Bob discusses the concept and importance of the Broker Trust Account for property management companies with Allison Disarro, Senior Vice President of Property Management Banking at Seacoast Commerce Bank. Real estate brokers and property management companies receive and hold funds in their everyday course of business from tenants and property owners for rent payments or property improvements. Property managers must accept, control and account for these "trust funds" within compliance under State of California Bureau of Real Estate standards. The improper handling of trust funds can put the monies at risk and may be cause for the suspension of a Broker's license. As such, it is very important for homeowners considering renting their properties to hire a property manager that has a properly established and documented Broker Trust Account. Allison provides her expert explanation of the importance of the trust account, how these accounts should be set up, and what questions a homeowner can ask of their property manager to make sure their owner funds are properly deposited and protected. This episode is always available for listening, sharing, or download at Property Management Brainstorm.
Bob Preston: 00:49 Welcome, welcome. Welcome to the property management brainstorm podcast. I'm Bob Preston, you're host of the show, roadcasting from our little studio at the North County Property Group office in Del Mar, California. Today we're going to talk about property management banking. Not a particularly exciting topic, but specifically we'll be talking about the broker trust account. This is a hugely important topic when considering renting your property or hiring a property manager. I have with me today, by telephone from Boston, Massachusetts, our banking officer for North County Property Group. Alison Disarro, of Seacoast Bank. Allison has built a banking practice around property management companies like ours in the San Diego property management and national market, so she's well qualified to discuss this topic. Allison, thank you for joining us today.
Allison Disarro: 01:39 Thank you, I'm happy to be here with you Bob. Well, be here in spirit I suppose since I'm in Boston.
Bob Preston: 01:45 We've got a good connection so you are coming in loud and clear. You just moved to Boston, right? That's a pretty exciting time for you.
Allison Disarro: 01:53 Yes, my family and I just relocated to Boston. I'm still with Seacoast Commerce Bank, working in the same capacity. I was always doing it nationally anyway, so it is an easy transition professionally to work from Boston.
Bob Preston: 02:11 Maybe you can just briefly tell us about yourself, Seacoast Commerce Bank, what you do for the bank, etc.
Allison Disarro: 02:20 I am with Seacoast Commerce Bank, headquartered in San Diego, California. However, we do have several, and please don't quote me on this number because I feel like we're constantly adding more, but I'd say 16 different loan production offices throughout the 50 states right now. So, we do have a national presence, but again, like I said, headquartered in San Diego.
Bob Preston: 02:44 I noticed you just made an acquisition of a bank in Encinitas, CA, right?
Allison Disarro: 02:49 Yes. our holding company acquired them, so we're really merging. Seacoast Commerce Bank is merging with Capital Bank. They're also California based. I've been at Seacoast since 2010. I only bank for property management companies and the benefit to the management company is that I specialize in the compliance on the broker trust accounts. I'm sure I'm getting a little bit ahead of us, but many, many banks, I'd say do not get it right when they set up these trust accounts and that is all I do, so I just stick to what I'm good at and try not to do anything else.
Bob Preston: 03:58 Well, you came to see me originally, this was a few years ago, and we started talking trust accounts. Previous to that I was never able to get my bank to understand what I was trying to do, so I was never confident it was set up properly. Now, with Seacoast I’m very confident we have it set up properly. Allison is not an accountant per se, so we're not going to be getting into accounting concepts today, but rather the topic is more oriented to why it's so important for property management companies to have their banking aspects dialed in properly. So with that, let's dive right into the subject matter and talk banking. This notion of the trust account is one of the very first things I learned back when I was studying for my Real Estate broker's license.
Allison Disarro: 06:03 In layman's terms, the broker trust account is the bank account in which the broker holds property related security deposits, prepaid rent, owner reserves, or maybe you're holding onto money for a large property project. In more Real Estate technical terms, brokers accept funds belonging to others that are subject to real estate or property management transactions. They have to deposit those funds an account designated as a broker trust account which is required to be separate from their general business accounts. Essentially, any funds that do not belong to the property management company needs to be deposited and held in the trust account.
Bob Preston: 07:02 Okay. So those funds are being held for another person who would be a beneficiary.
Allison Disarro: 07:07 It is a the beneficiary, but the majority of the time, especially in California, there are multiple beneficiaries within that account. This way, if something happens to the broker’s business which is a negative impact, the broker trust funds are held separately, and the clients are protected.
Bob Preston: 07:33 Let's talk about that now because this applies to real estate agents or real estate brokers who are selling and helping people buy properties. It also applies to property managers because to be a property manager you have to be a licensed broker, correct?
Allison Disarro: 07:53 Yes. A property manager must be a broker in California. Typically a sale agent would just hand deposit funds over to an escrow company. But for a property management company, those funds must go immediately into a broker trust account.
Bob Preston: 08:09 If I'm a homeowner, or if I'm a tenant of a rental property, knowing that a deposit with a property management company goes into the trust account. But what does that do for me? How am I being protected or how is it safer than giving it to somebody who puts it in their normal bank account?
Allison Disarro: 08:32 There are a few scenarios I would like to explain. The property management companies are always worried about a failed audit. However, most property owners or tenants don't realize that It may affect them more than the broker if their funds are not deposited into a property management broker trust account. So let's say for instance, there was a franchise tax or lean against the broker, which is not a favorable thing, but it does happen for poorly management property management companies. It could be some other event, such as a lawsuit or a bankruptcy or something that causes funds to be frozen for the broker or the property management company. So what happens to the client and/or tenant funds?
