TRUST ACCOUNT MANUAL

NOTE: No portion of the earnest money can be used to pay an expense prior to closing, unless the buyer and seller have provided written authorization to do so in advance of said disbursement. Under no circumstances may compensation or consideration be removed prior to closing.

II. SALES ACCOUNTS

D. Handling Trust Funds - Receipts

The Nebraska Real Estate License Act and Rules require that all funds coming into the possession of the broker, while acting in the capacity of a broker, be deposited into an account designated as a "Trust Account." This would include those transactions covered under Title 299, Chapter 2-013, in which the broker is participating as an independent closing agent or as an agent in the transaction.

"Trust funds," as defined by the License Act and Rules, may include, but not be limited to, downpayments, earnest money deposits, money received upon final settlement, rents, security deposits, money advanced by a buyer or seller for the payment of expenses in connection with the closing of a real estate transaction, and money advanced by a broker's principal for the payment of expenses on behalf of that principal.

When depositing funds into the trust account, the deposit slip must identify the funds deposited to a specific real estate transaction. The dollar amount should be identified to a specific buyer and seller, or the address of the property being sold. Some financial institutions do not return the original deposit slip with the financial institution statement. It is recommended, in these situations, that the duplicate deposit slip be maintained, unremoved from the deposit book, and that the duplicate be date-stamped by the financial institution=s teller at the time of deposit, or that a receipt of deposit be obtained at the time of deposit and attached to the unremoved, duplicate deposit slip.

When the broker is both the listing and selling broker in a real estate transaction, the License Act and Rules require the earnest money to be deposited into his or her trust account within 72 hours or before the end of the next banking day after the offer is accepted in writing, unless otherwise provided in the purchase agreement. In a cooperative real estate transaction between brokers, the License Act and Rules require the selling broker, unless all parties having an interest in the funds agree otherwise in writing, to deposit the earnest money into his or her trust account within 72 hours or before the end of the next banking day after the offer is accepted in writing and, without delay, transfer the earnest money to the listing broker by issuing a check, drawn on the selling broker's trust account, made payable to the listing broker.

When accepting other than cash or an immediately cashable check as earnest money, the licensee must communicate this fact to the seller prior to his or her acceptance of the offer, and such fact must be shown in the earnest money receipt section of the offer to purchase.

In a cooperative real estate transaction between brokers, if the buyer offers a promissory note as an earnest money deposit, the note should be made payable to the listing broker or should be endorsed without recourse by the selling broker to the listing broker. In all situations, the promissory note must be delivered to the listing broker with the offer to purchase.

Since both offer and acceptance create a contract, acceptance is normally when the seller signs the offer to purchase and that information has been transmitted to the offering party. For the purpose of depositing earnest money into the trust account, the trust account examiner will use the date of acceptance as indicated by the last party to sign the offer to purchase. The acceptance of the offer to purchase is not when the licensee receives an accepted offer to purchase in the mail from an out-of-town seller or when the buyer and/or seller receipt for a copy of the offer to purchase. In the case of a counter-offer, the acceptance would take place when both parties to the contract have a written understanding and are in total agreement as to the terms and conditions of the contract. In instances where either the seller or buyer is out-of-town and contracts are mailed, the Commission recommends the retention of the envelope so that verification of postmark can be determined. Any changes made to the original offer to purchase should be initialed and dated by both buyer and seller. This would provide for proper determination as to when final acceptance took place, and give evidence of the date of acceptance to be used in determining if the deposit was made in a timely manner. It should be noted that in any situation, the broker may deposit the earnest money into the trust account prior to acceptance, and refund the earnest money if final acceptance of the offer never takes place. In instances where the acceptance of an offer is by facsimile or telegram, the earnest money must be deposited into the trust account within 72 hours or before the end of the next banking day after the facsimile or telegram is received.

Once the trust funds have been received by the listing broker and have been deposited into the trust account, the License Act and Rules require the trust funds remain in the trust account until the transaction is closed or otherwise terminated, unless all parties having an interest in the funds have agreed otherwise in writing. To clarify this requirement of the License Act and Rules, the trust funds must be deposited into the broker's trust account and then, if all parties have agreed in writing, the funds may be transferred to the place designated in the written agreement of the parties.

