DISCLAIMER: Rentables does not provide Tax or Legal advice. Consult your Tax or Legal professional for advice regarding your specific situation.
1. Failure to Retain Records for the Required Length of Time
Most states require property managers to retain records for 3 to 4 years. The types of records that you should keep include deposit slips, cancelled checks, trust account records, and other transactions where a real estate license is required.
If you maintain paper records it is often hard to find them and it becomes burdensome to store years worth of records for more than just a couple properties. Not being able to produce complete historic records is a common audit finding. This could be due to a number of things; records filed in the wrong file, lost files/documents, or delay in finding and producing the document.
Using Rentables online property management software allows you to upload, store, and access the records you need - grouped by property, owner, or tenant. We keep your data organized and available at your fingertips. Think of how much less clutter you’ll have laying around the office.
2. Not Maintaining Trust Fund Records
Whether you use a trust account or not, most states require you to track, usually in columnar format, items related to the collection of and disbursement of trust funds. States also allow the use of online property management software, so long as the records include the items below.
- Date funds were received
- Name of payee
- Amount received
- Date of deposit
- Amount paid out
- Check number and date
- Daily running balance of the trust account
The most common findings related to maintaining trust fund records include failure to maintain trust fund records, maintaining records but not in a columnar format, using a standard checkbook as the record, recording incorrect amounts or dates, and not maintaining an accurate running daily balance of trust funds. Rentables lets you keep track of these common items required by most states and also allows you to maintain a running balance of your trust account.
We’ve developed intelligent forms, meaning that the forms reduce your effort required to fill them out because we prepopulate as much of the data for you as possible. We even subtract any outstanding fees so the amount you pay to the owner is the net proceeds. In addition, our intelligent forms contain the common required fields.
3. Not Reconciling Your Trust Account
General guidance suggests that your trust account should be reconciled at least once a month. The first step in the reconciliation process consists of matching up the transactions that were recorded in your ledger with the transactions on your bank account statement. Any discrepancies between the ledger and your bank account should be corrected and once all corrections are made the balance on the ledger should exactly match the balance on the statement. This results in what is referred to as your adjusted cash balance.
The second step is to then add up all the totals of all beneficiaries and compare this total to the adjusted cash balance. Both balance should match exactly. If they don’t then you have an overage or underage in your trust account.
If you are using paper records you should record the date that the reconciliation was performed. When you use property management software, such as Rentables, to enter all your trust account related transactions you can do real time reconciliation. You don’t have to wait until the end of the month - you can check off items as they clear your bank account. Then simply print the reconciliation report and your bank record as often as necessary to meet your state’s requirements.
4. Commingling of Broker’s Funds with Funds Held in Trust
Brokers should not commingle their own money with the money they hold in trust for others. If your property management fee is taken out of rents received you are allowed to deposit the rents including the property management fee in the trust account but usually your property management fees must be withdrawn from the trust account within a certain timeframe of being deposited. Also, most states allow brokers to leave a couple hundred dollars of their own funds in the trust account to cover items such as bank fees.
Audit findings related to commingling of funds usually include:
- The broker depositing trust funds received in the broker’s general business account rather than a trust account
- Keeping more than a couple hundred dollars of the brokers funds in your trust accoun
- Check with your state’s regulatory agency for specific threshold amounts
- The broker not being aware of funds that are considered trust account funds.
- For example, credit report fees are considered trust funds and must be maintained in the trust account until the bill is paid.
5. Failure to Keep Separate Records for Each Beneficiary or Transaction
Most states require property managers to maintain records for each beneficiary. Common beneficiaries are owners, tenants, and sometimes vendors. Beneficiary records should be maintained in columnar format, should show an accounting of all funds held in trust for each beneficiary, and can be maintained as an electronic record.
Information such as the date funds were received, deposited, and paid should be recorded in chronological order. Other items, check number and date, check amount, name of payee, and amount paid out, should be recorded as well. Common audit findings usually result from the failure to maintain these records, recording of incorrect dates or amounts, or not maintaining records in columnar format.
When using Rentables you don’t have to worry about keeping separate records for each beneficiary. Every time you enter a transaction or record a payment, Rentables’ forms allow you to fill in the commonly required fields. Once the form is submitted, Rentables automatically records the entries for you on the beneficiary ledgers. The beneficiary ledger is stored and available for you to print at anytime.
The above discussion is a general discussion of common audit findings. If you are unsure of your states rules and regulations regarding property management you should contact your state’s real estate regulatory agency.