need to prepare and by what deadline.

Gather the relevant documentation. This typically includes financial statements, transaction documents, property listings, details of trust accounts, property management agreements or funds, and more.

The auditor will either visit your office to review the documents or do so remotely.

You’ll have to document any steps you’d need to take to fix any compliance or risk management issues that occur.

The length of an audit period depends on the size of your brokerage and the audit findings.

Tips for Your Upcoming Real Estate Audit

There are plenty of things you can do to help an upcoming audit run smoothly.

Communicate with your auditor

Ensure that you understand exactly what they require and when the deadlines are. Clarify any steps you are unsure about.

Gather key documents

Once you know what the auditors require, start to gather the key documentation as soon as possible. Doing this gives you time to get everything organized ahead of the deadline.

💡 Pro Tip
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.

Speak to your agents

As mentioned earlier, unexpected audits may be performed, usually due to potential complaint. 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.

Alert staff

Let relevant employees know about the audit. Explain what they have to do to help things go smoothly.

Be transparent

If you detect violations during your research stage, 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 relevant regulations. They aren’t there to catch you out, unless you’ve done something wrong intentionally.

Best Practices to Stay Audit-Ready

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:

Create transaction checklists for real estate compliance tasks

Each property transaction is governed by a series of regulations that you must follow to ensure there is no financial or compliance risk.

Transaction checklists help ensure you and your agents follow each of the steps on every sale.

Your checklist should include all the steps that need to be taken, the documents you need to collect, and the timelines for each of these tasks.

You’re far less likely to miss a key task when the steps are written down. If you use an electronic checklist, you can even set up reminders to ensure nothing gets forgotten.

Keep up to date with requirements

Requirements for everything from generally accepted accounting principles to professional ethical behavior change over time. Ensure that you are taking steps to keep your internal controls up to date.

Keep full records

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 documents you must keep vary, so be sure to check the requirements in your area.

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
Paperless Pipeline makes record-keeping easy and transactions are stored for ten years from the day they’re created. Every plan includes unlimited storage and customers are provided with free monthly data backups for local storage options.

How Paperless Pipeline Helps Prepare You for Audits

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 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 a comprehensive list of all transactions within specified timeframes.

4. Transaction ledger & 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.