Misuse of trust accounts is the number one reason why property management companies are audited. That’s why it’s vital that the proper trust fund accounts are established as needed, and used properly.
Improperly using trust accounts that were established to maintain owner funds and tenant security deposits can result in stiff penalties, such as license suspension or revocation. Improper tracking or usage of tenant security deposits can also result in the management company being responsible for the cost of damages incurred while the property was occupied.
Trust accounts are traditionally used as a method to keep tenant deposits and rent payments separate from operating capital. For example, in both California and Arizona, rent payments must be placed into a trust account no later than three business days after the funds have been received.
Funds placed in the trust account can only be withdrawn by the broker or broker-officer whose name the account is established under. Brokers are not allowed to tap into these funds except for trust related items. To complicate matters, many states currently require that security deposits be kept in a trust account, with some state statutes requiring that the deposit be in a separate trust account, while others allow them to be placed with the owner’s trust account. For instance, in Arizona, brokers must maintain a separate account for all tenant security deposits. Note that in most states, security deposits received on broker-owned properties do not have to be deposited into a separate trust account, but it’s always wise to check your own state’s requirement.
In recent years, some states have implemented new laws requiring property managers and owners to specify in the management contract exactly how trust accounts will be used. Even if your state has statutes specific to the use of trust accounts, it’s best to spell out any specifics in the management contract.
The Department of Real Estate in each state has its own set of established rules and regulations governing the proper and improper usage of trust accounts, and it’s wise to get yourself up to speed on these regulations.
While your state’s department of real estate will continue to perform audits, if your management company has followed the statutes, and maintained ‘good accounting practices,’ you should be able to sail through any audit that your property management company may be subjected to.
In the next article, I’ll go over some practices you’ll want to implement immediately, if you’re not already doing them, along with some things to avoid.