So, in my search for a new CPA, I got a referral from another Atlanta investor, and set up an appointment. Today, my wife and I met with him for about 90 minutes, and were very impressed. First, he is an investor himself. Second, he specializes in real estate investors as clients. And third, he offered ten times as much information in our hour and a half discussion than our other CPA offered in 8 months.

The new guy won’t be cheap, but I’m confident that he’ll save us plenty more than we’re paying him, and he’ll also make our lives much simpler in terms of managing our business structure(s) and finances. He has a flat-fee program for clients that provides: a set number of hours of his time for consultation, tax preparation, setting up entities, etc; it also provided for 8 hours of book-keeping support — I imagine I’ll use this to have his book-keeper teach me how to import my Quicken data to Quickbooks and how to use Quickbooks for my book-keeping; the set-up of a “master LLC,” to be used as a partnership entity to hold our long-term real estate assets; unlimited email support from him; and use of their office as Registered Agent for any of our business entities.

Among the topics we discussed today:

• It’s time to officially hire my brother as Employee #1. He will now be paid as an employee, meaning I’ll have to set up payroll services ASAP. I’ll be looking into using one of the major online services (Intuit, ADP, Paychex, etc);
• My previous CPA neglected to tell me that I need to file a tax election for our LLC within 65 days of organization. While it’s possible to work around this (filing a petition of amendment), it’s a bit disheartening to think my old CPA had no idea I needed to do this (I specifically asked, and he specifically told me to hold off);
• We will start a second LLC specifically for the income generated by my wife from real estate commissions and from her staging activities;
• We discussed how we will hold our properties moving forward, with specific emphasis on those properties we plan to hold for the long-term as rentals;
• I learned that I can not claim Real Estate Professional status using the hours I spent working on properties that were not meant to be held as rentals. In other words, my time spent focused on the flips can not be used towards the 750 hours I need to be classified as an RE Professional. While this won’t matter much in 2008 (my losses aren’t that big), it could be an issue in 2009 and future years;
• Unfortunately, due to the large amount of income my wife and I generated early in the year (before we left our jobs), we are very likely going to run into the situation where we can’t deduct things like moving expenses, which are disallowed if you have over a certain amount of income. This means that our 2008 tax bill could be hefty. We’ll see…

I’m planning to spend the next couple days getting the rest of my tax data in order and sent over to him, and will also focus on some of the items we discussed, such as setting up payroll for our first employee, figuring out the details around our second business entity for the real estate business (”Lish Realty, LLC”), etc.

I’m finally confident that we have the financial future of our business under control…now it’s time to execute on it…

They’re making the trip this weekend, so we have about three more days to get The Bulge House in rental shape. Today, we had the landscaper do his thing, get the appliances delivered, and got all the fixtures, lights, fans, and bathroom/kitchen hardware replaced. Tomorrow, we have a pest inspector and a plumber coming out, Thursday is the cleaning crew, and Friday is the carpet cleaner. That leaves Saturday for us to do a bit of decorating and personalizing (my wife wouldn’t have it any other way).

We did hit our first rehab snag today… When the appliances were delivered, we realized that there were a few things that still needed to be taken care of. The refrigerator doesn’t have an ice-maker, so we need to cut and cap the plumbing line that is currently there (there’s no shut-off valve for this line); the new stove is electric, but the old stove was gas, and the existing gas line is in the way of the new installation, so that that needs to be cut and capped as well; and the plumbing for the washer isn’t available where it needs to be, so additional pipes and a drain need to be run for that. Our GC will be coming back tomorrow for another day to take care of this stuff, but unfortunately, that means a couple hundred dollars over budget and another day lost on The Corn House, where our GC has been working.

Time to find something to negotiate to hopefully keep us on budget!

Personally, I go out of my way to make my projects as easy as can be. I created a Scope of Work with everything I want done, I create a material list that has my materials right down to the store, the brand and the specific SKU number. If people are honest with me, there’s very little that I will ever get upset about. And if you get my business once and do a great job, I’ll make sure you get plenty more business from me and everyone I know who might need you.

