Trust Account Manual (PDF)PREFACEThis Manual is presented for the purpose of assisting Nebraska real estate brokers in understanding and complying with the basic requirements for properly establishing and maintaining a real estate trust account. All active brokers are required to maintain trust accounts in compliance with the Nebraska Real Estate License Act and the Rules of the Nebraska Real Estate Commission. As used here and throughout this Manual, the word A broker refers to self-employed and employing broker licensees only, not to associate brokers. It should be understood by all licensees that the primary purpose of the Nebraska Real Estate License Act is to protect the public interest. It is the intent of the Nebraska Real Estate Commission to educate real estate licensees concerning their obligations in handling trust funds, and how to properly account for them. The Commission understands that this Manual could not possibly address all situations that a broker may encounter, but it hopes to answer those questions that arise during the normal course of maintaining a real estate trust account. Questions and concerns which the Manual does not appear to address may, as always, be directed to the Nebraska Real Estate Commission. We encourage you to pay close attention to the enclosed information relating to the proper procedures which all brokers who maintain real estate trust accounts are required to utilize. The lack of proper accountability for trust funds is a serious violation of the License Act and Rules, even if it is unintentional. NEBRASKA REAL ESTATE COMMISSION TABLE OF CONTENTS I. GENERAL REAL ESTATE TRUST ACCOUNT INFORMATION
II. REAL ESTATE SALES ACCOUNTS
III. REAL ESTATE PROPERTY MANAGEMENT ACCOUNTS
I. GENERAL INFORMATION A. Broker Responsibility The authority and responsibility for the proper handling of the real estate trust account rests entirely with the broker. It should be noted that the broker may delegate to anyone of his or her choosing the authority to handle trust funds, maintain the trust account records, and even sign checks on the trust account. (This would not, however, include any person who had an interest in the funds maintained in the trust account.) The broker is ultimately responsible for whatever may happen regarding the handling of the trust funds, the trust account, and the attendant records. Therefore, the broker must take an active role in supervising the acts of all persons who handle trust funds and trust account records. This could be achieved by performing a financial institution statement reconciliation and a trial balance at random intervals during the month to monitor the proper handling of trust funds. Brokers are responsible for notifying the Real Estate Commission Office, in writing, whenever a trust account is closed. The written notification should include the account number, the name of the financial institution, and the date on which the account was closed or will be closed. Brokers and their associates should be reminded that violations of the License Act and Rules pertaining to the improper handling of trust funds could result in the suspension or revocation of their real estate license by the Nebraska Real Estate Commission. I. GENERAL INFORMATION B. Establishing a Trust Account The Nebraska Real Estate License Act and Rules of the Commission require each broker to maintain a trust account under the name in which the broker is doing business. Although it is not mandatory, it is suggested that each broker involved in the management of real estate establish a separate trust account for all property management activities, in addition to the trust account established for real estate brokerage activities. To establish a trust account, the following requirements must be followed:
Note: Brokers who operate under any name other than their own must register that name as a "Trade Name" with the Secretary of State. For example, "Tom Jones - Broker" does not need to be registered, but "Jones Real Estate Co." does. Brokers are reminded that, if the trust account is opened with a $-0- balance and there are no deposits or disbursements on the account, the financial institution might close the account because of the $-0- balance and lack of activity, or charge the account for various charges which will result in negative balances, without the consent of or notice to the broker. I. GENERAL INFORMATION C. FDIC Requirements Each trust account must be maintained in an insured financial institution. The following excerpt from an interpretation of the Rules and Regulations of the Federal Deposit Insurance Corporation deals with the recognition of deposit ownership in custodial accounts: "330.101 Recognition of deposit ownership in custodial accounts.
To recap the Federal Deposit Insurance Corporation's requirement:
I. GENERAL INFORMATION D. Unclaimed Trust Funds The Nebraska Real Estate Commission receives numerous inquiries regarding trust funds which have been in the trust account for several years, but have never been claimed by the rightful owner. These funds are usually in the form of earnest monies, uncashed checks, or security deposits. Nebraska State Statutes provide that, although not mandatory, the unclaimed funds "may" be maintained by the broker for a period of five (5) years. The broker must make a determined effort to locate the rightful owner, at least by first class mail to the last known address. If, after attempting to find the rightful owner, the rightful owner cannot be located, then the broker may maintain the funds for five (5) years and then send the unclaimed funds to the State Treasurer, or they may forward the funds to the State Treasurer's Office - Unclaimed Property Division as unclaimed property immediately after determining that the owner cannot be located. Claim can then be made by the rightful owner, should they re-appear, with the Treasurer's Office. For more specific information and the exact procedures for depositing unclaimed funds, contact: Nebraska State Treasurer, Unclaimed Property Division, P.O. Box 94788, Lincoln, NE 68509-4666. I. GENERAL INFORMATION E. Records Storage on Alternative Media Under Title 299, Chapter 3, Section 001, brokers A...must preserve for five years following its consummation records relating to any real estate transaction. Historically, the retention of the records has taken place in the form of paper files for transaction files or, in the case of computerized bookkeeping systems, on computer. With the advance of technology, records can now be stored securely on alternative forms of media, e.g. compact disk, optical disk, microfilm, etc. The Commission=s concerns with alternative media storage of required records are that: 1) the records stored on the alternative medium be able to be readily printed when requested by the Commission; and 2) the records, once stored on the alternative medium, are not able to be rewritten while on the alternative medium. Therefore, the Commission has issued the following guidelines to be used by brokers desiring to retain the required records on a medium other than in original paper format and/or on computer.
