Hi. I post on the BPO forum, but I'll give my background here real quick. I am primarily a rehabber. My husband and I have been renovating homes for resale for 10yrs now. I got my Broker's license a while back so that I could receive commissions when I buy property for this purpose.

Now I have a listing. The DRE says that as a Broker I need a Trust account for earnest money. They say that I cannot have more than $250 of my own money in the account - for fees and such.

Wamu says that in order to open a Trust account, I need a Trust agreement with the client. Huh? In order to open a small business account to use as a Trust account, they want a minimum of $1000, which exceeds my legal limit. My questions are:

1. What type of Trust account do I need? A small business or a Trust? If it's a Trust, what agreement is the bank talking about?

2. Can I just open escrow with a title/escrow company and hand the earnest money over to them, eliminating the whole Trust account altogether?


Any assistance at all is greatly appreciated. Thanks!

Don't think WAMU understands why you need a broker trust account. As a broker, I have a trust account with the same bank I have my regular business checking account with. It was opened with the $250.00 mandated by DRE and I use this account for the good faith deposit checks as well as rent checks from the properties I manage.

You may have to explain to WAMU that this is your broker trust account and it is not set up a third party.

Other than that, deposit checks on offers can be made payable to your brokerage, documented in your trust records and you then endorse the check over to the Escrow or title company handling the sale.

You can also have the buyers make their deposit check payable directly to the escrow company, copy and document this in your trust transaction records and forward on to the escrow company without delay.

Personal checks, cashier's checks or money orders are handled this way. We never accept cash in our office for good faith deposits.

Ack. I'm in CA & I do not, will not have a trust acct. Nothing but potential headaches since I don't do PM I see no sense in it.

Locally everyone just has buyers make their EM checks out to the escrow co.

Sooooo much less liability & bookkeeping.

I don't have a trust account either.

Everyone here also makes EM deposits out to the title companies.

On my REO listings I instruct them to write "_________ Title Company" and we fill it in later once we know who the bank is using.

Must be a California, and perhaps other states too, thing to have another company hold the earnest money deposit. In New York, at least upstate, the brokers have escrow accounts to hold earnest money. By law it must be a separate account so it is not comingled with operating funds. The broker is prohibited from claiming interest on the account therefore most, if not all, are non-interest bearing. Either listing or selling broker can hold it as long as it is documented how much and where.

A Broker in this area would flip out if an earnest money check was written out to the brokerage.

So funny how we all do the same job, but completely different.

Our state Ga is that way to with the brokers holding the earnest money in escrow.Nationally most earnest money is held by title companies.In Ga we are getting more title companies to hold earnest money and getting away from the escrow account held by a broker because of litigation reasons.

Our purchase and sale contracts stipulate what happens when there is an earnest money dispute.It says all interest earned from a brokers escrow account will go to the brokerage not the person putting the earnest money down.

It also says if there is a dispute the broker looks at the contract and makes a determination as to who was the breaching party and who is entitled to the earnest money.Letters are then sent out to the buyer and the seller with the decision and the seller or buyer has 15 days to respond and disagree with the decision.

If either party disagrees with the decisions the funds are interpleaded into a court of law where a judge will make the final ruling.The losing party will be responsible for all broker costs interpleading into court and attorneys fees.

While interpleading sounds good at first it is very costly and time consuming for the buyer and the seller.It is MUCH better for both to come to terms outside of court and move on.

Monitering earnest money deposits is a big pita for brokers and we are not paid enough to regulate these disputes.I do not have an escrow account and have my title company hold the earnest money.

The title company has a seperate addendum the buyer must sign along with the p&s where the title company has the final ruling and the earnest money cannot be interpleaded.If the buyer does not agree to this the title company WILL NOT hold funds.(smart on there part)

It just doesn't make sens for a broker to hold funds.

