I just picked up Business Weeks' latest issue which has a fascinating expose about why the lending industry is still not safe. It's an in-depth analysis of the lending practices which continue to threaten the viability and integrity of many of the nation's largest banks.
Reading the article caused me to reflect on how different the act of balancing my checkbook as a Real Estate Broker would be, if I used the accounting practises which were practised by many of the lenders who are now embroiled in the mortgage crisis. Here are 3 differences which were immediately evident to me...
Not Having to Worry about Having Enough Money...
For starters, I could deposit checks without worrying about a silly little thing called "clearing"...that is making sure there was actually money to back up the check. In a peculiar twist of advanced accounting, banks are allowed to report the full amount of interest on risky adjustable rate mortgages known as option-ARMS even though buyers did not have to make a full interest payment. As you can guess...many buyers did not make the full payment. From an accounting standpoint, this practise was in essence like cashing a check without the full amount of money in the bank.
Making Money as Soon as the Paperwork was completed...
Which Real Estate Broker would not relish the ability to count transactions as income as soon as the paperwork was written up? After all, everything will sell, for something...someday! This would definitely enhance the margin of profits on the bottom line. It would be wonderful to just gather up all my contracts and optimistically guarantee that regardless of the eventual terms of the deal...I would Prepay myself 4% on my commissions today. If the deal didn't pan out in the future...well, I can revise my projections downward with a little tool called the "write-off."
Making up the Rules as I went along...
Then, there are the creative ways I could deal with issues which arose that caused deals not to close as anticipated or other losses incurred during the normal course of business. If I were a big bank, there would be all sorts of "judgement calls" that I could make about just how and when to record these losses and what weight to give them. In essence, the ability to wave my magic wand and minimize problems including those pesky troublesome, money sucking things called bank charges.
Well, unfortunately, this reality doesn't work for me and it will no longer work for the banks who utilized these "creative tools" to maximize profits that were non-existent for the most part or materialized at levels much lower than expected. Just like I have to balance my checkbook and correct mistakes made in order to get back in sync with reality, we are witnessing the painful process of correction at the tills of many of the nations banks right now. But, this will be shared misery...all of us are going to be a part of paying the piper this time around...unfortunately.
So, in summary, here are 3 Simple Rules that make common sense in basic accounting for Ordinary Folks.
1. Understand the Rules!
When the rules are made, we all have to follow them. Particularly rules which govern addition and subtraction. If we don't make money...we don't get to pretend that we do and add that Fake Number to the balance sheet.
2. Don't Spend it Before You Make it!
Nothing happens until the Fat Lady Sings. No commission can be guaranteed until it's in your hand and in the bank AND cleared! Don't spend a cent before then!
3. Know the Difference between Having Money & Thinking You have it!
Worrying about money is a waste of energy. Being prudent about the management of money is not. The latter will prevent a loss which can send you to the poor house...the former can contribute to the digging of an early grave. Avoid the former...diligently practise the latter.
Related Story: Business Week, 2006 "Nightmare Mortgages"
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Lola Audu, is the Designated Broker & Owner of Audu Real Estate. Our company specializes in helping people buy and sell homes in the greater Grand Rapids, West Michigan area. We've had the privilege of helping hundreds of clients succeed in their goals of purchasing and selling property including demonstrated success in the negotiation of Short Sale Transactions. You can contact us via e-mail @ info@auduhomes.com or by phone at 616-791-0511.
The other rule is that if I make a large series of boneheaded mistakes and end up in deep trouble, the FED isn't going to use billions in tax dollars to bail me out.
It will be interesting to see if unlike so many other corporate 'creative accounting' situations, someone will actually be held accountable for the mess, or if they'll be given multi-million dollar bonuses, a pat on the head and sent cherrily on their way.
Oh no, a cynic got my password... what will I do, what WILL I do!!?!?!!??!!?
One thing that I've noticed about too many agents over the years is that, once they get a license and begin to sell real estate for a living, they are reluctant to make any changes in their personal life to accomodate their new business. They want the real estate business to accomodate their personal life.
I can almost predict the success of new agents based on how they schedule work and personal matters.