Property Management Webinar Series

TRUST ACCOUNTSInstructed by

Tom Morgan, Vice President of Legal Affairs

Edra Anderson, Associate Counsel

May 19, 2010

Whose Money Is It?

At any given time, property managers (PMs) may have money in their possession that falls into three categories

1. PM Money

2. Owner Money

3. Tenant Money

Commingling

As a real estate licensee, any time you hold money that belongs to another, you must keep that money in a trust account or risk a charge of commingling

TOC §1101.652(b)(10) – [TREC] may suspend or revoke a license issued under this chapter or take other disciplinary action authorized by this chapter if the license holder, while acting as a broker or salesperson commingles money that belongs to another person with the license holder's own money

But What Is a Trust Account?

How do you even define “trust account”?

Where can I get one?

Do I have to have a trust account as a PM?

Are salespersons allowed to maintain trust accounts?

What exactly goes into a trust account?

If the account earns interest, can I keep it?

Course Overview

Trust accounts unmasked

When use of trust accounts is required

The rules associated with trust accounts

Practically speaking…what does this mean for you?

Conclusion

Trust Accounts Unmasked

Black’s Law Dictionary defines client trust accounts as a bank account, usually interest-bearing, in which a [real estate licensee] deposits money belonging to a client

TREC Rules states in §535.146(a) that “for the purposes of this section, "trust account" includes any trust, escrow, custodial, property management account , or other account in which a licensee holds money on behalf of another person.”

Trust Accounts Unmasked

Bottom Line: If you have money belonging to someone else in one of your accounts, it is considered by TREC to be a trust account

***Defining an account as a trust account implicates numerous other provisions of TREC Rules and TRELA (TOC 1101)***

When Use of Trust Accounts is Required

TREC Rule §535.146(f): If escrow or other money belonging to another is held by a licensee, it must be maintained in a trust account. Placing such money in a licensee's operating account constitutes commingling.

If security deposits are held by licensee in a property management context (as may be dictated by your PM agreement), they must be held in a trust account. (TAC §535.159(g))

When Use of Trust Accounts is Required

Oftentimes, PMs will require owners provide cash to be used for repairs and other issues that may occur during management of property

•Must be maintained in a trust account

•Best practice: Never use one owner’s money to pay for repairs on another owner’s property

•Best practice: Maintain a strict office policy preventing you from spending money in excess of actual owner cash on hand

The Rules Associated withTrust Accounts

1. Trust accounts must always be in the broker’s name

TAC 535.2(c) A broker is responsible for the proper handling of escrow monies placed with the broker, although the broker may authorize other persons to sign checks for the broker.

TAC 535.159(f) A salesperson may not maintain an escrow account or act as an escrow agent. Any money received by a real estate salesperson which is to be held in trust pursuant to a real estate transaction must be delivered to the salesperson's sponsoring broker to be deposited in accordance with the agreement of the principals in the transaction.

The Rules Associated withTrust Accounts

2. Trust accounts must always be identified as such

TAC 535.159(h) If a broker maintains a trust or escrow account, that account must be identified as such.

3. Trust accounts may be savings accounts and are otherwise not defined by statute or rule

TAC 535.159(e) It is permissible for a broker to establish a savings account as an escrow account, provided said funds may be withdrawn at the appropriate time for disbursal…

TAC 535.159(j) If money held in trust by a broker is held in a noninterest bearing account, the broker is not liable for interest or for charges on the funds unless there is an agreement to the contrary.

The Rules Associated withTrust Accounts

4. Trust accounts may be interest-bearing and broker may retain interest so long as client agrees

TAC 535.159(e) …In the absence of an agreement to the contrary signed by the person depositing the funds with the broker, any interest earned on a savings account must be distributed to the person or persons who are the equitable owners of the funds during the time the interest is earned.

The Rules Associated withTrust Accounts

5. Any money that becomes property of broker must be removed from the trust account within 30 days of acquiring the ownership interest

TAC 535.146(g) If a licensee acquires ownership of money in the licensee's trust account that was originally held in trust for another, such money must be removed from the trust account within a reasonable time. "Reasonable time" in this context means within 30 days after the licensee acquires ownership of the money.

The Rules Associated withTrust Accounts

6. Brokers are strictly prohibited from commingling money that belongs to the broker with money they are holding that belongs to someone else

TOC §1101.652(b)(10) – [TREC] may suspend or revoke a license issued under this chapter or take other disciplinary action authorized by this chapter if the license holder, while acting as a broker or salesperson commingles money that belongs to another person with the license holder's own money

TAC 535.146(h) (h) Paying operating expenses or making withdrawals from a broker's trust account for any purpose other than proper disbursement of money held in trust is prima facie evidence of commingling money held in trust with the broker's own funds.

The Rules Associated withTrust Accounts

What This Means for You

Any property manager must have at least one trust account

• Must be in the broker’s name and identified as such

• May be any type of account, including interest-bearing

• Need to set office policy as to whether or not individual properties should have separate accounts

• Best Practice: Have separate trust accounts for security deposit funds and owner cash funds

What This Means for You

Be sure your operating expenses are kept completely separate from any funds you are holding in trust for an owner

•Payroll, office expenses, commissions, etc. all belong in your operating account

•Security deposits, owner cash (e.g. for property repairs), after-expenses rent payments, etc. all belong in a trust account

•Establish an office policy dictating how and when you will transfer owner money (typically from rents) to owner accounts and money that becomes yours to your operating account (typically interest)

What This Means for You

Always be prepared to provide an accurate accounting of any money you hold in trust

•Anytime the person for whom you are holding the money asks for the money, you must provide an accounting (or remit if required) to the person within 30 days

•Be sure any accounting software you use in your office is able to segregate various property accounts, security deposits and owner funds

What This Means for You

Be sure your Property Management Agreements and other paperwork are kept in strict order

•If owner agrees to you earning and keeping interest on trust accounts, be sure your agreement says so

•If you require owners to furnish cash for you to keep on hand, have that provision in your agreement

•Always be able to demonstrate what money you have in trust and to whom it belongs (may be requested by TREC, and owner, or a tenant)

In Case You Missed It

Maintenance of at least one trust account as a property manager is unavoidable

Commingling of broker money with trust money is strictly forbidden

Brokers are ultimately responsible for trust money and trust accounts

Stay up to date and informed about current statute and rules to maintain a compliant operation

Conclusion

Thanks for your participation in our 1st PM Webinar!

Future Topics

A. Lease Paragraph of the TAR Lease – August

B. Credit Reporting – October

C. Security Deposit – December

Questions? Contact the Legal Hotline 800/873-9155

Give us your feedback! Send to: eanderson@texasrealtors.com