CH21 - trust funds and trust money

Broker Brad accepts an earnest money deposit in cash when buyer Betty makes an offer to purchase Bill's property. She asks him to hang on to it until their negotiations are complete and Bill signs the contract. What is Brad's deadline for depositing Betty's earnest money into the brokerage trust account?

3 banking days after receiving it - If an earnest money deposit is made in cash, it must be deposited in the brokerage trust account within three banking days of receipt, even if the offer has not yet been accepted.

A brokerage trust account could be a fixed-term certificate of deposit that pays interest if all parties who have an interest in the funds provide written consent.

False - A certificate of deposit is considered a security, not a demand account, and therefore could not be used for the brokerage trust account. Similarly, a government bond would be a prohibited vehicle for a brokerage trust account.

On Monday, broker Ursula accepts an earnest money check from buyer Billy when his offer on Glen's property was accepted. Ursula's broker-in-charge must deposit that check into the company trust account by end of day Friday.

False - The check must be deposited within three banking days, so the deadline would be the end of day Thursday.

A North Carolina real estate trust account can be opened only in a state-chartered financial institution located in North Carolina.

False - The trust account must be in a federally insured financial institution that may lawfully operate in North Carolina, but it could be out of state if all required conditions are met.

Broker Damian is holding the earnest money deposit for buyer Julie. A week before closing, the seller rescinds the contract and Julie asks for her earnest money back. The seller does not agree, and the contract specifies that both parties have to agree on earnest money disbursement. Under what circumstances could Damian disburse the earnest money? Select all correct responses.

He receives a court order providing for disbursement. / He receives written direction from buyer and seller agreeing to disbursement. / He turns the funds over to the Clerk of Superior Court.

Shelly is holding earnest money for the Smith property transaction. The deal falls apart at the closing table and Shelly gets a written demand from Mr. Smith saying that he wants the earnest money as liquidated damages. Which statement provides the most reasonable course of action for BIC Shelly?

She must obtain signed consent of both parties as to how to dispense the earnest money.

Another thing to note about residential security deposits under the Tenant Security Deposit Act: The landlord—or the landlord's agent—must notify a tenant within 30 days of the beginning of the lease of the name and address of the financial institution where the tenant's security deposit is located, or the name of the insurance company providing the bond. This information is typically included in the lease. If the security deposit funds are transferred to a different financial institution, all affected tenants must be notified.

True

Broker-in-charge Brittany is opening a trust account for the new branch office to which she was assigned. She can deposit $100 of brokerage funds into the trust account to maintain the minimum balance necessary and cover any service fees.

True

Commingling is the illegal mixing of money that is held in trust on behalf of a client or other party with business or personal funds. Commingling is specifically prohibited under North Carolina Real Estate License Law [G.S. § 93A-6(a)(12)]. Trust account funds must always be separate and distinct from the company's general business accounts or the broker's personal accounts.

True

Conversion, remember, is another word for "stealing."

True

Generally, trust monies must be deposited no later than three banking daysfollowing the broker's receipt. If earnest money accompanies an offer to purchase or lease, the deposit deadline is three days after acceptance. Cashtrust monies must always be deposited within three banking days of receipt.

True

If the buyer chose to pay the seller a separate due diligence fee, that too would generally be applied as a buyer credit. However, remember that a buyer pays a due diligence fee directly to the seller, therefore, the fee would not be transferred to a settlement agent.

True

In a purchase transaction, of course, the contract of sale specifies what happens to any earnest money in case one of the parties backs out of the deal. In the standardized sales contract used in North Carolina, for example, if the buyer defaults, the earnest money deposit is forfeited to the seller. This is a type of liquidated damages provision. The seller keeps the deposit instead of suing for breach of contract.

True

Like earnest money, a due diligence fee is not required for a valid purchase contract. However, it's important to remember that due diligence fees are not the same as earnest money. If the buyer does cancel during the due diligence period, he or she can likely get back any earnest money deposit, however (depending on the terms in the purchase contract).

True

Nonresident Limited Commercial Brokers. This is someone who is licensed in another state and who has a brokerage cooperation agreement and declaration of affiliation with a North Carolina broker to handle a commercial transaction (Rule A .1808). A nonresident limited commercial broker must turn over any trust money to his or her affiliated North Carolina broker upon receipt, which, again, means as soon as reasonably practicable.

True

Provisional broker Becky accepts a cash earnest money deposit from her buyer client on Saturday afternoon, which she turns over to broker-in-charge Paula when they're both in the office Monday morning. Becky has complied with the requirements for handling earnest money deposits.

True

So long as the account is properly designated as a trust/ escrow account, all deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per each individual for whom funds are held. Thus, a broker's trust account may contain $500,000 total, but all funds are fully insured so long as no one individual's interest in the account exceeds $250,000.