If the parties want their funds handled through an interest-bearing account(s), written authorization from all parties having a claim to the funds is required. The written authorization must either be included in the written agreement between the parties or be a separate written authorization, and should include the following: 1) a statement specifying who will earn the interest on the funds; 2) authorization from all parties involved to transfer the funds from the trust account to the interest-bearing account; 3) dated signatures from all parties involved; and 4) the following notice: "Interest-bearing accounts are not examined by the Nebraska Real Estate Commission. It is understood by all parties concerned that placement of funds in such account removes them from the provisions pertaining to trust accounts in the Nebraska Real Estate License Act and the Rules and Regulations of the Nebraska Real Estate Commission."

When opening an interest-bearing account, brokers should check with the financial institution as to how the account should be titled. The interest-bearing account may be titled as a "Trust Account," but should not be registered with the Nebraska Real Estate Commission as a real estate trust account. The interest-bearing account will not be examined by the Nebraska Real Estate Commission, and all records relating to the interest-bearing account should be maintained separately. The Social Security Number or the Federal Identification Number of the interest recipient should be provided to the financial institution for taxation purposes. Brokers should also acquire a "No Right of Offset" letter from the financial institution. This letter is an agreement between the broker and the financial institution in which the financial institution agrees not to offset any personal obligations of the broker with the funds deposited to this account. It is recommended that the broker be the only signatory on the interest-bearing account, so that the broker is the only person who can access the funds.

In order to establish a paper trail for examination purposes, the broker must deposit the funds into the trust account, then transfer the funds to the interest-bearing account via a check drawn on the trust account.

When the transaction has reached the day of closing, the broker should transfer the funds from the interest-bearing account to the trust account and disburse the funds, along with other trust funds received as part of the final settlement, from the trust account.

In the event the real estate transaction does not close and there is a dispute over the return of the earnest money, the broker is required to maintain the funds in the trust account until a written release is received from the buyer and seller directing the broker how to disburse the funds, or until civil action is filed, at which time the broker may pay the funds into the court or retain the funds until directed by the court as to the disposition of the funds.

In the case of a dispute and in the absence of a pending civil action, the broker will not be subject to disciplinary action by the Nebraska Real Estate Commission if the earnest money deposit is returned to the buyer, based on a good faith decision by the broker that a contingency in the purchase agreement has not been met. Also, it will not be grounds for disciplinary action by the Nebraska Real Estate Commission if, in the case of a dispute and in the absence of a pending civil action and after one year has elapsed from the date of acceptance, the broker pays the earnest money deposit to the seller, based on a good faith decision by the broker that the buyer has abandoned any claim to the funds. Although these provisions of the Rules prohibit disciplinary action against the broker if the Rule is followed, it does not eliminate the possibility of civil action being taken against the broker.

Brokers are required to post all receipts and disbursements in chronological order to the general ledger and the applicable sub-ledger(s) as the activity occurs.

II. SALES ACCOUNTS

E. Handling Trust Funds - Disbursements

Title 299, Chapter 3-006, states: "In the case of cooperative sales between brokers, the selling broker shall deposit the earnest money payment in his or her trust account within 72 hours or before the end of the next banking day after an offer is accepted, in writing, and then forthwith transfer such earnest money deposit to the listing broker by issuing a check drawn on the selling broker's trust account; Provided, that if for any reason the earnest money check tendered to the selling broker is returned by the bank unpaid, selling broker shall forthwith notify the listing broker who shall immediately refund from his or her trust account the earnest money deposit which has been tendered by the selling broker." The seller should be informed immediately if a check is returned for insufficient funds.

The closing of a real estate transaction may be handled by licensed real estate brokers; licensed attorneys; title insurance agents licensed and authorized to engage in escrow activities; and persons or entities regulated by the State Banking Department, the Federal Deposit Insurance Corporation, the Federal Office of Thrift Supervision, the Federal Farm Credit Administration, or the National Credit Union Administration, unless prohibited by statute, rule, or regulation. The requirements for a third party closing are further discussed in Section F of the Sales Accounts Chapter of this Manual.

Generally speaking, the listing broker should understand that the License Act and Rules require that no funds may be disbursed prior to a real estate closing without the written consent of all parties having an interest in the funds. This consent must authorize the broker to use all, or part, of the trust funds to pay certain closing expenses prior to closing. In no case, however, may the broker be paid any part of his or her compensation or consideration, prior to the closing of the real estate transaction. It should be emphasized that the broker is not entitled to compensation or consideration until the transaction is closed or otherwise consummated. Obtaining the written consent of the parties authorizing such compensation or consideration payment is strictly prohibited, and would constitute a serious violation of the License Act and Rules. Also, no portion of earnest money can be used to pay any expense prior to closing, unless the buyer and seller have given written authorization prior to the disbursement.

