As of November 2020, Seacoast Commerce Bank has merged with Enterprise Bank & Trust. Allison DiSarro and her property management banking team from Seacoast remain intact and run the whole property management banking division within Enterprise Bank & Trust. If you would like to learn more about the merger, watch this recent episode of the podcast where we interview Allison DiSarro and Ken Carteron about the merger as well as Property Management vs. HOA Banking: https://fourandhalf.com/hoa-vs-property-management-banking/
Allison DiSarro from Enterprise Bank & Trust (formerly Seacoast Commerce Bank) joins us today on The Property Management Show to discuss property management banking and trust accounts.
Maybe you think you’re fine when it comes to this topic: you’ve done a great job of separating all the funds that need to be separate, and you understand the importance of trust accounts.
The problem, however, is not necessarily in what you don’t know. The problem could be in what your banker doesn’t know.
Allison worries that your trust account might just be a business account that the bank calls a trust account.
If it worries Allison, it should worry you, too.
Introduction to Property Management Banking and Allison DiSarro from Enterprise Bank & Trust
Allison started out with Seacoast Commerce Bank over 10 years ago. She worked for a branch in Massachusetts and she noticed a lot of property management accounts coming into the bank where she began as a business development officer. This led to a focus and an expertise on serving property management companies and their unique banking needs.
All banks look for what’s called a “sticky deposit”.
This is money that’s deposited and sticks around. The rents that property managers deposit aren’t sticky; the money moves right back out of the account so owners can be paid. Trust accounts, however, are sticky. The bank holds security deposits and reserve funds. Since property management business was already at Seacoast Commerce Bank and the company’s CEO was dedicated to hiring industry experts for their business banking division, Allison quickly developed an expertise of her own.
She has spent years diving deep into trust accounts to find out what makes them special and how to keep them compliant.
The question she asked herself was: who are we afraid of? Most property managers are afraid of the Department of Real Estate. If you own a property management company, your main concern is likely that you’d pass an audit if the DRE showed up at the doors of your business.
Allison met with auditors and attorneys and became acquainted with FDIC rules and regulations to figure out how to build a division within Seacoast related to property management. She would later on bring this same knowledge and expertise as the head of the property management banking division within Enterprise Bank & Trust (formerly Seacoast Commerce Bank).
Now, she’s here to tell us that the DRE audit isn’t necessarily the biggest threat.
Trust Account Terminology:
What are We Really Talking About?
A trust account holds other peoples’ money.
The money is held there until a trigger of some kind releases it.
When people hear the term trust account, they probably think about family trusts. You might set one up at the bank for your own family. It puts money away for other people, who are your beneficiaries. When we think about property management trust accounts, the beneficiaries are the property manager’s customers who are actually entitled to the money being held there.
As the owner of a property management company, you can walk into any bank and open up an account. You have to take some steps to make sure you’re having the right account opened. Your business operating account is easy enough. But, for a trust account, you want a bank that understands the property management industry and the needs of businesses within that industry.
The most common mistake in the industry is that bankers aren’t aware of the legal and regulatory complexities involved in a property management trust account. They’re actually opening up a general business account and they’re calling it a trust account. That might be the account’s nickname the same way another business account would have an “operating expenses” nickname or “payroll account” nickname.
So, you’re walking away from the bank thinking you opened a property management trust account, but you really only have a business account that’s called a trust account. There’s no protection, and that’s dangerous.
What to Ask your Business Banker
Most bankers aren’t trained on how to open a trust account that’s specific to property management companies. It’s not part of the traditional banker training.
Find out if you have a trust account or if what you think is a trust account is actually just a business account. Put these questions and requests in writing.
- Email your banker with your account number and the name of the account.
- Ask your banker what would happen if the bank went under tomorrow. How much are you insured for?
- If there was a lien put on your accounts from a governing entity or a lawsuit or a judgment, would the trust account have its assets frozen?
If your trust account is only insured for $250,000, and those funds can be frozen if there’s a lien or a lawsuit, you might not actually have a trust account.
These are the most common risks. The money in the trust account doesn’t belong to you. But if you’re sued and those funds are frozen, you’re going to be in a lot of trouble.
Switching banks isn’t as scary as it seems to be. If you are in the position where you have to educate your banker on how to set up a proper trust account for your property management company, you might want to consider finding a new bank. If they’re willing to look into it and learn what they have to do themselves, you can probably safely stay. Otherwise, start looking for a bank that can serve your business better.
You want someone who knows this inside and out.
Trust Accounts and Regulations
Almost everyone is afraid of audits.
If you pass an audit, you probably feel like you’re completely covered. But, there are some risks that are worse than an audit.
Liens and lawsuits will be a problem if your account isn’t a true trust account.
You can also find yourself having money taken out of your trust account if it’s not a true trust account. Perhaps your operating account will not have enough funds to cover something, and the bank will take money out of what you think is your trust account to cover the charge. That will create problems.
Funds can be frozen because it’s an account under your tax ID number.
