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Trust Accounts | Real Estate Exam Prep - YouTube
Channel: The Real Estate Classroom
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hey everybody my name is paul vachesky
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and welcome to the real estate classroom
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youtube
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channel in this video we're going to
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discuss trust accounts it is something
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that you as a real estate stude a
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student studying for your real estate
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exam
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absolutely you have to know what they
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are and there are some particular
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things about trust accounts you just
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have to know
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so let's talk about trust accounts
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all right so in this video we're going
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to discuss trust accounts now trust
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accounts is something that you as a
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student
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studying for your real estate licensing
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exam you have to know
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especially you broker candidates okay
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but
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quite frankly as a real estate
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professional you're gonna have to know
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about trust accounts anyways because we
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do
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deal with them on a daily basis in our
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profession
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but before we get to trust accounts and
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what you need to know do me a favor
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if you would give this video a thumbs up
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subscribe to the channel hit that little
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and you know what if you have not uh
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if you have questions or comments please
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put them down below
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in the comment section we love comments
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all right so trust accounts
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a couple of key terms you have to know
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trust account
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and then earnest money now earnest money
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we've already talked about
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in a previous video so i'm not going to
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get into the details of that but trust
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account what is it well here's the legal
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definition
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it's a a trust account is a legal
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arrangement through which
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funds or assets are held by a
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third party called a trustee for the
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benefit
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of another party called the beneficiary
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so if i were to put that in layman's
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terms here what i would
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here's what i would tell you a trust
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account is
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an account such as a checking account at
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a financial institution within
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the state in which the broker is doing
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business
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where money that belongs to
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other people is deposited into when it
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become when it comes into the possession
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of the broker
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so a buyer gives the broker or the
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broker's
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agent earnest money as part of
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a purchase contract that earnest money
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will be deposited into the trust account
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uh if a tenant
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pays the monthly rent and gives that
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rent money or that rent check to the
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broker
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that broker is going to deposit it into
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the broker's trust account think about
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it
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the the rent money is not the brokers
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the earnest money is not the brokers but
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the broker has to account for it
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and that's why we have trust accounts
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so that's the definition all right so
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let's talk about the specific
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requirements
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for trust accounts and things that you
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have to know for the real estate exam
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number one
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design every designated broker must have
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at least one trust account now they
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typically can have more than one and in
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a few states
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it's actually required that they have
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more than one depending on the
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sales activities or the the real estate
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activities that they do
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but what you need to know is there's
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only one designated
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broker per company now that designated
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broker could have associate brokers that
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work underneath them
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there can be managing brokers there can
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be branch manager brokers
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but there's only one designated broker
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and
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at a minimum every designated broker
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must have
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one trust account as i said there are
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some states
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you don't have to know this but some
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states require the broker to have a
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trust account for example for
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their sales division and then another
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trust account for property management
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but what you need to know is one
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designated broker one
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trust account and very important
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that trust account must be at a bank or
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other financial institution
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that's located within the geographical
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boundaries of
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where the real estate company or that
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broker is doing business
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very important number two
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what is the purpose of trust accounts
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you have to know this it is
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for other people's money that comes into
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the broker's possession
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for example earnest money rent money
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security deposits monies that's taken
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in advance to pay expenses and down
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payments
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uh the buyers down payments for example
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that those
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monies belong to other people and so
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once they come into that possession of
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the broker it has to be put into the
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trust account
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and it has to remain in that trust
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account until that
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transaction is consummated
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meaning it was closed or it was
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terminated
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or by mutual agreement by mutual
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written agreement of the parties to the
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contract so let's kind of work through
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that number one
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look at uh money's advanced to pay
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expenses i discussed that what does that
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mean well
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for example let's say it's a commercial
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broker and they
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are managing a huge uh
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commercial retail outlet for an
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owner there could be literally tens of
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thousands of dollars in marketing and
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advertising that the broker is going to
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have to utilize to get tenants the
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owners typically pay that
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so the owner will deposit
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10 20 30 50 000 into that broker's trust
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account so the broker
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can use it to pay for that advertising
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so the
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it's other people's money it's the
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owner's money but they are authorizing
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the broker to
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use it for advertising and marketing
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and there's going to be a paper trail to
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ensure that it was you know used for
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what its intended purposes
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but that's what we mean by money advance
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to pay expenses
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all right so the other thing is i do
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want to talk about just briefly
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uh when is a broker owed money so
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maybe there is ten thousand dollars
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that's deposited into that trust account
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that eventually
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at a future date when the transaction is
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closed
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the broker gets two thousand dollars in
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commission we know that the broker
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is entitled to two thousand dollars in
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at a future date
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but not today so the broker can't touch
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that
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now once that deal closes then the
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broker can legally take out the two
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thousand dollars that's entitled to them
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and then the other eight thousand is
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dispersed as
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according to the terms of the contract
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so that's an example of when it's
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consummated or closed another scenario
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may be that same ten thousand dollars is
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there
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that broker is owed that two thousand
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dollars if it closes but
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maybe there's a termination agreement
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between the client and the broker that
