This is the final episode in our new weekly video series covering property management principles. This episode covers a property manager’s ongoing duty to account to the landlord and maintain accurate records of all deposits, receipts, disbursements and expenditures.

 The prior episode introduces a property manager’s handling of a trust account to accommodate the flow of property income and expenditures.

Proper handling of the trust account

If a property manager or their employees delay the proper maintenance of a trust account, the property manager is in violation of their duty to the landlord to maintain the trust account. This violation places the broker’s license at risk of loss or suspension.

To avoid mishandling of the trust account, the property manager:

  • deposits the funds received, whether in cash, check or other form of payment, within three business days [Department of Real Estate Regulations2832];
  • keeps trust fund account records for three years after the transaction [Calif. Business and Professions Code10148];
  • keeps a separate ledger or record of deposits and expenditures itemized by each transaction and for each landlord [DRE Reg. §2831.1]; and
  • keeps accurate trust account records for all receipts and disbursements. [DRE Reg. §2831]

Accounting to the landlord

Tied to the property manager’s duty to properly maintain their trust account is the duty to account to the landlord.

All landlords are entitled to a statement of accounting no less than at the end of each calendar quarter (i.e., March, June, September and December).

The accounting is to include the following information:

  • the name of the property manager;
  • the name of the landlord;
  • a description of the services rendered;
  • the identification of the trust fund account credited;
  • the amount of funds collected to date;
  • the amount disbursed to date;
  • the amount of any fees paid to field agents or leasing agents;
  • the overhead costs; and
  • a breakdown of the advertising costs, a copy of the advertisement, the name of the newspaper or publication and the dates the advertisement ran.

Also, the property manager hands the landlord a full accounting when the property management agreement expires or is terminated. Any discrepancy or failure by the property manager to properly account for the trust funds will be resolved against them and in favor of the landlord.

Even when the property manager’s only breach is sloppy or inaccurate accounting, they are responsible as though misappropriation and commingling occurred.

Although the property manager is required to account to the landlord no less than once each calendar quarter, best practices call for a monthly accounting. They may then rightly collect their fee at the end of each month after they have fully performed and their fee is due. In this way, the property manager avoids the receipt of advance fees. Accounting for the collection of advance fees requires a DRE-approved form. [Bus & P C §10146]

Failure to account for funds

A property manager on the receipt of monies while acting on behalf of the landlord places them into a trust account. As trust funds, these monies need to be diligently managed to avoid claims of mishandling, misappropriation or the commingling of the landlord’s funds with the property manager’s personal funds.

Consider a landlord who hires a broker to act as a property manager. In addition to paying for expenses and costs incurred, the property manager is instructed and authorized to pay the monthly mortgage payments.

The property manager locates a tenant and collects the initial rent and security deposit. After depositing the funds in the property manager’s trust account, but prior to disbursing the mortgage payment, the property manager withdraws:

  • the leasing fee for locating the tenant; and
  • the monthly property manager’s fee.

Both fees are due the property manager for work completed under the property management contract.  [See RPI Form 590]

However, the withdrawal of the property manager’s fees leaves insufficient funds in the trust account to make the authorized mortgage payment. The property manager then issues a check on funds held in one of the property manager’s personal accounts to make the landlord’s mortgage payment. However, this account also has insufficient funds.

Meanwhile, the lender sends the landlord a late payment notice for the mortgage delinquency. The landlord immediately contacts the property manager regarding the delinquent payment. The property manager says they will cover it and does so.

More than three months later, the landlord terminates the property management agreement.

The property manager sends a closing statement on the account containing some erroneous deductions. The closing statement is the only accounting the property manager ever prepared for the landlord.

After discussion with the landlord, the property manager corrects the errors in the closing statement, issues the landlord a check for the remaining balance, closes the account and destroys the landlord’s file.

Later, the landlord files a complaint with the DRE regarding the property manager’s conduct while under contract.

The DRE investigates and concludes the property manager breached their agency duties. The property manager issued a check for a mortgage payment from an account other than the trust account, an activity that automatically constitutes commingling of the property manager’s personal funds with trust funds.

Also, the property manager knew they had insufficient funds when they issued the check. This constituted a dishonest act.

In addition, the property manager failed to accurately account for funds taken in or expended on behalf of the landlord. Worse, the property manager neglected their duty to provide an accounting at least every quarter.

Finally, the property manager destroyed the records prior to the expiration of the three-year minimum record keeping requirement. Based on these many violations, the DRE properly revokes the property manager’s real estate broker license. [Apollo Estates Inc. v. Department of Real Estate (1985) 174 CA3d 625]

Management conflicts with sales operations

A broker who operates a real estate sales office, in conjunction with a property management operation, has a potential conflict of interest that may need to be disclosed to their clients.

For example, a creditworthy prospective tenant responding to a rental advertisement might be swayed by the broker’s sales staff to purchase a residence instead of renting. Sales fees are typically greater than leasing fees for the time spent. Conversely, sales fees are one-shot fees, not continuously recurring fees.

Any active attempt to convert a prospective tenant to a buyer when the prospect has responded to a rental advertisement paid for by a landlord or provided as part of the property management services, suggests improper conduct. The broker’s conduct may range from “bait and switch” techniques with prospective tenants to diverting the landlord’s existing tenants through efforts purportedly expended on the landlord’s behalf or interfering with the landlord’s best interests.

A property manager takes care to keep their sales and management operations sufficiently separate from one another. When in contact with a creditworthy prospective tenant applying to rent a property they manage, the manager needs to diligently pursue rental or lease agreements with them. The conflict of interest arising when a client seeks the same or different purposes does not bar a broker from conflicting activities so long as the conflict has been timely and properly disclosed. [See RPI Form 527]

Simply, the landlord comes first – always. The broker’s concern for greater fees comes second.