A Real Estate Broker’s Trust Account provides an arrangement between an investor and a licensed brokerage firm that enables an investor to securely deposit funds with the firm.
A typical trust fund transaction in real estate involves a Broker or salesperson receiving trust funds from a principal in connection with the purchase or lease of real property.
Real Estate trust funds may never be co-mingled with any other accounts. Trust accounts are strictly regulated by the Bureau of Real Estate to protect the consumer.
A real estate broker must manage the accounting records for all trust accounts maintained at banks or other financial institutions. The amount, date of receipt and source of all funds received from clients has to be recorded. It is required that each entry in the trust account ledger be in chronological order. The real estate broker must preserve a separate, sub-account ledger for each owner of the funds and each transaction. Within the general trust account there can be separate sub-accounts for each transaction and for each owner of the funds; in other words, small accounts within a larger general account.
A real estate broker must also keep a record of any funds received from a client that do not get deposited into the broker’s trust account, but are given directly to another party such as a title company. If the funds pass through a broker to another entity, the location and date the funds were forwarded must be recorded.
A real estate broker must do a monthly reconciliation of all deposits, withdrawals, and disbursements in their trust account, as well as the separate sub-account ledgers for each person and each transaction. These records must be kept for at least three years. Most brokers keep them for a longer period of time. Lack of proper accounting records is considered evidence of negligence or incompetence in performing the broker’s duties and can result in suspension or revocation of the broker’s license.
A client can ask for a statement or reconciliation of any funds they have with their real estate broker at any time. The broker should be able to provide the client with a documented statement showing exactly the disposition of the client’s funds at any time.
It is very rare that you hear of a broker misusing any trust account funds. The Bureau of Real Estate requires accounting practices that hold brokers to a high standard of professionalism. Brokers are subject to Bureau of Real Estate audits on a routine basis to insure that proper accounting practices are being employed and that there are no co-mingled or misappropriated funds.
This article was published in the San Francisco Examiner.
Articles are written by Eric Ruxton and Larry Aikins, owners of Terrace Realty, Inc. and Terrace Associates, Inc. in Redwood City. Terrace has been in business more than 55 years and in addition to being an independent Brokerage Company, also owns and operates rental properties.