II. SALES ACCOUNTS A. Identification of Trust Account For sales or brokerage accounts, the following trust account titles are recommended:
II. SALES ACCOUNTS B. Trust Account Records The Nebraska Real Estate License Act and Rules require each broker to maintain a bookkeeping system which clearly and accurately accounts for all trust funds received and how those trust funds are disbursed. Section G of the Sales Accounts Chapter of this Manual provides the licensee with illustrated examples of trust account bookkeeping for a sales account. Chapter 3-001 of the Commission Rules states, "It shall be the duty of each broker to preserve for five years following its consummation records relating to any real estate transaction." Records which must be maintained by the broker include, but are not limited to:
II. SALES ACCOUNTS C. Broker's Equity "Broker's equity" is a term most frequently used to describe the broker's personal funds which are maintained in the trust account. Title 299, Chapter 3-004 of the Nebraska Real Estate Commission Rules states, in part, "Funds deposited in the trust account will necessarily include monies which will ultimately belong to the broker, but such monies shall be separately identified in his or her trust account records and shall be paid to the broker by check drawn on the trust account after the same are due the broker." As a guideline in establishing the trust account, personal funds may be deposited into the trust account. These funds are to be used for the accounting of transaction fees assessed against the trust account. Transaction fees are more commonly identified as monthly service charges, check printing charges, insufficient fund check charges, etc. These fees must be posted to the broker's equity sub-ledger account, as well as the general ledger, immediately after being notified by the financial institution that the fee was assessed. In fact, all deposits and disbursements from broker's equity should be posted immediately to the general ledger and the broker's equity sub-ledger. Broker's equity can never show a negative balance. Brokers are cautioned that the maintenance of excessive amounts of the broker=s personal funds in the account could cause the trust nature of the account to be placed in jeopardy. The broker's equity portion of the account cannot be used as an "Operating Account" for the purpose of paying general operating expenses on behalf of the broker or his or her real estate firm. In a real estate sales transaction, it is permissible to use broker's equity for the purpose of paying a closing expense on behalf of a seller, prior to the real estate closing. Such disbursement must be posted to the broker's equity sub-ledger and the general ledger. Broker's equity would then be reimbursed on the day of closing, and the appropriate postings made to the sub-ledgers. NOTE: No portion of the earnest money can be used to pay an expense prior to closing, unless the buyer and seller have provided written authorization to do so in advance of said disbursement. Under no circumstances may compensation or consideration be removed prior to closing. II. SALES ACCOUNTS D. Handling Trust Funds - Receipts The Nebraska Real Estate License Act and Rules require that all funds coming into the possession of the broker, while acting in the capacity of a broker, be deposited into an account designated as a "Trust Account." This would include those transactions covered under Title 299, Chapter 2-013, in which the broker is participating as an independent closing agent or as an agent in the transaction. "Trust funds," as defined by the License Act and Rules, may include, but not be limited to, downpayments, earnest money deposits, money received upon final settlement, rents, security deposits, money advanced by a buyer or seller for the payment of expenses in connection with the closing of a real estate transaction, and money advanced by a broker's principal for the payment of expenses on behalf of that principal. When depositing funds into the trust account, the deposit slip must identify the funds deposited to a specific real estate transaction. The dollar amount should be identified to a specific buyer and seller, or the address of the property being sold. Some financial institutions do not return the original deposit slip with the financial institution statement. It is recommended, in these situations, that the duplicate deposit slip be maintained, unremoved from the deposit book, and that the duplicate be date-stamped by the financial institution=s teller at the time of deposit, or that a receipt of deposit be obtained at the time of deposit and attached to the unremoved, duplicate deposit slip. When the broker is both the listing and selling broker in a real estate transaction, the License Act and Rules require the earnest money to be deposited into his or her trust account within 72 hours or before the end of the next banking day after the offer is accepted in writing, unless otherwise provided in the purchase agreement. In a cooperative real estate transaction between brokers, the License Act and Rules require the selling broker, unless all parties having an interest in the funds agree otherwise in writing, to deposit the earnest money into his or her trust account within 72 hours or before the end of the next banking day after the offer is accepted in writing and, without delay, transfer the earnest money to the listing broker by issuing a check, drawn on the selling broker's trust account, made payable to the listing broker. When accepting other than cash or an immediately cashable check as earnest money, the licensee must communicate this fact to the seller prior to his or her acceptance of the offer, and such fact must be shown in the earnest money receipt section of the offer to purchase. In a cooperative real estate transaction between brokers, if the buyer offers a promissory note as an earnest money deposit, the note should be made payable to the listing broker or should be endorsed without recourse by the selling broker to the listing broker. In all situations, the promissory note must be delivered to the listing broker with the offer to purchase. Since both offer and acceptance create a contract, acceptance is normally when the seller signs the offer to purchase and that information has been transmitted to the offering party. For the purpose of depositing earnest money into the trust account, the trust account examiner will use the date of acceptance as indicated by the last party to sign the offer to purchase. The acceptance of the offer to purchase is not when the licensee receives an accepted offer to purchase in the mail from an out-of-town seller or when the buyer and/or seller receipt for a copy of the offer to purchase. In the case of a counter-offer, the acceptance would take place when both parties to the contract have a written understanding and are in total agreement as to the terms and conditions of the contract. In instances where either the seller or buyer is out-of-town and contracts are mailed, the Commission recommends the retention of the envelope so that verification of postmark can be determined. Any changes made to the original offer to purchase should be initialed and dated by both buyer and seller. This would provide for proper determination as to when final acceptance took place, and give evidence of the date of acceptance to be used in determining if the deposit was made in a timely manner. It should be noted that in any situation, the broker may deposit the earnest money into the trust account prior to acceptance, and refund the earnest money if final acceptance of the offer never takes place. In instances where the acceptance of an offer is by facsimile or telegram, the earnest money must be deposited into the trust account within 72 hours or before the end of the next banking day after the facsimile or telegram is received. Once the trust funds have been received by the listing broker and have been deposited into the trust account, the License Act and Rules require the trust funds remain in the trust account until the transaction is closed or otherwise terminated, unless all parties having an interest in the funds have agreed otherwise in writing. To clarify this requirement of the License Act and Rules, the trust funds must be deposited into the broker's trust account and then, if all parties have agreed in writing, the funds may be transferred to the place designated in the written agreement of the parties. If the parties want their funds handled through an interest-bearing account(s), written authorization from all parties having a claim to the funds is required. The written authorization must either be included in the written agreement between the parties or be a separate written authorization, and should include the following: 1) a statement specifying who will earn the interest on the funds; 2) authorization from all