Tracking Real Estate Deposit

"Ross Payne" wrote

I've seen many different opinions in this NG for this. Here's mine:

A deposit is generally credited back to you at the Act-of-Sale on your HUD statement.

But not always.

Sometimes (fairly often, actually), disagreements occur in real estate. Sometimes, the purchase is cancelled. When that happens, the Purchaser may or may not receive part or all of the deposit back.

I show the deposit as an expense category when paid. If the sale goes as planned, then the deposit credit received at Act-of-Sale negates the amount, resulting in a total of zero. I believe this method reflects as accurately as possible what happens in real life.

Hi, Ross.

Use an asset account. Not a "category"; in Quicken-speak, those are for income and expenses and an earnest-money deposit on the purchase of real estate is neither an income nor an expense. It is an asset because it is still your money until the deal is done, and refundable if the deal falls through. If you end up having to forfeit all or some of the deposit, then that amount will become an expense at that time, not now.

Assuming the deal is completed, when you get your HUD-1 (or other closing statement), record each line on that document - including a credit back to your asset account for the deposit applied to the final purchase price. We've often discussed the line-by-line recording of everything shown on the closing statement, so you should find plenty of details in the archives. Most of the discussions are about purchase or sale of residences, but the same principles apply to business or investment property, whether improved or bare land.

What you choose to call the asset account is not terribly important. "Deposit" is as good a name as any. After the closing is recorded, the full purchase price of your new property should be in your real estate asset account and this deposit account balance should be zero.

RC

"R. C. White" wrote

In order to give the OP a consistent response, I agree that your method of utilizing an asset account provides a better reflection of what happens in real life.

The problem with my method of calling the deposit an expense is, as you say, it's still the Purchaser's money unless part or all is forfeited. Thus, a net worth report run during the period the deposit is held in escrow will incorrectly omit this amount. And this could be for a time period of several weeks to several months.

I disagree that the real estate asset account should show any amount other than the property's market value (which may or may not equate to the purchase price.) I believe that the opening balance of the real estate asset account should reflect the amount of the appraisal. Periodic credits or debits to this account can reflect changes to equity.

I know you utilize another asset account to provide adjustment for changes in equity, but I believe that your method is unnecessarily complex -- especially for those with multiple properties.

Here is how I handle it for my property purchases.

I create an "closing statement" asset account that will eventually reflect the closing statement. For now, you would show a transfer of the earnest money from your checking/savings/whatever account into the "closing statement" asset account.

You will likely create other accounts that also support the new property: asset account for the property itself to track its value mortgage account for the property to track your mortgage escrow account for the mortgage (assuming you have escrow)

After you close, record each line of your closing statement into the "closing statement" account. Many of the lines will be transfers into the other accounts: mortgage value, pre-paid escrow, etc. Other lines, should be categorized correctly: HOA fees, taxes, fees, interest, etc. Once everything is entered, the balance of the closing statement account should be zero (since the closing statement is a type of a balance sheet). At that point, you may hide the "closing statement" account. Don't delete it since it contains tax information you might need for your taxes.

The concept basically maintains your net worth throughout the purchase process (other than closing expenses). If you purchased the property at a premium or discount, then you can make an adjustment to the property's asset account after the closing.

-- Randy Stevens