Trust Accounting for Property Managers (eBook)


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Proper accounting is vital to a successful property management business. This complimentary eBook will give you and your team a refresher course on trust accounting so you're sure to follow all of the rules and requirements.

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Trust Accounting for Property Managers (eBook)

  1. 1. Trust Accounting for Property Managers By Mary Girsch-Bock, PropertyManager.comWhat Are Trust Accounts And Why Use Them��������������������������������������������������������������������������1Know Your State Laws����������������������������������������������������������������������������������������������������������������2Staying Out Of Trouble����������������������������������������������������������������������������������������������������������������3Record Keeping And Other Requirements��������������������������������������������������������������������������������4 �What To Do If You’re Audited������������������������������������������������������������������������������������������������������4Final Suggestions������������������������������������������������������������������������������������������������������������������������5What Are Trust Accounts And Why Use ThemIf you’re in the property management business, you should be familiar with trust accounts. A trustaccount is typically established by a property manager or real estate broker to hold and managefunds that are the property of their client (the property owner).While requirements for setting up and maintaining trust accounts vary from state to state, all statesare in agreement that using a trust account in some form is a necessity.The recommended procedure for handling trust accounts is to establish two separate accounts foreach client, with security deposit transactions handled from one account, and rents collected andbills paid handled from the other.While this may exceed the trust account requirements of some states and is usually not practical forthose managing single family homes, the benefits of setting up and maintaining separate accounts foreach client are plentiful, including:Improved Accuracy • You’ll be able to present your clients with a highly accurate statement at the end of each month including an accurate picture of all account activity, income, and expenses. • Easier transaction tracking increases your ability to locate and pinpoint the date, amount, and reason for any transaction that goes into or out of the account. © 2011 AppFolio, Inc. | Trust Accounting for Property Managers | 1
  2. 2. www.appfolio.comBetter Property Performance Tracking • Managers can get a better handle on property performance based on the activity maintained for each client. Any disputed transactions can be easily located and verified by property management staff.A Clean Audit Trail • Establishing and maintaining separate accounts for each client significantly reduces the opportunity to commingle funds – a major point of contention in most trust account audits. If you choose to utilize a single trust account for your clients, you must make sure to keep it properly reconciled. • Maintaining trust accounts properly reduces the chances of being audited, and if you are audited, will make the process a whole lot easier.This e-book will provide you with the information you need to set up and manage trust accounts foryour clients. To begin setting up trust accounts for your clients, keep the following in mind:1. Locate and learn the trust account requirements that have been established in any state where you currently do business.2. Only use federally insured institutions when setting up a trust account(s) for your client.3. Implement and rigorously follow an approved regiment for each trust account established.4. Expect an audit at any time – and be prepared for it by keeping good records.Know Your State LawsState laws governing trust accounts vary widely from state to state. For instance, some states requireseparate accounts for all clients or for all properties. Others allow the property manager or real estatebroker to deposit all trust monies into a single account and keep a detailed reconciliation for eachclient. Whatever the law is in the state(s) where you do business, be sure to adhere to it. If you currently utilize a single trust account for your clients, be sure that it is reconciled on a timely basis. A single trust account for multiple clients can quickly become a nightmare if adequate account reconciliation practices are not implemented and maintained. Remember, just because your state does not require multiple trust accounts is not a good reason to not utilize them. While there are more accounts to reconcile, the process is much simpler than trying to keep track of multiple transactions for multiple clients from a single account. Record keeping requirements also vary from state to state and cover areas such as the period of time that all records must be maintained. Some states even govern what the account can be named – so be sure to read the fine print. © 2011 AppFolio, Inc. | Trust Accounting for Property Managers | 2
