Real estate broker trust account violations, DRE enforcement and compliance best practices

Your state’s Department of Real Estate (DRE) will absolutely look at intent — but even the best intentions don’t excuse a violation. As a broker, if you don’t have a system in place for handling trust funds, and if that system can’t prove compliance to the penny, you’re exposed, whether you meant harm or not.

In a recent episode of our TrueCrimes podcast, we looked at the case of a California property management company that pocketed $20,000 in underperformed credit report fees and audited trust shortages of $50,000. 

Check out that episode for all the details, then come back and find out how to protect yourself and your business so that you can meet state auditors with a clear conscience and scrupulously completed ledgers.

Good intentions don’t balance trust accounts. Controls do

As a broker, once you take custody of funds, you’ve triggered the trust fund handling rules. Here are 10 things to remember about handling money and maintaining your brokerage’s compliance.

1. Application fee handling requires a compliance system

In the case we discussed, the firm collected application screening fees with a portion designated for credit reports. However, the credit reports were never pulled. That’s not just an oversight; it’s a controls failure. 

Your system needs to tie the receipt of fees to service completion, retaining all documentation to show where and when the money was spent, with overages refunded as needed.

2. Trust accounts are sacred because the money isn’t yours

Good intentions and silent clients don’t shield you from responsibility. California does not require proof of consumer harm to discipline trust account violations — control failures alone are enough.

3. Delegation is not a defense. Supervision is required

As the broker, you’re probably not getting out your old-fashioned adding machine and filing receipts yourself. There may be a bookkeeper or other staffer, third-party background screening vendors and individual agents involved, but the supervising broker must do just that — supervise the system end to end. 

Lack of broker oversight goes hand in hand with negative compliance outcomes.

4. Policies aren’t enough to protect you if they’re not enforced

Having your attorney draft a fancy policy won’t do you any good if there’s not a plan in place to enforce it. Make sure your policies are mapped to actual documentation, procedures, controls and audit trails to ensure compliance.

5. Software is a tool, not a compliance strategy

If you don’t know how to reconcile reporting, you can’t properly evaluate the feedback you’re receiving from your software. While you don’t have to do all of the daily work yourself, you need to achieve a level of competence that allows you to spot-check and challenge problematic output.

6. Build a meaningful compliance stack

First, understand the law, then create policy around it. Next, wrap procedures and processes around that policy, ensuring redundancies where needed to serve as quality control checks.

7. Multiple trust accounts increase complexity and scrutiny

Maintaining multiple trust accounts increases your documentation burden and expands the risk of repeated errors or inherited control failures. Increase oversight as you increase the scope of responsibility.

8. Don’t assume self-reporting earns goodwill

While California law doesn’t require it, some brokers believe self-reporting will obviate the consequences of a compliance violation. However, discipline is tied to correction and mitigation. If issues persist or aren’t corrected quickly — containment and cure — you may still get disciplined.

9. Revocation and license restriction is common

Prevention is cheaper than “winning” later. A negotiated stipulation could end up in revocation of your broker’s license with a path to a restricted license, plus associated penalties, audit and investigative costs, proof of repayment and multi-year restrictions.

10. The broker of record ‘goes down with the ship’

If you’re a broker of record for someone else’s brokerage, also known as a managing broker, your employment contract should reflect the reality of the risk. That includes your authority, access, staffing standards and your right to independently verify what’s happening inside the business. After all, you ultimately carry the responsibility for basically everything that happens in that brokerage.

The bottom line isn’t glamorous, but it’s essential: If you can’t systematize trust fund handling and demonstrate compliance through accurate bookkeeping, reconciliations, and spot checks, you may not be ready for property management. DRE audits leave no room for guesswork.

NOTE: The opinions and recommendations expressed in this article are based on Summer Goralik’s experience as a real estate compliance consultant and former investigator for the California Department of Real Estate. They are provided for informational purposes only and should not be construed as legal advice. Readers should consult with their brokerage and/or qualified legal counsel in their jurisdiction for guidance on specific situations.

True Crimes of Real Estate is an investigative podcast and video series exposing what really happens when real estate professionals cross the line. Hosted by real estate strategist Troy Palmquist and DRE compliance expert Summer Goralik, the show breaks down actual cases involving: trust account violations, brokerage supervision failures, property management compliance issues, ethics breaches, fraud and misconduct.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the editor responsible for this piece: tracey@hwmedia.com