Any real estate licensee will frequently come into possession of money which does not belong to that licensee. This happens whenever customers make an offer on a listed property and give good faith deposits with that offer, for instance. It also happens whenever a licensee manages rental properties for the owners. The licensee will collect the rents and disburse the funds. Whenever a broker or a salesperson holds money which belongs to someone else, that licensee has a fiduciary obligation to the owner of those funds. This fiduciary obligation means that the licensee must put the interest of the funds' owner ahead of the personal or business interests of the licensee.
Real estate brokers must handle, control and account for these funds according to established legal standards. While compliance with these laws and regulations might or might not increase the profitability of the brokerage office, non-compliance may have severe consequences, financial and otherwise. Improper handling of trust funds is cause for revocation or suspension of a real estate license, not to mention the possibility of being held financially liable for damages incurred by clients.
This course is designed to assist licensees in understanding and complying with the laws and regulations regarding trust funds as set forth the in the Real Estate Law (which is part of the Business and Professions Code) and the Real Estate Commissioner's Regulations. It describes the requisites for maintaining a trust fund bank account and the precautions a licensee should take to ensure the integrity of that account. It explains and illustrates the trust fund record keeping requirements under the Business and Professions Code and the Commissioner's Regulations. (Code Section Numbers and Regulation Numbers are for reference purposes only and need not be memorized.)
Since there are a number of laws and regulations pertaining to trust funds, it is important to understand the definition of trust funds, so that one knows what is, and what is not subject to these laws and regulations. The Department of Real Estate defines trust funds as follows:
Trust funds are money or other things of value that are received by a broker or salesperson on behalf of a principal or any other person, and which are held for the benefit of others in the performance of any acts for which a real estate license is required.
In essence, any time a broker or salesperson receives something of value which is for the benefit of someone else, the result is a transaction involving trust fund regulations. Trust funds are not limited to cash. They can include:
- cash
- deposit checks payable to the broker
- deposit checks payable to the seller
- deposit checks payable to escrow or other legal entity
- personal notes issued in lieu of a deposit
- rents and security deposits received from properties managed by licensees, and
- other items of value (such as a "pink slip" to a car given in lieu of a deposit).
It is also important to understand what things are not considered trust funds. For example, if the broker and/or brokerage firm directly owns a rental property, the rents and deposits received are not considered trust funds. These funds would directly belong to the broker or firm and as long as they are not commingled with legitimate trust funds, the laws and regulations governing trust funds would not apply.
Trust Fund Handling Requirements
Since trust funds belong to others and are entrusted to the care and handling of a real estate licensee, the licensee has a fiduciary responsibility to the owners of the funds. This duty requires that the licensee handle the funds according to the law and use them only for purposes authorized by the funds' owners. Additionally, the licensee must maintain accurate, complete, and up-to-date accounting records of all trust funds.
A typical trust fund transaction begins with the broker or salesperson receiving trust funds from a principal in connection with the purchase or lease of real property. According to Business and Professions Code Section 10145, when trust funds are received by a broker or salesperson, one of the following events must occur within three business days:
- The funds may be given to the owner(s) of those funds; or
- The funds may be deposited into a neutral escrow depository; or
- The funds may be deposited into the broker's trust fund account, provided that the broker must comply with Commissioner's Regulation 2830 governing trust funds.
There is one exception to this rule, which would allow the broker to hold a check uncashed. If a check is received in connection with an offer to purchase or lease real property, the check may be held uncashed if both of the following conditions are met:
(1) The check by its terms is not negotiable by the broker, or if the offeror has given written instructions that the check shall not be deposited or cashed until acceptance of the offer; and
(2) The offeree is informed, before or at the time the offer is presented for acceptance that the check is being so held.
If the offer is later accepted, the broker may continue to hold the check undeposited only if the broker receives written authorization from the offeree to do so. Otherwise, the check must be placed, not later than three business days after acceptance of the offer, into a neutral escrow depository or into the trust fund bank account or into the hands of the offeree if both the offeror and offeree expressly so provide in writing.
According to Business and Professions Code Section 10145, a real estate salesperson who accepts trust funds on behalf of the broker under whom he or she is licensed must immediately deliver the funds to the broker or, if directed by the broker, place the funds into the hands of the broker's principal or into a neutral escrow depository or deposit the funds into the broker's trust fund bank account.
A neutral escrow depository, as used in the Business and Professions Code Section 10145, means an escrow business conducted by a person licensed under Division 6 (commencing with Section 17000) of the Financial Code or by any person described in subdivisions (a) and (c) of Section 17006 of the Code. In essence, this would be any duly-registered escrow company in the State of California.
Identifying the Owner(s) of the Trust Funds
A broker must be able to identify which of the parties in a transaction owns the trust funds and is entitled to receive them, since these funds can be disposed of only upon the authorization of that person. The person entitled to the funds may or may not be the person who originally gave the funds to the broker or salesperson. In some instances the party entitled to the funds will change upon the occurrence of certain events in the transaction. For example, in a transaction involving an offer to buy or lease real property or a business opportunity, the party entitled to the funds received from the offeror (prospective buyer or lessor) will depend upon whether or not the offer has been accepted by the offeree (seller or landlord).
Prior to the acceptance of the offer, the funds received from the offeror belong to that person and must be handled according to his/her instructions. If the funds are deposited in a trust fund bank account, they must be maintained there for the benefit of the offeror until acceptance of the offer. Or, as discussed in the previous section, if the offeror wishes, his/her check may be held uncashed by the broker as long as he/she gives written instructions to the broker to do so and the offeree is informed before or at the time the offer is presented for acceptance that the check is being so held.
After acceptance of the offer, however, the funds shall be handled according to instructions from the offeror and the offeree as follows:
- An offeror's check held uncashed by the broker before acceptance of the offer may continue to be held uncashed after the acceptance of the offer, only upon written authorization from the offeree. (Commissioner's Regulation 2832(d)).
- The offeror's check may be given to the offeree only if the offeror and offeree expressly so provide in writing. (Commissioner's Regulation 2832(d)).
- All or part of an offeror's purchase money deposit in a real estate sales transaction shall not be refunded by an agent or subagent of the seller without the express written permission of the offeree to make the refund. (Commissioner's Regulation 2785(a) (10)).
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