  3. 3. www.appfolio.comIf you have any questions about the trust account laws governing your state, contact the Departmentof Real Estate for your state, who should be able to answer any questions. Once you know the law for your state, you may find it helpful to implement procedures that not only meet your respective state requirements, but exceed them.Staying Out Of TroubleWhile the majority of larger property management companies strictlyabide by their respective state laws regarding trust accounts, manysmaller firms continue to skirt the law by maintaining a singleaccount for all rental activities. This not only puts them at risk for alarge fine, but it puts their business and ultimately, their license atrisk as well.Here’s what property managers and brokers need to do to keeptheir firm out of trouble: • Deposit all rental funds on a timely basis – usually within 24 to 48 hours after receipt. Many property management companies are now using online rent collection solutions integrated with their property management software to avoid checks and collect rent faster. • Keep tenant security deposits in a separate account. • Keep all accounts reconciled on a monthly basis and investigate all discrepancies promptly. Bank accounts should balance to GL account activity. • If you haven’t already, consider establishing a separate trust account for each client. • Start and maintain excellent record-keeping practices. It does matter when you deposit that check or issue that security deposit refund. Record it accurately.While you’re adhering to your state’s laws, and the suggestions above, it’s important to note what youshould NEVER do: • Borrow from one client’s trust account to pay a bill for another client. • Commingle funds between accounts – even if they belong to the same client. • Pay a bill using security deposit monies. • Use trust funds to pay business or brokerage bills.Using a web-based property management software is an important component for staying incompliance. Look for a solution with an accounting system that will warn you if you try to co-minglefunds. It is also very important that your software offers detailed reporting so you always know whatyour balances are on each property.While adhering to the suggestions above, remember that there’s no guarantee that doing (or notdoing) these things will help you avoid an audit. But they will help you get through the audit smoothlyand (relatively) painlessly. © 2011 AppFolio, Inc. | Trust Accounting for Property Managers | 3
  4. 4. www.appfolio.comRecord Keeping And Other RequirementsIf the laws governing trust accounts weren’t enough for property managers to memorize, you’ll alsohave to be aware of the record-keeping requirements that are imposed by each state.The checklist below can assist you with keeping track of all of the requirements: WHAT YOU NEED HAVE MUST GET A copy of the management agreement for all clients – past and present A copy of the lease agreement for all tenants – past and present All checkbooks or check registers corresponding to each trust account A record of all checks issued from each trust account-including cancelled and voided checks All bank statements for each trust account as well as the related reconciliation All bank deposit slips for each trust account Access to the utilized bookkeeping system – manual or computerized Copies of all financial reports that have been provided to property owners Any vendor invoices that have been paid, including invoice backup Copies of any security deposit refunds issued from the trust accountWhat To Do If You’re AuditedThe word ‘audit’ strikes fear in most of us; particularly when it’s unexpected, which it almost always is.Today, many states have begun issuing preliminary audit requests by mail, with your governing stateagency requesting copies of specific information. However frightening this may seem, if you’ve beenkeeping good records, you should have nothing to worry about.Again, while the information requested will likely vary from state to state, you will most likely be askedfor the following: • A copy of the most recent bank reconciliation for the trust account that is being audited. • A copy of all current tenant ledgers that relate to the specific account being audited. © 2011 AppFolio, Inc. | Trust Accounting for Property Managers | 4
  5. 5. • A copy of all receipts and disbursements that have been made from the trust account, including all back up documentation such as invoices, wire transfer receipts and the like.After this information has been provided to the requesting agency, they will review it and determinewhether to investigate further or if your company is in compliance. A request for additional informationor an audit determination will be provided after the review.While some audits are initiated based on complaints received, the majority of audit recipients arerandomly selected and are not an indication of wrong-doing. Many states routinely send out auditrequests, and some states have a policy of auditing every property management company/brokeragefirm every two years.Nonetheless, being in compliance with all state regulations and having your record keepingimpeccable will go a long way toward a stress-free audit, something most people would notthink possible.Final SuggestionsKeeping your property management company compliant when it comes to trust account regulationsis one of the most important things that you can do. Not only will it keep you out of trouble with yourstate governing agency, but all of that solid record-keeping ultimately produces detailed, accurateclient statements that will only reflect positively on your business.Go beyond the minimum requirements when setting up trust accounts, and most importantly, makesure they are reconciled on a timely basis, preferably within days of receiving the bank statement.Promptly investigate and correct any discrepancies for each account. Good record-keeping willultimately make your life a lot easier, and your clients will appreciate it as well.About the AuthorMary Girsch-Bock is a successful business and technology writer, specializing in property management and lawoffice technology. A contributing writer for a variety of publications including the CPA Technology Advisor, Mary’s first book was published in 2006, and she is currently working on another. Maryhas over ten years of property management experience and has worked in both the Chicago and Las Vegasarea markets.About AppFolioAppFolio provides web-based property management software that helps you grow your business. Our customersfind and retain better residents faster, increase profitability and love the ability to work from anywhere. AppFolioalso provides educational resources for property managers including free webinars and articles on online magazine. You can learn more about AppFolio at © 2011 AppFolio, Inc. | Trust Accounting for Property Managers | 5