- Describe the requirements for establishing an escrow account and the requirements for timely deposit of escrow funds, including interest-bearing escrow accounts
- Describe the requirements for handling advance fees and know the penalty for a violation of advance fee requirements
- Calculate the broker’s trust liability and the reconciled bank balance Prepare a monthly reconciliation statement
- Describe the penalties for an overage in the escrow account
- Describe the situations wherein good faith doubt is considered to exist and know the time period allowed to notify the FREC of conflicting demands or good faith doubt
- Distinguish among the four settlement procedures
- Describe the escrow disbursement dispute process
- Recognize exceptions to the FREC’s notification and settlement requirements
Establishing Escrow Accounts
Introduction: The purpose of an ESCROW ACCOUNT is to allow a broker to hold deposits and other items of value in trust for others. A broker is not required to have an escrow account; however, if the broker accepts a deposit from a customer or client in a real estate transaction, he or she must deposit that money in a separate account known as a trust or escrow account.
This account must be separate from any other account such as the business account or personal account. The most common places to hold escrowed funds are commercial banks, savings banks, and credit unions that are doing business in Florida. It should be remembered that any escrow is any place of safekeeping for any property so long as the buyer and seller agree to it in contract. Stocks, bonds, jewelry, artwork, and any other real or personal property can be given as a deposit. As long as the broker places it in a safe place, such as a safety deposit box, and the parties in the contract agree, it is considered escrow. An escrow account is also known as a TRUST ACCOUNT.
If a broker chooses not to have an escrow account, there are other places where deposits can be placed. Attorneys or title companies that are authorized with trust powers can perform this task. Brokers should remember that even though the deposit is being held by another party, the broker is still responsible for keeping up with the transaction and deposit status. Another method of handling deposits is to allow the listing broker to accept the deposit rather than the broker working with the buyer. Remember that anyone with the proper legal authority can hold the escrow deposit as long as the seller and buyer know about and agree to that particular situation. Sales associates cannot have an escrow account.
Types of Deposits: There are a variety of deposits that can be held in trust by the broker. Sales deposits, rental deposits, security deposits, maintenance deposits, and pet deposits are the major categories of escrow. Although a broker should separate sales deposits from rental deposits as a practical matter, the law does not require it.
A broker can establish either an interest bearing or non-interest bearing account. If the trust account is interest-bearing, the disposition of the interest must be agreed upon by all parties in the transaction. Whenever the broker retains the interest as part of the agreement, it must be taken out of escrow each month so as not to have an overage.
Establishing Escrow Accounts: Setting up an escrow account requires a number of steps. Florida law allows a broker to use up to $1,000 of his or her own money to open and maintain the escrow account for sales and $5,000 for property management accounts. It is illegal for the broker to commingle other funds that are not held in trust for others.
A broker may establish escrow accounts in a commercial bank, credit union, savings association, title companies having trust powers, and attorneys. These facilities must be doing business in Florida. Brokers are required to place all deposits in escrow “IMMEDIATELY” which means within three business days. Sales associates and broker associates are required to deliver to their employers any deposits within one-business-day. It is acceptable, however, for the sales associate to deliver the funds directly to the escrow agent provided the broker knows and approves this procedure.
Establishing Escrow Accounts (Suit): If EMD is being held by a title company or an attorney a broker has 10 business days after delivery to request a verification of deposit if that has not yet been provided. If verification of deposit is not provided in a timely manner the broker must notify all parties involved as to the situation.
The broker may designate another person to sign checks on the business account or the escrow account. However, Florida law requires the broker to be a signatory on the trust account(s). Real estate brokers are allowed to accept cash, personal checks, business checks, and certified funds. Brokers are not allowed to accept POST-DATED CHECKS or promissory notes without first securing permission from the seller.
If an earnest money deposit is made payable to the name of the sales associate, the sales associate should endorse the check and deliver it to his or her broker by the end of the next business day or ask the client to write another check made payable to the escrow agent.
The broker may disburse funds from the escrow account in accordance with the contractual agreement between the parties. It would be good business practice, although not required by law, to have all parties concerned to sign a deposit release form. This would be especially prudent when a contract is terminating in a fashion other than performance. Contracts that have a specific closing date, but are contingent upon financing, may or may not cause the contract to expire on the agreed-upon date. If the closing is unable to occur on time and it can be shown the lender was at fault, the buyer may be given a reasonable time to close by the courts.
CONVERSION is when money that is owed an interested party in a transaction is not paid but rather used for another purpose. Conversion, however, is not restricted to money alone. It could be anything of personal value. Conversion is considered a crime and is defined as the unauthorized use or control of someone’s money or personal property.
COMMINGLING, on the other hand, is the illegal practice of mixing a seller’s, buyer’s, landlord’s, or tenant’s funds with the brokers’ business account. Commingling might also be mixing the escrow money with the broker’s business funds or even personal funds.
