Escrow account administration is an urgent business issue. Brokers can find themselves in regulatory hot water not only for blatant mishandling of escrow funds, but also for shoddy accounting and record keeping. Requirements are rigorous, and penalties are severe.

10 Tips for Safer Escrow Accounts

Loretta Dehay, general counsel of the Texas Real Estate Commission, offers this advice on keeping out of trouble with escrow accounts. Check with your state’s real estate commission to get exact directions on managing escrow funds in your state. For more on handling escrow funds, visit the Risk Management Broker Tool Kit.

1.  Never commingle funds. Money held in escrow must be kept in a separate account.

2.  Keep separate transaction journals for sales escrow, rental escrow, and advance-fee escrow accounts. Then, with your journals as supporting data, prepare reconciliation statements for each account.

3.  Disclose interest. Escrow funds may be placed in an interest-bearing account, but you must notify, in writing, all parties who will receive interest. (Note: not all states permit brokers to put escrow funds in interest-bearing accounts).

4.  Don't borrow from escrow funds. No matter how quickly you replace the money, it’s illegal to use escrow accounts to fund your business operations.

5.  Don't attempt to resolve disputes. It's not a broker's place to decide who gets what in escrow account disputes. Many states have procedures in place for settling these matters, including referral to a third-party mediator.

6.  Consider contracting with a title company or law firm to handle escrow accounts. More and more brokers are using these expert services to cut down on paperwork and errors. But make sure the company knows how to address a broker's unique requirements.

7.  Get written releases. If a contract fails to close, you must obtain written releases from the principals before disbursing any escrow funds.

8.  Don't take commissions out early. Licensees aren’t entitled to any part of a commission until the sale is closed, unless the principals to the transaction stipulate otherwise in writing.

9.  Deposit escrow funds within a reasonable time after the contract is executed. In some states, you must make this deposit within two business days. Check your individual state requirements.

10. Retain records of all deposits and withdrawals from escrow accounts as mandated by your individual state laws. In some states that period is four years.

TIP: Be sure that your accounting software can accommodate the separate escrow accounts required in many states. —John Cyr, Joan Sobeck, Laurel McAdams, Real Estate Brokerage, 5th Edition, 1999

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