The Importance Of Next-Level Trust Fund Separation For Residential Rental Agents
No residential rental agent needs to be reminded of the unbreakable golden rule – trust funds must be kept separate from business funds, to ensure landlord and tenant funds are only ever used for the purpose they were meant for.
The basic principle is that all agents must have a trust account separate from their business account, into which tenant and landlord funds should be paid. The overwhelming majority of agents comply with this rule.
In addition, they must keep an accounting record, which ideally (but not always) includes a system of reconciliation – to match rent payments to the tenants they were received from, and to the landlords and other beneficiaries whom the funds will be paid to.
Some property management systems even go so far as automating the settlement of these amounts, albeit in a roundabout way – by pulling funds from a trust account, putting them into a settlement account, and then pushing all payments out.
But a trust fund isn’t like water in a bucket
It all sounds fairly simple and effective, and it complies with Section 32 of the Estate Agency Affairs Act. But according to Jan Davel, CEO of PayProp – SA’s leading industry payment platform – it is not enough.
“Using this approach is like treating your trust account as a bucket of water. All tenant funds flow into the bucket, and each month funds are scooped out and distributed,” Davel says.
“The trouble with that is you don’t know what money belongs to what property. You could be paying property A’s expenses with B’s money. What if a debit order fails? You think you have the money, and you pay, but without knowing which property it belongs to or if it was earmarked for repairs, you’ll be taking a grave risk.”
Worse, you could be paying the landlord or supplier who is making the most noise – hoping that when the right tenant eventually pays, the imbalance will sort itself out. “In the long run, these little exceptions create a trust account that is almost impossible to reconcile down to each property,” explains Davel.
And that goes double for funds on retainer
Retaining some of the landlord’s money (with their permission) to cover approved property expenses is a healthy practice and helps when there is a problem with the property. But when no funds are available, an agent cannot just use some of the other money in the bucket.
“The damage deposit belongs to the tenant. It is not the agent or the landlord’s money,” says Davel. “Using it to pay for repairs, even by accident, can ruin an agent’s relationship with the tenant and landlord – especially when the deposit money is needed at the end of the lease to pay for damage to the property or to refund the tenant.”
The case for next-level separation of trust funds
Davel says using PayProp ensures there is proper separation of funds. “Imagine that within your PayProp trust account bucket, there is a little bucket for every property, into and from which only funds belonging to that property are paid. Each little bucket is further subdivided, to keep funds for the landlord, the tenant, third parties, and all the different purposes relevant to those beneficiaries,” he says.
Next, there is the matter of the funds actually being there. “Through our platform’s unique integration with the banking system, we can guarantee that beneficiaries are only paid once funds are actually received and cleared, that a property’s expenses are only paid with money meant for that property, and that any money retained is separately ‘tagged’, stored and accounted for. We also ensure that outgoing payments do not exceed the amount received in respect of a particular property, and we ensure that each agent’s trust account is reconciled to the last cent daily.”
Davel says all accounting, banking, and property management tasks related to these funds are automated for PayProp-powered agents, leaving no room for human error, while an unalterable audit trail remains on the platform forever, for every user and every action they take. This allows the agency to track (and prove, if necessary) who has done what on the trust account from the moment a user logs in.
“Unfortunately, many estate agencies struggle to achieve detailed segregation of funds. As a result, their business principals and clients are exposed to a significant risk of misuse of funds – often in error. The efficient use of PropTech can solve this problem while helping with agency compliance.” Jan Davel, CEO, PayProp SA