Jozef Magyar, Esq.
May 2018
The California Bureau of Real Estate (CalBRE-soon to be Department of Real Estate or DRE once again effective July 1, 2018) continues to increase enforcement activity against property managers.
The CalBRE’s Audit section is charged with examining various types of real estate business activities involving real estate brokers. These include resale, mortgage loan, broker escrow, subdivisions, and of course, property management. The Bureau has made it very clear that the primary focus of these audits is trust fund handling by licensees. Seven of the ten most common violations found in CalBRE audits are trust fund violations.
The Audit section’s report for 2015-2016 shows:
- 590 audits were completed.
- Of those, 423 (72%) were focused on brokers who performed property management activities
- Audit staff found trust fund shortages totaling $13,305,444.04 across all broker activity. Of that, $11,419,174.31 of shortages were in connection with property management activities.
The Audit section’s report for 2016-2017 shows:
- 598 audits were completed.
- Of those, 391 (65%) were focused on brokers who performed property management activities.
- Audit staff found trust fund shortages totaling more than $10.2 million across all broker activity. Of that, $7,792,215.60 of shortages were in connection with property management activities.
The trust fund record-keeping requirements are the same for each of the above-referenced activities. The following Regulations describe the trust fund records required in an audit:
- Regulation 2831: Record of Trust Funds Received and Paid Out
- Regulation 2831.1: Separate Record for Each Beneficiary or Transaction
- Regulation 2831.2: Trust Account Reconciliation
The Bureau typically also requests the following documents when conducting an audit:
- Bank statements for all trust fund or operating accounts (Business & Professions Code § 10148)
- Front and back copies of cancelled checks (Business & Professions Code § 10148)
- Deposit slips (Business & Professions Code § 10148)
- Cash receipt records (Business & Professions Code § 10148)
- Cash disbursement records (Business & Professions Code § 10148)
- General ledgers (Business & Professions Code § 10148)
- Transaction files (Business & Professions Code § 10148)
- Salesperson and broker licenses (Regulation 2753)
- Broker-salesperson relationship agreements (Regulation 2726)
- Corporate records (if applicable)
- Advance fee documents (Business & Professions Code §§ 10085 and 10146; Regulation 2972)
A broker performing property management activities may also be requested to provide the following documents:
- Lease or rental agreements (Business & Professions Code § 10148)
- Property management agreements (Business & Professions Code § 10148)
- Screening fee documents (Civil Code § 1950.6)
- Maintenance records (Business & Professions Code § 10148)
If you are a licensed real estate broker in the State of California performing property management activities, a thorough review of your operations, and specifically your trust fund accounting, may help ensure that you are in full compliance with applicable law.
Additional Resources:
- Ten Most Common Violations Found in DRE Audits:
http://www.bre.ca.gov/files/pdf/CommonViolationsFoundInAudits.pdf
- Fall 2016 Real Estate Bulletin with a look back at Fiscal Year 2015-2016 available at:
http://www.dre.ca.gov/files/pdf/reb/rebfall_16.pdf
- Fall 2017 Real Estate Bulletin with a look back at Fiscal Year 2016-2017 available at:
http://www.dre.ca.gov/files/pdf/reb/rebfall_17.pdf
- The KTS article, BRE Compliance Resources for California Property Managers, is available at:
https://www.kts-law.com/bre-formerly-dre-compliance-resources-for-california-property-managers/.
Kimball, Tirey & St. John LLP offers a Proactive Audit Service for BRE Compliance that entails a thorough review of your licensing, affiliate licensee/salesperson agreements, marketing/advertising, accounting, supervision, transaction files, branch offices, fictitious business names, record retention, and overall day-to-day licensed activities. Please contact Jozef Magyar at (800) 564-6611 or jozef.magyar@kts-law.com for further information.
Kimball, Tirey & St. John LLP is a full service real estate law firm representing residential and commercial property owners and managers. This article is for general information purposes only. While KTS provides clients with information on legislative changes, our courtesy notifications are not meant to be exhaustive and do not take the place of legislative services or membership in trade associations. Our legal alerts are provided on selected topics and should not be relied upon as a complete report of all new changes of local, state, and federal laws affecting property owners and managers. Laws may have changed since this article was published. Before acting, be sure to receive legal advice from our office. For contact information, please visit our website: www.kts-law.com. For past Legal Alerts, Questions & Answers and Legal Articles, please consult the resource section of our website.
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