Are Your Good Intentions Putting You at Risk? Shocking Trust Account Violations Every Broker Must Know!

In the world of real estate, good intentions alone won't shield brokers from scrutiny or violations. A recent episode of the True Crimes podcast delves into a troubling case involving a California property management company that mishandled funds, including pocketing $20,000 in underperformed credit report fees and failing to account for a staggering $50,000 in trust shortages. This incident underscores the critical importance of having robust systems in place for handling trust funds—something that brokers must take seriously.

When brokers take custody of funds, they trigger strict trust fund handling rules. Here are ten essential guidelines to remember when managing money and maintaining compliance in your brokerage.

Essential Guidelines for Trust Fund Management

First and foremost, application fee handling requires a stringent compliance system. In the aforementioned case, the firm collected application screening fees, part of which was meant for pulling credit reports that were never accessed. This isn’t just an oversight; it reflects a failure in internal controls. Your system should clearly tie the receipt of fees to actual services rendered, retaining all documentation to demonstrate where and when the money was spent, ensuring overages are refunded as necessary.

Trust accounts are sacred because the money held isn’t yours. In California, it's crucial to understand that the Department of Real Estate (DRE) doesn’t require proof of consumer harm to impose discipline for trust account violations; control failures alone can lead to serious repercussions.

Moreover, delegation isn't a defense. As the supervising broker, you’re responsible for overseeing the entire system, even if staff and third-party vendors are involved in the day-to-day operations. A lack of broker oversight often correlates with negative compliance outcomes.

Having policies in place also won't protect you if they aren’t enforced. A policy drafted by your attorney is meaningless unless there’s a concrete plan to enforce it. Ensure that all policies are mapped to actual documentation, procedures, and audit trails to guarantee compliance.

Additionally, remember that software is merely a tool and not a comprehensive compliance strategy. Understanding software reports is vital; if you can't reconcile them, you won't be able to effectively evaluate the information being produced. Achieving a competent level of familiarity with your tools is necessary to spot-check and challenge concerning outputs.

Building a meaningful compliance stack is another essential step. Start by comprehending the law, then create policies and wrap procedures around that framework. Ensure redundancies exist to serve as quality control checks.

Maintaining multiple trust accounts can complicate matters further. While having several accounts might seem beneficial, it increases your documentation burden and the risk of recurring errors. As you expand your responsibilities, increase your oversight accordingly.

Don't fall into the trap of assuming that self-reporting will earn you goodwill. Although California law doesn’t mandate self-reporting, brokers sometimes believe it will mitigate the consequences of compliance violations. However, discipline is tied to the prompt correction and mitigation of issues. If problems persist or aren’t addressed quickly, you could still face penalties.

Prevention is far less expensive than dealing with the fallout of license revocation or restriction, which is increasingly common in the industry. A negotiated stipulation could lead to revocation of your broker's license, creating a pathway to restrictions, penalties, and extensive audit and investigative costs.

If you're the broker of record for another brokerage, your employment contract should reflect the reality of the risks involved. This includes your authority, access to financial records, staffing standards, and your right to independently verify internal operations. After all, as the managing broker, you bear ultimate responsibility for everything that transpires within that brokerage.

The bottom line is straightforward but vital: if you cannot systematize trust fund handling and demonstrate compliance through accurate bookkeeping and reconciliations, you may not be ready for property management. The DRE’s audits leave no room for guesswork or assumptions.

For further insights into these compliance challenges and more, check out the True Crimes of Real Estate, a podcast that investigates real-world cases of trust account violations and brokerage issues. Hosted by real estate strategist Troy Palmquist and DRE compliance expert Summer Goralik, the series sheds light on what can happen when real estate professionals cross ethical lines.

NOTE: The opinions and recommendations expressed in this article are based on Summer Goralik’s experience as a real estate compliance consultant and former investigator for the California Department of Real Estate. They are provided for informational purposes only and should not be construed as legal advice. Readers should consult with their brokerage and/or qualified legal counsel in their jurisdiction for guidance on specific situations.