But, if you really want to earn my business (and create a strong partnership), here are some things I recommend focusing on when we meet:

* Show Up On Time, or Call. Remember that I’m in Atlanta where it’s around 105 degrees, sitting in a foreclosed investment property that probably doesn’t have the electricity turned on (and therefore no air conditioning) waiting for you. So, if you’re going to be more than 10 minutes late, please call. I realize that things come up, you probably live an hour away, and traffic is horrible, and I really have no problem sitting in my truck with the AC blasting waiting for you. But, I want to know that you haven’t forgotten about our appointment, and that I won’t be sitting in my truck until I run out of gas. So, if you’re going to be 30 minutes late, just pick up the phone to let me know, and all is forgiven.

* Take Notes. It amazes me that when doing a walk-through to get a bid on a project, some contractors don’t write anything down. Most of my walk-throughs last one to three hours (I was surprised by this at first, but good GCs want details upfront), and unless you have a photographic memory, I have little confidence that you’re going to remember every detail I’ve mentioned during our walk-through. And the last thing I want to do is have to repeat everything again when it’s time to start the job (not that you’re likely to get the job). Oh, and if you’re not taking measurements at some point (after the walk-through, or even the next day is fine), how can I believe that you have any idea what your materials cost will be, and therefore whether your bid is reasonable?

* Ask Questions. Sure, I’ve provided you with a Scope of Work that lists everything I want done, but that list is far from detailed enough to allow you or any contractor to complete the job (I’m just not that good). I can’t be so thorough that you have no questions about the property or the job, so not asking questions tells me that you are not very detail oriented or don’t really care about the details of my project.

* Make Suggestions. Most of the contractors I’ve dealt with, I’ve told them upfront that I don’t come from a construction background. And I’ve also told them that my properties are investments and I’m on a budget. So, when I say things like, “Let’s move the kitchen sink back 3 feet,” I expect you to remind me that it will probably cost an extra $500 in plumbing to do so. Maybe I’ll still want to do it, but at least I can do so with the knowledge of where my money is going and how I can keep costs down. Even better, if you have some good ideas for how to design that basement we’re finishing as inexpensively as possible, by all means, let me know. You guys have done this a lot more than I have, and I wouldn’t have made that fact clear if I didn’t want some expert advice along the way.

* Remember That It’s My House. Just don’t push the last tip too far. I don’t mind if you throw out a million suggestions, and have a better way to do every little thing I ask (in fact, I appreciate it), but remember, in the end, the decision is mine. To the GC that came in and basically told me that he had flipped a lot of houses and that I should just write him a check and let him rehab mine exactly like all of his, thanks anyway. Again, I love lots of suggestions and advice, but in the end, unless you’re paying for it, it’s my decision.

* Don’t Quote a Price On the Spot. Whenever a contractor does a walk-through, I can’t resist asking if he has a ballpark estimate for me before he leaves. Some will say, “I don’t like to throw out estimates before I can sit down and put the numbers together.” I respect that. Some will say, “I can give you an estimate, but I have to run the numbers and it very well may come in higher or lower.” I respect that too. What I don’t respect is, “Yeah, I’ll do it for $40,000…do I get the job?” No, you don’t. If you’re going to make up numbers now, I have no idea what else you’ll be making up later to get even more money out of me.

* Break Down Your Bid. When you eventually get me your bid, please, please, please don’t just give me a list of things you plan to do (often just parroted back from my Statement of Work), along with a final price. This is just as bad as quoting me an estimate on the spot. It’s great that you list “Replace countertops” in your bid, but unless I know whether you’re planning to replace them with laminate, granite, or phone books, how am I supposed to know if I’m getting a decent price or not? Also, if you come in with the lowest bid but it’s still $2000 too high, I’d like to be able to see a breakdown of costs so I can say, “I see that replacing the countertops will be $4000, can we shave $2000 off of that by just refinishing the cabinets that are there?”

