Colorado Recordkeeping & Trust Accounts
Acknowledgment of Trust Account Status by Bank requires
1. Account title must have proper words (escrow or trust) 2. Personal name of the owner must be included 3. Broker must be able to independently control and operate all escrow accounts 4. Customer deposit agreement must indicate the nature of the account
Rule E-4 (Detailed) (Duplicate Documents)
1. Broker is responsible for delivering duplicates of originals of the transaction documents to all parties executing. 2. Duplicates includes: - Photocopy - Carbon copy - Fax - Electronic that contain DIGITAL or E-Signature 3. Broker must retain a copy of the duplicate for future use/audit
Rules of Journal Keeping
1. Maintain the journal on a cash-basis (entries are made in the journal when the cash is received) unless beneficiaries demand an accrual basis. 2. Never record an entry in the journal unless the receipt and payments are actually received. 3. Keep the journal open until the bank account and open ledgers are closed. 4. Never record a false entry in anticipation of the event happening; wait until the event has happened.
Ledger must contain
1. Names of parties 2. Description of property 3. Transaction dates 4. Check numbers 5. Balance 7. Reference numbers when appropriate
Account Title (name) requirements
1. Owner of the account 2. Type of account being established (sales, management, homeowner association etc) 3. Nature of the account (escrow or trust) 4. Broker's personal name 5. Broker's fiduciary capacity *the employing broker must be able to independently control and operate all escrow bank accounts, but others may be designated as signatories as well.
Record Retention Period
4 years for all records of licensed brokerage activity.
Netting Earned Commission Against Earnest Money Deposit
A broker is entitled to offset the broker's commission against any earnest money deposits.
CP-5 (Security deposits)
A broker may not deliver a security deposit to an owner (landlord) unless notice is given to the tenant in writing that the deposit will be held by the owner. If broker fails to notify tenant, broker may be civilly liable and in violation of license law.
The Journal
A form for recording transactions in chronological order.
Bank Reconciliation
A report that accounts for the differences between the bank statement and a checkbook balance.
Advanced funds
Any time a broker advances funds, the broker must collect "Good funds" within 45-90 days.
The safest way to maintain compliance in escrow accounts.
Appoint an independent audit committee to perform supervisory functions at regular intervals. Duties should include: 1. Examine all company banking and accounting activity. 2. Review the quality of all services provided. 3. Maintain effective channels of communication, feedback and personal involvement in key operating processes. 4.Enforce and correct improper practices or policies. 5. Provide adequate training and supervision.
Rule E-16 (Owner-held Security Deposits)
Broker cannot deliver deposits to an owner without the tenant's written authorization in a lease or unless written notice has been given to the tenant by first class mail.
Responsibility of earnest money if interpleaded with court belongs to who?
Broker is absolved of all responsibility for the earnest money. The court assumes this role.
Broker's Ledger
Broker must keep a ledger for the broker's participation in the escrow accounts. Broker cannot co-mingle funds from the broker's operating account with the funds in the escrow account.
Ledger Activation
Broker opens ledger record when funds from a party are received.
Ledger for Interest-Bearing Accounts
Broker will have to establish a separate savings account for the beneficiary. Broker does NOT have to keep a journal and ledger, the Bank Statement will suffice.
The deposit slip for escrow deposit (earnest money) must show...
Buyer's name, property description, recorded in the journal and beneficiary's ledger
Version of accounting used by brokers unless written agreement states otherwise.
Cash basis.
Management Files to Keep (11)
Current/past management and/or short-term reservation management agreements. Current/past lease or rental occupancy agreements with tenants and guests. Lead-based paint disclosures for residential property built before 1978. Disclosure of brokerage relationships and/or listing contracts to lease. Disclosure of compensation, service income from affiliated entities. Brokerage accounting records, bank reconciliation, tax and owner reports. On-going contracts, bids, invoices, service provider billings, correspondence with client. Legal notices, actions, accounting reports affecting owner/occupant/tenant funds. Documentation for commissions earned vs. taken/charged to others. Prompt assessment, timely (45-90 days) collection, restitution of all money due escrow. Documentation verifying reported receipts, income and all expenses paid for another.
