DRE Hot Seat: Trust funds are held “in trust” and belong to another

This article is part of an ongoing series covering violations of real estate law. Here, the Department of Real Estate (DRE) revoked the California real estate license of a broker who failed to disburse trust funds to the owner of the funds.

In April 2022, the California Department of Real Estate (DRE) decided by default to revoke the license of Marissa Nicole Hudson, a broker since 2018 operating out of Morro Bay, California. The decision entered into force in May 2022.

Marissa Nicole Hudson was the designated agent (DO) of Beachfront Real Estate, Inc.a real estate company engaged in property management Activities.

Seaside Real Estate entered into a property management agreement to manage a three-unit property in Morro Bay, California in April 2017. [See RPI Form 590]

Seaside Real Estate collected rent from each of the three units in February and March 2019 for a combined total of $13,800. However, Hudson failed to shell out these funds to the owner. Instead, Hudson and Seaside Real Estate mix then converted the funds to their own general account.

Because the owner has not received his funds, he terminated the property management contract in March 2019. After the contract was terminated, the owner requested the return of Security deposits collected for the three units — a total of $8,400.

Hudson and Seaside Real Estate have not returned any of the funds belonging to the owner.

Accordingly, the DRE found that Hudson committed violations of real estate law, including:

  • to mix together other people’s money with his own money [Calif. Business and Professions Code §10176(e)]; and
  • conduct involving fraud Where dishonest transaction. [Bus & P C §10176(i)]

These violations subjected Hudson to the revocation of her real estate broker’s licence, since she:

  • deliberately ignored real estate laws [Bus & P C §10177(d)]; and
  • demonstrated neglect Where incompetence as a licensee. [Bus & P C §10177(g)]

Fundamentals of Trust Funds

Brokers who receive, transfer or disburse trust funds must comply with strict rules record keeping terms.

Related article:

Word of the Week: Trust Accounts

These requirements should not be treated casually. Trust Fund Violations are one of the most common issues that result in DRE disciplinary action, according to the DRE.

To avoid trust fund violationsall real estate brokers should be aware of the following laws and regulations governing the management of trust funds:

  • the general statute governing the handling of trust funds [Bus & P C §10145];
  • maintain columnar records of trust funds received [DRE Regulations §2831];
  • keep separate records for each beneficiary [DRE Regs. §2831.1];
  • perform a monthly reconciliation of trust fund accounts [DRE Regs. §2831.2]; and
  • prohibiting unauthorized and unsecured signers on a trust account. [DRE Regs. §2834]

Related video: Maintaining the Integrity of the Trust Account

Click here for more information on trust accounts.

Real estate law has specific guidelines and requirements that real estate brokers must follow when managing trust funds. Any real estate broker who manages trust funds must be aware of these requirements and strictly comply with them.

The DRE publishes an information brochure, which is a good starting point for brokers who are not yet familiar with the management of trust funds.

Editor’s note — For a more in-depth study, RPI (Realty Publications, Inc.) offers free access to our Management and supervision of office, agency, fair housing, trust funds, ethics and risk management Ebook.

An even greater concern for ERD is licensees who deliberately convert

trust funds in their personal accounts for their personal use. The DRE guarantees brokers who intentionally convert trust funds for their own use will be subject to disciplinary action against their license, with the additional possibility of criminal prosecution.

Brokers should be vigilant about trust fund operations and record keeping. They should also be knowledgeable about the proper management of trust funds. [See RPI e-book Real Estate Principles, Chapter 6]

Brokers who fail to maintain accurate trading records and balances will soon have a DRE audit on their hands – and possibly, disciplinary action taken against their license.

Related article:

Brokerage Reminder: Trust Fund (amentals)

Want to learn more about trust fund compliance? Click on an image below to download the RPI books cited in this article.

About Martin Aaron

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