Q: How do I set up banking for a property management franchise?

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Q: How do I set up banking for a property management franchise?

Q: How do I set up banking for a property management franchise?

Fort Worth, Texas

answer-icon-masterHow do I set up banking for a property management franchise?Great question! Sadly, the handling of escrow accounts trips up real estate salespersons/agents and brokers all the time – and gets them into trouble, so it’s important to get this right.  

The TREC (Texas Real Estate Code) does indeed require the broker to maintain overall control of the account, as a fiduciary. As a salesperson and a non-broker, you pretty much have to stay clear of messing with the escrow account, yourself, at least in Texas:

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Texas Real Estate Code Section 535.159(f) states: 

“A salesperson may not maintain a trust account or act as an escrow agent. Any money received by a real estate salesperson, to be held in trust pursuant to a real estate transaction, must be delivered to the salesperson’s sponsoring broker to be deposited in accordance with the agreement of the principals in the transaction.”

Understand that as a fiduciary, your broker cannot afford any shenanigans at all with the escrow account. Try to “borrow” from it and you will find your career coming to a screeching halt. 

Many a defendant has been given a stiff sentence for fraud while claiming to the court “I meant to put it back!” And even if you do replace the funds before you get caught, you put yourself on a fast track to license revocation and a nasty fine, at best. 

Meanwhile, there will be a claim on your brokers’ errors and omissions policy, which will quickly make it more expensive for your broker, you and all the other agents who work for your broker to do business as premiums increase. 

Another reason to maintain a strict segregation between your property management activities and your activities as a real estate salesperson is this: Suppose you were sitting in your brokers’ office doing paperwork and answering emails. Suppose further that during the course of your day, you also did a bunch of work for your property management company. But you did it on your broker’s time, on his equipment, on his email server, etc. 

Now imagine this: Bang: You make a mistake, and accidentally release a bunch of confidential information, or you misplace a form, or your broker’s email server crashes, losing data that you later need to defend your property management company in a lawsuit. 

Now, whose errors and omissions policy is liable? It’s difficult to say – and both companies may refuse to pay out, leaving both you and your broker and all your clients unprotected. 

This isn’t to say that it’s impossible to do both: Just go into it with your eyes wide open, and with the buy in of a lot of different potential stakeholders, including your broker, your insurance company and your brokers’ insurance company. 

This brings us to the narrower question of who does a good job with escrow accounts? You’ll probably want to select a Texas financial institution – one with FDIC insurance on it. FDIC protects each account against the possibility of a bank failure.

It doesn’t have to be in an interest-bearing account, although it’s nice to have one where you can get it. Interest goes to the equitable owner of the funds at the time it earns interest – which is normally the tenants. 

Escrow accounts that hold security deposits in a property management setting are much simpler, with fewer moving parts, than escrow accounts in a mortgage setting. But if you’re concerned about administration, I’d use a bank that has an established escrow service, with a licensed escrow officer on staff. 

Which describes most medium to large banks doing business in Texas. It probably doesn’t matter a ton which one – use the bank you are comfortable with, whose systems you already understand, and ask for information on their escrow services. 

One caveat: I know that some states require that escrow monies be deposited in institutions licensed to do business in state. 

However, looking over the Texas Real Estate Code, I only found a requirement that non-resident agents use an in-state escrow agent. Regardless, anyone in property management should be familiar with Texas Real Estate Code Section 535.159. 

Also, note that under Paragraph g of the same section, brokers may, but are not required to, maintain separate accounts for funds received as earnest money and security deposits. However, my recommendation would still be to maintain segregation. Commingling funds is usually seen as less than optimal practice for a fiduciary.

Moreover, the Texas director of enforcement for their Division of Real Estate is on record stating that commingling funds is the predominant cause of disciplinary action there. So my recommendation would be to establish a companywide culture of outright hostility to anyone who would even think of commingling funds. 

It won’t help much, if at all, even if legal and it can hurt your business very badly, if it’s not. 

Author Bio
Writing about personal finance and investments since 1999, started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.
Author Bio for Jason Van Steenwyk

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