Property managers can inadvertently make big mistakes that can put them at the risk of losing their business license, result in fines, and possible jail time. It is critically important that you understand how to ensure that your accounting is in compliance with the Department of Real Estate in your individual state. This blog post is designed to help you identify common mistakes and help you identify what you must do to get your business back on track if you are guilty of any of them.
- Overstating How Much is in the Trust Account.
Are there any deposits, journal entries, or transfers that remain uncleared and that will not clear in the following month’s reconciliation? If there are “money in” transactions that won’t clear the bank, the owner / tenant ledgers are overstated. This is a RED FLAG to the DRE and should be to the broker. It could represent the co-mingling of owner / tenant funds. If audited by the DRE, the audit would fail and could lead to fines.
2. Failing to Reconcile Your Accounts.
Most states require that your trust and security deposit bank accounts are reconciled to your accounting software and that this is completed within 15 days from the last day of the previous month. Failure to do so could result in hefty fines along with the risk of losing one’s license.
3. Allowing Owner’s Account to Go Negative.
If you are using trust fund for another owner’s expenses, you are co-mingling funds which is illegal. Fines for allowing this to happen within your accounting so ware can be assessed between $1,000 and $2,500 per occurrence (depending on the state). You could also lose your license and go to jail.
4. Having Uncleared Deposits.
Most states require that your trust and security deposit bank accounts are reconciled to your accounting software and that this is completed within 15 days from the last day of the previous month. Failure to do so could result in hefty fines along with the risk of losing your license.
5. Failing to Have Accounts 3-Way Tied Out.
The DRE (Department of Real Estate) requires that your check register,
your owner / tenant balances, and your bank statements be reconciled and that the statements from each match the owner’s ledger. If you are using your trust fund for other owner’s expenses, you are co-mingling funds which is illegal.
Fines for allowing this to happen within your accounting so ware can be assessed between $1,000 and $2,500 per occurrence (depending on the state). You could also lose your license and go to jail.
6. Using Security Deposits to Pay Expenses.
This is fraud pure and simple. Security deposits belong to the tenant. Co-mingling money in this way will result in huge fines and the likelihood that you will lose your license. If an owner doesn’t have money to pay for an expense for their property and they suggest using the deposit, you should fire that client.
7. Failing to Close the Accounting Period.
If your financials change for previous periods, you will lose clients. Owners expect consistency and accurate accounting. This should be completed and tied out so that your financials in the software match the reality in your accounts.
Property Management Inc. has an entire department that focuses on helping its franchisees keeps their books in compliance with federal and state regulations for property managers. Franchisees who do accounting the PMI Way are able to pass audits with flying colors and are the industry standard. For more information about how you can be a part of an upcoming webinar on accounting and converting your portfolio over to accounting the PMI way, please contact Jamie Harris at jamie@propertymanagementinc.com.
