After successfully completing this topic, you will be able to
• list the two ways a broker can use to safeguard trust funds,
• define the term “immediately” as it applies to the handling of a customer’s trust funds, and
• distinguish between the terms commingling and conversion.
An escrow account is a place to deposit money to be held in trust by a third party who is not a principal to the transaction. An escrow account is also called a trust account. A broker may receive funds in the form of cash, money order, personal check, or securities that can be converted into cash.
The three methods a broker may use to safeguard trust funds for real estate sales deposits are
1. maintain an escrow account for trust funds,
2. place deposits with a title insurance escrow account, or
3. place deposits with an attorney’s escrow account.
In real estate sales transactions, buyers customarily give a good-faith deposit with their offer to buy property. The broker may or may not hold the deposit in an escrow account. A broker who performs property management receives security deposits to assure the landlord that the tenant will take good care of the property and receives rent from the tenant. In both instances, the funds that the tenant gives to a broker or sales associate must be placed in in the broker’s trust account.
If funds are given to a sales associate by a customer, the sales associate must immediately give the funds to the broker. “Immediately” in this context means by the end of the next business day.
The broker must immediately deposit the funds into the escrow account. “Immediately” in this context means no later than the end of the third business day after the customer first gave the funds. The day the sales associate receives the funds is not counted as one of the three days.
|Wednesday||Thursday (1st Day)||Friday (2nd Day)||Monday (3rd Day)|
|Customer gives check to sales associate||Sales associate must give check to broker||No required action||Broker must deposit check in trust account|
A broker’s escrow account must be in a Florida commercial bank, credit union, or savings association.
The broker may authorize other persons, such as an office manager or an attorney, to be check signers, but the law requires the broker to be an authorized check-signer on the escrow account.
Before a broker can deposit funds into an interest-bearing escrow account, all parties to the contract must give written consent stating which party is entitled to the interest. There is no rule that prohibits the broker from receiving the interest if all parties agree.
The broker must ensure that the escrow account is reconciled each month and must sign the reconciliation.
Commingling means that a broker mixed a customer’s money with the broker’s own money. This is a serious violation for which the broker’s license could be revoked. Brokers may not put customers’ money into the broker’s business or personal accounts. They must put the funds in escrow or with an escrow company.
Conversion is the administrative term for the theft of property or funds from a customer.
Failure to account and deliver is a serious violation of the law. Brokers must carefully account for all funds and timely deliver the escrowed funds to the appropriate party.
A broker may place up to $1,000 of the broker’s funds into a sales escrow account, or up to $5,000 into a property management account. These funds ensure that bank charges or returned checks will not result in using the other customers’ funds.
Brokers must keep business records in accordance with FREC rules and make the records available to DBPR representatives upon request. Examples of the records a broker must keep include: escrow account bank statements and reconciliations, signed purchase and sale contracts, listing contracts, leases, brokerage relationship disclosures or property management contracts.
The broker must keep those records for at least five years from the date of receipt of funds, or from the date of the document. If the records are the subject of a court case, the broker is required to keep the records for two years after the court case is concluded or five years, whichever is longer.
A broker may place deposits into the broker’s escrow account, with a title company, or with an attorney. The broker must ensure that the purchase contract shows the identity of the escrow agent. If the escrow funds are held by an attorney, the broker must be a check signer on the attorney’s escrow account.
If the funds are held in a title company
If the customer’s check is made payable to the sales associate, the sales associate should ask that the customer write a new check made out to the broker’s escrow account. If that is not possible, the sales associate should endorse the check to the broker’s escrow account. The downside of this alternative is that it would make the sales associate a co-signer on the check, becoming liable if the check is not good.
Sometimes a buyer will give the broker a postdated check as a good-faith deposit. Postdated checks are legal in Florida, and they have the status of a promissory note. If they are dishonored, they are more difficult to collect, because the person who accepted the check was informed that the check would not be good until the stated date. The contract offer should clearly state that the good-faith deposit is in the form of a post-dated check, and the seller should approve that fact before accepting the offer. The broker must hold the check in a secure place until the check date and then deposit it immediately. The broker is not responsible if the check is dishonored unless the broker failed to deposit the check on time.