parties involved to transfer the funds from the trust account to the interest-bearing account; 3) dated signatures from all parties involved; and 4) the following notice: "Interest-bearing accounts are not examined by the Nebraska Real Estate Commission. It is understood by all parties concerned that placement of funds in such account removes them from the provisions pertaining to trust accounts in the Nebraska Real Estate License Act and the Rules and Regulations of the Nebraska Real Estate Commission." When opening an interest-bearing account, brokers should check with the financial institution as to how the account should be titled. The interest-bearing account may be titled as a "Trust Account," but should not be registered with the Nebraska Real Estate Commission as a real estate trust account. The interest-bearing account will not be examined by the Nebraska Real Estate Commission, and all records relating to the interest-bearing account should be maintained separately. The Social Security Number or the Federal Identification Number of the interest recipient should be provided to the financial institution for taxation purposes. Brokers should also acquire a "No Right of Offset" letter from the financial institution. This letter is an agreement between the broker and the financial institution in which the financial institution agrees not to offset any personal obligations of the broker with the funds deposited to this account. It is recommended that the broker be the only signatory on the interest-bearing account, so that the broker is the only person who can access the funds. In order to establish a paper trail for examination purposes, the broker must deposit the funds into the trust account, then transfer the funds to the interest-bearing account via a check drawn on the trust account. When the transaction has reached the day of closing, the broker should transfer the funds from the interest-bearing account to the trust account and disburse the funds, along with other trust funds received as part of the final settlement, from the trust account. In the event the real estate transaction does not close and there is a dispute over the return of the earnest money, the broker is required to maintain the funds in the trust account until a written release is received from the buyer and seller directing the broker how to disburse the funds, or until civil action is filed, at which time the broker may pay the funds into the court or retain the funds until directed by the court as to the disposition of the funds. In the case of a dispute and in the absence of a pending civil action, the broker will not be subject to disciplinary action by the Nebraska Real Estate Commission if the earnest money deposit is returned to the buyer, based on a good faith decision by the broker that a contingency in the purchase agreement has not been met. Also, it will not be grounds for disciplinary action by the Nebraska Real Estate Commission if, in the case of a dispute and in the absence of a pending civil action and after one year has elapsed from the date of acceptance, the broker pays the earnest money deposit to the seller, based on a good faith decision by the broker that the buyer has abandoned any claim to the funds. Although these provisions of the Rules prohibit disciplinary action against the broker if the Rule is followed, it does not eliminate the possibility of civil action being taken against the broker. Brokers are required to post all receipts and disbursements in chronological order to the general ledger and the applicable sub-ledger(s) as the activity occurs. II. SALES ACCOUNTS E. Handling Trust Funds - Disbursements Title 299, Chapter 3-006, states: "In the case of cooperative sales between brokers, the selling broker shall deposit the earnest money payment in his or her trust account within 72 hours or before the end of the next banking day after an offer is accepted, in writing, and then forthwith transfer such earnest money deposit to the listing broker by issuing a check drawn on the selling broker's trust account; Provided, that if for any reason the earnest money check tendered to the selling broker is returned by the bank unpaid, selling broker shall forthwith notify the listing broker who shall immediately refund from his or her trust account the earnest money deposit which has been tendered by the selling broker." The seller should be informed immediately if a check is returned for insufficient funds. The closing of a real estate transaction may be handled by licensed real estate brokers; licensed attorneys; title insurance agents licensed and authorized to engage in escrow activities; and persons or entities regulated by the State Banking Department, the Federal Deposit Insurance Corporation, the Federal Office of Thrift Supervision, the Federal Farm Credit Administration, or the National Credit Union Administration, unless prohibited by statute, rule, or regulation. The requirements for a third party closing are further discussed in Section F of the Sales Accounts Chapter of this Manual. Generally speaking, the listing broker should understand that the License Act and Rules require that no funds may be disbursed prior to a real estate closing without the written consent of all parties having an interest in the funds. This consent must authorize the broker to use all, or part, of the trust funds to pay certain closing expenses prior to closing. In no case, however, may the broker be paid any part of his or her compensation or consideration, prior to the closing of the real estate transaction. It should be emphasized that the broker is not entitled to compensation or consideration until the transaction is closed or otherwise consummated. Obtaining the written consent of the parties authorizing such compensation or consideration payment is strictly prohibited, and would constitute a serious violation of the License Act and Rules. Also, no portion of earnest money can be used to pay any expense prior to closing, unless the buyer and seller have given written authorization prior to the disbursement. All funds received by the listing broker at or before closing are considered to be trust funds, and must be deposited and disbursed from the trust account at the time of closing. Therefore, all funds pertaining to a particular real estate transaction should be disbursed on the date of closing. Exceptions may include situations in which the broker is required to escrow certain funds to pay bills which may not have been received prior to closing, or if the written permission of all parties has authorized prior disbursements as set forth previously. Real estate brokers, as well as other entities authorized to close real estate transactions, are required to have "good funds" available for disbursement at the time of closing a real estate transaction. "Good funds" are defined as: (a) lawful money of the United States; (b) wired funds when unconditionally held by the real estate closing agent; (c) cashier's checks, certified checks, bank money orders, or teller's checks issued by a federally insured financial institution and unconditionally held by the real estate closing agent; or (d) United States treasury checks, federal reserve checks, federal home loan financial institution checks, State of Nebraska warrants, and warrants of a city of the metropolitan or primary class. "Federally insured financial institution," as used above, is defined as an institution in which the monetary deposits are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. (Note: Brokers should understand that the definition of "federally insured financial institution" as used here only applies to "good funds," and should not be confused with where a trust account can be placed. For information on where a trust account can be placed, see section on "Establishing a Trust Account.") Once the real estate transaction has closed, the listing broker is required to provide the buyer and seller a complete accounting of all trust funds received and how those funds were disbursed. This is done by providing the buyer and seller with a detailed closing statement which accounts for all funds received and how those funds were disbursed. The listing broker must maintain, within his records, a copy of each statement. Although some real estate companies have developed a policy which requires the closing statement to be signed by the buyer or the seller, this is not a requirement of the License Act or Rules, but would serve as evidence of receipt. Earned compensation or consideration should always be removed from the trust account at the time of closing, and are always due and payable to the listing broker, or to the operating account under which the listing broker is doing business, upon closing. All compensation splits with sales associates or other real estate brokers must be paid from the listing broker's operating account and not the