Establishing Accounting Controls, Policies and Procedures
Any Brokerage Firm or Broker who receives Money Belonging to Others must establish written accounting control policies and procedures, which must include adequate checks and balances over the financial activities of the Broker, Brokerage Firm, and unlicensed persons, as well as manage the risk of fraud or illegal acts.
All Money Belonging to Others accepted by a Broker or Brokerage Firm for deposit into the Broker’s or Brokerage Firm’s Trust or Escrow Account must be deposited in one or more accounts separate from other money belonging to the Broker or Brokerage Firm. The Broker or Brokerage Firm must identify the fiduciary nature of each separate Trust or Escrow Account in deposit agreements with a Recognized Depository by the use of the word “trust” or “escrow” and a label identifying the purpose of such account, such as “sales escrow”, “rental escrow”, “security deposit escrow”, or other abbreviated form defined in the deposit agreement. The Broker or Brokerage Firm must retain a copy of each executed Trust or Escrow Account deposit agreement for inspection by the Commission.
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.
The Commission has a statutory and rule compliant Notice of Escrow or Trust Account (Brokerage Firm) or Notice of Escrow or Trust Account (Individual licensee) document that one should use to present to your banking institution when setting up these types of accounts. It is recommended when setting up a trust or escrow account with the banking institution, you verify that your account is established as a fiduciary/trust account for the purpose of holding monies for others.
An example of how to title the escrow or trust account signature cards can be found below. The signature card example shows the difference in titling a standard business ownership account versus the required language for the compliant trust or escrow account. This specific language is necessary for the creation of a fiduciary/escrow relationship.
Review the brokerage firm’s office policy manual regarding the depositing of these funds into the brokerage firm’s trust or escrow accounts.
When receiving any of these monies from services other than real estate brokerage services brokers must comply with all of the terms and conditions of the Commission’s rules pertaining to Separate Accounts and Accounting as found in Chapter 5 of the Rules of the Commission.
Brokers managing their own rental properties or acting as a builder outside of a brokerage firm must now be cognizant of placing those monies belonging to others accepted for deposit into a trust or escrow account, making sure that those monies are not commingled with personal or business operating funds, maintaining appropriate records, and following all the accounting practices set forth within those rules.
Non-Real Estate Related Activities Examples
Guest deposits for short term rentals
Security deposits for the broker’s own rental properties where the broker’s ownership interest is more than 20%
Deposits from a buyer when the broker is acting as a builder
Any other purposes, other than real estate brokerage service