The Division’s goal is to complete ten financial examinations of real estate brokers (“Brokers”) and brokerage firms (“Brokerage Firms”) per month. Our financial examiners commonly see brokers who don’t perform three-way reconciliations, trust accounts that are not properly named, trust accounts that are only “trust accounts” by name and do not actually afford any protections from the seizure of funds, employing brokers who do not have access to the trust accounts, and the commingling of funds. This article will focus on the expectations the Real Estate Commission (“Commission”) has of a Broker who holds any money belonging to others for reasons outside of licensed real estate practice.
Understanding §12-10-217(1)(h), C.R.S.
§12-10-217(1)(h), C.R.S. requires a Broker to account for or to remit, within a reasonable time, any money coming into the Broker’s possession that belongs to others, whether acting as a real estate broker or otherwise, and keep records relative to the money. The records must contain such information as prescribed by the rules of the Commission and are subject to audit by the Commission. So, if you are a Broker that also has a house painting business, and you take deposits for the painting business, the license law requires that you place those funds in a trust or escrow account. Basically, you will have to comply with the Chapter 5 rules of the Commission which currently include the performance of three-way reconciliations, providing detailed reports to each beneficiary, using the cash basis of accounting (unless another method is agreed upon in writing), and not commingling, diverting or converting the funds. It also means that the Commission can audit your paint deposit account and discipline your license if you don’t comply with the rules.
There are two scenarios that we commonly see during our examinations where Brokers hold the funds of others, and do so outside of their licensed Brokerage Firm: 1) short term rentals (not owned by the broker) and 2) the rental of Broker’s own investment properties. There are quite a few Brokers performing short term rentals these days. One of the common issues that we see is that the guest deposits, owner funds, and State or local sales taxes are not placed in trust or escrow accounts. It is pretty typical for Brokers to perform the accrual basis of accounting, which is acceptable as long as the owner agrees to the accrual basis of accounting in writing. With investment rental properties owned by the Broker, the Commission expects to see the security deposits placed in a trust or escrow account because those are technically the tenant’s funds, until such time as the tenant forfeits the security deposit. Rental proceeds should not be placed in such trust or escrow accounts because those funds belong to the Broker landlord and doing so would constitute the commingling of funds. In either scenario, the rest of the Commission’s regulations still apply, including the requirement of performing monthly three-way reconciliations and the Commission has the authority to audit the accounts and records.
Lastly, the current Commission regulations focus on money belonging to others being accepted by a Brokerage Firm and the recordkeeping requirements being the responsibility of the Employing Broker or the Independent Broker. The Commission is currently working on parsing out the regulations to accommodate Associate Brokers who accept funds of others for non-real estate related activities that are not conducted in the name of the Broker’s Brokerage Firm. As they are currently written, the rules would require the Brokerage Firm to hold the aforementioned paint deposit, short term rental proceeds, or tenant security deposit in a trust or escrow account, and the Employing Broker would be responsible for accounting for those funds. We understand that this is a liability that the Employing Broker may not be aware of or may not allow per the Brokerage Firm’s policy manual. It is anticipated that the Commission will consider alternative regulations at their June 2, 2020 meeting.
Director Marcia Waters