Record-Keeping Requirements: All brokers who have an escrow account must keep and make available the DBPR all deposit slips, bank statements, and contracts in all real estate transactions. The broker is required to maintain these records for at least five years. There are five forms that should be used to reconcile an escrow account:
1. Monthly Cash Receipts and Disbursements Journal
2. Master Journal Control
3. Monthly Reconciliation Statement
4. Individual Customer Ledger Sheet
5. Master Customer Ledger Control
The broker can decide the best method to use in order to reconcile the escrow account. Quickbooks® and Quicken® are programs that many brokers use along with bank statements. Regardless of the method used, all books and records are subject to inspection by the DBPR at any reasonable time during regular business hours.
Reconciliation: Monthly statement reconciliation must be prepared in writing comparing the trust liability with each trust account’s reconciled bank balance. The minimum information required is:
1. Reconciliation date
2. Date used to reconcile the balance
3. Name of bank
4. Account name
5. Account number
6. Account balance and date
7. Outstanding checks
8. Itemized list of the broker’s trust liability
9. Deposits in transit
10. Miscellaneous data relevant to reconcile account
The broker is required to review, sign, and date the reconciliation statement each month. Failure to do so can result in disciplinary actions by the FREC.
Trust Liability: The broker’s TRUST LIABILITY is defined as the total sum of all deposits received, pending, and being held by the broker at any given time. It is other people’s money that the broker is holding in trust. The broker cannot abuse the privilege of this trust.
Reconciliation: Brokers can calculate their trust liability by totaling up all contract deposits. Taking the monthly bank statement less any outstanding checks plus those deposits that are in transit (not posted yet) determines the reconciled bank balance. The broker’s trust liability should equal the reconciled bank balance. A NEGATIVE REPORT occurs when the broker’s trust liability does not balance due to either an overage or deficiency. In the event the monthly reconciliation is either short or over, the broker must take corrective actions and make notations of steps taken.
Disciplinary Guidelines: Deposits in an escrow account that exceed the reconciled bank balance are considered an overage. Besides the money that brokers are allowed to place in escrow to maintain the account, there are other legitimate overages that may exist. If a buyer makes an offer to purchase a property and gives the broker a deposit, the money should be placed in escrow. If the offer is never accepted, that deposit may be used for another purchase. The broker is allowed to retain the deposit in escrow provided the escrow reconciliation reflects the situation. In addition, buyers and tenants sometimes unjustly cancel transactions, and their deposits are retained in escrow. If the deposit is refundable, the broker should make a good faith effort to locate and return the deposit. If the lawful owner of the deposit cannot be located, the abandoned deposit should be turned over to the Department of Banking and Finance.
Disciplinary guidelines have been established for those who fail to reconcile their escrow account. Citations for failing to reconcile a trust account fall into three categories:
Broker fails to reconcile and the account is less than $100 out of balances; $100 fine and 7 hours of escrow management course.
Broker fails to reconcile and the account is up to $200 out of balance; $200 fine and 7 hours of escrow management course.
Broker fails to reconcile and the account is from $200 to $500 out of balance; $500 fine and 7 hours of escrow management.
If a broker’s escrow account is more than $500 out of balance, more serious penalties may be involved.
FREC Notification Requirements: The broker is required to notify the FREC if a buyer and seller each make conflicting demands for a deposit (also applies to landlords and tenants). Whenever all parties to a contract make a demand on deposits held in trust, the broker is receiving CONFLICTING DEMANDS, also known as a dispute. The broker is holding the deposit in trust for the parties involved in the transaction and should not be the judge as to its disposition until closing or agreed upon otherwise. On the other hand, if the parties are still in the negotiations stage, the buyer is the boss of the money and is entitled to receive a full return of the deposit if requested.
GOOD FAITH DOUBT occurs when there is no actual demand made by any party, but the broker knows the contract is in trouble or is otherwise in some doubt. For example, if a closing date has passed and the parties have not signed a written extension but still intend to go to closing, good faith doubt exists.
Escape procedures: The broker must follow the same procedures as if it were a dispute. The broker must notify the FREC of conflicting demands or good faith doubt within 15-business days and commence one of four settlement procedures within 30-business days. The settlement procedures include:
1. MEDIATION is a process whereby the parties attempt to negotiate a settlement with the help of a third party. Mediation is non-binding and if not completed within 90 days another procedure must be taken.
2. ARBITRATION is a process whereby the parties allow an arbitrator to decide the entitlement to the deposit. The arbitrator’s decision is binding.
3. ESCROW DISBURSEMENT ORDER (EDO) is requested by the broker from the Florida Real Estate Commission. The broker is required to obey all escrow disbursement orders issued by the FREC.
