How Real Estate Transactions work and Understanding Accounting Entries

How Real Estate Transactions work and Understanding Accounting Entries

Real Estate 101

Loft is an accounting platform for Real Estate Brokerages that manages the sale of real property. Closing a transaction involves many parties, including buyers and sellers, Agents, Brokerages,Lawyers, Escrow and Title companies. 

The life cycle of a Real Estate deal for a Brokerage includes taking in or tracking monies in trust or escrow until the sale completes. At that time, the monies being held are distributed out among the Agents as commission earned.  A Brokerage earns their income by taking an agreed-upon fee or fees from the Agents commission. 

Loft is specifically designed to work for Brokerages and their Agents. That means we create the record for the transaction and track all contractual documents and financial data for the Brokerage and all their Agents. 

How does a Real Estate Transaction work?

  • Buyers & Sellers will hire their own REALTOR®. REALTORS® are licensed Agents and operate under the umbrella of a Brokerage license.
  • Agents make their money from Commissions, this will be agreed with the Seller/Buyer when a property is listed.
  • Agents acting for the Seller  ‘Sell’ their clients property.
  • Once a Buyer is found they will make an offer through the Sellers’ Agent either Directly or via a Buyer Agent (dependent on your Province/State rules around reciprocity)
  • Once an agreement is reached the Buyer, a gesture of good faith will be required to put down a deposit which will be held ‘in Escrow’ or ‘In Trust’ by the company designated in the contract.
  • Escrow, Title & Brokerage companies may hold Escrow/ Trust funds.
  • The Lawyers or Title Company will complete the legal formalities prior to the agreed close-date on the contract.
  • The Buyer will then provide final funding via the Title, Escrow, or Law Firm which will contain the Realtor’s commissions.
  • Title, Escrow, or Law Firm will cut a check to the Brokerage on the day of closing and the Brokerage will then pay the Agent their agreed commission, less their own Brokerage deductions. 
  • The Title company also may cut a check directly to theAgent for their net commission, and another check to the Brokerage for the brokerage portion only, known as ‘Paid at the Table’.

Where does Loft & Xero/QuickBooks Online come in?

Brokerages are required to process a deal from start-to-finish and to enable them to do this, they require efficient software capable of dealing with the complexities of income, deductions, and payouts for Real Estate transactions.
  1. Once a contract is agreed in principle, a deal will be entered into the Loft platform via an integration with contract software, or manual entry.
  2. Loft will generate a deal in which all of the contractual, financial and documentation is stored.
  3. Brokerage deductions are entered to ensure that the Brokerage will get their agreed portion of the commission on closing.
  4. Each Agent has their own agreed deduction profile which can vary and Loft has the ability to deal with high levels of complexity.
  5. Agents can view their deal paystub in Loft, both before and after the deal has closed.
  6. When a Real Estate deal closes and the check arrives at the Brokerage office, funds are deposited into the Loft platform which is automatically recorded in Xero & QuickBooks Online via the G/L Mapping.
  7. Once a deal is paid out in Loft by the Brokerage Administrator, the financial entries are batched over to your respective accounting platform where checks can be cut and reconciliation can take place.

Understanding Accounting Entries

Flow of Funds
The flow of funds will differ based on your Bank account setup. In this example, we'll outline the flow that's the most typical.
Trust > Commission Trust > General
Please note, each T account will always balance per transaction, and each bank account is assigned a corresponding liability to track your flow of funds through each bank.  

Trust Account 

Deposit to Trust/ Escrow: 

$10,000 Trust Deposit is received & Deposited to Bank as a Receipt


$10,000 Trust Deposit is received & Deposited to Bank as an Invoice to collect

Release funds from Trust/Escrow account

This includes Lawyers, Title Companies, and/or back to Payer of Deposit.

Outside Brokerage Payout from the Trust/Escrow Account


Transfer from Trust/Escrow to Commission


Commission Account 
After the Trust/Escrow account clearing, the entries will flow & clear through a commission clearing GL account often labelled as commission payable.

Deposit to Commission Account when posted as a receipt


Deposit to Commission Account when posted as an Invoice to collect


Release funds from Commission Account



Outside Brokerage Payout from the Commission Account


Agent Payout

   

Journal Entries/Flow of Agent payout


*Please note you can substitute in any of your "Income accounts" for those mentioned above, the mapping and flow are the same


Transfer from Commission Account to Operating/General

Loft posts the Income paid (Transfer out) as a bill and the Income Earned (Transfer/deposit) as a deposit (Receive money) and both post to the 2947 - Commission Clearing Control GL

Profit & Loss Statement Impact


Balance Sheet Impact





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