All funds received by the listing broker at or before closing are considered to be trust funds, and must be deposited and disbursed from the trust account at the time of closing. Therefore, all funds pertaining to a particular real estate transaction should be disbursed on the date of closing. Exceptions may include situations in which the broker is required to escrow certain funds to pay bills which may not have been received prior to closing, or if the written permission of all parties has authorized prior disbursements as set forth previously.

Real estate brokers, as well as other entities authorized to close real estate transactions, are required to have "good funds" available for disbursement at the time of closing a real estate transaction. "Good funds" are defined as: (a) lawful money of the United States; (b) wired funds when unconditionally held by the real estate closing agent; (c) cashier's checks, certified checks, bank money orders, or teller's checks issued by a federally insured financial institution and unconditionally held by the real estate closing agent; or (d) United States treasury checks, federal reserve checks, federal home loan financial institution checks, State of Nebraska warrants, and warrants of a city of the metropolitan or primary class. "Federally insured financial institution," as used above, is defined as an institution in which the monetary deposits are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. (Note: Brokers should understand that the definition of "federally insured financial institution" as used here only applies to "good funds," and should not be confused with where a trust account can be placed. For information on where a trust account can be placed, see section on "Establishing a Trust Account.")

Once the real estate transaction has closed, the listing broker is required to provide the buyer and seller a complete accounting of all trust funds received and how those funds were disbursed. This is done by providing the buyer and seller with a detailed closing statement which accounts for all funds received and how those funds were disbursed. The listing broker must maintain, within his records, a copy of each statement. Although some real estate companies have developed a policy which requires the closing statement to be signed by the buyer or the seller, this is not a requirement of the License Act or Rules, but would serve as evidence of receipt.

Earned compensation or consideration should always be removed from the trust account at the time of closing, and are always due and payable to the listing broker, or to the operating account under which the listing broker is doing business, upon closing. All compensation splits with sales associates or other real estate brokers must be paid from the listing broker's operating account and not the trust account. When compensation or consideration is received by the selling broker, it should be deposited directly into the operating account of the selling broker and disbursed, if necessary, from there. (It should be noted by all licensees that the Real Estate Commission does not get involved in disputes between licensees over the payment or division of compensation or consideration.)

The broker must ensure that sufficient funds are available, at all times, to cover any check issued on the date of issuance.

As previously noted, brokers are required to post all receipts and disbursements in chronological order to the general ledger and the applicable sub-ledger as the activity occurs.

II. SALES ACCOUNTS

F. Third Party Closings

Under Neb. Rev. Stat. ' 76-2,121 through 76-2,123, the closing of a real estate transaction may be handled by licensed real estate brokers; licensed attorneys; title insurance agents licensed and authorized to engage in escrow activities; and persons or entities regulated by the State Banking Department, the Federal Deposit Insurance Corporation, the Federal Office of Thrift Supervision, the Federal Farm Credit Administration, or the National Credit Union Administration, unless prohibited by statute, rule, or regulation. When the listing broker utilizes the services of any third party closing agent identified above, certain authorizations from the buyer and seller are required. It is the responsibility of the broker(s) involved in the transaction to ensure that these authorizations are in place.

Once the listing broker has received an accepted offer to purchase and has received the earnest money, the trust funds must be deposited into the trust account and remain there until closing. If a third party will be utilized to close the transaction, the broker must:

1. Receive written authorization from all parties having an interest in the funds, buyer(s) and seller(s), allowing for the use of the third party in the closing of the real estate transaction;

2. Receive written authorization from both buyer(s) and seller(s) allowing for the transfer of earnest money from the listing broker's trust account to the third party closing the transaction;

3. Acquire written agreement of the buyer(s) and seller(s) as to who will pay any applicable fee charged for the third party closing, or how the fee will be split;

4. Deposit the earnest money into the trust account before transferring the earnest money by a trust account check to the third party closer.

Although the third party closing agent may prepare the closing statements of the buyer and seller, it remains the responsibility of the listing broker to ensure that a copy of the closing statement is delivered to both the buyer and seller. The broker must also retain a copy of each closing statement in the transaction file.

It is the position of the Nebraska Real Estate Commission that should any broker use any entity other than those third party closing agents identified above to close a real estate transaction, such broker would be in violation of the Nebraska Real Estate License Act, Section 81-885.24(29), and that such violation could result in disciplinary proceedings being instituted against the broker.

