During the past several years, with an ever-increasing number of individuals engaging in the management of real property on behalf of others, there has been a growing need for regulation to protect the interests of the public. Property management involves more bookkeeping and paperwork than any other area of real estate practice. Not only does a property manager need to consider licensing regulation relating to accounting of trust funds and records, but liability concerns, maintenance issues, improper or negligent management, landlord/tenant laws, equal housing laws, tax and insurance requirements, labor and payroll matters, and many other very important issues.
It is the intent of the Commission that the following information will assist the property manager in achieving compliance with South Dakota Real Estate License Laws & Administrative Rules.
The management agreement, in conjunction with the lease and security agreements, are the key ingredients of a property management business. This agreement is a contract between the property manager and the owner of the income-producing property which accurately represents the responsibilities and authority of the property manager.
Management agreements should, at a minimum, address the following:
All properties rented or leased by the property manager must be supported by a written rental or lease agreement. A lease is a contract between a landlord and tenant establishing the tenant's right to use and possess the property according to agreed terms and conditions. A written lease is essential for establishing the terms of occupancy for a tenant. Oral leases do not clarify enough legal issues to be of value to the property manager, who needs a written lease to establish the terms of occupancy. The written lease, when properly written and executed, provides protection for the owner of the property, the property manager and the tenant.
Leases, at a minimum, should contain the following information:
A property manager's license is a restricted broker's license. The real estate license law requires brokers to place trust funds into their designated trust (or escrow) account. For property managers that means two types of funds: (1) security deposits or damage deposits and (2) rent collections. These trust funds shall be deposited in a non-interest bearing trust account in a federally insured financial institution. The property manager shall inform the commission of the name of the financial institution, the name of the account and the account number. Trust funds may be deposited in an interest bearing account if written permission has been given by the clients involved to place the deposits in a separate interest bearing trust account. The permission must be in written form and state clearly who will receive the interest. The property manager cannot benefit from the interest.
The property manager should be aware that security deposits can only be used for certain specified purposes. At no time can security deposits be used for the payment of operating expenses of the rental unit.
Personal funds of the property manager are not to be placed in the trust accounts as this may be determined as commingling, which is a violation of South Dakota Real Estate Commission Law (South Dakota Codified Law (SDCL) 36-21A-71 (5); however, a small amount of the property manager's own money (usually not to exceed $100) may be kept in the trust accounts in order to meet any requirements or fees of the financial institution. If such conditions exist, a special ledger account must be maintained specifying the amount of the property manager's personal funds deposited and any disbursements made. The property manager shall be an authorized signer on each trust account utilized in his/her licensed activity and shall control the receipts and disbursements on each account.
If the security deposit trust account is moved to a different bank, the tenant must be notified of the location of those funds. Also, with regard to security deposits, the property manager may not turn these monies over to the owner of the property without the written consent of the tenant. The latter might occur when the owner changes property managers or elects to manage his or her own property. It is recommended that when negotiating a rental or lease agreement, the property manager provide for a clause in the rental or lease agreement, allowing the transfer of security or damage deposits to the owner or new property manager, upon mailing of proper notification, when the owner or property manager changes. Additional requirements placed on security deposits are directed by the Landlord Tenant Act rather that real estate licensing law; therefore, the property manager must comply with those provisions also.
Checks used to disburse funds from a client's trust account shall be prenumbered and should bear the words "Trust Account" upon the face of the checks. The property manager shall account for all checks, including but not limited to voided checks, as part of the records maintained by the property manager. It is suggested that the property manager prepare a legible written receipt for any cash funds received under a property management agreement. Said receipt must be prenumbered and printed in duplicate form. A copy of the receipt should be retained in the manager's records. Funds received shall be deposited on the first legal banking day after the money is received and such money may not be used by the property manager except as authorized by the management agreement and/or lease agreement.
In many property management firms, attempts are made to reduce paperwork by combining ledgers, etc. This is not acceptable. Each client, in this case, each owner, must have a separate ledger card. Many property managers will also provide a separate ledger card for each property when an owner has more than one property, rather than maintaining all of the properties on one ledger card. This also makes the compilation of owner's reports easier. However, the primary importance of the individual ledger card requirement is to prevent disbursements in excess.
A separate tenant ledger card should be maintained for each tenant and should show only the rents owed and paid by that particular client . Since the purpose of this ledger card is to only show if the tenant is current or how far and much the tenant is in arrears, the account balance is not shown on a trust account trial balance.
A security/damage deposit ledger card must be maintained as a separate balance in the owner's ledger or in a tenant ledger account to show the funds held for a particular client's security or damage deposit. The amount of deposit and disbursements, if any, should be recorded on the ledger card.
Another aspect of maintaining the trust account records system is the performance of monthly bank reconciliations and trial balances. The whole process is referred to as a monthly trust account reconciliation. A check register, duplicate deposit book and most recent bank statement are needed to perform an accurate bank balance. The ending bank statement balance plus outstanding receipts minus outstanding checks should equal the property manager's balance plus/minus any automatic bank transfers. (A trust account reconciliation form is available in Adobe .pdf format on our Forms page.)
A trial balance is the determination of the amount of trust funds held. It consists of listing the trust account balances for each and every client. The property manager's trust liability is the total amount of funds in the trust account, based on trust account records. This liability is determined by adding all of the balances on the individual client ledgers or security deposit ledgers. (Please remember not to take balances from the tenant ledgers as they represent the money the tenant owes, not the liability the property manager has). When adding the ledger balances a debit (or negative) balance should not exist. This would indicate that the funds of other clients in the trust account have been used.
Performing monthly trial balances and reconciliations of each trust bank account is the single most important item a property manager can do for the accountability of trust funds. This could be a very serious breach of property manager responsibility if the trial balances and reconciliations are not done timely and properly.
The reconciled check register (or disbursement/receipts journals), reconciled bank statement and trial balance should equal. If these three do not agree, the first thing to do is to again balance the checkbook or check register and to perform another trial balance. Should this not correct the problem, the bank reconciliation should be checked for problems--missed checks, outstanding checks, voided checks, receipts properly posted, etc. If the problem still exists, each individual ledger may have to be checked for accuracy. A math error frequently produces an incorrect balance on the ledger sheet. Receipts may also have to be matched with deposits.
All records related to the receipt, deposit, maintenance and withdrawal of trust funds must be kept on file for four years following the termination of any management contract. It is the duty of the South Dakota Real Estate Commission to audit the records of all licensees maintaining trust accounts. Utilizing the preceding guidelines and suggestions will help provide the property manager with an accurate set of records in order to produce a sufficient audit trail.