It's like a friend of mine that owned 6 auto shops.You constantly get hit with frivolous lawsuits where customers say after you did a repair you messed up there car but the problem has to do with anothe rpart of the vehicle and nothing you worked on.Needless to say you spend countless hours in court and the lawsuits are dropped but it can consume you.That's why he sold 4 auto shops off and kept the 2 highest income ones that net him 500k a year each.

Most agents put in there contracts xyz company to hold earnest money.The problem with this is every time you submit an offer for a buyer and it is rejected you have to go through a pits process to get there funds back.You have to wait for the funds to clear and reissue back to the buyer.

Instead of doing this we put in our contracts xyz company is to hold earnest money (upon acceptance) of the contract meaning once all the dust settles and we go under contract THEN that's when we get the earnest money check from the buyer and have the title company hold.This way if we put in 5 offers and the last one was accepted we wouldn't have to worry about the earnest money being held until then-it saves alot of time and headache.

When it's an offer on a short sale I put the stipulation that Upon Acceptance by the bank or banks if there are 2 or 3 mortgages than upon the short sale being accepted earnest money will be deposited into escrow.

there nothing unusual about a broker holding an earnest money deposit check uncashed until acceptance, then placed into escrow.

First, that is preposterous. There is no "agreement". This is a no brainer (with all due respect). A trust account is very simple; You open a free checking account. Thats it. On mine, I have my name followed by "Broker Trust Fund Account". My balance is $5.67.

2; I think this is not allowed since the trust account must be ongoing and not just while you have an escrow.

California requires a trust fund account also, but in CA, broker is allowed to hold the EM deposit uncashed until acceptance if agreed by both parties, then put in escrow, which is not allowed in some other states.

Of course, if the parties don't agree to allow the broker to hold the check, then it has to be deposited into the brokers trust account, which is why one should always be maintained.

Brokers here are allowed to collect the interest as long as the buyer agrees to it. All EM deposits here are held by either the listing or selling brokerage.

jgizzi,

Is your free checking account a business account? Also, does it recieve interest, and if so, who gets it?

Everyone - go you just have your clients sign something stating that they receive no interest on the EM?

Brokers in California are not allowed to earn interest on their trust account, after all it is other people's money. My trust account is non-interest bearing.

In my previous post, I also forgot to mention that checks we receive for the credit report fee on loan applications are also deposited in our trust account.

Should your bank allow an interest-bearing trust account, and I doubt they would do that, you would then have the task of prorating the interests earned back to each and every individual client for whom you are holding their money in trust.

Calif Dreaming:

Your last point is why most New York brokers use non-interest bearing escrow accounts. Since the broker can't claim the interest, if any, it must be apportioned among the clients' balances that are deposited there. With money going in and out of the account on any given business day the apportionment must be done on a a daily basis, hence the use of a non-interest bearing account to avoid a major bookkeeping task.

LND:

I'm not aware of anyone using a disclosure form to tell the buyers that it is non-interest bearing but it sounds like a good idea.

Here was an observation about holding earnest money from our RE commission:
1.) It is the Division of Real Estate's position that the best practice for brokers is to hold their earnest money deposits in their trust/escrow accounts because:

a. The broker is stiIl responsible for the earnest money even if it is transferred to a title company to hold.

b. The broker is able to maintain control over the earnest money and is able to return the deposit to the buyer/seller, as appropriate, if the contract fails according to the terms of the
contract and the return of the deposit is not in dispute. We are told by title companies that they will not release any earnest money deposit from a failed sales contract (even if the return of the deposit is not in dispute) until they have a signed lease from both the buyer and seller.

c. Brokers have to keep track of which title company is holding each individual deposit - some brokers of larger companies whose associates use different title companies have
told us that they have to maintain some sort of recordkeeping system even if the deposits are given to title companies.

……Then is goes into the procedures for RE offices which send checks to Title Companies….
and it states:

Requiring, title 'companies to hold, deposits in their escrow account.
Division of insurance Regulation 3-5-1 does not address the issue of title companies holding earnest money deposits.

p.s. the point is, our Title Co's come under the supervision of the Insurance Div. & NOT the RE Commission, giving the RE commission no jurisdiction over earnest money disputes. Also, brokers who hold EM, collect interest, which is collected for housing for the needy, and the Title Co's don't contribute to that effort.

