Okay, I think we all know by now how the magic of accounting can make something appear solvent when it really isn’t.

That’s the beauty of numbers…they’re even worse than words, precisely because they seem so solid and unmanipulable.  After all, one plus one is two everywhere, isn’t it?

(Actually, no; not if you’re counting in base two!)

Accounting complexities can be a little like that (only a lot more complex!), and in this article I, Isaac Toussie, will discuss some aspects of what I call real estate accounting, ways of keeping tabs on profits and losses that are fairly particular to the real estate business.  I used to be a professional land developer myself, and in one of the most interest property markets of all anywhere in the whole world, my hometown, New York City.  With several years of first-hand experience, I have a lot to say – but I must first say that what I will say in the rest of this article are first and foremost nothing more than my own personal opinions, nothing that should be taken as some kind of advice.  Consult your licensed lawyer and accountant for all business decisions of any consequence; here I’ll only be surveying the topic, not giving instructions in it.

Real estate accounting is specialized partly because of the very nature of the industry.  Property markets are what economics describe as one of “monopolistic competition” because aspects of both worlds are combined.  For example, property is usually unique, and thus so skew supply and demand as to create conditions similar to a monopoly.  At the same time, traditional characteristics of a competitive market do exist, such as the fact that similar properties often substitute for one another, thereby diluting or even outright negating the monopolistic advantage just noted, as is often the case with “cookie-cutter” housing in a subdivision.

Real estate accounting is also highly specialized because of the legal environment that has come to grow up around the industry, involving such factors as zoning laws and tax breaks.  Changing tax laws, safe building codes, and environmental regulations also contribute to the complexities surrounding real estate accounting.  And of course, profits and losses are intimately tied to cycles of supply and demand, which in turn take their cue from social trends – which are based on demographics.  Finally, mortgage interest rates are among the biggest reasons behind sales and purchases.  It’s all interconnected – “intertwined,” even; a word suggesting something messy – and that’s why real estate accounting is in a class all its own.