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says that the deal is terminated
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for this reason or that reason then we
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still get our
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summer all of that two thousand dollars
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so when that contract has been
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terminated then the broker could legally
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take
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whatever they're entitled to out of that
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money
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um or written consent
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uh sometimes for whatever reason i can't
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think of anything off the top of my head
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but um
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maybe for whatever oh i got an example
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that actually happened
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so there was a broker uh that was
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setting on about fifty thousand dollars
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in uh in a trust account for money
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advanced to pay other expenses this was
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a case where the broker
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had deposited 50 000 for property
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management services well
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the owner who had a management contract
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with that
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designated broker wanted to purchase
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another property
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and so they authorized in writing for
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the broker to take
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10 000 of that 50 and transfer it over
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for the earnest deposit for that
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property
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again again the broker had to have
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written consent from the person that
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owned that money it was party to the
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contract
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so that's an example all right number
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three parties involved in the
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transaction may agree
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in writing to other arrangements doesn't
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happen often
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but here's an example
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in most states the the trust account is
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non-interest-bearing so let's say that
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it's a
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huge development project and
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the owner or the principal in that
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transaction deposits
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50 million dollars as a down payment
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into that broker trust account
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now that's 50 million dollars not making
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any interest
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oh and by the way the closing is 12 or
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18 months out which is really not
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uncommon so 50 million dollars over 18
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months making
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zero interest is not okay so sometimes
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what will happen is the buyer and the
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seller will agree in writing
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for the broker to open up a savings
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account or a money marketing
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account to put that 50 million dollars
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into
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uh so you know that person that that
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deposited the 50 million dollars can get
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interest
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it's not common but that is a that is a
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method or or a way to do that for those
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larger deposits but again all parties to
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the contract have to agree to it
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number four um most
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trust accounts can be interest bearing
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or non-interest bearing and that
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solely depends on the state in which the
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trust account is in
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number five in every state there is a
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process for the regulatory body the
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government regulatory body
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most of the time it's the real estate
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commission or or maybe they call it the
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the department of professional licensing
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here in nebraska for example where i'm
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at the nebraska real estate commission
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will
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audit that trust account at least once a
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year
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they may do it more than once a year
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depending on the size and the number of
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transactions that firm does but at least
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once a year
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and if they find that that trust account
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is
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not satisfactory and there's been some
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things that the broker wasn't doing
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right
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then uh that governing body
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in fact they could revoke the
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the brokers the broker's license or
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censure the license if the if that
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governing body
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has definitively determined through the
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due process
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through due process that they indeed did
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violate some law or some prob uh some
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policy
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or or regulation uh one thing i do want
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to point out with that
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very important if a if
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if a trust account is found to not be
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in the way it's supposed to be so they
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were doing
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illegal transactions or they the the
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broker was pulling money out when they
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shouldn't have those type of things
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that account is what we or that broker
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is what we call in jeopardy
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but the governing body no matter where
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what state you're in no matter what they
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can't just
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automatically revoke a license or
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censure the broker there has to be
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a mechanism for due process here in
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nebraska we have what's called the
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nebraska real estate commission so the
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auditor will find that the
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trust accounts in unsatisfactory
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condition they'll file a report with the
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nebraska real estate commission
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the nebraska real estate commission then
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will press charges if you will
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or bring a complaint against that broker
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then the broker has a right to have a
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hearing in a trial and everything else
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in front of the actual
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nebraska real estate commission it's
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never automatic
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due process must happen before
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any kind of punitive things can happen
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and the reason i being that bring that
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up because sometimes
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the the the real estate exam
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likes to use words like automatically
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revoke
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those type of things and it's never
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automatic there has to be that due
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process
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i know it's kind of a long sidebar but i
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really wanted you to know that
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and then number six it's shielded from
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any creditors of the broker
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it makes sense think about this the
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trust account is for other people's
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money so if the broker
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is getting sued or the broker has
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judgments against them or the broker is
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filing bankruptcy
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those creditors should not have access
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to
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that trust account money because it's
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not the broker's money that's just not
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the broker's money
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so those are six things you definitely
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need to know
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last thing please keys to remember very
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important
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number one trust accounts are for other
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people's money that comes into the
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possession of the broker
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number two brokers can not in any way
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co-mingle funds
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none they can't put their general
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operating funds in with the trust
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account
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the trust account is only for other
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people's money
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and number three is the broker can't
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take money out of that account until
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they're legally entitled
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to that money which means they can't
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take it out until the deal has been
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trans
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uh the transaction has been consummated
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terminated
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or there's some other written consent
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that's been given by the parties
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now last thing before i let you go
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please remember this trust accounts are
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for other people's monies
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you can't co-mingle funds and the funds
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have to remain there
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until the deal is consummated terminated
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or written consent is given by parties
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to the contract
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of other arrangements very important
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that you remember that
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all right thanks for joining me today
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for this video if you're going to
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continue studying check out this video
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appreciate it alright i'll see you in
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the next video
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