trust account. When compensation or consideration is received by the selling broker, it should be deposited directly into the operating account of the selling broker and disbursed, if necessary, from there. (It should be noted by all licensees that the Real Estate Commission does not get involved in disputes between licensees over the payment or division of compensation or consideration.) The broker must ensure that sufficient funds are available, at all times, to cover any check issued on the date of issuance. As previously noted, brokers are required to post all receipts and disbursements in chronological order to the general ledger and the applicable sub-ledger as the activity occurs. II. SALES ACCOUNTS F. Third Party Closings Under Neb. Rev. Stat. ' 76-2,121 through 76-2,123, the closing of a real estate transaction may be handled by licensed real estate brokers; licensed attorneys; title insurance agents licensed and authorized to engage in escrow activities; and persons or entities regulated by the State Banking Department, the Federal Deposit Insurance Corporation, the Federal Office of Thrift Supervision, the Federal Farm Credit Administration, or the National Credit Union Administration, unless prohibited by statute, rule, or regulation. When the listing broker utilizes the services of any third party closing agent identified above, certain authorizations from the buyer and seller are required. It is the responsibility of the broker(s) involved in the transaction to ensure that these authorizations are in place. Once the listing broker has received an accepted offer to purchase and has received the earnest money, the trust funds must be deposited into the trust account and remain there until closing. If a third party will be utilized to close the transaction, the broker must:
Although the third party closing agent may prepare the closing statements of the buyer and seller, it remains the responsibility of the listing broker to ensure that a copy of the closing statement is delivered to both the buyer and seller. The broker must also retain a copy of each closing statement in the transaction file. It is the position of the Nebraska Real Estate Commission that should any broker use any entity other than those third party closing agents identified above to close a real estate transaction, such broker would be in violation of the Nebraska Real Estate License Act, Section 81-885.24(29), and that such violation could result in disciplinary proceedings being instituted against the broker. Licensed title insurance agents authorized to engage in escrow activities would not include entities formed by title insurance companies or agents which are not subject to licensing and regulation by the Nebraska Department of Insurance under the Nebraska Title Insurance Act. Subsidiary entities not regulated under the Nebraska Title Insurance Act would not be qualified closing entities under this policy. Authorized and licensed title insurance agents must actually complete or supervise the closing. Brokers may close transactions for third parties under 299 NAC 2-013. This normally occurs in one of two scenarios: 1) the broker becomes involved in the transaction after the written purchase agreement has been entered into by both parties; and 2) the broker becomes involved in the transaction before a written purchase agreement has been entered into by the parties. Scenario 1: Broker involved after written agreement by the parties:
Scenario 2: Broker involved before written agreement by the parties:
II. SALES ACCOUNTS G. Trust Account Bookkeeping - Illustrated 1. Manually Posted Systems The Nebraska Real Estate License Act and Rules require each broker to maintain a bookkeeping system which will clearly and accurately account for all trust funds received and how those trust funds are disbursed. Once the broker has established the proper trust account records, they are maintained by recording the entries as cash or checks deposited or checks paid out. When funds are deposited, the accounting process consists of preparing a deposit slip, recording the deposit in the general ledger, recording the deposit on the individual sub-ledger, depositing the trust funds into the trust account, and preparing a transaction file. A disbursement consists of preparing the check, recording the check in the general ledger, recording the check on the individual sub-ledger, and mailing the check to the payee. "Bookkeeping system," as defined, implies that a separate record be maintained in some type of organized fashion. The basic requirement for a bookkeeping system is based on a cash-in/cash-out basis. The following recommendations are minimal for any bookkeeping system implemented by the broker.
NOTE: All receipts and disbursements must be posted in chronological order to both the general ledger and the applicable sub-ledger(s) at the time at which they occur. The posting of receipts and disbursements several days after the activity occurs is an unacceptable accounting practice. This would include the posting of insufficient fund checks returned by a financial institution, refunds of earnest monies to a buyer, transfers of earnest money to the listing broker or to a third party, and the like. The following examples illustrate the process of accounting for receipts and disbursements for several real estate transactions. For simplicity, receipt transactions are shown first, followed by the related disbursements and, finally, the process of reconciling the financial institution statement to the general ledger and sub-ledgers. Example1: Recording the deposit of broker's money, i.e. broker's equity, to open the trust account for Tom Jones, Broker. On April 1 of the current year, $100.00 belonging to Tom Jones was deposited to open the trust account. On April 5, the financial institution charged $20.00 to the trust account for check printing fees, which were recorded when notice of the charge was received from the financial institution. The proper entries are shown as follows: Deposit
Slip dated April 1
General Ledger Entry
Example 2: Recording a buyer's earnest money deposit. Property is listed by Tom Jones and sold by Sara Stone. On April 8, Tom Jones received a $1,000.00 check from Sara Stone representing an earnest money deposit from Mary Smith for the property located at 1717 South Hawkins Drive. The seller is Henry Wright. This receipt is recorded on the books of Tom Jones (listing broker) as follows: Deposit Slip dated April 8
Sub-Ledger Entry
General Ledger Entry
Example 3: Recording a buyer's earnest money deposit when the property is listed by another broker, Sara Stone, and sold by Tom Jones. On April 12, the broker received a $750.00 earnest money check from buyer Mark Hadley, which represents an earnest money deposit for 2106 Arbor Drive. The seller is Angela Brown. This receipt is recorded on the books of Tom Jones (selling broker) as follows: Deposit Slip dated April
12
Sub-Ledger Entry
General Ledger Entry
Example 4: Recording the transfer of earnest money from the selling broker to the listing broker. On April 13, Tom Jones issued check number 101 to the listing broker, Sara Stone. This disbursement is recorded on the books of Tom Jones as follows: Sub-Ledger Entry
General Ledger Entry
Example 5: Recording a real estate transaction which is closed by the listing broker (Tom Jones). The closing of the sale on 1717 South Hawkins Drive was held in the listing broker's office on April 22. The listing broker received buyer loan proceeds in the amount of $23,746.10, and the broker issued checks numbered 102 through 108 as shown below: Deposit Slip dated April 22
Sub-Ledger Entry
General Ledger Entry
Example 6: The financial institution statement for April of the current year was received on May 5. The ending cash balance, per the financial institution statement as of April 30, was $4025.10. On April 30, a monthly maintenance charge of $5.00 was assessed by the financial institution, which had not been recorded on the general ledger or the sub-ledger for broker's equity. The financial institution statement also shows that checks numbered 101, 103, 104, and 107 have cleared the trust account prior to April 30 and appear on the statement. Checks numbered 102, 105, 106, and 108 are still outstanding as of April 30. The monthly maintenance charge will be recorded on the books of Tom Jones as follows: Sub-Ledger Entry
General Ledger Entry
Example 7: The reconciliation of the April 30 financial institution statement would appear as follows: Statement Reconciliation Worksheet
