Real estate agents have to handle client's funds in real estate transactions. An agent has a fiduciary responsibility to his client, which means the former should act in the client's best interest, especially in handling funds properly. 

In some real estate transactions, agents practice commingling. If it is your first time hearing this term, read this blog post to learn what it is and whether it is legal. 

Commingling in Real Estate: Defined

Commingling refers to an act of mixing both funds of a real estate broker and the client. This practice can be against the law, particularly when an agent or broker does not deposit the client’s investment money into a client trust, escrow account, or earnest money deposit account within a specified period. 

A real estate agent or broker who commits this type of fraud can result in the suspension or revocation of their license. Thus, agents and brokers should avoid commingling at all costs. However, commingling can have legal standing with regard to real estate investing in which the money is utilized intentionally from various sources.

For instance, crowdfunding projects and real estate investment trusts or REITs are legal because individual investors intentionally contribute their funds to such investment programs or instruments. As long as there is intent and knowledge on the part of the client as to where the funds are to be used in a real estate investment, commingling is legal. 

Fiduciary Duties of Brokers and Agents

States differ as to their regulations of commingling. However, it is typically considered a fraud when there is a mishandling or mixing of funds of both the client and the broker. This practice is illegal in most states because brokers and agents should do their fiduciary responsibilities to their clients, and there are ethical codes they must observe. 

A real estate broker or agent should handle a client’s funds in accordance with the law and their professional ethical codes while acting as a fiduciary. Typically, in the practice of commingling, conversion also happens. Conversion occurs when a broker or agent spends the client’s money for purposes other than the original intent agreed between both parties. Most states punish anyone who commits such an act. 

For real estate brokers and agents, commingling and conversion run counter to their fiduciary responsibility. They must avoid committing such acts if they do not want to get their license suspended or revoked.

Steps to Avoid Commingling of Funds

Real estate brokers and agents should keep their personal bank accounts and business bank accounts separate. Real estate professionals can minimize the risks of mixing their client’s funds with their own money or spending the same on things other than its expressed purpose when they keep personal and business accounts this way.

Here is a list of ways to avoid commingling real estate funds. 

• Abide by the proper escrow process in your real estate transactions

• Create an LLC for investment properties

• Establish a trust account for security deposits

• Keep records of your real estate transactions for easy tracking

• Use bookkeeping software to organize all your real estate transactions

• Set up a system of checks and balances to ensure the proper deposit of investment funds

• Train and educate your team on the best practices of collecting client funds.

• Consult with a real estate attorney

Transferring of Funds to All Parties

An escrow is a third-party account to keep real estate transaction funds. A buyer or seller will come across different types of escrow accounts throughout the transaction process. The primary purpose of setting up an escrow account is to ensure the client's money will not get mixed with the broker’s or another client's funds. 

A real estate agent typically collects the earnest money deposit and keeps it in an escrow until the closing of the deal. The said collection of earnest money deposit occurs within five days after the client makes an offer on a property. 

When there is approval on all financing and inspections, the escrow process is accomplished. Typically, the escrow process is completed within 30 days. 

In the settlement stage, the buyer must present a cashier’s check or proof of wire transfer of the down payment and closing costs. Parties can close the escrow after this step is completed. Then, the escrow agent will disburse the funds to pertinent parties. 

Having a mortgage escrow is common after closing. The mortgage escrow differs from the escrow where you keep an earnest money deposit. 

Endnote

When a real estate broker or agent does commingling, legal consequences may ensue. Therefore, it is crucial for them to take all necessary steps to avoid commingling funds in real estate transactions. Real estate brokers and agents should follow the escrow process and consult a lawyer if they are unsure of the proper procedure for handling a client’s money.