* Give Me a Materials List. Along with above, if I don’t know what materials you’ll be using (or at least a quality level), how can I evaluate your bid? For one thing, I want to use the same materials in all of my houses, so ultimately I’ll provide the final list of materials (and we can negotiate who buys them, if you have a preference). Second, I want to know if your materials will be more or less expensive than mine, so that I know whether your bid might be affected by my materials list (if I you had planned for laminate countertops, and I want granite, I’m going to make sure you get paid enough to cover the difference, and vice-versa). And lastly, don’t say things like, “I use my own materials, and if you tell me what colors you want, I’ll try to match them as best as possible.” That guy won’t be getting my business.

I’m sure I’ll have more suggestions once I get to the point where I actually hire some of these guys, but keep in mind that a walk-through is a first impression, and if you screw up the first impression, it can be hard to recover. All it takes is a little common sense…

In preparation for walking through the house with contractors to get bids, I created a “Scope of Work” document that lists all the work I expect to be done on this project. That provides a reference for the GCs when they leave and have questions, and always gives me peace of mind that my requirements were adequately communicated. In the interest of sharing everything I’m doing, here is a copy of the Scope of Work I put together for the Corn House.

As for my GC meetings, I’ve met with all five of them over the past few days. The level of detail and professionalism really ran the gamut for these guys — one threw out an estimate after 5 minutes of chatting, one spent an hour after the walk-through taking measurements, one brought a project manager who would ultimately be managing my project, and all of them seemed very interested in forming “long term” relationships with me; I guess the fact that I plan to do a lot of these is very attractive when these guys are seeing major slow-down in their businesses. I imagine each will have their own way of doing proposals (e.g., including materials cost vs. not including materials costs), and I’m looking forward to getting the bids back.

I have a feeling that many of the bids are going to be higher than I expected, mostly do to the fact that most of the GCs I spoke with run companies with a lot of overhead (licensing, insurance, vehicles, employee costs, etc). Of course, these overheads costs mean that they take their jobs seriously, and I’d rather pay a little more to know that everyone on the site is insured, the company is licensed, and no corners are being cut. That said, if all the bids come in way higher than I expected, it may create a situation where I can’t profitably resell this house. I guess I’ll have to wait and see…most of the GCs said they’d have bids to me by early next week.

But, first and foremost, I need to start building my contractor team. While I will certainly need contractors to actually do the rehab work, there’s actually a shorter-term need that’s much more pressing. Now that I’m looking at houses, I need to be able estimate the cost of rehab prior to making offers on the property (if I don’t know how much it will cost to fix up, I don’t know how much I can afford to pay for the house). While I’ll probably get pretty good at estimating this sort of stuff after my first couple rehabs, I’m going to need some serious help until then.

To help with the estimation of rehab costs, the recommendation I’ve gotten from other investors is to find a strong General Contractor (GC) to do a walk-through of the property with me and provide me a ballpark estimate what it will cost to rehab. For those that aren’t familiar, a GC is generally skilled in many areas of real estate construction, often including carpentry, electrical, plumbing, roofing, etc. And even where he is not an expert, a GC often has the basic skills to understand the scope of the work that would need to be done and an estimate of the cost. Even better, GC’s often work closely with specialty contractors (electricians, plumbers, roofers, etc), and can call in these specialists when needed.

Obviously, having a GC do a pre-purchase walk-through to provide a rehab estimate won’t yield a perfect result, as the walk-through won’t generate detailed specifications or define the specific materials; not to mention, if the GC who does the walk-through isn’t the same GC who ends up doing the work, there could be differences in prices there as well. But, the goal of having a GC do a walk-through is to generate a high-level estimate (without a few thousand dollars) to help nail down how much can be offered for the property. Also, doing a walk-through with a GC can help identify issues that otherwise might not be recognized until after the offer is accepted and an inspector is called in.