A basic accounting equation has been illustrated and proven as follows: Reconciled Financial Institution Statement Balance ($75.00) equals General Ledger Balance ($75.00) equals the total of all Sub-Ledgers ($75.00). In addition to the above, the checkbook balance, which has not been illustrated, should also be $75.00. If all the above balances do not agree, then a posting error has been made and the broker should immediately review the bookkeeping entries made during the period of the financial institution statement for accuracy. The financial institution statement must be reconciled in a timely manner after receipt. It is recommended that a list of all sub-ledgers with a cash balance be prepared as of the period ending date shown on the financial institution statement, and attached to the financial institution statement. It should be noted that the total cash balance of this list must agree with the reconciled financial institution statement balance and the checkbook balance. II. SALES ACCOUNTS G. Trust Account Bookkeeping - Illustrated 2. Computerized Systems For trust account examination purposes, computerized bookkeeping systems must provide the same bookkeeping records as if the broker were maintaining a manually-posted bookkeeping system as described in the preceding pages. The system must be posted current at all times. The computer program must be capable of generating a general ledger which accounts for the income and expenses relating to all transactions on a day-to-day basis, and sub-ledgers which account for the income and expenses relating to each specific transaction on a day-to-day basis. The ledger and sub-ledgers must be a debit/credit/ledger balance format, with a specific ledger balance identified after each bookkeeping entry. (See examples on following pages.) Income and expenses must be posted in chronological order and on a current basis at all times. All data entered into the computer system should be transferred to hard copy as soon as practical to prevent the loss of information due to any unforeseen circumstances, and to avoid excessive printing delays at the time of the trust account examination. The trust account examiner will not examine information directly from the computer screen. Canceled, voided, and unused checks must be maintained for trust account examination purposes, just as required in the manual system. The computer program must also be capable of generating, upon request, a current Trial Balance which identifies the ledger balance of trust funds for a specific transaction as of a specific date. This Trial Balance report should be attached to the financial institution statement, and used only to check that the sum of the individual sub-ledger funds equals the reconciled financial institution balance and the checkbook balance. The Trial Balance report, and any other financial-type report, will not be accepted as a bookkeeping system itself, because it does not identify the specific bookkeeping entries that were required to arrive at the ledger balance. The Trial Balance report will be used only as supporting documentation for the bookkeeping system. The broker is reminded of the fiduciary responsibility to the principals. It is the intent of the Commission to ensure that the bookkeeping system clearly and accurately accounts for all trust funds received and disbursed, and to ensure that a balance is identified on the general ledger and each sub-ledger after each bookkeeping entry. Example 1: Debit, Credit, and Ledger Balance Format This computer-generated transaction sub-ledger is acceptable under the guidelines established by the Nebraska Real Estate Commission. All bookkeeping entries are posted in chronological order, and the balance is shown after each entry. NOTE: Posting to both the general ledger and appropriate sub-ledger(s) is described in Section G, Subsection 1, of the Sales Account Chapter of this Manual. An account balance must be provided after each bookkeeping entry. Sub-Ledger Entry SELLER: Henry Wright PROPERTY ADDRESS: 1717 S. Hawkins DATE DESCRIPTION CK# DEBIT CREDIT BALANCE 4-08
Earnest Money - Mary Smith 1,000.00 1,000.00 Example 2: Dollar Amount and Balance Format This computer-generated property sub-ledger is acceptable under the guidelines established by the Nebraska Real Estate Commission. All bookkeeping entries are posted in chronological order, and the balance is provided after each entry. NOTE: Posting to both the general ledger and appropriate sub-ledger(s) is described in Section G of the Sales Account Chapter of this Manual. An account balance must be provided after each bookkeeping entry. Sub-Ledger Entry SELLER: Henry Wright PROPERTY ADDRESS:
1717 S. Hawkins DATE DESCRIPTION CK.# AMOUNT BALANCE 4-08 Earnest Money - Mary Smith 1,000.00 1,000.00 II. SALES ACCOUNTS H. Trust Account Examinations The Nebraska Real Estate Commission has an active trust account examination program, which is designed to be educational and help acquaint brokers with the requirements for proper record keeping and their obligation in handling trust funds, as well as to determine the compliance level being achieved by brokers. Each broker can expect to have each trust account examined on an irregular schedule, and the examination is unannounced. The trust account examination process generally takes only a few hours. During this period, the examiner will verify that the financial institution statements have been reconciled and will perform a random inspection of transaction files, both pending and closed. The examiner will also review, on a random basis, the entries to the bookkeeping system and the supporting documentation to ensure full compliance with the License Act and Rules. The Commission requires that posting to the bookkeeping system be current at all times. Since the examinations are unannounced, the broker needs to ensure that posting is current so that the examiner can complete the examination in an accurate and efficient manner. It is also of assistance to the examiner if key personnel, other than the broker, are aware of the location of the trust account records, in case the broker is not available at the time the examiner arrives. The broker will be asked to provide the following records for the period being examined:
The broker can make the examination process more efficient by maintaining the files and records in a neat and orderly fashion. The examiner will review the listing and purchase agreements, closing statements of both buyer and seller, and any written agreements between the principals which might have an effect on the way the transaction is or was to be handled. The examiners do not review the general business records of the broker, and it is recommended that those records be maintained separate from the trust account records. III. PROPERTY MANAGEMENT ACCOUNTS A. Identification of Trust Account For property management accounts, the following trust account titles are recommended:
If preferred, the broker may simply precede the words "Trust Account" by the word "Management" only. It is also recommended that security deposits, if held by the broker, be held in a separate trust account. In the case of a security deposit trust account, the words "Trust Account" would be preceded by "Security Deposit". In instances where a broker manages property for more than one owner, or many properties for one or more owners, the broker may want to establish separate trust accounts for each owner or for each property. After indicating in the trust account title the name under which the broker is doing business, the following would be examples of appropriate titles:
III. PROPERTY MANAGEMENT ACCOUNTS B. Trust Account Records The Nebraska Real Estate License Act and Rules require each broker to maintain a bookkeeping system which will clearly and accurately account for all trust funds received, and how those trust funds are disbursed. Section F of the Property Management Chapter of this Manual provides the licensee with illustrated examples of trust account bookkeeping for a property management account. Chapter 3-001 of the Commission Rules states, "It shall be the duty of each broker to preserve for five years following its consummation records relating to any real estate transaction." Records which must be maintained by the broker include, but are not limited to:
