By Emmet R. Wood, Director, Audits and Investigations
Brokers who sell their own property must not commingle earnest money deposits received in connection with their own properties with funds they hold in trust for other third party clients.
If you are a broker in business as a sole proprietor and you receive an earnest money deposit on a house that you own, it would be commingling to deposit that earnest money deposit into your sole proprietorship’s trust account that contains trust monies for your third party clients. In this situation, you have several options to prevent commingling.
• You could have an attorney hold the deposit but be sure that the contract clearly identifies who is holding the money.
• You could open another trust account to deposit the earnest money deposit on your personally owned property making sure you do not deposit in it any trust monies for third party clients.
Now suppose you have incorporated your real estate business and want to sell a property you own personally. When you receive an earnest money deposit on your personally owned property, you can deposit that earnest money deposit into the corporate trust account and it would not be commingling. But be sure to execute a signed written listing agreement between the corporation and yourself to comply with the Commission’s Rules.
To determine if you would be commingling or not, you need to answer two questions:
1)Who owns the real estate?
2)Who owns the real estate company?
If the two entities are the same legal entity, then it would be commingling to deposit an earnest money deposit on a property owned by that entity into a trust account that maintains earnest money deposits for its third-party clients. In the first example, the owner of the property (you) and the real estate company (you as a sole proprietor) are the same legal entity; thus you would be commingling. In the second example, the owner of the property (you) is a separate legal entity from the real estate company (a corporation); thus, you would not be commingling.
What if in the second example, the owner of the property was your real estate corporation?Would it be commingling to deposit the earnest money deposit into the corporate trust account that contained earnest money deposits held for the corporation’s third party clients?Yes, because the entity that owns the real estate is the same legal entity as the real estate company.
This article came from the February 2005-Vol35-3 edition of the bulletin.