Payment of Expenses
If there is a shortfall of funds, broker may advance money to the owner in accordance with the procedure set forth in Broker's Ledger Rules. When managing multiple properties, broker may transfer (with owner authorization) funds between the account.
Good Funds - Cashier's Checks / Teller's Checks
Issued by the lending institution or credit union where purchaser has an account. Bank or CU will only issue check if party requesting has funds in the account to cover.
Rule E-21 (Audit of records)
If broker is audited and record keeping deficiencies are found, broker must submit a written answer to the commission.
Property Management Ledgers
If broker manages fewer than 7 residential properties, tenant security deposits and rental revenues and expenses may all be kept on the owner's ledger. For more than 7, there will be separate ledgers for the owner and tenant.
Accounting system has 3 parts
Jornal Ledger Bank reconciliation worksheet
Bank Reconciliation Formula
Jornal Balance + Sum of ledger balances = Bank balance = Transaction file
Sales FIles to Keep (23)
Lead-based paint disclosures for residential property built before 1978 Exclusive right-to-buy/sell, or agency or open listing agreement (listing broker only) Disclosure of brokerage relationships Disclosure of compensation for services and income from affiliated entities Disclosure of the source of residential property square footage Contract to buy/sell/exchange real estate Current marketing/MLS information used in the transaction Inspection notice Seller's property disclosure statement Actual closing instructions-negotiated before the actual date of closing Copy of any power-of-attorney (show recording data if closed in-house) Copy of earnest money check, validated escrow bank deposit slip (or receipt below) Signed and dated receipt for earnest money held by third-party closing entity Copy of earnest money note Buyer's financial information—if "owner-carry" financing Rental/occupancy agreement before closing date (have separate security deposit) Estimated closing costs/estimated monthly expenses prepared by licensee Settlement statement (or equivalent computer form) for the party represented or assisted Side agreement/amendment to revise a settlement statement Promissory note (unsigned, marked "COPY")** Closing entity commission check remittance less earnest money amount if applicable Escrow receipts or collection agreements—continuing after closing. Accounting for use of advance retainer fees.
CP-6 (Release of Earnest Money)
If no dispute and purchase agreement is terminated, EM is disbursed to appropriate party. If disputed, broker should obtain written releases from both parties. Review 3 options 1. Await proceedings between parties 2. Interplead earnest money into a court and recover court costs. 3. Broker will provide notice to buyer and seller that unless broker receives a copy of summons and complaint or claim within 120 days, broker will return earnest money to BUYER.
CP-4 (Interest)
If the contract does not state otherwise, interest on an interest-bearing account does NOT belong to the broker and will follow the earnest money.
Good Funds - Wire Transfer
Most common way of transfering funds for commercial transactions. Broker acting as closing agent must verify that funds have hit the broker's bank before broker can disburse closing funds. **Be aware of wire cutoff times for each institution. They will sometimes delay closing.
When does the broker deposit the escrow deposit (earnest money)?
No more than 3 business days after the contract is accepted.
Documents to keep ONLY REQUIRED when the BROKER is closing a transaction
Promissory Note (unsigned, marked "COPY"). Tax reports required by government agencies (Colorado withholding tax). Six-column worksheet for settlement (or equivalent computer form). Deed (copy showing recording data if closed in-house). Deed of trust (copy showing recording data if closed in-house). Other legal documents prepared by the broker.
Escrow Accounting Equation
Reconciled escrow bank account cash balance must equal the escrow account liabilities found in the contract.
Rule E-6 (Electronic Records)
Records may be maintained in electronic format.
Interest-Bearing Accounts can be placed in these types of investments.