True

The buyer may choose to terminate the contract prior to the end of the due diligence period for any reason—or no reason—but would forfeit the due diligence fee, as it is nonrefundable. If the seller terminates the contract during the due diligence period, however, the fee would be returned to the buyer. If the transaction goes to close, the due diligence fee is generally credited to the buyer at settlement.

True

The handling of tenant security deposits was covered in detail in an earlier chapter. Also, remember that this discussion does not apply to due diligence fees, which are nonrefundable. If the buyer terminates the contract during the due diligence period, the seller is entitled to keep the funds.

True

The law specifically indicates that a trust account maintained by a broker-in-charge must be in a demand deposit account located in a federally insured depository institution that is lawfully doing business in North Carolina [G.S. § 93A-6(g)].

True

Under the Tenant Security Deposit Act, the landlord—or the landlord's agent—must notify a tenant within 30 days of the beginning of the lease of the name and address of the financial institution where the tenant's security deposit is located.

True

When a broker accepts a deposit earnest money included with an offer to purchase or a security deposit included with an offer to lease, the deadline to deposit the funds into the trust account is three days following the date of acceptance. If the earnest money, due diligence fee, or security deposit is made in cash, however, it must be deposited within three banking days of receipt [Rule A .0116(a)(3)], even if the offer has not yet been accepted.

True

When a broker-in-charge opens a trust account, he or she must ensure that the bank properly designatesthe account so that the words "trust account" or "escrow account" appear on all associated documentation or communications, including bank statements, checks, deposit tickets, or signature cards. This requirement protects the funds of clients and others that are maintained in the trust account should the brokerage company become insolvent or be involved in a lawsuit.

True

When a buyer's earnest money deposit is held in a brokerage trust or escrow account, Commission rule A .0116(e) indicates that the broker-in-charge may transfer those funds to a closing attorney or other settlement agent no more than 10 days prior to the anticipated settlement date.

True

When the disbursement of trust funds is in dispute, the broker-in-charge can disburse the funds only with a written release from the parties or a court order. The BIC could also deposit disputed funds with the Clerk of Superior Court or disburse money according to a written agreement if it appears that one of the parties has abandoned his or her claim to the funds.

True

While a broker-in-charge may transfer possession of trust money to a bookkeeper, secretary, or some other clerical employee to record and deposit the funds in a trust account and to maintain trust account records, the broker-in-charge nonetheless remains responsible for the care and custody of such funds. Brokers-in-charge should closely and diligently supervise the acts of all persons having access to the trust account, since final accountability for the accuracy and integrity of the account rests with the broker-in-charge. Access to trust money should be limited and carefully controlled. Remember: Even if a broker-in-charge designates someone else in the office to maintain the trust account, the BIC is ultimately responsible to safeguard those funds and ensure compliance with the Real Estate License Law and the Commission rules.

True

While the instrument is in the broker's possession, he or she has a fiduciary to safeguard it, but the broker cannot deposit it into the brokerage trust account. Instead, within three business days after the acceptance of the option or sales contract, the broker must follow the buyer's instructions to either: Deliver the instrument to the named payee OR Return it to the buyer. For example, a buyer writes earnest money deposit check made out to the seller when submitting an offer to purchase. She asks her broker to hold the check during negotiations. Once the buyer and seller agree to terms and execute the contract, the buyer's agent must deliver the check to the seller.

True

A broker who withdraws monies from an escrow account to pay for brokerage expenses is guilty of conversion.

True - Commingling is simply mixing escrow funds with brokerage funds. When escrow money is appropriated by a broker for personal or company use, this is known as conversion.

Broker Bob is preparing to purchase a property that is listed by another brokerage company. If he deposits his earnest money deposit for the purchase of that property into his company's escrow account, he could be guilty of commingling.

True - That earnest money deposit represents Bob's personal funds. If he deposits it into the company escrow account, he would be illegally mixing his personal funds with the funds held in trust for other people. Bob could, instead, ask the listing broker to hold his earnest money.

The North Carolina Real Estate Commission has oversight authority over the time share industry in the state.

True - The Commission oversees time shares in North Carolina. It has the same authority related to licensing, rule-writing, and administrative discipline as it does for real estate brokers. Commission rules addressing time shares are found in Article B of Chapter 58-Real Estate Commission.

A separate demand deposit bank account used for the safekeeping of funds belonging to parties to a real estate transaction. Also called Escrow Account.

Trust Account

Could Glen maintain one interest-bearing escrow account and one escrow account that is not interest-bearing?

Yes

Glen is the BIC for a large commercial real estate firm. At any given time, there could be hundreds of thousands of dollars in the brokerage trust account. Buyer ABC Company refuses to sign the document allowing Glen to keep any interest earned from its earnest money deposit. Do you think Glen can deposit the ABC Company money into his interest-bearing account?

Yes - Technically, Glen could deposit ABC Company's earnest money in an interest-bearing trust account. But then Glen would have to give ABC Company any interest earned on its funds, which means someone would have to calculate what percentage of the earned interest was based on the amount of ABC Company's deposit. Situations like this are why many brokers-in-charge simply open non-interest-bearing trust accounts.

