Are brokers required to have a trust account?
If a broker receives trust funds, the broker is required to open a trust account according to Wisconsin Administrative Code rules. Wis. Admin. Code § REEB 18.033(1) provides: “Opening an account. A broker shall open a real estate trust account if the broker receives real estate trust funds.” A broker may elect not to open an account, but then must assure the broker does not receive trust funds.
Improper management of earnest money may result in investigation and discipline of the licensee by the Real Estate Examining Board (REEB). Wis. Stat. § 452.14 provides a licensee may be disciplined if the licensee “failed, within a reasonable time, to account for or remit any moneys coming into the licensee’s possession which belong to another person.” Therefore, decisions regarding trust accounts must not be taken lightly.
When a broker chooses not to have a trust account, who must be informed of this fact?
Everyone! Not literally “everyone,” but everyone related to the real estate transaction should be informed if the broker chooses not to have a trust account. What does this mean for the seller? First, the seller needs to be informed the broker does not have a trust account, and the seller will need to negotiate his or her offer to have earnest money held elsewhere. The listing broker should indicate to the seller that the seller may incur additional costs or expenses for an escrow agreement or a third party holding earnest money.
Who can hold earnest money if the listing firm does not have a trust account?
There are several options. The seller may hold earnest money if the buyer is willing to agree. Likewise, the buyer and seller may agree to open an account themselves for the purpose of holding earnest money. If there is a cooperating broker, either acting as a subagent or buyer’s agent, the earnest money may be held in the cooperating broker’s account. Alternately, the parties may engage a title company or attorney to hold the earnest money. If a third party holds the funds, the parties should determine the costs involved and address the need for an appropriate escrow agreement. The offer may then be modified to clearly indicate the allocation of fees and, as appropriate, the incorporation by reference of the escrow agreement.
The buyer and seller want the earnest money to be held by the title company. Can a licensee draft an escrow agreement for the parties?
No. Licensees may not draft escrow agreements. The offer to purchase clearly cautions the parties about having an escrow agreement drafted, at line 373 of the WB-11 Residential Offer to Purchase:
CAUTION: Should persons other than a broker hold earnest money, an escrow agreement should be drafted by the Parties or an attorney.
Given calls to the WRA Legal Hotline, the most frequently overlooked aspect of a third party holding earnest money is having an escrow agreement addressing the holding and distribution of earnest money.
Cooperating firm holds earnest money
The listing broker notified the cooperating firm that the listing firm does not have a trust account. How does the offer need to be modified when the earnest money will be held by the cooperating firm?
The earnest money provisions at lines 370-372 state, unless otherwise agreed, earnest money will be held by the listing firm if the property is listed:
HELD BY: Unless otherwise agreed, earnest money shall be paid to and held in the trust account of the listing broker (Buyer’s agent if Property is not listed or Seller’s account if no broker is involved), until applied to the purchase price or otherwise disbursed as provided in the Offer.
Therefore, the parties must “otherwise agree” to allow the cooperating firm to hold the earnest money. The offer must be modified to reflect the decision of the parties. A statement “buyer and seller agree earnest money will be paid to and held by the cooperating firm until applied to the purchase price or otherwise disbursed as provided in the Offer” will be included in additional provisions or an addendum properly incorporated by reference into the offer. On line 11, “listing broker or” will be crossed off. Finally, line 12 will include the name of the cooperating firm. Given the earnest money will be held by a real estate firm, the remaining earnest money provisions do not need to be modified as the references to broker disbursement still apply.
Title company or attorney holds earnest money
The modifications to the offer are more extensive when a non-licensee holds the earnest money. The Caution at lines 373-374 is there for a reason!
CAUTION: Should persons other than a broker hold earnest money, an escrow agreement should be drafted by the Parties or an attorney.
Remember real estate licensees are prohibited from drafting escrow agreements. Therefore, before a third party is asked to hold funds or funds are sent to a third party, the third party ideally will agree to accept the earnest money and provide the buyer and seller with terms and conditions under which they will hold the funds and later disburse them. The third party may provide an escrow agreement, which may then be incorporated by reference into the offer.
Back to modifying the offer. The parties must agree on who will hold the earnest money, who will pay the fees associated with the service, and who will provide an escrow agreement.
The earnest money provisions at line 370-375 state, unless otherwise agreed, that earnest money will be held by the listing firm if the property is listed. Therefore, the parties must “otherwise agree” to allow a third party to hold the earnest money. On line 11, “listing broker or” will be crossed off, and line 12 will include the name of the third party holding the funds. Now, here is where it gets messy. Lines 376-394 of the WB-11 Offer to Purchase presume the earnest money is held by a real estate licensee. The applicability of these provisions to a third party are tenuous at best. Therefore these provisions of the offer could be removed and the third party escrow agreement may be incorporated by reference to reflect the agreement of the parties. Again, take the caution seriously: when a third party holds the earnest money, the parties must understand what will happen to the earnest money when there is a successful transaction, but more importantly if there isn’t.
Other modifications to the offer would include insertion of a statement indicating who will hold the earnest money and who will pay for that service, and incorporation of an attorney- or party-drafted escrow agreement, including disbursement instructions.
How can a broker go about closing a trust account?
A broker may make a business decision to close a trust account if there are no trust funds in the account. An existing trust account must be kept open until there are no trust funds remaining. Wis. Admin. Code § REEB 18.035(2) provides that when a trust account is closed, the broker should notify the DSPS by letter since there is no specific form for such a notification. Be sure to include the trust account name and number. The letter may be addressed to the Department of Safety and Professional Services, P.O. Box 8935, Madison, WI, 53708-8935.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.
Trust account resources
More information about trust account requirements is available in the following: