CO Real Estate - Trust Accounts Flashcards
A separate bank account established to hold money for the benefit of others
A trust account
In Colorado who is allowed to have a trust account?
Only principal brokers who are either an employing or independent broker
Does this mean associate brokers aren’t responsible for collected earnest money?
No, all licensed brokers are responsible for collecting earnest money and other funds and seeing that it’s delivered/deposited correctly. They just do so in their employing brokers accounts.
Is an operating account a trust account?
No, operating accounts hold funds that belong to the principal broker/firm and are used for operating expenses including commissions.
Funds cannot go from trust accounts to paying bills, they must always flow through the operating account first
Combining operating and trust funds is called
Commingling and is illegal
Who is liable for what happens to funds at all times during a closing?
The principal broker, even if deposited into a title company trust account
Can accounting for trust accounts be delegated?
Yes, principal broker may delegate the accounting to another person in the company but must do so in writing but they are still responsible and must maintain control over the accounts at all times
An additional requirement of principal broker ?
They must be able to withdrawal funds from the trust accounts without a cosigner
Principal broker MAY authorize other signers on the account who may be licensed or unlicensed.
Can an unlicensed person sign checks from a trust account?
Yes, if authorized to do so by the principal broker
What is the only means of “commingling” allowed?
If a broker must use their funds sufficient to open and operate the trust account but should not be in excess of what would be a considered a reasonable amount
Types of Trust Accounts
Sales trust account (earnest money)
Management trust account (PM services)
Security deposits trust account (refundable to tenants)
Advance rental (different from security deposit)
HOA trust account (held on behalf of Condos, use a separate account for each HOA because money belongs to all owners as a group)
How are commissions handled via accounts?
Once commission is earned, the funds are deposited to firm’s operating account and from there a check to the broker associate is cut for their share
Where do funds going into trust accounts come from?
Written documents that are kept in the transaction file and can be used to reconcile the the accounts using “beneficiary ledger cards” for each new beneficiary
Where can COlorado brokerages have trust accounts?
They must be in a bank or recognized depository in Colorado that is insured by an agency of the US government
Most often involved agency in trust accounts?
Federal Deposit Insurance Corporation (FDIC)
Can Colorado brokers use credit unions for their trust accounts?
No, because all parties might not be insured against a loss with credit unions so it’s prohibited
All trust accounts must be identified in the bank records and on bank statements with the following specific information:
- company name as registered with the COmmission
- The personal name and capacity of the principal broker responsible for the account
- The type of trust account, such as sales or property management
- The account records, checks and deposit slips stating that it is a trust or trustee account
What form is used to document protection of the trust account from actions against the principal broker?
A notice of escrow or Trust Account form, executed between the bank and principal broker
Can branch offices of a brokerage firm use the trust accounts of the primary office?
Yes, but if they maintain separate accounts then they must also maintain separate record keeping system
The statute and Commission rules permit funds to be held in interest-bearing accounts under the following conditions
- All parties with an interest in the fund must provide their informed consent and agree to risks or penalties of a withdrawal. They must also agree to whom the interest will go to
- If an affording housing program benefiting COlorado residents will receive the interest, the broker must post a notice in the office indicating that the company participates in such a program
What is the most used affordable housing program in Colorado?
Colorado Association of REALTORS Housing Opportunity Fund
What forms can earnest money take?
Any form the seller will accept, cash, personal check or property etc.
When must earnest money be delivered, if required?
From buyer’s broker to listing broker immediately upon accepting the offer
Listing broker has 3 business days to deposit the earnest money into a trust account
If an Earnest Money Release is used when a transaction does not close…
Seller has 3 days to sign and return the release to the brokerage. The holder of the earnest money will then have 5 days to return the money to the buyer
Who holds the money if there is a dispute on where earnest money should go?
Broker may hold the money in a trust account until parties provide mutual written instructions
OR they can choose to interplead the money (give to the court if a lawsuit is pending or has commenced)
Brokers may technically hold on to earnest money indefinitely if no agreement is reached and no lawsuit is initiated. To address this problem the Commission inserted what language into the COntract to Buy/Sell?
Wording that provides for the broker to notify the parties that, unless an agreement is reached or a lawsuit is initiated within 120 calendar days of the notice, the broker is authorized to return the earnest funds to the buyer
Can buyers use a promissory note as earnest money?
Yes, if acceptable by the seller. If they do, it must be due before closing so the funds will be available in the broker’s trust account as good funds to be disbursed at closing.
How long must brokers maintain transaction files?
For four years by the brokerage firm
Every brokerage firm that maintains a trust account must maintain a recordkeeping system for each account. It can be manual or computerized but it must contain the following types of records and historical reports;
Bank Account Agreement
Notice of Maintaining A Trust Account
Account Journal of all cash receipts/disbursements
Beneficiary ledger card system
Broker ledger Card
Bank reconciliation records
Individual transaction files (invoices, contracts, management agreements, bills etc)
What is a beneficiary ledger card system?
A series of individual records segregating receipts and disbursements as they affect individual beneficiaries or transactions (contains transaction specific info such as SS and tax identification numbers)
What is a broker ledger card?
A record of brokerage funds used to open and maintain the trust accounts and that cover related services charges as they are incurred
How often must trust accounts be reconciled to the bank statement?
Once a month in any month there is activity
Can commissions be held in a trust account?
No, commissions earned and payable from funds in the trust account must be withdrawn and deposited into the firm’s operating account to avoid commingling.
Types of safeguards for trust accounts
- Frequent reconciliations to bank statements
- Separation of duties
- An outside audit
Who is required to have an audit of their trust acounts?
HOAs, on an annual basis
What is “conversion”
The illegal use of one party’s funds to the benefit of another party
TO avoid this illegal act, each owner’s ledger card must be reconciled before funds are either disbursed for owner’s benefit or paid directly to an owner that way no owner balance can go in the negative
What is the “less than seven” rule?
Commission policy states that a broker may use the sales trust account for those funds involved in management of a small number of single family properties, “less than 7 single family residential units (so 6 or less). Still must maintain property recordkeeping.
Colorado rules for security deposits
- SD must be held in a separate account set aside for SD only unless the brokerage meets the less than 7 exception
- Brokerage is responsible for the SD funds and is expected to keep them in a trust account under principal brokers control. They may be turned over to the property owner only with tenant authorization in a lease
- If SD funds are transferred to a new PM, tenants must be notified in writing along with instructions for contacting the new manager
- If the property is sold, per Contract, seller must give the tenant notice of new owner’s name/address
How long does a SD holder have to return an SD?
Within 1 month after termination of lease, unless specified longer by original lease but can’t be longer than 60 days.
What happens if a landlord does not return a security deposit within the specified time?
They can be liable for damages up 3 triple the amount wrongfully withheld
Can brokers receive compensation for managing properties in which they have an ownership interest?
Yes, but they must maintain a separate trust account for those properties to keep the broker’s funds segregated from any other managed proeprty
A principal broker managing a common interest (HOA) association is generally considered a ____
Temporary Custodian and trustee for the association records
If a brokerage is a corp, LLC, partnership etc, the business is responsible for maintaining the records. If the business dissolves, who is now responsible?
The final acting broker retains personal responsibility
In a cooperative transaction which one broker holds an exclusive right to sell listing contract, and another broker is the buyers broker, how is earnest money treated?
The buyer’s broker must deliver earnest money deposit to the listing broker immediately upon offer acceptance
In the even a dispute arises between seller and a buyer regarding earnest money, the principal broker
may interplead the earnest money into court
In a real estate sale, if the broker places the earnest money deposit into an interest-bearing account, any accrued interest…
must be agreed to in writing by the principals
A chronological summary of cash receipts and disbursements made by the broker, which can affect the balance of a trust account is a ____
Account journal
Which of the following details receipts and disbursements as the affect a particular property?
A. Property File
B. Journal
C. Management File
D. Beneficiary Ledger
D. beneficiary ledger
The employing broker should pay the associate broker’s commissions from what account?
A business operating account
After closing of a property transaction, the balance on a beneficiary ledger card should be
Zero
The listing broker must keep a signed copy of what documents in a property file?
The listing contract, sales contract and closing statements
A broker managing how many properties must maintain a property management trust account?
A. 2
B. 4
C. 6
D. 8
D. 8
when MUST a broker first open a trust account?
When first receiving earnest money for deposit
What is the document that reports all specific income and expenses associated with a particular owner’s property?
A Beneficiary Ledger card
Where must security deposits collected from tenants in connection with property management be held?
In the security deposits trust account
In the case of an interest-bearing sales trust account, where can interest go to?
A nonprofit affordable housing fund
When does the Commission have the authority to audit a broker’s files?
At ANY time
Earnest money received by a listing broker must be deposited where and when?
In the sales trust account no later than the third business day following NOTICE of acceptance of contract
Upon closing of a transaction, if a property ledger card shows a negative balance what is this?
This reflects conversion of funds from one owner to another (illegal)
Are employees and broker associated permitted to have a trust account?
NO