Allison knew someone who had owed back taxes. When they didn’t pay those taxes, the franchise tax court froze the company’s trust accounts. They didn’t put a hold on all the money, but they did freeze a lot of the money. This was a big problem, and it was due to the fact that the account had not been set up properly with the necessary protections.
That property manager was able to rectify the problem, but it was detrimental to the business. Not only are you risking other peoples’ money; you’re risking the loss of your business.
This is more common than a failed audit.
Understanding FDIC Insurance and Your Trust Accounts
Another risk to having an improper trust account is a lack of adequate FDIC insurance.
The FDIC insures a tax ID number at the bank. All of your accounts at the bank are set up under one ID number. That ID number is insured up to $250,000. So, if your property management company has accounts with a total value of $1,250,000, the funds beyond $250,000 are essentially lost if that bank collapses.
This is unfortunate in any way that you look at it, but it’s especially dangerous if most of that money isn’t even yours.
If the trust accounts are set up right, each beneficiary in the trust is insured up to $250,000.
But, the account has to be set up correctly. If you have a trust account with a million dollars in it, you want to be sure there are at least four beneficiaries disclosed on the account to have all those funds protected.
This is important and yet so misunderstood. You can’t embrace a false sense of security just because you passed an audit. The audit is not the biggest risk.
State Trust Account Laws
In Delaware, there are no legal requirements associated with trust accounts.
That doesn’t mean property management companies have a free pass. It doesn’t matter what your state requires. If the funds you’re holding for your clients aren’t in a bank account that’s been set up properly, the money is not protected.
It doesn’t matter what your state laws say – those laws aren’t the standards against which your trust accounts should be held. You are acting as fiduciary for someone else’s money. You have to protect it.
Audits protect an industry. State and federal laws protect the consumers within that industry. But, you are a responsible business owner and your reputation is on the line. Don’t make the mistake of shrugging off implementing a proper trust account just because you’re passing audits and following the minimum legal standards.
Moving to a New Bank
Allison is aware that changing banks seems easy to her; she helps property management companies do it every day.
It’s not as complex as changing your software system. If you’ve decided that you want a bank with a property management specialist who understands the industry, make your plans to move.
First, you’ll collect a proposal from the bank you might decide to work with.
Then, you and your banker will come up with a timeline.
The timeline is important, and you don’t want to rush. It has to follow the rent cycle, and again – working with a bank that specializes in property management will help you ensure that everything will move over in time for rent to be collected and owners to be paid.
Decide on the day that everything will transition, and then work backwards. Your bank will provide documentation and signature cards and set up the accounts. Most of the work will be with them. You’ll need to communicate with your software company and make sure everything on that end transitions smoothly for accounting purposes.
Your switch to the right bank needs a timeline. A bank shouldn’t just hand over your new account number and that’s it.
You do very specific things on very specific days. You don’t want to transition from one bank to another, alone. You need someone who knows all this.
Most of the new property management customers at Enterprise Bank & Trust (formerly Seacoast Commerce Bank) are grateful for the smooth transition that Allison manages from their old bank to their new bank.
Analysis Banking and Credits
Since Allison is here to talk about trust accounts and compliance, we also asked her to discuss another benefit to property management companies, and that’s analysis banking. If you’ve never heard of analysis banking, it’s possibly because most banks don’t promote it very much. At Enterprise Bank & Trust (formerly Seacoast Commerce Bank), however, it works really well for their property management clients.
With analysis banking, a company earns a number of credits based on the amount of money they have in all their accounts at the bank.
This already puts property management companies at an advantage because with trust accounts, they have a high monthly average.
Interest rates are often calculated based on the amount of money you have. So, in a traditional bank account you might earn one percent interest off your million dollars that’s in all your accounts. These credits are calculated the same way. The amount in your accounts dictates the number of credits you have.
At specialty banks like Enterprise Bank & Trust (formerly Seacoast Commerce Bank), those credits are used to pay bank fees first.
If you’re currently banking with a financial institution that offers free small business banking, you might bristle at the idea of paying bank fees. If you love your bank and your business checking account is free and they don’t offer analysis banking, you should stay where you are.
But, with analysis banking, your fees are quickly offset. You can earn more with analysis banking than you would with free banking.
After your bank fees are paid with your credits, you can use the remaining credits to pay a third-party invoice. That might be an invoice from your CPA or your software company. It may even be your Fourandhalf marketing invoice.
There are a lot of reasons why your property management bank cannot and should not pay interest. Instead of interest, you’re getting credits through analysis banking, and some of your bills are being paid.
Almost every state allows analysis banking, and in California you simply have to disclose that you’re doing it. Allison works closely with property managers and the DRE to ensure the program is compliant and the disclosures are transparent.
As you think about your property management banking, be vigilant with your trust accounts. Get educated, and take this more seriously regardless of your state laws and your audit scores.
If you have specific questions about property management trust accounts and the benefits of working with a bank that specializes in your industry, contact Allison DiSarro (firstname.lastname@example.org).
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