Trust account inspections may be conducted _______________ without the consent of the broker-in-charge.

at any time

The mixing of brokerage operating funds with contract deposit funds is known as

commingling.

You collect an earnest money check from your buyer client and give it to the seller's agent along with the offer. The seller's broker deposits the check into his general business account. This is an example of

commingling.

Broker-in-charge Sue deposits a client's earnest money check into her personal account to cover some short-term expenses. She plans to move the money into the office escrow account when she gets her commission on a deal that's about to close. Her actions could be considered an example of

conversion.

A broker-in-charge can deposit up to _______ of business funds in his or her trust account to cover service charges imposed by the bank.

$100

A bank account for which the account holder has instant access to the funds in the account with no advance notice or penalties for withdrawal, such as a checking account.

Demand Deposit Account

The nonrefundable agreed-upon amount that the buyer pays the seller for the right to terminate the contract for any reason or for no reason during the due diligence period; this is not the same as earnest money.

Due Diligence Fee

Money offered as an indication of good faith regarding the future performance of a purchase agreement that is often held in a brokerage trust account.

Earnest Money

A broker-in-charge CANNOT earn interest on the money kept in the brokerage trust account.

False

A certificate of deposit (CD) is a bank product that earns interest on a lump-sum deposit that's untouched for a predetermined period of time.

True

Provisional Brokers. A provisional broker must turn over any trust money to his or her supervising broker-in-charge upon receipt, which, for all intents and purposes, means as soon as reasonably practicable.

True

Trust accounts

must be FDIC-insured.

An insured depository institution is any bank or savings institution that is covered by some form of deposit insurance. Of course, virtually all eligible banks and savings institutions carry this protection, as both state and national banks are required by law to have coverage from the Federal Deposit Insurance Corporation (FDIC).

True

According to Commission rule A .0117(c)(4)(C), brokers are allowed to maintain a maximum of $100 of company funds in the escrow account to cover any bank fees charged against the account. If the service charges exceed $100 per month, the broker may deposit whatever amount is necessary to cover the service charges each month. The BIC must specifically document any company funds being deposited into an escrow account in a separate ledger that identifies the date, the amount, and the running balance for each deposit and disbursement.

True

Although not required, a broker-in-charge is allowed to deposit trust funds belonging to principals and other parties into an interest-bearing account as long as the broker has written authorization from all interested parties that conspicuously sets forth how and to whom any earned interest will be distributed [Rule A .0116(c)].

True

An escrow account is the same thing as a trust account.

True

Which statement about trust accounts in North Carolina is not TRUE?

The trust account must be in a North Carolina bank.

Broker-in-charge Andrea designates Sid, her unlicensed assistant, to make trust fund deposits and handle the bookkeeping. Which statement is TRUE?

This is fine, but Andrea is still responsible.

A broker could choose to maintain one or multiple trust accounts. If collecting and holding funds for a property owners' association, the BIC must maintain a separate, exclusive trust account for each association. A trust account could be interest-bearing if the BIC has written authorization from all interested parties that conspicuously sets forth how earned interest is distributed.

True

A broker-in-charge can transfer a buyer's earnest money deposit is held the trust account to a closing attorney or other settlement agent no more than 10 days prior to the anticipated settlement date. The BIC cannot disburse any earnest money held for any other purpose without the written consent of the parties.

True

A broker-in-charge is holding disputed trust funds. The buyer and seller take the matter to court. The BIC must disburse the funds as directed by a court order.

True

A broker-in-charge who collects, maintains, disburses, or otherwise controls the funds of a property owners' association, such as an HOA or condominium association, must maintain an exclusive trust account for each association. The funds for one property owners' association cannot be commingled the brokerage funds OR with the funds from any other property owners' association. Of course, a broker is also prohibited from converting any money from a trust fund to business or personal use. Periodic statements (not less than every 90 days) must be given to the association reporting the balance of the money and indicates all receipts and disbursements on behalf of the association [Rule A .0118].

True

A buyer gives her agent an earnest money deposit in cash and asks him to hold on to it until the sales contract is signed. He puts the cash in the brokerage safe while the negotiations are going on, then deposits the cash into his trust account a week later on the day that contract was finally signed. This broker is in violation of Commission rules.

True

A landlord or property manager who collects and maintains security deposits from a tenant in a residential dwelling must have a trust account. The basic requirements are the same: A demand deposit account located in a federally insured depository institution that is lawfully doing business in North Carolina. It could be an interest-bearing account under certain circumstances.

True

A trust account protects the interests of all parties to the transaction.

True

A __________ account is one in which the account holder has instant access to the funds in the account with no advance notice or penalties for withdrawal, such as a checking account.

demand

Generally speaking, who is the beneficiary of earnest money deposited in a brokerage's trust account?

the seller