Many companies with a property management portfolio also operate a trust accounts for property management to hold funds for clients and has an independent audit of these accounts annually.
Some property management companies will use the fact that they have auditetrust accounts as a selling tool for their services.
What are property manager’s trust accounts?
Most people link the term “Trust Account” with solicitors, but a real estate or property manager’s trust account is not the same.
- Solicitors trust accounts have a fidelity fund backing them up. An example of the security given by the fidelity fund is that if money is misappropriated from a solicitor’s trust account the New Zealand Law Society’s fidelity fund will repay the client for any loss.
- Real estate agents and property managers’s trust accounts are not backed by a fidelity fund thus there is no safeguard for clients money.
What is the purpose of trust accounts for property management if they have no back up?
The definition of a Trust Account is that it is used for clients funds only as opposed to a company’s own business account. If the company, or a lawyer, becomes insolvent the bank can access the company’s business funds but cannot touch the Trust Account which is a plus for clients.
Whereas lawyers are legally bound to deposit client’s funds into a Trust Account this is not true for real estate agents and property managers whether they are a member of REINZ or independant. However, because of the reasons stated above, it is one obvious safeguard an agent or manager can provide for their clientele.
What is the best way to work this system?
To deal with funds coming in on a regular basis a property manager should have an 01 account for their business cashflow and an 02 account for all rental related moneys.
Management fees should be transferred on a monthly basis from the trust account to the cashflow account of the business.
Trust accounts for property management are not a compulsory legal requirement for managers or agents (even if allied to an REINZ office) nor is the auditing of them.
Auditing of Trust Accounts, what’s involved?
The fact of having an audited trust account can be a selling point for property managers but what is actually involved in the audit process?
Basically an audit will check financial balances between the account and bank statements but does not audit the process or procedure connected with the deposits and withdrawals.
What may or may not be revealed by an audit?
As only the financial transactions are audited there are limits to what can be revealed, below are a few points of interest.
- An audit will show if there is a discrepancy between the account and financial records.
- An audit will not be able to confirm if repair work has been paid for in full, or if paid in full whether the job has actually been completed or even started.
- An audit may confirm whether repair work has the appropriate authorisation but it may not either. The auditor is not required to delve back into the paperwork to confirm if the work has been completed satisfactorily or any payment mistakes or omissions have been made by the property manager.
- Regular audits may show that bonds have been repaid in full to the tenant but will not show that damage has been repaired or paid by a tenant before the bond is returned.
- An audit will not reveal if a recent tenant has paid all their bond and it has been paid into the bond centre, or if rent is in arrears.
- The audited trust account will also fail to show if a tenant who has left is up to date with their rental payments and the property manager has not pursued it.
If trust account auditing cannot pick up on problems what do you do?
The Disputes Tribunal is the only recourse for property owners in these circumstances when there has been mismanagement.
Promoting audited trust accounts can be a misleading to the unsuspecting property owner giving the impression of safety for their money. We have seen recently that one property management company is advertising that funds are monitored daily and are secure in their trust account.
The assertion that the funds are secure is simply not true – funds are only as safe as the property manager administering them and doing their job in an honest, correct manner. As detailed above an audit does not cover a multitude of scenarios.
There are relevant industry qualifications a property manager can obtain on top of which experience in the industry and references should give some idea of their competence.
