The Only Real Estate Audit Checklist You Need

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.

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 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 a 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.

What Is the Difference Between a Real Estate Audit and a Property Management Audit?

Real estate and property management audits have overlapping elements but serve different purposes. Below is an explanation of how they differ:

➡️ Scope and purpose

In real estate, an audit examines the financial and operational aspects of transactions, asset valuation, compliance with legal and tax requirements, and overall investment performance.

A property management audit is more focused on assessing the effectiveness and accuracy of property management operations, including relations, maintenance tasks, lease agreements, rent collection, and adherence to property management regulations.

➡️ Key areas of examination

A real estate audit considers financial statements, revenue, tax compliance, fair market valuation of property value, and reporting.

On the other hand, a property management audit focuses on rent collection processes, lease agreement compliance, repair records, and vendor or contractor management.

➡️ Who conducts the audit?

Financial auditors or accountants typically conduct a real estate audit, while a property management audit is conducted by property management companies, compliance officers, or internal auditors.

➡️ Compliance and risk focus

A real estate audit ensures compliance with financial regulations, tax laws, and risk management.

In contrast, a property management audit ensures compliance with lease agreements, tenant rights, maintenance laws, and operational best practices.

➡️ Outcome and reporting

In a real estate audit, the focus is to analyze the financial health and legal standing of a brokerage, while a property management audit identifies inefficiencies in day-to-day operations.

It also ensures adherence to lease obligations and recommends improvements in tenant services and maintenance by property managers.

Which one do you need?

A real estate audit is the right choice to evaluate a company’s financial standing. A property management audit is more relevant if you’re managing homes for property owners and want to ensure compliance and efficiency.

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 regulates real estate licenses and other system audits, will contact you when an audit is due.

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

You’ll need to gather the relevant documentation. This typically includes financial statements, bank statements, transaction documents, property listings, details of trust accounts, and property management agreements or funds.

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

You’ll have to document any steps you 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.

A Real Estate Checklist for Your Upcoming Audit

Below is a comprehensive real estate checklist to help you ensure a smooth audit with less hassle:

✅ Start with an internal audit

It’s a good idea to regularly run internal audits of your real estate business before you are audited externally. This is for several reasons:

Identify and correct issues early

An internal audit allows you to identify and rectify any discrepancies, errors, or compliance issues within your operations.

This proactive approach minimizes the risk of these issues becoming problematic when you are audited, which could lead to penalties or legal complications.

Ensure compliance with regulations

As you know real estate is a highly regulated industry with various federal, state, and local laws.

An internal audit helps ensure that all your operations comply with these regulations, reducing the risk of non-compliance penalties.

Enhance financial accuracy

Internal audits can uncover inaccuracies in financial records, such as misreported income or expenses. Correcting these discrepancies ensures that your financial statements are accurate and reliable before an audit.

Improve operational efficiency

The internal audit process can help you identify inefficiencies or weaknesses in your brokerage’s processes and systems.

Addressing these issues can improve operational efficiency, cost savings, and better resource allocation, ultimately enhancing your business’s overall performance.

✅ Communicate with your auditor

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 audit’s scope, objectives, and requirements. This communication helps avoid misunderstandings during the audit process.

Ensure that you ask about key focus areas and request a document checklist to ensure you provide all the necessary materials for your audit.

✅ Gather key documents

Once you know what the auditors require, gather the key documentation as soon as possible. This will give you time to organize everything ahead of the deadline.

Below are some of the documents that you’ll need to have ready for your audit:

Financial records: Profit and loss statements, balance sheets, and tax filings.

Transaction logs: Sales agreements, escrow records, and commission reports.

Client agreements: Contracts, disclosures, and agency agreements.

Trust account records: If applicable, ensure all funds are appropriately accounted for.

HR and payroll records: Compensation structures, W-2s, and contractor agreements.

Licensing and compliance documents: Broker and agent licenses, continuing education records, and adherence to state laws.

💡 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.

✅ Speak to your agents

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.

You should also educate your real estate agents on the audit process and what’s expected of them.

Ensure you have proper documentation of all deals, commissions, and disclosures, and confirm that your agents have maintained accurate transaction logs and records.

✅ Alert your staff

Let relevant employees know about the audit and explain what they need to do to help things go smoothly.

Alerting your staff makes sure 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.