Stock market Credit unions Colorado Association of Realtors Housing Opportunity fund (CARHOF) The account must be "liquid".
Interest on security deposits belongs to...
Tenants UNLESS the landlord can demonstrate that the landlord is entitled to retain security deposits. *Interest earned on security deposits may be retained by landlord of a MOBILE HOME PARK as compensation for administering the trust account.
Purpose of The Ledger
To keep each beneficiary's transaction separate from other beneficiary's transactions in the escrow account.
Bank Reconciliation Worksheet
To verify that at any given point, the amount of liabilities shown in the transaction documents balances with the amount of cash available in the escrow bank account.
Broker's Journal
Used to track all income and outflow of the escrow account. The journal will correspond to the individual beneficiary ledger entries.
Good Funds - Broker Check in Advance of Closing
When broker receives earnest money from buyer and broker is NOT acting as closing agent... Broker may transfer funds to closing agent prior to closing by writing a check on the escrow account.
Rule E-5 (Detailed) (Closing Responsibility)
Whether working with the buyer or seller as a customer, the licensee shall be responsible for the proper closing of the transaction and shall provide, sign and be responsible for accurate, complete and detailed closing statement.
Requirements to place funds in Interest-Bearing Accounts
Written consent and disclosure of the nature of the account (description, risk warnings, detailed description of restrictions and penalties, agreement between parties as to any income or loss).
CP-9 (Record Keeping)
a broker shall maintain a duplicate of the original of any document (non public record) which was prepared by or on behalf of the licensee and pertains to the consummation of the leasing, purchase, sale or exchange of real property in which the broker participates as a broker. Cooperating brokers, including brokers acting as agents for buyers in a specific real estate transaction, shall have the same requirements for retention of duplicate records as is stated above, except that a cooperating broker who is not a party to the listing contract need not retain a copy of the listing contract or the seller's settlement statement.
Records for funds DISBURSED must include
- Date of payment - Check number - Name of payee - Reference to vendor documentation verifying purpose for payment - Amount paid - Resulting cash balance for account
Records for funds RECEIVED must include
- Date of receipt & deposit - Name of person giving money - Name of person and property for which money was received - Purpose of receipt - Amount received - Resulting cash balance for account
Broker does not need to retain copies of...
- Existing public records - Title commitments - Loan apps - Lender required disclosures - Related affirmations from independent third party closing entities AFTER settlement date.
FDIC insurance amount on regular checking accounts.
$250k
Good Funds - Tri-Party Agreements
Agreement among the broker, title company and broker's bank. The broker's bank unconditionally guarantees a lender's check.
Beneficiaries' Ledgers
Each beneficiary of an escrow account will have a separate ledger. The owner Each tenant The seller The buyer
Where to Keep Files
Each transaction will have a file. All files should be kept in the broker's office in a file cabinet capable of being locked. Escrow checks are deposited in the escrow account and copies of each escrow check should be retained in the file.
Accounting rule of commission earned
Earned when the broker has completed performance of the service and the occupant has left the premisis.
Tax rule of commission earned
Earned when the broker has the right to use the funds according to contract provisions.
Rule E-40 (Agency relationships)
The agent must represent the interests of the principal over the interests of other parties. The broker shall not enter into a brokerage relationship with one party as an agent and the other party as a transaction broker. If broker is working with both buyer and seller, the broker may do so as.. 1. Transaction broker for both 2. Single agent for seller, treating the buyer as a customer. 3. Single agent for buyer, treating the seller as a customer.
When a promissory note is used as a deposit...
The broker should not enter the deposit in the journal until the note is redeemed.
Owner of interest accrued in a property management trust account
The landlord.
Broker can retain all or part of interest when...
The parties agree.
Escrow Account
The trust account established by the broker under the provisions of the license law for the purpose of holding funds on behalf of the broker's principal or some other person until consummation or termination of a transaction.
Storage of Promissory Notes
They should be treated like cash and kept under lock and key.