Licensed title insurance agents authorized to engage in escrow activities would not include entities formed by title insurance companies or agents which are not subject to licensing and regulation by the Nebraska Department of Insurance under the Nebraska Title Insurance Act. Subsidiary entities not regulated under the Nebraska Title Insurance Act would not be qualified closing entities under this policy. Authorized and licensed title insurance agents must actually complete or supervise the closing.

Brokers may close transactions for third parties under 299 NAC 2-013. This normally occurs in one of two scenarios: 1) the broker becomes involved in the transaction after the written purchase agreement has been entered into by both parties; and 2) the broker becomes involved in the transaction before a written purchase agreement has been entered into by the parties.

Scenario 1: Broker involved after written agreement by the parties:

As set forth in the accepted agreement, the broker performs the ministerial functions necessary to complete the transaction under the applicable provisions of the License Act and Rules, including the receipt and disbursement of funds through the trust account, delivering buyer and seller settlement papers, etc. Prior to the transaction closing, the broker shall provide written disclosure to all parties involved which states that the broker is only providing those ministerial services, and is not acting as an agent for either party. The disclosure shall be signed by both parties, and a copy shall be maintained in accordance with 299 NAC 3-001.

 

Scenario 2: Broker involved before written agreement by the parties:

Technically, in this scenario, the broker is not acting as a third party closing entity. The broker needs to decide the agency relationship, as set forth in Neb. Rev. Stat. ' 76-2401 through 2430, and fulfill all obligations required of a licensed broker in the transaction.

II. SALES ACCOUNTS

G. Trust Account Bookkeeping - Illustrated

1. Manually Posted Systems

The Nebraska Real Estate License Act and Rules require each broker to maintain a bookkeeping system which will clearly and accurately account for all trust funds received and how those trust funds are disbursed.

Once the broker has established the proper trust account records, they are maintained by recording the entries as cash or checks deposited or checks paid out. When funds are deposited, the accounting process consists of preparing a deposit slip, recording the deposit in the general ledger, recording the deposit on the individual sub-ledger, depositing the trust funds into the trust account, and preparing a transaction file. A disbursement consists of preparing the check, recording the check in the general ledger, recording the check on the individual sub-ledger, and mailing the check to the payee.

"Bookkeeping system," as defined, implies that a separate record be maintained in some type of organized fashion. The basic requirement for a bookkeeping system is based on a cash-in/cash-out basis. The following recommendations are minimal for any bookkeeping system implemented by the broker.

A. General Ledger - A permanent record which records the chronological sequence in which trust funds are received and disbursed by the broker on behalf of all clients. This is commonly referred to as a "checkbook register." This record should include:

1. For funds received: a) the date of the deposit; b) the name of the party from whom the funds were received, or the property address for which the funds should be applied; and c) the dollar amount of the deposit.

2. For funds disbursed: a) the date of the disbursement; b) the payee's name; c) the property address for which the funds were disbursed; d) the check number; and e) the amount of the disbursement.

3. A running balance after each entry which would account for the total amount of all trust funds in the account at any given time. This balance would include broker's equity.

B. Sub-Ledgers - A permanent record which records the chronological sequence in which trust funds are received and disbursed by the broker on behalf of a buyer and a seller, as related to a single real estate transaction. On each sub-ledger page, the broker should record the name of the seller, the name of the buyer, and the address of the property being sold. This record should also include:

1. For funds received: a) the date of the deposit; b) the name of the party from whom the funds were received; and c) the dollar amount of the deposit.

2. For funds disbursed: a) the date of the disbursement; b) the payee's name; c) the check number; and d) the amount of the disbursement.

3. A running balance after each entry which would account for the remaining funds to be disbursed relating to that particular real estate transaction.

C. A written reconciliation of each financial institution statement received which would prove agreement, as of the ending date on the financial institution statement, to the following:

1. The total cash balance in the general ledger;

2. The sum of the cash balances for all sub-ledgers, including broker's equity;

3. The checkbook balance.

D. A written list of all sub-ledger balances, as of the date of the financial institution reconciliation.

NOTE: All receipts and disbursements must be posted in chronological order to both the general ledger and the applicable sub-ledger(s) at the time at which they occur. The posting of receipts and disbursements several days after the activity occurs is an unacceptable accounting practice. This would include the posting of insufficient fund checks returned by a financial institution, refunds of earnest monies to a buyer, transfers of earnest money to the listing broker or to a third party, and the like.

The following examples illustrate the process of accounting for receipts and disbursements for several real estate transactions. For simplicity, receipt transactions are shown first, followed by the related disbursements and, finally, the process of reconciling the financial institution statement to the general ledger and sub-ledgers.