III. PROPERTY MANAGEMENT ACCOUNTS C. Broker's Equity "Broker's equity" is a term most frequently used to describe the broker=s personal funds which are maintained in the trust account. Title 299, Chapter 3-004 of the Nebraska Real Estate Commission Rules states, in part, "Funds deposited in the trust account will necessarily include monies which will ultimately belong to the broker, but such monies shall be separately identified in his or her trust account records and shall be paid to the broker by check drawn on the trust account after the same are due the broker." As a guideline in establishing the trust account, personal funds may be deposited into the trust account. These funds are to be used for the accounting of transaction fees assessed against the trust account. Transaction fees are more commonly identified as monthly service charges, check printing charges, insufficient fund check charges, etc. These fees must be posted to the broker's equity sub-ledger account, as well as the general ledger, immediately after being notified by the financial institution that the fee was assessed. In fact, all deposits and disbursements from broker's equity should be posted immediately to the general ledger and the broker's equity sub-ledger. Broker's equity can never show a negative balance. Brokers are cautioned that the maintenance of excessive amounts of the broker=s personal funds in the account could cause the trust nature of the account to be placed in jeopardy. The broker's equity portion of the account cannot be used as an "Operating Account" for the purpose of paying general operating expenses on behalf of the broker or his or her real estate firm. A common violation found during examinations of property management trust accounts occurs when the broker issues a check on the trust account to pay an expense on behalf of the owner, but the owner does not have sufficient funds available in the account to cover the expense. Since the owner had insufficient funds available, the broker has used another owner's funds to cover the expense. This is a violation of the Nebraska Real Estate License Act and the Rules and Regulations of the Commission. To eliminate the possibility of a negative fund balance for an owner, the broker may remedy the situation by performing any of the following prior to the account going into a negative cash situation:
In alternatives 2 and 3, the broker must understand that, once a personal loan is made, either from the broker's operating account or the broker's equity account, the funds immediately become the property of the owner and no longer belong to the broker. Once the property sub-ledger account has sufficient funds available, the broker should immediately reimburse the operating account or the broker's equity sub-ledger account, and record the transaction in the general ledger and the appropriate sub-ledgers. III. PROPERTY MANAGEMEN ACCOUNTSD. Handling Trust Funds - Receipts The Nebraska Real Estate License Act and Rules require all funds coming into the possession of the broker, while acting in the capacity of a broker, be deposited into an account designated as a "Trust Account." "Trust funds," as defined by the License Act and Rules, may include, but not be limited to, downpayments, earnest money deposits, money received upon final settlement, rents, security deposits, money advanced by a buyer or seller for the payment of expenses in connection with the closing of a real estate transaction, and money advanced by a broker's principal for the payment of expenses on behalf of that principal. Once the property manager has collected any rents, security deposits, or any other trust funds which might be considered the property of the owner, these funds must be deposited into the trust account in a timely fashion. Once the trust funds, which belong to the owner, have been received by the broker and have been deposited into the trust account, the License Act and Rules require that the trust funds remain in the trust account unless the owner has agreed otherwise in writing. In this case, the written management agreement between the broker and owner should dictate how the owner's trust funds are to be handled. Rent monies may be deposited directly into the broker's trust account by a lessee, provided that the financial institution immediately sends a receipt to the broker which identifies the remitter's name and the amount received, to establish a paper trail for examination purposes. Other fees which are charged to the tenant, such as late rent payment fees or insufficient fund check charges, are always considered as income for the owner, unless the written management agreement clearly authorizes the broker to earn such fees in addition to the management fee. When depositing funds into the trust account, the deposit slip must itemize the funds to clearly identify each dollar amount to a specific tenant and rental property address. Some financial institutions do not return the original deposit slip with the financial institution statement. In this situation, it is recommended that the duplicate deposit slip be maintained, unremoved from the deposit book, and that the duplicate be date-stamped by the teller at the time of deposit, or that a receipt of deposit be obtained at the time of deposit, and attached to the unremoved, duplicate deposit slip. Cash payments of any kind, i.e. rent, security deposits, etc., must go through the trust account. Once a security deposit has been deposited into the trust account, the security deposit must remain in the trust account unless the tenant and the owner have agreed otherwise, in writing, as to the disposition of the security deposit. Written authorization will normally occur in the management and lease agreement. In the absence of written authorization from all parties having an interest in the funds, i.e. the tenant and the owner, the security deposit must be maintained by the broker in the trust account. Security deposits held in the same trust account with owner's funds should be separately identified in the accounting system. This can be done by establishing separate sub-ledgers for the security deposits and for the owner's other funds, thereby eliminating the possibility of using a portion of the security deposits to pay the operating expenses of the owner. In residential property management only, while the security deposit is maintained by the broker, it cannot be used to pay the operating expenses of the property owner unless both the tenant and the owner have given written authorization. In commercial property management, the security deposit may be used to pay operating expenses of the owner, as long as the owner and tenant do not stipulate that the security deposit is to be held in the broker's trust account. If both the lease agreement and the management agreement state that the security deposit is to be maintained by the owner, and if the tenant's check is made out to the broker, then the broker shall deposit the security deposit in the trust account and then remit the security deposit to the owner via a check drawn on the trust account. In this situation, it would be the owner's responsibility to return the deposit, not the broker's. If both the lease agreement and the management agreement state that the security deposit is to be maintained by the owner, and if the tenant's check is made out to the owner, the check would not need to be deposited into the trust account prior to sending it to the owner, even if the check comes into the possession of the broker. In this situation, the broker would simply forward the check to the owner. If both the lease agreement and the management agreement state that the security deposit is to be maintained by the owner, the owner may authorize the broker to use the security deposit to pay operating expenses. Any security deposit paid to the property owner must be authorized in both the management agreement and the lease agreement. The only time the management agreement does not have to state that the security deposit is to be maintained by the owner is when the lease agreement names the owner as the landlord, and each lease agreement is signed by the owner. If the owner wants his or her funds (other than security deposits maintained by the broker) to be handled through an interest-bearing account(s), written authorization from the owner is required. The written authorization must either be included in the written agreement between the parties or be a separate written authorization, and should include the following: a statement specifying who will earn the interest on the funds; authorization from the owner to transfer the funds from the trust account to the interest-bearing account; a dated signature from the owner; and the following notice: "Interest-bearing accounts are not examined by the Nebraska Real Estate Commission. It is understood by all parties concerned that placement of funds in such account removes them from the provisions pertaining to trust accounts in the Nebraska Real Estate License Act and the Rules and Regulations of the Nebraska Real Estate Commission." For security deposits, written authorizations from both the owner and the tenant are required. When opening an interest-bearing account, brokers should check with the financial institution as to how the account should be titled. The interest-bearing account may be titled as a "Trust Account," but should not be registered with the Nebraska Real Estate Commission as a real estate trust account. The interest-bearing account will not be examined by the Nebraska Real Estate Commission, and all records relating to the interest-bearing account should be maintained separately. The Social Security Number or the Federal Identification Number of the interest recipient should be provided to the financial institution for taxation purposes. Brokers should