So, knowing that I need to start building relationships with at least a couple GCs, I posted a request online looking for GCs to contact me. I included details about my business and the needs I had, so that only those who could likely help me would reply. Surprisingly, I got several dozen emails and phone calls within 24 hours after the posting! In anticipation of getting a large response, I prepared a set of questions for each of the GCs that responded, so that I could narrow down the field and decide which ones I wanted to meet with.

Here is the list of questions I used:

1. Are you licensed and Bonded? (I wouldn’t consider a GC was wasn’t!)
2. Will you sign an Independent Contractor Agreement? (I don’t want contractor employees at this point)
3. Do you create Statements of Work and Detailed Specifications as part of your bids? (Contracts are important!)
4. Where are you located? (If I need someone on short notice, I don’t want someone who has to drive 60 minutes)
5. What types of projects would you be qualified to do and interested in doing? Purely cosmetic? Basic Remodeling? Major Rehab? Structural? (You want the right person for the right job!)
6. Do you know how to pull permits? (I’m won’t be doing that myself)
7. Do you hire subs? (Saves me the effort of finding all the workers myself and allow me to get a smaller number of bids)
8. What contracting areas are you qualified to perform work or hire subs? Plumbing, Electrical, Roofing, Carpentry, Exterior, Landscaping, etc? (Jack of all trades is good for a GC)
9. What contracting areas would you be able to estimate material and labor costs for houses I’m considering purchasing? Plumbing, Electrical, Roofing, Carpentry, Exterior, Landscaping, etc? (I don’t want to have to bring more than one guy out to get an estimate)
10. If you got one of my projects, what part of the work will you be doing yourself vs sub-contracting out?(The more he does himself, the fewer people I’ll likely be paying for)
11. Have you ever done any rehabs for investors? (i.e,. do you understand my business needs?)
12. How much notice would you generally need to schedule a walk-through of a property I’m considering purchasing to give a rehab estimate? (Shorter is better)
13. How much would you charge to provide pre-purchase estimates on rehab costs? (I’m happy to pay, but I want to see what they thing they’re worth)
14. Would you be able to provide references upon request? (I will check them before giving them a job)

After asking those questions of each of the GCs that contacted me, I was able to narrow the field down to a few that I think I’d work well with. I even had the opportunity to bring one of them out to a house I was looking at this weekend to get an estimate. More on that in a future post…

The bottom of the barrel were the ones who obviously knew very little about anything tax related. For example, the first guy I spoke with, when asked, “What should I be aware of from a tax-perspective when buying my personal residence?” responded with, “The most important thing is to get the house checked for Radon.” While I appreciate the advice, it wasn’t what I would be paying him for.

Then there were those who had very little knowledge of real estate issues (despite what they had previously told me). One guy suggested that I register my investment company as a C Corporation, which is clearly a bad decision from a tax perspective (C Corporations are not a good entity for which to hold appreciating assets). Another guy, when asked, “What would it take for me to qualify as a Real Estate Professional?” responded with, “As long as you spend a lot of time doing it, you are a professional.” Somehow I don’t think the IRS is going to agree with that definition…

And then there were the CPAs who were just plain out of my league. A few had obviously been dealing with big-time RE investors for a long time, and didn’t have the patience (or the desire) to deal with someone just starting out and asking for basic help (like setting up the businesses). While I appreciate the fact that there isn’t always going to be a great fit, unfortunately the CPAs who were in this category didn’t do a spectacular job of making me feel like a potential client.

Heading into my final meeting, I was pretty discouraged. My only business goal for this trip was to find a CPA and it appeared I wasn’t going to do it. But, as luck would have it, the last guy I spoke with was fantastic. He was qualified to help me with all the basic aspects of defining the business, and referred me to a law firm that could actually register the businesses for me (in Atlanta, it is apparently illegal for CPAs to register businesses for clients). He was also able to answer all of my questions about short-term accounting and tax strategy, and made me feel comfortable about the fact that I didn’t fully understand the relationship and process that would ensue as we started to work together.

