Office Hours with Professor Bill is a multimedia learning experience covering fundamental real estate concepts.
In Episode 6, Professor Bill responds to questions about:
- managing, receiving, depositing, holding and disbursing funds;
- broker held trust funds; and
- record keeping and subaccount ledgers.
How do I properly manage, receive, deposit, hold, and disburse funds?
By nature, real estate transactions involve the handling of money.
Usually large quantities of money.
Real estate licensees often handle other people’s items which have or evidence monetary value, called funds.
More specifically, funds belonging to others which a broker and their agents handle when acting as agents in a transaction are called trust funds.
Trust funds generally include:
- rents and security deposits collected under a property management agreement.
- good faith deposits tendered by a buyer with an offer to purchase.
- fees and costs handed to the broker in advance of their performance of agreed-to services.
- loan payments and funds on contract collection and loan brokerage; and
- any other personal property of value.
Trusts funds are held by brokers for safekeeping and may not be treated casually.
Trust funds are received by a broker, or by an employee acting on behalf of the broker.
What are the general laws and regulations governing broker-held trust funds?
Further, recordkeeping and accounting requirements are imposed on brokers when they receive, transfer, or disburse trust funds.
Funds received in the form of cash or checks are to be:
- deposited into the broker’s trust account.
- held undeposited as instructed; or
- endorsed and handed to others entitled to the funds.
Trust funds received in the form of checks or cash may only be used for expenditures authorized and incurred for the benefit of the owner of the funds.
Prior to the end of the third business day following the day the broker receives negotiable trust funds, the broker needs to deposit the funds:
- with the person or escrow depository entitled to the funds; or
- in a trust account maintained by the broker at a bank or other state-recognized depository.
When an agent of the broker accepts trust funds on behalf of the broker, the agent is to immediately deliver the funds to the broker, unless directed by the broker to:
- deliver the trust funds to the person or the escrow entitled to the funds; or
- deposit the trust funds into the broker’s trust account.
A subaccount ledger is an accounting document or file used to identify the owner of trust funds and the amount held for the owner.
Through the use of a subaccount ledger, the broker knows of the identity of the owner of the funds at all times.
Further, the broker is required to regularly account to the owner on the status, expenditure, and location of the negotiable trust funds, called an owner’s statement.
A broker’s use of trust funds for any reason other than those expressly authorized by the owner of the funds constitutes a conversion of the client’s funds to the broker’s own use.
For example, a broker cannot deposit rent and security deposits into a general account the broker maintains for personal or business use.
A related term you ought to be familiar with is commingled. Trust funds are illegally commingled when a broker deposits the funds into an account other than a dedicated trust fund account.
Think of commingling as mixing different types of funds together. Conversion occurs when these mixed funds are spent on the broker’s personal use.
Consider a broker who negotiates the purchase of real estate. The broker receives a check from a buyer as a good faith deposit.
Does the broker automatically have to deposit it immediately? As discussed, trust funds generally have to be deposited within three business days.
However, deposit of the trust funds can be conditioned on the occurrence of an event, such as when an offer is accepted, or escrow is opened.
The broker may hold the check undeposited until an event occurs when:
- the check is made payable to someone other than the broker; or
- the check is made payable to the broker with written instructions to hold the check undeposited until the occurrence of a stated event; and
- the person to whom the offer is submitted is informed the check is being held by the broker when the offer is submitted.
Further, after a buyer’s offer is accepted, the broker may continue to hold the buyer’s check for the good faith money undeposited if the seller has given the broker written instructions to continue to hold the check undeposited.
Recognize that written instructions to hold a check undeposited are critical to protect the broker from claims of mishandling.
As before, without instructions to further retain the check undeposited, the broker is to deposit or deliver the funds no later than three business days after acceptance.