4. Litigation is a legal procedure to settle a dispute. Since this procedure can be expensive, the deposit should be significant. If the buyer or seller chooses to litigate the dispute, the broker can petition the courts to accept the deposit and manage the funds until the dispute is settled. The process is known as INTERPLEADER. If the broker chooses to claim a portion of the deposit in dispute, a declaratory judgment requested by the broker will be required.
Procedures: Escrow disbursement dispute process must be followed as prescribed by law. From the moment the broker has a conflicting demand or good faith doubt, the broker has 15-business days to notify the FREC. The dispute will be assigned a case number and will be closely monitored. The broker has 30-business days from the last demand to either resolve the problem or take one of the four settlement procedures. The EDO is probably the most common and easiest to administer for the broker. If the parties settle their dispute while an EDO is pending, the broker must notify the FREC within 10 days of the settlement. Also, regardless of the settlement procedure utilized (except for EDO), the broker must notify the FREC within 10 days of the resolution.
There are two situations that allow the broker to return a deposit to the buyer and not be required to follow the above settlement procedures. If the contract is contingent upon financing in a residential transaction and the buyer is unable to obtain a loan according to the contract, the broker is allowed to return the deposit to the buyer. Brokers should have a paper trail such as a letter from the bank in the event the situation is ever challenged.
The second situation can occur when a buyer enters into a contract to purchase a residential condominium and requests to cancel the agreement during the recission period. On a new developer purchase, the buyer has fifteen days from either entering into the contract to purchase or the date that he or she received the proper condominium documents, whichever comes last. In addition, if the condominium is a resale, the buyer has three business days to rescind from the day or she receives the condominium documents or signs a contract, whichever occurs last.
HUD Owned Properties: Department of Housing and Urban Development (HUD) properties that are under contract are exempt from the conflicting demands notice and settlement procedures required by Florida law. This exemption only applies if a HUD contract is used.
Property Management: In compliance with the Florida Residential Landlord and Tenant Act, the broker is exempt from the required conflicting demands notice and settlement procedures for property management deposits and advanced rents provided the broker complies with Section 83.49, F.S. If the landlord or the broker acting as the agent of the landlord fails to properly notify the tenant within 30 days of the termination of the lease that some or all of the deposit will be used for damages, the broker is obligated to disburse any deposits back to the tenant. If the notice is properly executed and the tenant fails to respond in a timely manner, the broker may deliver the deposit to the landlord.
Condominiums: The Condominium Act (F.S. 718) requires that a developer or the broker acting as the agent of the developer provide a disclosure to buyers notifying them that the contract to purchase can be rescinded with 15 days of either entering to a contract or receiving the appropriate condominium documents, whichever comes last. The resale of a condominium provides a rescission period of 3-business days. Florida Statute (Chapter 475.25(1)(d)1.a. allows a broker to return the deposit during the rescission period and is exempt from having to follow the conflicting demands settlement procedure required by law.
The requirements for establishing an escrow account include deciding to hold deposits in trust for others and opening the account in a Florida commercial bank, credit union, or a savings association. The broker must be at least one of the signatories on the escrow account.
In order to establish an escrow account, a broker may place up to $1,000 of personal funds to open and maintain the account if it is for sales deposits. They may place up to $5,000 of personal funds into a management account.
An associate must deliver a deposit to his or her employer immediately which means within one-business-day from accepting the deposit. Brokers are required to deliver any deposits received into escrow within three business days from the day they were accepted by the associate.
The broker’s trust liability is the amount of deposit the broker should have on deposit, accounting for any checks that have been written but not cleared or any deposits made that have not posted. The broker’s escrow bank statement should be a confirmation of the broker’s trust liability.
If the broker’s escrow account has an overage, the broker must identify the cause for the overage and make it part of the reconciliation. If the overage is not a legitimate overage (deposit carried forward), the broker may be fined up to $500.
Good faith doubt can occur when a broker fails to get a written extension after a contract expires. When good faith doubt occurs (or the broker receives conflicting demands), the broker must notify the FREC within 15-business days and take one of the four remedies available if the contract has not closed within 30-business days of the expiration.
The broker may institute one of the following four settlement procedures in the event of conflicting demands or good faith doubt:
Escrow disbursement order, which is issued by the FREC
Mediation, which allows the parties to negotiate a settlement
Arbitration, which is a process in which a third party will make the decision
Litigation (including interpleader), which is a legal action to resolve the situation
The exceptions to the notification and settlement requirements are:
If the contract is contingent on financing and the buyer is unable to obtain financing according to the contract, the deposit may be returned to the buyer.
If the buyer requests the deposit back and the contract canceled during the rescission period.
Vocabulary List: advance fee, arbitration, commingle, conflicting demands, conversion, declaratory judgment, escrow account, escrow disbursement order, good-faith doubt, immediately, interpleader, mediation, the negative report,post-dated checks, treble damages, trust account, trust liability