He suggested that I set of the businesses as LLCs, and that once that was done, we should meet again, and he would file the paperwork necessary to declare a taxable entity for the businesses (likely Sub-Chapter S Corporation). I have contacted the firm he suggested to get the LLCs set up, and then will be giving him a call once I get settled in Atlanta for a follow-up meeting.

We spent all day Thursday meeting with CPAs, hoping to find a firm that could support our businesses. We spent Thursday evening meeting with the mortgage broker to sign papers and prepare for if/when we found a house. We spent all day Friday with our real estate agent looking at houses (21 houses in one day!). We spent Saturday morning checking out the potential location for our upcoming wedding. And then we spent the rest of the weekend continuing our house searching.

I’ll go into more detail on subsequent posts, but here’s the quick summary:

• We found our CPA
• We got our mortgage papers in order and ready to go for when we find a house
• We reserved our wedding ceremony/reception location
• We found two houses we really liked, and put an offer on one

All in all, it was a tremendously productive weekend! More detail to come in my next few posts…

Unlike some of the other professionals I’ll have on my real estate team, where if I make a bad choice I’ll likely only be out some time and effort, if I make a bad choice on my CPA, it could cost me lots of money. Not only will I be looking to my CPA to help me determine the best tax strategies to use to keep as much of the money I make as possible, but I’ll also be looking to my CPA to help me determine the best strategy for asset protection (in the case of a lawsuit, for example). So, finding someone good can definitely make the difference between long-term success and failure in this business.

I do want to point out that when I say I don’t have any personal recommendations for a CPA, that’s not entirely true. In fact, through one of the main Internet investing forums I contribute to, I have met Diane Kennedy, the founder of both Diane Kennedy Associates and TaxLoopholes, and a well-known author and tax strategist. I really wanted to give Diane a plug here, as her insights have been absolutely invaluable over the past several months, as I’ve been preparing to start my business. There is no doubt that once my business gets off the ground, I will work with Diane and her team to put together a tax strategy for both my and my fiancee’s business, but I haven’t quite come to terms with not having a local CPA when first starting out. So, while I’m thrilled that I have someone like Diane to go to once I’m up and running, I still really want to find someone local who can help me get things off the ground.

To seed my list of potentials, I did a Google search for CPAs in Atlanta, and specifically those with real estate experience. I’m aware that there are a lot of professional real estate investors in Atlanta, so it shouldn’t have surprised me that pretty much all the CPAs claim to be experts in real estate. A basic Google search narrowed the list to about 60 CPAs and CPA firms in the greater Atlanta metro area.

From those 60, I ruled out any of the firms that didn’t have the expertise or specialization I was looking for. I then ruled out the firms that didn’t seem to fit my “personality” (too big, too small, etc). Then, with little else to go on and not wanting to have to contact the dozens of firms that remained on my list, I decided to rank order the results based on how well-designed their websites were. While this might sound ridiculous, keep in mind that I’ve lived in Silicon Valley for the past seven years, and have gotten very accustomed to communication via means other than the telephone (email, instant messenger, etc). So, having a CPA who is tech savvy enough to have a decent website is likely well-enough versed in email that he’s willing to use that as a primary means of communication. While I wouldn’t necessarily want to communicate with my agent or lenders through email, I think being able to ask questions of my CPA, attorney or property manager through email is perfectly reasonable.

Based on the website test (wow, none of them had nice websites!), I narrowed my list down to about a dozen potential CPA firms, and fired off emails to each…

In the 24 hours since I sent the email, I’ve heard back from four firms. Based on the fact that all four firms have met my current criteria (relevant services/expertise/skills, “personality” fit, decent website, and responsive to email), I’m planning to meet and interview each of them when I’m in Atlanta later in the week. That’s when I’ll start the interviews in earnest, and hopefully find someone who I can trust to help me build a financial strategy for my business.

