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A real estate trust account is one of the most important legal and financial parts of any property management business. But for many principals and property managers, they’re also one of the most frequent sources of confusion and stress. This is particularly true for new entrants into the industry, who may not be familiar with the long list of rules and regulations that apply.
To help, we’ve put together a handy guide to the ins and outs of real estate trust accounts, from basic definitions to best practices. If you want to learn more, check out our trust accounting course at Console Nebula.
What is a real estate trust account?
Trust accounts are common in any industry where a business or individual has to hold a client’s money. This includes law firms, car dealerships, auctioneers, and yes, Property Management agencies. Essentially, they exist to hold money for clients separately from business and personal funds, ensuring an additional level of accountability and protection.
Because they are created specifically to hold onto money that belongs to other entities, trust accounts are governed by strict legal requirements, which can vary depending on the industry and the state they’re held in.
How do I open a trust account?
Trust accounts are generally opened through approved banks, credit unions, and building societies, known as authorised deposit-taking institutions (ADIs). These can vary by state in Australia, so it is worth checking with relevant law societies and government bodies — QLS in Queensland or NSW Fair Trading for example
There are some exceptions, but generally real estate trust accounts must be opened by the owner or director of the Property Management business. The trust account must also include “trust account” or “special trust account” in its name.
Once a trust account is opened, you’ll need to appoint an auditor within one month. The account must also be registered with the Office of Fair Trading via a Form 5 within two months.
What sort of funds do real estate trust accounts hold?
Payments that Property Management agencies receive can be split into two major categories: trust and non-trust money. It’s important to know the difference to ensure these funds are dealt with properly.
Simply put, trust money is money that you handle on behalf of someone else, such as a rental or bond payment, whereas non-trust money is paid directly to you, such as a commission or management fee.
Non-trust payments can be held in a general business account, but trust payments must legally be held in a trust account. The table below, sourced from Consumer Victoria, provides a helpful guide:
In some cases, you may be paid an amount that consists of both trust and non-trust money. When this occurs, you’ll need to remove the non-trust money from the trust account. And the faster the better — the more non-trust money in a trust account, the more time-consuming and costly an audit. Perhaps even more crucially, by banking non-trust money in a trust account, you’re denying your business access to cash flow it has rightfully earned.
Trust accounting best practice
Real estate trust accounts are governed by a whole host of rules and regulations, and it’s essential that you’re always aware of your legal obligations. But outside of compliance requirements, there’s plenty of best practice to wrap your head around too. Here are some handy hints to save you time, money, and stress down the track.
Track and report everything
The simplest way to stay on top of your real estate trust account — and make your auditor’s life much easier — is to keep detailed records of what goes in and out. Finding a few dollars behind a couch cushion might be an exciting surprise, but discovering an unexplained hundred in your trust account isn’t.
Make rules and stick to them
Alongside your legal obligations, make rules for your office about processes and procedures, and ensure they’re followed to the letter. The more detailed the rules and the more consistently they’re followed, the less likely it is that something will go wrong down the line.
Hire for qualified staff
Your trust account is one of the most important parts of your Property Management business, so make sure it’s handled by someone who knows what they’re doing. Even smaller errors can snowball over time and become major headaches later on, so it’s worth getting things right the first time.
Try to avoid having a single person control the entire trust accounting process. Not only will this make it easier to handle absenteeism, it also adds an extra level of accountability for any irregularities. That said, it’s also poor practice to have too many staff with access to the trust account either.
Don’t misallocate funds
While it’s rare, property managers, especially inexperienced ones, can give in to the temptation to use one client’s funds to pay off expenses for another. This is not just a bad idea — it’s also illegal — and will likely result in a visit from the OFT. Don’t do it.
While some agencies reconcile monthly, performing a daily reconciliation is one of the most effective ways to stay on top of your trust account. Not only will this prevent things from being forgotten, it’s also much easier to spot discrepancies, which means they can be handled before they turn into major issues.
Create frequent backups
If you’re still using server-based trust accounting software, a computer crash or corrupted data can spell disaster for your business. That’s why creating regular backups — no matter how painful — is essential to your peace of mind. Of course, cloud-based software, such as our own Console Cloud, automatically creates backups for you.
Skip manual data entry
Manually entering data into your software is bound to lead to errors eventually. And even a simple typo can lead headaches down the track. That’s why it’s important to make full use of advanced software features like bill scanning, bank file imports, and automated disbursement. Not only will this cut down on inadvertent mistakes, it will also make trust accounting faster and simpler.
Avoid accepting cash
Although it’s becoming increasingly uncommon, avoid accepting cash payments as much as possible. It’s harder to track, more hassle to bank, and increases the risk of funds being misallocated or mixed up with other money.
How Console Cloud can help
Console Cloud is Australia’s premier property management and trust accounting software. It’s cloud-based, eliminating the need for manual backups, and features powerful tools including FlashScan, Console Pay, and Bank Feed to automate data entry and cut down on potential errors. Its trust accounting processes have also been independently audited and are fully compliant with every state’s trust accounting laws to keep you — and your business — covered.