Auditors may ask to speak with your brokers, agents, or financial staff. For this reason, you should provide training on how to respond to audit questions, ensure consistency in responses across different team members, and clarify who is authorized to speak on behalf of your brokerage.

Inconsistent or unclear answers can raise concerns and prolong the audit process, so your team must be prepared.

✅ Be transparent

If you detect violations during your internal audit, you may avoid punishment by mitigating 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 unless you’ve intentionally done something wrong.

✅ Verify advertising and marketing compliance

Real estate advertising is subject to strict regulations, so you need to ensure all your marketing materials comply with federal, state, and local laws. Misleading or non-compliant advertising can lead to hefty fines or even legal action.

You should check for proper disclosures on listings and adverts, such as brokerage affiliation and fair housing compliance.

Ensure your digital marketing materials, such as your website, social media, and paid advertising, are compliant.

Finally, you should review all your advertisements to ensure they meet legal standards.

✅ Check for proper licensing and renewals

You need to ensure that all your required licenses and certifications are up to date. You should confirm that brokers and agents have active licenses, verify continuing education requirements have been met, and check for required permits.

Operating with expired or missing licenses can result in fines and even the suspension of business operations.

✅ Ensure contract compliance

Real estate contracts must be properly executed and legally compliant to pass an audit. Contracts that contain errors or missing elements can lead to legal disputes and audit failures.

You should review active and past contracts to ensure all terms were fulfilled properly. Check for any missing signatures, disclosures, or amendments, and ensure that sale agreements comply with local real estate laws.

✅ Monitor commission payments and disbursements

Your commission payments must align with your transaction records and be properly documented. Unexplained discrepancies in commission payments can trigger financial red flags during an audit.

You should verify that commission split matches contractural agreements, check for any missing or delayed payments, and ensure commission payments are correctly reported on tax documents.

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 to ensure compliance

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.

➡️ Keep up to date with requirements

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.

➡️ Maintain 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 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.

Mistakes for Brokers to Avoid Ahead of An Audit

Even the most seasoned real estate brokers can make errors that lead to compliance issues, financial penalties, or prolonged audits. By proactively addressing common pitfalls, you can ensure a smoother audit process. Below are some key mistakes to avoid:

❌ Inaccurate record-keeping

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.

How to avoid this issue

Use reliable accounting software to automate reconciliations and maintain real-time accuracy.
Keep detailed transaction logs, including commission records, escrow details, and client agreements.
As mentioned earlier, you should conduct regular internal audits to verify financial statements and correct any errors before your official audit.

❌ Ignoring internal controls

You should implement and adhere to robust internal controls, ensuring all your transactions are appropriately authorized and documented. Failing to establish or follow internal controls and procedures could result in issues when you’re audited.

How to avoid this issue

Establish clear authorization protocols for all financial transactions.
Ensure dual verification for key processes like trust fund disbursements or commission payouts.

❌ Failure to provide complete information

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 complete, accurate information. If there are gaps or issues, explain them clearly to your auditor and provide context.

How to avoid this issue

If any gaps or discrepancies exist, address them upfront and provide clear context.
Maintain a centralized document repository or use a transaction management system to quickly retrieve necessary records and prevent delays.

❌ Inconsistent policies and procedures

A lack of standardized policies can lead to confusion, compliance violations, and operational inefficiencies. Auditors will check whether your brokerage follows consistent protocols in handling transactions, commissions, escrow accounts, and compliance requirements.

How to avoid this issue

Develop clear, written policies for all your financial and operational procedures.
Regularly review and update policies to align with new regulations and best practices.
Ensure staff adherence by incorporating these policies into training programs.

❌ Neglecting training and education

You must provide your staff with regular training to help ensure they remain compliant. Ensure you hold training sessions on compliance, internal controls, and proper record-keeping practices.

How to avoid this issue

Conduct regular compliance training to keep agents and staff updated on industry regulations.
Provide ongoing education on internal controls, record-keeping best practices, and ethical standards.
Encourage employees to stay informed about new industry trends and legal requirements through workshops, webinars, and professional courses.

❌ Failing to monitor advertising and marketing compliance

Many real estate audits also review broker advertising and marketing materials for regulatory compliance. Misleading claims, failure to disclose broker representation, or non-compliant digital ads can result in fines.

How to avoid this issue

Ensure all your marketing materials comply with local and federal real estate laws.
Disclose brokerage affiliation in all listings and adverts.
Regularly review your social media posts and digital ads for accuracy and compliance.

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 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.