Property Management Issues and Concerns: A Real Estate Broker Advisory

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For licensed real estate brokers that practice in the area of property management, there are many things that are unique to this area of real estate practice, and certain problem issues often come to the attention of the Real Estate Commission on a recurring basis. Being more aware of some of these concerns will help you stay compliant with the Commission rules, and improve your property management business.

Property Management Guidance
Commingling money belonging to others.

A broker’s or brokerage firm’s personal or business operating funds must not be commingled with money belonging to others. One or more separate trust or escrow accounts may be maintained by a brokerage firm as long as the duties and limitations in Rule 5.10 are adhered to. This is an area of concern that can have devastating effects on one’s license if a violation is found to occur. Some instances to watch out for include:

  • Not mixing money belonging to others with personal or business funds.
  • Not using money belonging to one party for the benefit of another even if it’s paid back.
  • Failing to have funds in proper escrow accounts.
  • Knowing that rental monies (belong to the owner) and security deposits (belong to the tenant) are different funds, and should be in different escrow accounts.
Commingling Examples
  • Paying bills for an owner before the rent is paid and their ledger has sufficient funds. (This is a common Commission violation.)
  • Using multiple owner reserves to pay one owner’s bills. Each owner’s funds must be tracked and used independently.
  • Paying brokerage bills from the rental proceeds escrow account.  (Commissions must be paid and transferred to the brokerage business checking account which would then be used to pay any brokerage bills.
  • Using multiple reserves from properties owned by the same client if it is NOT allowed in the management agreement.

    Commingling Money Belonging to Others - Rule 5.10

Trust or escrow accounts must be fiduciary in nature and deposited with a recognized depository.

The trust or escrow account must be a “true” trust account and not one that is just labeled with the word “trust.” A properly established trust or escrow account must meet certain statutory conditions and be correctly titled in the bank’s depository agreement and signature cards. Oftentimes an account may be set up that is simply labeled for instance, “property management escrow account” or “trust account” which might not in fact be a “true” trust or escrow account.  

  • A recognized depository as described in Rule 1.44 is any bank, savings and loan association, or credit union that accepts deposits or shares insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) respectively.
  • The Division has a list of recognized depositories on its website, as well as instructions on how to set up a proper fiduciary trust account. Please note that the list is not all inclusive, so check with your financial institution.

      Trust or Escrow Accounts Must be Fiduciary in Nature and Deposited with a Recognized Depository - Rule 5.2

Money belonging to others for deposit by a broker for non-real estate brokerage services.

Money belonging to others which is accepted for deposit in connection with activities not involving real estate brokerage services must be deposited into broker’s or brokerage firm’s trust or escrow account(s).

Such activities not involving real estate brokerage services include:

  • Guest deposits for short term rentals;
  • Security deposits for broker’s own rental properties including any broker owned properties held in a partnership, join ventures, syndications or other entity with others, provided the broker’s ownership in the entity or property is more than 20%;
  • Deposits from a buyer when the broker is acting as a builder; or
  • Any other non-real estate brokerage service purposes.

If a broker accepts money belonging to others for deposit into broker’s or brokerage firm’s trust or escrow account for activities not involving real estate brokerage services, the broker must either:

  • Deposit the funds in the broker’s brokerage firm’s trust or escrow accounts if required by the broker's brokerage firm’s office policy manual; or
  • Deposit the funds into broker’s own trust or escrow accounts.

In either case, compliance with the Chapter 5 Rules must be adhered to.

Not conducting proper 3-way reconciliations on a monthly basis.

Many investigations involve the failure to follow Rule 5.14 concerning recordkeeping requirements, especially not performing or not conducting 3-way reconciliations properly.

  • Licensees who manage properties for others must complete 3-Way reconciliation monthly for all escrow accounts.
  • This includes rental income and security deposits at a minimum.
  • Bank statement records must match the tenant security deposits.
  • Journal entries for monies received must show the date of receipt and deposit, amount, name of payer, name of person and property for which money is received, purpose of receipt, and resulting cash balance for the account.
  • Journal entries for monies dispersed must show the date of payment, check number or electronic transfer record, name of payee, reference to documentation verifying payment purpose, amount paid, and resulting cash balance for the account.
  • Using a ledger or accounting system equivalent to record all money received or disbursed in order to track funds.
Not providing disclosures to the landlord and tenant.

A common complaint is that the property manager does not disclose or properly disclose the required brokerage relationship disclosures.

  • Brokerage Duties Addendum to Property Management Agreement (BDA55-7-20)
    • This addendum supplements the property management agreement and is made a part of the management agreement and leasing of the particular property.
    • The default is to a transaction brokerage if neither box at top of the form is checked describing the relationship.
  • Brokerage Disclosure to Tenant (BDT20-10-19)
    • Property managers should make it clear to a tenant what their working relationship is with the owner and tenant.
    • Disclosure should be made at the first available opportunity.
    • Disclosures should be made prior to any confidential information being shared by the tenant.
Not having the lease and property management agreement drafted by a licensed Colorado attorney.

An area of concern is not using attorney drafted forms when required to do so, such as when there is no Commission approved form or there is no form appropriate for the transaction, for instance a lease agreement or a property management agreement.

In addition, using attorney drafted forms that are non-compliant with the statute and rules. Make sure the required attorney drafted forms:

  • Are not missing required disclosures pertaining to attorney-drafted forms.
  • Contain the mandatory language stating:
    • “This form has not been approved by the Colorado Real Estate Commission”;
    • The name of the attorney or law firm that prepared the form; and     
    • The name of the broker, employing broker, or the brokerage firm that the form was prepared for. Rule 7.1.B and §12-10-403, C.R.S.

An attorney drafted form for one broker or brokerage does not mean that another can use the same form and meet the requirements.