also acquire a "No Right of Offset" letter from the financial institution. This letter is an agreement between the broker and the financial institution in which the financial institution agrees not to offset any personal obligations of the broker with the funds deposited to this account. It is recommended that the broker be the only signatory on the interest-bearing account, so that the broker is the only person who can access the funds. In order to establish a paper trail for examination purposes, the broker must deposit the funds into the trust account, then transfer the funds to the interest-bearing account via a check drawn on the trust account. The only exception is when the rent checks are made payable to the owner per the lease agreement, and the management agreement calls for the use of an interest-bearing account instead of a trust account. In that case, the rent checks may be deposited directly to the interest-bearing account even if they come into the possession of the broker. If a satellite office, e.g. the rental office at an apartment complex, collects rent checks or cash rent payments, and the satellite office is at a location where the main depository for trust funds is not readily accessible, a trust account should be established near the satellite office so that the trust funds may be deposited in a timely fashion. The satellite office would prepare the itemized deposit slip, deposit the trust funds, and forward the duplicate deposit slip to the main office, where the rents could be posted to the bookkeeping system and expenses could be paid. Trust funds should be transferred directly from the satellite trust account to the main depository account. A general ledger and/or sub-ledger(s) would need to be maintained on the satellite trust account, following the same procedures as the main trust account. Obviously, when transferring funds to the main depository, the applicable ledgers would need to be posted accordingly to establish a paper trail for examination purposes. III. PROPERTY MANAGEMENT ACCOUNTSE. Handling Trust Funds - Disbursements Once trust funds are deposited into the trust account, the written management agreement usually dictates how those funds should be handled. The Commission will assume that all disbursements are to be made from the trust account and are supported by a vendor invoice, and that the payment of such invoice has been authorized by the owner, unless otherwise outlined in the written management agreement. All expenses paid on behalf of the owner must be paid from the trust account, regardless of whether the funds are held in an interest-bearing account, unless otherwise specified in writing by the owner. Property management fees are normally determined by a written management agreement, and should be removed from the property sub-ledger account when due the broker. Removal of the management fees can be accomplished by issuing a check drawn on the trust account for each management fee earned, or by transferring the management fee to the broker's equity sub-ledger account. The transfer to the broker's equity would be accomplished by journal entries which would lower the fund balance on the property sub-ledger account and increase the fund balance on the broker's equity sub-ledger account. The transfer of fees to the broker's equity sub-ledger account allows the broker to remove from the trust account, via a check drawn on the trust account, several management fees at one time versus issuing a check for each management fee. A broker is also prohibited from authorizing a financial institution to automatically remove trust funds, such as a mortgage payment, from the trust account. The prohibition is due to the fact that an automatic debit on the trust account occurs even if funds are not available to cover the expense. This could result in an unnecessary service charge or overdraft charge against the trust account and the property owner. It would also create a negative balance to the owner's funds, which would be a violation of the License Act and Rules. It is the responsibility of the broker to initiate all disbursements from the trust account by the issuance of a check or wire transfer drawn on the trust account, and to ensure that concurrent posting occurs. The broker must ensure that sufficient funds are available, at all times, to cover any check issued on the date of issuance. III. PROPERTY MANAGEMENT ACCOUNTS F. Trust Account Bookkeeping - Illustrated 1. Manually Posted Systems The Nebraska Real Estate License Act and Rules require each broker to maintain a bookkeeping system which will clearly and accurately account for all trust funds received and how those trust funds are disbursed. Once the broker has established the proper trust account records, they are maintained by recording the entries as cash or checks deposited or checks paid out. When funds are deposited, the accounting process consists of preparing a deposit slip, recording the deposit in the general ledger, recording the deposit on the property or owner's sub-ledger, depositing the funds into the trust account, and preparing a client transaction file, if one has not previously been prepared. A disbursement consists of preparing the check, recording the check in the general ledger, recording the check on the property or owner's sub-ledger, and mailing the check to the payee. "Bookkeeping system," as defined, implies that a separate record be maintained in some type of organized fashion. The basic requirement for a bookkeeping system is based on a cash-in/cash-out basis. The following recommendations are minimal for any bookkeeping system implemented by the broker.
Posting to the general ledger and sub-ledger of receipts and disbursements must occur concurrent to the time at which this activity occurs and in chronological order. This includes the posting of insufficient fund checks returned by a financial institution, refunds, and the like. If the trust funds of multiple owners (2 or more), and/or tenant security deposits, and/or broker's funds (broker's equity) are maintained in one trust account, the posting to the bookkeeping system must be done at the time of receipt of funds or disbursement of funds. If a separate management trust account is maintained for each owner or each property managed, and the trust funds in the trust account are not commingled with those of another owner or any security deposits, the posting of income and expenses would only need be completed through the date of the last monthly financial institution statement received, but never more than five weeks in arrears. Brokers in this situation must receive monthly financial institution statements. This would provide the broker with sufficient time to reconcile the current financial institution statement and post the activity to the bookkeeping system. If the current financial institution statement has been received, the broker must make reconciliation and posting of all current activity a priority item so that a trust account examination could be completed through the date of the last financial institution statement received. Broker's equity may be commingled if it is accurately identified at all times. The broker must ensure that sufficient funds are available in the trust account at all times to cover any check issued on the date of issuance. Any overdraft charges assessed the trust account are considered a violation of the License Act and/or Rules of the Commission, and should be charged to the broker, not the owner. "Floating" checks in anticipation of future deposits is strictly prohibited. The following examples illustrate the process of accounting for the income received and the expenses paid on a residential property managed by Tom Jones, broker. For simplicity, we will show how the sub-ledgers would appear after several months of bookkeeping entries, instead of illustrating the recording of each receipt and disbursement. Deposit slips should be completed as outlined in Chapter 2, Section G, with the remitter's name, the type of payment, and the property address noted (Bill Johnson, Feb. Rent for 3767 A St.). Example 1: The broker has assumed his duties as "Property Manager" under a fully-executed management agreement which authorizes the broker to collect a management fee of 8% per month, and requires the broker to maintain the security deposit in the trust account. The rent will be $425.00 per month, with a security deposit equal to one month's rent. The property sub-ledger account would appear as follows: Sub-Ledger
