Trust funds play a large role in real estate transactions. A firm should always know what to do when handling trust funds, whether the funds are related to a sale or a lease transaction. The following questions and answers address trust account rules and earnest money concerns.

Trust accounts   

A property management company is going to be holding security deposits. In which account should these funds be deposited?

Property management funds such as security deposits and pre-paid rents do not belong in a firm’s interest-bearing real estate trust account (IBRETA). The IBRETA account is only for client funds. Client funds are funds related to a conveyance, such as earnest money in a sale. Security deposits and pre-paid rents that a firm is holding for another are considered non-client funds and can be deposited in one of three accounts:

1. A non-interest-bearing trust account for non-client funds. The firm must name this account with the name appearing on the broker license or a trade name registered with the Department of Safety and Professional Services (DSPS) and shall include the words “trust account” in the name of the account. 
2. An interest-bearing trust account for non-client funds if the firm obtains the written consent of the parties for whom the funds are being held. This authorization must specify how and to whom the interest will be paid. No interest may be paid to or provided in any way for the benefit of the firm. Some municipalities used to require landlords to collect interest on security deposits and return that interest to the tenant. The state law changed, though, and municipalities cannot require a landlord to collect and pay interest on a tenant’s security deposit anymore. The firm must name this account with the name appearing on the broker license or a trade name registered with the DSPS and shall include the words “trust account” in the name of the account.
3. The rental owner’s account. “Owner’s account” is defined as an account maintained by the rental property owner for the deposit and disbursement of the owner’s funds. A firm may deposit rental application deposits, security deposits and rent into the owner’s account as long as these checks are payable to one or more of the owners or to the owner’s account, as authorized in Wis. Admin. Code § REEB 18.031(5).

Regardless of the type of trust account, a firm may deposit and maintain a sum not to exceed $300.00 from personal funds in any real estate trust account. Such sum shall be specifically identified and deposited to cover service charges relating to the real estate trust account.

A licensee is looking to open their own firm. Is a trust account required?

Wis. Admin. Code § REEB 18.033(1) requires a firm to open a real estate trust account if the firm receives real estate trust funds. If the firm does not have a trust account and does not intend to hold trust funds, the firm should notify the parties and ensure any offer is modified so someone else will hold the earnest money. The offer may be modified so the other firm, an attorney, a title company or even one of the parties holds the earnest money. 

Earnest money   

The buyer did not deliver the earnest money by the deadline. The buyer now has the earnest money check, but the seller wants to cancel the deal because of the late earnest money payment. Can the seller cancel the deal?

Failing to deliver earnest money by the deadline in the offer is a breach of the contract. If the buyer does not send the earnest money and the deadline in the offer passes without the buyer sending the funds, the buyer is likely in breach of the contract.

If the seller does not want to proceed, the seller can issue a notice to the buyer terminating the offer pursuant to the default provisions of the WB-11 Residential Offer to Purchase along with a WB-45 Cancellation Agreement and Mutual Release (CAMR). Specifically, if the seller does not want to proceed with the transaction because the buyer did not deliver earnest money in a timely manner, the seller may use a WB-41 Notice Relating to Offer to Purchase to let the buyer know the seller believes the buyer is in breach of contract. In addition to the notice, the seller may also deliver a CAMR. The buyer may not agree to sign the CAMR.

If the buyer will not sign the CAMR, the seller can accept secondary offers or offers contingent on the resolution of the existing offer. If the buyer will not sign the CAMR and the seller would like to resume marketing and accept another offer as primary, the agent should recommend the seller seek legal counsel before accepting another offer as primary. 

Earnest money disbursement   

Both parties want to cancel the deal, but neither is willing to give up the earnest money. The title company is holding the earnest money. What should the firm do?

What happens to the earnest money will depend on the title company’s disbursement policy. Many title companies may have an escrow agreement form. Many times, these forms require both parties to sign to authorize any disbursements, so this may not be beneficial to the parties, and they may want their attorneys to draft a different escrow agreement. The provisions in any title company escrow agreement would apply in place of the disbursement provisions in the offer.

Technically an escrow agreement when earnest money is being held by a title company is not required but is strongly encouraged. Without an escrow agreement regarding the earnest money being held by a title company, neither the buyer nor the seller knows the process for disbursing the earnest money when the transaction closes or what happens to the earnest money if the transaction does not close. Ideally the parties would sign an escrow agreement regarding the earnest money at the time it is deposited with the title company. If the parties already have an accepted offer, they could sign an escrow agreement after acceptance and amend the offer to reflect this agreement.

An old address was written on the WB-45 Cancellation Agreement and Mutual Release (CAMR) for the return of the earnest money. The recipient of the earnest money has not received the earnest money check and is asking the listing firm to cancel the issued check and send a new check to the new address.

Can the listing firm withhold the stop payment fee from the earnest money disbursement if the firm obtains written consent from the party?

The WB-45 Cancellation Agreement and Mutual Release is specific. It indicates a specific party, a specific amount of money, and a specific address that applies if the earnest money will be returned by mail or some other method requiring an address. The only way to correct the form such that it would withstand any potential future challenge is to create a new CAMR with the correct information and have it signed by both parties.

Lines 10 and 12 now note that including the address is optional for the disbursement since it is possible the disbursement will not be mailed but rather may be hand-delivered or wire-transferred depending on the circumstances. 

The firm may ask the party to pay the stop payment fee and include an invoice for the charge with the disbursement. However, the firm may also just view the stop payment fee as a cost of doing business.

The listing firm is holding the earnest money. The buyer’s financing fell through, so the buyer cannot close. Each party believes it is entitled to the earnest money. What should the listing firm do?

A firm that is holding earnest money disburses according to authorization provided within the real estate contract. If a firm has knowledge that not all the parties agree with the terms for disbursing the earnest money as contained in the contract, the firm must notify the parties in writing of the firm’s intent to disburse at least 30 days before disbursing the money. The notification to the parties shall state to whom the firm intends to disburse and when the disbursement will be made. The notice must be sent by certified mail to the parties’ last known addresses.