Did you know that if your property management company is not setting up trust fund accounts to manage your property’s accounting, the property management company could be liable for not complying with the California Department of Real Estate (CalDRE) rules and regulations?
First, let’s define the key terms:
Trust account – This is a type of business bank account used for holding money that does not belong to your business (or the business that is holding money for someone else).
Trust accounting – These are the processes involved in bookkeeping, auditing and reporting so that a trust account remains compliant with the laws and regulations.
The CalDRE’s oversight and regulation is quite clear and the consequences of an audit could be quite severe. It is important for you and your property manager to know the legal guidelines to understanding trust fund accounting.
Here’s How it Works
Let’s say you are a real estate owner/investor and have hired a property management company to manage your properties. You sign a management contract and the management company opens a trust fund account with their bank. They are essentially holding money from your properties “in trust for” you and so must handle the money according to trust fund accounting standards.
For the property manager, they take this function upon themselves and they are fully responsible and accountable for your funds. This is why management companies need to practice proper and ethical trust fund accounting.
In order to do trust fund accounting, the management company sets up a trust fund account, usually referred to and used as the “operating account” into which rent collections are deposited, funds held and from which payments and distributions are made for, among other things, services, maintenance and repairs, loan payments, payment of taxes and distribution to owners.
Many owners/investors also have another type of trust account for their tenant’s security deposits and reserves. NOTE: It IS legal to have one trust account to manage several properties held by the same owners or different owners, but this can sometimes be considered a bad business practice due to the complexity of keeping accurate records. It’s recommended to have a trust account for each property, but it all depends on how owners want the management company to set it up.
Even though a property manager can use one trust account for multiple properties, none of the trust fund accounts can be commingled with the management company’s corporate accounts and the trust fund accounts must be non-interest bearing accounts. And, although it’s much easier for record keeping and reporting to set up separate accounts, the most important thing is that the property management company clearly identifies who owns what account, and keeps accurate records for each property separately.
When a property manager begins managing your properties and collecting rents and paying your bills. the management company has created an agency relationship with a third party (you) through a management contract and therefore has a legally-bound fiduciary duty to the owner(s) of the funds they are managing.
Record Keeping and Reporting
It is vital to keep accurate records for each property under management, even if there is only one trust account. The data management can be cumbersome and costly for the management firm, though there are systems and software to automate this process to create streamlined processes of bookkeeping and accounting, which will better serve owners, and keep the property manager compliant. These systems will help the owner and property manager with:
· Ownership/Property Reporting
· Tenant Info / Rent Roll
· General Ledger/Transaction Reporting
· Balance Sheet & Financial Statements (like Property P&L’s)
· Bank Statements & Reconciliation Reports
Most property managers are well aware of the requirements of trust fund accounting. However, there are always some companies that aren’t managing your funds the way they’re supposed to. If you care about your real estate investment(s), do not let your management company expose themselves to noncompliance accounting practices.
For more information, questions, or to schedule a FREE property analysis of your San Diego properties, please contact us at Makana Property Management today!