A Brokerage Account is an arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage, which then carries out the transaction on the investor’s behalf.
A typical trust fund transaction in real estate begins with the Broker or salesperson receiving trust funds from a principle in connection with the purchase or lease of real property.
A real estate broker must manage bookkeeping records for each trust account maintained at any bank or other financial institution. 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 are separate sub-accounts for each transaction and for each owner of the funds; in other words, small accounts within a larger general account.
The real estate broker must also keep a record of any funds they receive from a client that do not get deposited into the broker’s trust account, but are given 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.
The real estate broker must make monthly reconciliation of any deposit, withdrawal or pass through, both in their general and separate sub-account ledger of 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 evidence of negligence and incompetence in performing the broker’s duties and can result in suspension or revocation of the broker’s license.
The client can ask for a statement or reconciliation of any funds they hand 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. However, proper accounting practices hold brokers to a high standard of professionalism. The diligence of maintaining proper accounting grants the broker the ability to prove that deposits and disbursements are proper and not misappropriated.
The Broker of Real Estate has very strict guidelines for all Real Estate Brokers and salespeople to follow regarding trust accounts. Realtors are subject to Bureau of Real Estate audits on a regular basis.
This article was originally written for and appears in the San Francisco Examiner. Eric Ruxton and Larry Aikins are the owners of Terrace Realty Inc. and Terrace Associates Inc., in Redwood City. Terrace has been in business for 60 years and in addition to being an independent Brokerage Company, also owns and operates rental properties.