I’ll keep you updated…and in the meantime I may start thinking about starting my “building websites for CPAs” business plan…

]]> http://www.123flip.com/finding-a-cpa-part-2/feed 4 http://www.123flip.com/finding-a-cpa http://www.123flip.com/finding-a-cpa#comments Tue, 13 May 2008 07:01:18 +0000 J Scott http://www.123flip.com/finding-a-cpa Now that I’m getting ready to actually relocate across the country, it’s time to start building my team and defining our business structure(s). With that in mind, the first team member I’ll be looking to find is a really good Certified Public Accountant (CPA), with a specialty in real estate.

Unfortunately, I haven’t been able to get a good personal recommendation for CPA, which means I’m going to have to be extra diligent in my interviewing and screening process.

Essentially, I’m looking for someone who can provide the following services for my real estate business:

1. Help me define the appropriate business structures, both from a legal protection and from a financial/tax perspective
2. Help me create a tax strategy for my business that will allow me to legally keep as much money as I possibly can
3. Help me make smart decisions with respect to individual real estate investments
4. Prepare my annual tax returns
5. Recommend other team members (attorney, insurance agent, real estate agent, etc) who can help make my business a success

With those goals in mind, I’ve put together the following list of interview questions that will hopefully allow me to find a qualified CPA who can successfully help me sustain and grow my business:

• What are your credentials?
• What services do you offer?
• What areas of tax and accounting do you specialize in?
• What is your background and do you personally own real estate?
• How would I be able to communicate with you? Can I get questions answered by email?
• Given my circumstances, what business structure(s) do you recommend? Why?
• Can you register the business structures for us?
• How can you help in the various phases of real estate investing (acquisition through sale)?
• Do you specialize in tax strategy? Specifically geared towards real estate?
• How aggressive will you be in helping us keep as much money as possible?
• What tax strategies/issues should I be aware of upfront?
• How often would you suggest we meet to review our progress/plan?
• Do you do tax preparation?
• What software do you use (and expect me to use) to do our accounting?
• Can you help me find other team members (attorney, insurance agents, real estate agents, etc)?
• What is your schedule of fees?
• Do you have references?

If you can think of any other questions I should be asking, please let me know!

Here’s what the Business Plan calls for in terms of building a team:

LISH PROPERTIES BUSINESS PLAN

Investment Team

It is clear that in real estate investment, a key differentiator – and often the difference between success and failure – is the ability to put together a great support team. Using networking contacts, referrals, and detailed research, the company intends to put together a great team prior to making a first investment.

At very minimum, the following team members will be identified and consulted with prior to making a first purchase:

Key Team

Real Estate Attorney

• To define and create an initial business structure and entity for the company
• To help define and create partnership agreements for each investment vehicle
• To create contracts to control property during due diligence

Certified Public Accountant

• To define and create an initial business structure and entity for the company
• To help create methodologies for tracking revenue and expenses
• To help identify tax strategies
• To complete annual taxes

Real Estate Agent

• To provide access to available properties (and MLS, if necessary)
• To provide insight into the local markets
• To identify and analyze available investments

Property Management

• To support due diligence process during acquisition phase
• To provide day-to-day management of investment properties (where desired)

Due Diligence & Acquisition

Property Management

• To support due diligence process during acquisition phase

Property Inspector

• To provide inspection services prior to purchase
• To help define cost of repairs and improvements
• To make strategic recommendations on improvements or repairs

Appraiser

• To help define comps and reasonable market value when dealing with non-typical properties or non-typical investments

Mortgage Broker or Lender

• For all financing needs and future finance planning

Title Company

• To clear title for acquired properties

Insurance Agent

• To provide insurance on investments
• To provide recommendations on insurance strategy for investments and tenants

Improvements & Repairs

The following maintenance and repair companies/people should be identified prior to making a purchase:

• General Contractor
• Landscaping
• Handyman
• Plumber
• Electrician
• Cleaning Services
• Carpenter