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The truth about property management Trust Accounts

16th May 2012
Trust accounts don’t offer as much security as most property owners think. Here’s the low-down on what you need to watch out for.

Trust accounts don’t offer as much security as most property owners think. Here’s the low-down on what you need to watch out for.

Like many property management companies, Bridgman Property Management operates a trust account for holding client funds and also undertakes independent annual auditing of this trust account.

In fact, you’ll often hear it in a sales pitch from property management companies that they have audited trust accounts.

But what exactly is a property manager’s trust account?

When the phrase “Trust Account” is used, people often think of solicitors’ trust accounts. But this isn’t the same as property managers’ or real estate agents’ trust accounts.

  • Solicitors: these trust accounts have a fidelity fund. For example, should a solicitor unlawfully take money from the trust account, the New Zealand Law Society has a fund to compensate a client who suffers loss.
  • Property managers and real estate agents: these trust accounts aren’t supported by a fidelity fund. There is no financial safeguard for a client of a property manager or real estate agent.

So if there’s no fidelity fund, why have a trust account?

The difference between a trust account and a general account is simply that you’re identifying that the funds aren’t yours. So if a property management company or lawyer became insolvent, their bank could access credit funds in their office or general account. However, their bank would not be able to access funds in the trust account because they have separated their own funds from client funds. This is good news for clients!

Another point to note is that lawyers are legally bound to deposit client funds into a trust account but property managers (whether they are independent or operating through an REINZ office) do not have any legal requirements to do so. However, it would be prudent for all property managers to operate a trust account in order to separate client funds, as mentioned above.

How this works in practical terms in property management

The way that a property manager might separate client funds is to have an 01 company account for paying bills and an 02 account called “Trust Account”. This trust account shows that rental moneys are not property management company funds.

Then, at month end, management fees would be transferred from the trust account to the property manager’s company account.

Note that there is no legal requirement for either independent property managers or those operating through an REINZ office to have a trust account. Neither is there a legal requirement for the auditing of property management trust accounts.

What does trust account auditing involve?

A number of property management companies promote the fact that they audit their trust accounts each year. In this respect, what does a trust account audit actually involve?

These trust account audits are of a financial nature only, rather than an audit of procedures and processes. This means a number of transactions are checked off between bank statement and account records.

What trust account auditing will and won’t reveal

Because the trust account auditing is purely financial in nature, there are limitations as to what the audits will show. Here are some examples of what will and won’t show up in a trust account audit:

  • An audit will tell you if what is in a bank account matches with the financial records. But if the payment amount is in error then both the bank accounts and financial records are in error. This error will not be uncovered by an audit.
  • An audit will not uncover the fact that a contractor was paid out in full for repair work while that repair work to the property was not completed (or not even started).
  • An audit may tell you if payments have been appropriately authorised or not. Appropriate authorisation consists of checking that a required name is associated with each payment. However, the audit will not show that the authorised party (i.e. the property manager) has made mistakes or omissions in making that payment, or if that the payment should never have been made to start with.
  • A regular audit will not show that a final bond payment has been signed off in full in favour of the tenant, while a recently damaged carpet hasn’t been repaired or charged to the tenant.
  • Auditing will not uncover that a recently signed up tenant has defaulted on rent while the majority of bond hasn’t been collected and deposited with the bond centre.
  • An audited trust account will not show that a departing tenant has vacated while still owing rent, and that the property manager has done nothing about it.

So if auditing can’t help with these issues, what can you do?

Seeing as auditing doesn’t pick up such issues of mismanagement, the only recourse for property owners is through the Disputes Tribunal in the District Court.

Therefore neither trust accounts nor their auditing are particularly helpful or practical to property owners. The fact that so many property managers promote trust accounts in their marketing is very misleading to unsuspecting landlords. Yet we’ve recently seen a property management company advertisement stating: “Funds are monitored daily and are secure in our audited trust account.”

The assertion that client funds are secure because they are held in a property manager’s audited trust account is simply false! Client funds are only as secure as the property manager running the portfolio. Trust accounts and auditing do not guard against the property manager not doing their job correctly.

The only real test for security of client funds and asset protection is to look at what industry qualifications the property manager holds and how extensive their property management experience and training is.

Next step:

Read our free report, “Why Some Property Management Ends In Disaster”. It includes a checklist of questions you can ask a prospective property manager, so you can see to what extent they have your best interests at heart.

You can get your copy of this report here: www.bridgmanpm.co.nz/report