Trust accounting is a term that all property management and real estate business owners should be very familiar with. My next couple of posts will cover trust accounting: what trust accounts are, why use them, record keeping and staying out of trouble. These will be great posts to read if you’re not familiar with trust accounting, just need a refresher, or want to make sure you’re properly accounting for trust funds.
What Are Trust Accounts and Why Should You Use Them?
A trust account is usually a separate account set up by a real estate broker or property manager to hold and manage funds that belong to, and are held in trust for, their clients. These clients can be the owners of managed properties and purchasers of real estate for sale. The typical type of funds held in a trust account are security deposits and earnest money. For the purposes of this and the next blog post, I will be concentrating on trust accounting for property managers.
The guidelines and requirements for setting up and maintaining trust accounts can be varied from state to state. But one thing that all states agree upon is that using a trust account in some form is necessary.
One of the recommended guidelines for handling trust accounts is to establish two accounts. You will want to hold security deposits in one account, while rents collected and bill payments are processed through the second account. In some cases, this could be more than the trust account requirements of some states. It is also not very practical for property managers who manage single-family homes.
If you’re curious why you should manage two separate trust accounts, here are just a few of the benefits:
- You will be able to greatly improve your accuracy in presenting your clients with reconciliation reports at the end of each month, including an accurate accounting of all income and expenses. Maintaining two separate trust accounts also makes it easier to track any transaction that goes into or out of the account.
- Property managers can benefit from a thorough understanding of property performance based on the activity maintained for each client. Any disputed transactions can be easily located and verified.
- Maintaining two separate trust accounts also provides a cleaner audit trail by significantly reducing the opportunity to co-mingle funds. Co-mingling of funds is a major point of contention in most trust account audits. If you maintain your trust accounts properly from the beginning, it greatly reduces your chance of being audited by your Real Estate Commission.
If there is any doubt that you are handling your trust accounts correctly, and even if there isn’t, you should make sure you know your state laws. The first place to look for advice and guidelines is from your state-specific Real Estate Commission. Most Real Estate Commissions will have regulations about how you need to register your trust accounts, how you need to maintain them, and what type of record keeping they feel is best for your trust accounts.
Be sure to read my next post which will cover ways that you can stay out of trouble when it comes to your trust accounts and some suggested record-keeping tips!