I remember the 1st ouse I bought. I was asked if I wanted to receive interest on the EM. The title company made me sign a form stating my preference, and I received a small check at closing.

Nowadays in California most title companies charge a $15 fee in order to deposit into their interest bearing account, which doesn't work out to being worth it.

Really? I have never even heard of such a thing. Perhaps it's more of a regional custom.

I see no point in maintaining a trust acct when the EM can be held by an escrow co.

"I see no point in maintaining a trust acct when the EM can be held by an escrow co."

Wonder what the DRE's preferred position is on who's to hold the EM, and why?

I have never heard a position taken one way or another.

Having escrow hold the funds is certainly safer for the buyer than letting the broker hold the funds.

"Having escrow hold the funds is certainly safer for the buyer than letting the broker hold the funds."

We have had escrow/title co's go belly up, so, why would that be safer than a RE broker? At least the DRE can reimburse the EM, whereas the escrow company/title company here comes under a different, non related jurisdiction.

Hmmm, interesting point Pikes..

We don't have any "local" companies here. All of the title companies are huge national companies so it is a thought that I doubt has crossed anyones mind.

I have a feeling the DRE in California doesn't have a preference either way. They're based in Sacramento, and in Sacramento the custom is that the check is written directly to the title company. We would hear about it if they were unhappy, they like to complain

In New York the law is very specific that brokers holding earnest money must do so in an escrow account where it is not co-mingled with operating funds. Earnest money must be deposited by the next business day following final signature on the contract. Based on attorney advice I have been told there are only 3 ways to take the money out of the escrow account.

1) It may be applied to the broker's commission on closing of the sale transaction.

2) It may be released to buyer and/or seller per an agreement between them as documented on a Cancellation and Release terminating a contract.

3) If it is in dispute it is to be released per a court order settling the dispute.

In a relatively few cases, when required by the client (and I have only seen this a couple of times, and only with REO clients), the earnest money is deposited in the client's attorney's trust account.

B/c there are unscrupulous brokers out there who can be tempted if they are in a financial bind. It happens. Brokers can abscond w/the funds in the trust acct.

Far less likely w/a title and/or escrow co who are bonded & insured.

The reason I don't like brokers holding the earnest money is 2 reasons.Liability for the broker is one.The other and I have seen this is brokers are supposed to be impartial when they interpret a contract for earnest money dispursement but many times are not.

Then you get into a big mess trying to recover the earnest money-when a bank or a seller wants to hold the earnest money I laugh at that.

I like title companies because they are a nuetral third party.They don't represent the seller or buyer in the tranasaction-you could also have a nuetral attorney hold the EM at least in my state.

There is no responsibility shift to another party holding the EM. The broker is still responsible for the EM and it's disposition. (at least in my state..."accounting in a timely manner for all money and property received")

"We don't have any "local" companies here. All of the title companies are huge national companies so it is a thought that I doubt has crossed anyones mind."

Hmmmmm, see below.

http://www.caclo.org/perl/index.pl?document_id=bf1c12fdacd08a71d5986b121494d0ab

Just read this deposit instructions from Old Republic Title company.

In part, this is what it states:

"You have the opportunity to earn interest on the funds you deposit with us through a special account arrangement OldR
has established with one of its depository banks. The current interest rate for these accounts is 2.5% per annum...subject to market conditions.

If you elect to earn interest through this arrangement, OldR will charge you an additional fee of $45.00 for the establishment and maintenance of the account. It is important that you consider this cost in your decision because the cost may exceed the interest you earn.

At the bottom of the form, it gives the buyers the choice of opting in or out on placing their deposit in a segregated interest bearing account, as they call it, plus a lot more legalese.

I've never heard of Universal Title.