* On February 1, the broker had an option to pay the management fee of $34.00 and/or the invoice for $166.21. Since there were insufficient funds available to pay the invoice, the broker decided to make a personal loan of $26.21 to the owner and pay the invoice for $166.21, and wait until there were sufficient funds in the account to pay the management fee. If the broker had paid the invoice for $166.21 without making the loan, the owner's account balance would have been overdrawn in the amount of $26.21, and the broker would have been in violation of the Nebraska Real Estate License Act and Rules of the Commission. Example 2: Security deposit sub-ledger account. On January 2, the broker also received a security deposit of $425.00 from the tenant, as stipulated in the lease agreement. The management agreement and the lease agreement both state the security deposit will be held by the broker and not the owner. Therefore, the broker immediately deposited the security deposit in the trust account. Although not illustrated, the broker is reminded that all entries must be posted to both the general ledger and the appropriate sub-ledger as set forth at the beginning of this Subsection. The security deposit sub-ledger would appear as follows: Sub-Ledger
The security deposit was posted to a separate sub-ledger so that the funds would not be inadvertently used to pay the expenses of the owner. Until a residential lease is terminated, the broker cannot apply the security deposit to unpaid rent or damages. The broker cannot transfer the security deposit to the owner unless the broker obtains the written permission of both the tenant and the owner, since both agreements stipulate that the security deposit will be held by the broker. Example 3: Broker's equity sub-ledger account. On February 1, the broker made a personal loan of $26.21 to the owner in order to pay the invoice for $166.21. The journal entry would appear as follows: Sub-Ledger
Example 4: General Ledger Entries. Note that the journal entries regarding the sub-ledger loan from broker=s equity are not recorded on the general ledger, because they do not affect the general ledger balance. General Ledger
The financial institution statement must be reconciled in a timely manner after receipt, as outlined in Chapter 2, Section G. It is recommended that a list of all sub-ledgers with a cash balance be prepared, as of the period ending date shown on the financial institution statement, and attached to the financial institution statement. The total cash balance of this list must agree with the reconciled financial institution statement balance and the checkbook balance. III. PROPERTY MANAGEMENT ACCOUNTSF. Trust Account Bookkeeping - Illustrated 2. Computerized Systems For trust account examination purposes, computerized bookkeeping systems must provide the same bookkeeping records as if the broker were maintaining a manually-posted bookkeeping system as described in the preceding pages. The computer program must be capable of generating a general ledger which accounts for the income and expenses relating to all properties on a day-to-day basis, and sub-ledgers which account for the income and expenses relating to each specific property on a day-to-day basis. (Note the exception for separate accounts specified earlier in this Chapter.) The ledger and sub-ledgers must be a debit/credit/ledger balance format, with a specific ledger balance identified after each bookkeeping entry. (See examples on following pages.) Income and expenses must be posted in chronological order and on a current basis at all times. (Note the exception for separate accounts specified earlier in this Chapter.) All data entered into the computer system should be transferred to hard copy as soon as practical to prevent the loss of information due to any unforeseen circumstances, and to avoid excessive printing delays at the time of the trust account examination. The trust account examiner will not examine information directly from the computer screen. Canceled, voided, and unused checks must be maintained for trust account examination purposes, just as required in the manual system. The computer program must also be capable of generating, upon request, a current Trial Balance which identifies the ledger balance of trust funds for a specific owner, property address, or security deposit as of a specific date. This Trial Balance report should be attached to the financial institution statement, and used only to check that the sum of the individual sub-ledger funds equals the reconciled financial institution balance and the checkbook balance. The Trial Balance report, and any other financial-type report, will not be accepted as a bookkeeping system itself, because it does not identify the specific bookkeeping entries that were required to arrive at the ledger balance. The Trial Balance report will be used only as supporting documentation for the bookkeeping system. The broker is reminded of the fiduciary responsibility to the principals. It is the intent of the Commission to ensure that the bookkeeping system clearly and accurately accounts for all trust funds received and disbursed, and to ensure that a balance is identified on the general ledger and each sub-ledger after each bookkeeping entry. Example 1: Debit, Credit, and Balance Format This computer-generated property sub-ledger is acceptable under the guidelines established by the Nebraska Real Estate Commission. All bookkeeping entries are posted in chronological order, and the balance is shown after each entry. NOTE: Posting to both the general ledger and appropriate sub-ledger(s) is described in Section F of the Property Management Chapter of this Manual. An account balance must be provided after each bookkeeping entry. Sub-Ledger Entry OWNER: Terry Smith
TENANT: T & B Farms DATE DESCRIPTION CK# DEBIT CREDIT BALANCE 1-02 Balance forward
3,302.98
Example 2: Dollar Amount And Balance Format This computer-generated property sub-ledger is acceptable under the guidelines established by the Nebraska Real Estate Commission. All bookkeeping entries are posted in chronological order, and a balance is shown after each entry. NOTE: Posting to both the general ledger and appropriate sub-ledger(s) is described in Section F of the Property Management Chapter of this Manual. An account balance must be provided after each bookkeeping entry. Sub-Ledger Entry OWNER: Terry Smith
TENANT: T & B Farms DATE DESCRIPTION CK# AMOUNT BALANCE 1-02 Balance forward
3,302.98
III. PROPERTY MANAGEMENT ACCOUNTSG. Trust Account Examinations The Nebraska Real Estate Commission has an active trust account examination program, which is designed to be educational and help acquaint brokers with the requirements for proper record keeping and their obligation in handling trust funds, as well as to determine the compliance level being achieved by brokers. Each broker can expect to have each trust account examined on an irregular schedule, and the examination is unannounced. The trust account examination process generally takes only a few hours. During this period, the examiner will verify that financial institution statements have been reconciled and will perform a random inspection of the files related to properties managed, including currently-managed properties, those no longer being managed, and those for which management was terminated during the period being examined. The examiner will also review, on a random basis, the entries to the bookkeeping system and the supporting documentation to ensure full compliance with the License Act and Rules. The Commission requires that posting to the bookkeeping system be current at all times. (Note exception for separate accounts as set forth in Section F of the Property Management Chapter of this Manual.) Since the examinations are unannounced, the broker needs to ensure that posting is current so that the examiner can complete the examination in an accurate and efficient manner. It is also of assistance to the examiner if key personnel, other than the broker, are aware of the location of the trust records, in case the broker is not available at the time the examiner arrives. The broker will be asked to provide the following records for the period being examined:
The broker can make the examination process more efficient by maintaining the files and records in a neat and orderly fashion. The examiners do not review the general business records of the broker, and it is recommended that those records be maintained separate from the trust account records. III. PROPERTY MANAGEMENT ACCOUNTS H. Ownership Interest If a broker owns the majority interest in a piece of real estate (50.1% or better) or is acting as a general partner, and that real estate is being managed by the broker/owner or broker/general partner, the funds relating to the property being managed would not need to be handled through a trust account, unless compensation or consideration is being paid to the broker. If the broker owns less than the majority interest in a piece of real estate (50.0% or less) and that real estate is being managed by the broker, the funds must be deposited and disbursed from a trust account established by the broker under the License Act and Rules of the Commission, and in accordance with this Manual. Top of Page |