Bob Preston: 09:36 Especially in the property management industry, if there were to be a law suit the court may say any funds under this tax id number must be frozen. So, if the broker trust account does not exist or was not set up properly, all of those client or tenant deposit funds could be frozen. So, having a proper broker trust account puts the funds that don't belong to the broker in a safe place that can't be touched by any interests outside of the intended beneficiaries, the property owners and the tenants. Bottom line, it's really important when hiring a property manager, to make sure that they have a propert broker's trust account and that it's been set up with a federally insured institution. Have you come across property managers that don't have it set up propertly
Allison Disarro: 13:39 Asolutely, you would be surprised how many property managers who have been around for years don’t have it right. I've been doing for about eight years now and I can probably count on less than two hands how many property management accounts It’s immediately obvious by looking at signature cards for the accounts. So yeah, I see it all the time. It's a very taboo subject in your industry but when becoming bankers, the typical branch manager is not aware of California Department of Real Estate standards for a broker trust account.
Bob Preston: 14:57 What I’ve found with most banks is that when “trust” is mentioned, the branch representative thinks it is like a family trust.
Allison Disarro: 15:02 That’s exactly right. If a consumer walks into a bank with a certification of trust our, like you said, a trust agreement, the typical bank will get it right and up the family trust account correctly. As a property management company, however, you're not going to have any of that documentation which will often confuse the bank representative in the branch. So, it is essential that property managers go with a bank that understands what is needed to open up a broker trust account.
Bob Preston: 16:14 In setting up a broker trust correctly, what kind of documentation is required? It is pretty straightforward, right?
Allison Disarro: 16:22 It is actually really simple. So there are rules when it comes in California. Let me just practice that works because every state is different. In California, if you were to come to me and to open up a property management broker trust account, I would ask for the same entity information that you would need to open up your corporate operating account. However, then I'm going to search the corporation name and see who the officers and broker are for that corporation. The corporation is actually considered the broker.. When you're looking at a signature card, there should always be a legal name, such as North County Property Group, as trustee.
Bob Preston: 18:53 So let’s assume I’m an individual homeowner who's considering hiring a property management company. Are there a few simple questions I could ask just to confirm that if I give you my funds they're going to be deposited into a proper broker trust account?. What's the sniff test on that?
Allison Disarro: 20:17 As a landlord or a homeowner looking for s property management company, you can simply ask prospective property management company if their owner funds are in a trust account. My very candid advice to the homeowners and landlords, however, is don't just take their word for it because unfortunately they're taking their branch manager’s word for it and that may not be correct. You can request a letter from the bank providing specific information relative to the trust account. For instance, we have a letter that we often provide and we address it to the management company, but it's up the management company to disperse that to their clients. It is basically a letter of authorization that says yes, you have a bonafide trust account in place
Bob Preston: 22:36 I'm going to keep moving here because we are up against a little bit of time constraint. Let’s discuss the trust account as it relates to do-it-yourself landlords who put their rental lisitng on Craig's list and independently rent to somebody as a tenant. In that scenario, is the property owner required to protect it in some kind of a trust account or does it not apply to your typical individual landlords?
Allison Disarro: 23:03 My opinion on that matter is that it should be put into an escrow account or a trust account. If it's not your money, it should be in trust account. I don't specialize in individual homeowners but suffice it to say as a tenant, you have to understand that there are lots of personal issues that homeowners can get into trouble when they're renting their house.
Bob Preston: 24:16 I was speaking with a rental property Eviction Attorney this morning and he was saying that the highest percentage of clients who come to him are individual homeowners that are managing their own rental property properly. Another good reason to hire a property manager and get somebody who you know has a bonified trust account and is protecting the funds on both sides, both the owner’s funds and the tenant’s funds.
Allison Disarro: 25:16 I can attest that North County Property Group has their trust account set up property and I would certainly be confident giving you, as my property manager, funds to hold on my behalf.
Bob Preston: 25:30 Well good. Thanks for that endorsement. We've already talked a little bit about the fiduciary responsibility of taking funds and depositing them into trust. We accept rent, we accept owner deposits and these funds have to go into trust. What is the concept called commingling? Maybe you can touch on that a little bit because we have two accounts with you. We have a trust account and we also have our operating account and you can't commingle between the two. I know you're not an accountant, but maybe you can at least explain the concept of commingling?
Allison Disarro: 25:51 It’s pretty easy to understand. If I'm taking a rent deposit as a property manage from a tenant or reserve funds from a property owner, I can't put that in the same bank account that I'm using to corporate bills, pay my employees, pay the rent for our office or general corporate expenses.
Bob Preston: 26:56 What else, Allison? Are there any other aspects important to know about property management trust accounts?
Allison Disarro: 27:30 Basically, it’s important to remember that anything related to the property can be paid out of trust. So, the property mortgage payments, property management, commissions, property repair bills, and owner rent distributions can all be paid out of trust. Anything related to the plumbers, electricians, people who have worked on that specific property.
Bob Preston: 28:17 I think this has been a great discussion. Thank you so much for joining today, Allison Disarro. This has been extremely useful information that I'm sure our listeners can utilize and consider if they're thinking about renting their home or hiring a property manager. Thank you all for joining us on the Property Management Brainstorm podcast!