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A Property Manager’s Guide to Financial Integrity and Compliance

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A Property Manager’s Guide to Financial Integrity and Compliance

Most of us have learned about commingling when we initially took our real estate licensing courses or as we renewed our real estate license. Perhaps you aren’t familiar with it at all, don’t worry, you’re in the right place. Regardless of if or when, we are constantly reminded of how lackluster good financial accounting practices can be in the property management industry, especially when it comes to the commingling of client funds.

Commingling is a term that holds significant importance in the realm of property management. It refers to the mixing of a client's funds with the property manager's own funds. This practice is not only frowned upon but is also illegal in most jurisdictions. In this comprehensive blog, we will delve deep into the concept of commingling, explore its implications in property management trust accounting, discuss why commingling must be avoided at all costs, and highlight the crucial role of performing a monthly 3-way reconciliation to ensure compliance with real estate commissions.

Understanding Commingling in Real Estate:

  • Definition of Commingling: Commingling is a practice that occurs when a broker or property manager mixes a client's funds with their own, violating trust accounting rules and regulations. It fundamentally involves the improper blending of financial resources meant to be kept separate.

  • Real-Life Scenarios: In real estate, commingling can inadvertently take place in various scenarios. For instance, when a property manager mistakenly transfers a client's rent payment into their operating account instead of the trust account, or when they use client funds for personal expenses, even temporarily. But even more common is when the property manager forces payment of an outstanding bill or invoice when there aren’t funds available on the client’s account, thus forcing the funds from the trust account, in general, to come from other client funds.

The Implications of Commingling in Property Management Trust Accounting:

  • Legal Consequences: Commingling carries severe legal consequences, including potential fines and the risk of having one's real estate license suspended or revoked. Legal authorities take a strong stance against this breach of trust accounting standards. Many states have inspectors whose sole responsibility is to find instances of misutilization of client funds.

  • Loss of Trust and Credibility: Commingling can irreparably damage trust and credibility with clients. Once clients discover their funds have been mixed improperly, they may lose faith in the property manager's ability to safeguard their interests.

  • Negative Impact on Client Relationships: Commingling can lead to strained relationships between property managers and their clients. It erodes the essential foundation of trust that is vital for a successful property management partnership.

Why Commingling Must Be Avoided:

  • Legal Violations and Penalties: Commingling is a direct violation of laws and regulations governing trust accounting in real estate. Property managers who engage in commingling risk facing hefty fines and potential legal action.

  • Ethical Considerations: Beyond legal implications, commingling also raises ethical concerns. Property managers are entrusted with their client's financial well-being, and commingling breaches this fundamental ethical responsibility.

  • Risk to Property Managers' Reputation: Engaging in commingling can severely damage a property manager's professional reputation. Rebuilding trust and credibility after a commingling incident can be an uphill battle.

  • Reputation of the industry: Perhaps the most damaging, is the damage that is done to the industry as a whole and the mistrust that is provided to the general public.

The Monthly 3-Way Reconciliation: A Shield Against Commingling:

  • What is a 3-Way Reconciliation?: The 3 items that need to match, for a 3-way reconciliation are: Bank Statement Balance, Book Balance also referred to as the General Ledger Balance, and the Client/Portfolio Ledger Balance. When these three values match, you are 3-way reconciled. For a deeper understanding, check out our blogMastering the 3-Way Reconciliation Equation: Ensuring Trust Account Integrity in Property Management

  • How It Ensures Non-Commingling: A 3-way reconciliation acts as a safeguard against commingling by providing a rigorous and transparent process for verifying the accuracy and separation of funds. Any discrepancies are promptly identified and addressed.

  • Employee Fraud Detection: A 3-way Reconciliation also safeguards against employee fraud and theft of the Trust account funds or at the very least, creates an opportunity for early detection.

  • Step-by-Step Guide to Performing a 3-Way Reconciliation: Property managers can follow a step-by-step guide to conduct monthly 3-way reconciliations effectively. This guide involves verifying bank statements, cross-referencing property ledgers, and reconciling software records.

The Importance of a 3-Way Reconciliation for Real Estate Commissions:

  • Commissions and Trust Accounting: Real estate commissions are directly tied to trust accounting. A failure to maintain a clear separation of funds can lead to commission disputes and regulatory non-compliance.

  • Staying in Compliance: Regular 3-way reconciliations are essential for remaining compliant with real estate commission regulations. They demonstrate a commitment to transparency and financial responsibility.

  • Benefits Beyond Avoiding Commingling: While preventing commingling is a primary goal, 3-way reconciliations offer additional advantages, such as improved financial transparency, reduced errors, and enhanced client trust.

Best Practices to Prevent Commingling:

  • Segregation of Funds: A fundamental best practice is to segregate client funds from personal or operational funds. Having a trust account specific to holding only client funds and a separate operating account specific to business operations only, is the standard. In most states, this practice is mandatory. This clear separation is a cornerstone of trust accounting integrity.

  • Transparent Record Keeping: Maintaining clear and detailed financial records is crucial. Property managers should document all financial transactions meticulously to ensure transparency, besides, we’re being entrusted with clients funds and we should do whatever is necessary to protect their money.

  • Regular Audits and Reviews: Internal and external audits and reviews should be conducted regularly to identify and rectify any commingling issues promptly.

  • Correct and Clear Financials: When client funds are held separately in a Trust Account away from operational funds, we gain a clearer understanding of operational funds and how they affect the profits, losses, and expenses of the business.

Ensuring Trust and Compliance:

Understanding commingling, its implications, and the role of 3-way reconciliations is paramount in property management. Property managers must grasp the legal, ethical, and reputational risks associated with commingling. They must implement robust financial practices, including regular reconciliations, to prevent commingling and maintain trust and compliance in their real estate endeavors.


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