The only companies I have ever used in 10 years are Financial Title, Fidelity, North American, First American, Old Republic, Chicago & Placer Title (which I must admit, is somewhat local)

Well, except for all the wacky title companies my REO listings choose. You know, the ones 600 miles away who can't seem to ever get things done on time..

No and no. It's a regular, non-interest bearing checking account.

Actually there is a bit more to a properly established escrow account than just being a no interst checking account. When it is properly set up with the bank that holds it there will be an important difference seperating it from an operating funds checking account. Specifically it will be designated as an escrow (or possibly as a trust) account indicating that the funds contained in it are not yours but rather being held for other parties. As such it is excluded from your assets in the event of some legal action against you.

That's what I thought, and that's why the bank wanted an 'agreement' with whomever I was holding the funds for. Don't they 'get' RE Trust accounts?

Apparently your bank doesn't "get it". If they are looking for a specific agreement for each and every buyer that tenders earnest money with you. I have a single escrow account for the RE business but it contains deposits from multiple buyers at any given point in time. The deposits come in as contracts are written and are dispersed as the contracts are closed (or occasionally terminated per a Cancellation and Release that specifies the agreed escrow dispersment). It would be a nightmare to have seperate agreement, or worse yet seperate account, for each EM deposit.

The bank I have mine at is relatively small, I think they have about 8 office locations. I was told by one of their VP's, a personal friend, that I was only the 2nd such account they have ever had; but at least it is done right!

I have buyers make out checks to my title company to hold them in escrow. There are benefits and negatives about this. I just don't want another bank account and more records to keep.

The benefit is you don't have to worry about comingling. Here in Colorado when I read the commission's newsletter and it lists about the brokers that have gotten into trouble in the last month alot of them are for comingling earnest money and other funds. A surprising amount.

But the negative is it's more difficult to get an earnest money check back from the title company as addressed in Pike Peak's post above.

Yes, if the broker holds earnest money it should be in a separate account and not co-mingled with the operating funds. In my case the operating account and escrow account are actually at different banks, further reducing the chance that the wrong account is being used for a deposit or withdrawal.

So what can we conclude from this? (at least in California)

If a broker does not accept trust funds, is a trust fund account still required by the DRE? Can a broker avoid any trust fund requirements by simply never touching any money and requiring checks to be given directly to the title company?

In GA if a title company holds the earnest money or an attorney the principal broker DOES NOT have to have a trust account with a bank because we are not holding the funds.The attorney or title company is put into the line in our contracts of who is holding the earnest money and the buyer makes the check out to them.Sometimes the title company or attorney want to thebuyer to sign an additional rider outlining how they will handle em disputes and make the buyer sign it and if the buyer disagrees they WILL NOT hold the earnest money.It's different for each state and your state real estate commission should be able to give you the answer and a copy of the code that applies to your state.

avoid having a trust account unless you do property management, period. You are only asking for fines

So if a buyer writes earnest money deposit directly to escrow, does the brokerage have to log it in a columnar trust log?

That procedure should be "clearly" defined in your State's Real Estate Rules and Regulations. Here, almost 40% of the disciplinary actions involve mis-management (and co-mingling) of Escrowed Funds.

In California, yes. If the check is written (and funds are handed over) directly to escrow, the columnar record must indicate the date the funds were received, the form of the funds, the amount received, a description of the property, the identity of the person to whom the funds were forwarded, and the date of disposition.

I called into the C.A.R Legal hotline. The attorney who answered said as long as the brokerage does not touch the deposit and the buyer sends EMD directly to escrow, there is no duty for the brokerage to log it in the columnar trust form.

If it is *wired* directly from the buyer to escrow, you are correct. I always recommend the RPA form specify that the buyer will wire their earnest deposit into escrow for that reason.

If, as you stated, a buyer "writes"--i.e., a paper check is involved--a check directly to escrow, and you so much as touch it, then my understanding is that Regulation 2831 still requires you to record it as funds received but not deposited unless the amount is less than $1000.