House to House: Watch your Property Management Revenue
By: Gary Isom, Executive Director of the Arkansas Real Estate Commission
When the real estate economy began to decline in the last several years, many real estate brokerage firms turned to property management to make up for the downturn in residential sales. This seemed like a natural transition to many brokers since property management and residential sales are so similar. However, one thing that definitely sets the two apart is the amount of cash flow associated with property management – particularly the amount of cash that flows through the real estate broker’s trust accounts. By far one of the most prevalent issues being investigated by real estate regulatory agencies across the nation involves property management funds. Arkansas is no exception.
While it involves only a handful of brokers, since 2011, the Arkansas Real Estate Commission has paid out close to $200,000 to persons who lost funds related to properties being managed by those brokers. These monies are paid from the Commission’s Recovery Fund. While the Recovery Fund is funded by real estate licensees when they first apply for their real estate license, the monies actually belong to the state of Arkansas. Consequently, the brokers owe the money back to the state. The Commission attempts to collect those funds from the broker, who cannot hold an active real estate license unless they reimburse the Recovery Fund.
As I mentioned above, property management involves significant cash flow. For that reason, a lot of money can disappear in a short time. In addition to damage claims filed with the Commission, we’ve also seen brokers who have had to recover misappropriated funds from persons who handled their property management. Plus, we know of brokers who have had to replenish missing funds out of their own pockets. Some even self-reported the delinquencies and provided proof of replenishing the funds.
While part of a property owner’s rationale for hiring a property manager is to pay someone else to do those things the owner doesn’t want to do, the owner still has a responsibility to oversee how his property is being managed, particularly where his finances are concerned. Owners should request and review financial statements from their brokers periodically, preferably monthly. While the Commission offers some financial relief for misappropriated funds, the Commissioners who determine how much should be reimbursed do hold the property owner somewhat accountable.
In a 2011 case, an out-of-state owner asked the Commissioners to reimburse him for three years of back rent. The Commissioners instead gave him six months of back rent and reasoned that the owner should have realized the shortages and filed his complaint with the Commission in a more expedient manner. The Commission takes the charge of protecting the public quite seriously, and part of that involves a responsibility to steward well the Recovery Fund in order to ensure sustainability in our ability to award damages to those consumers who may be entitled to them.
Consumers who engage real estate brokers to manage their property need to monitor their rental income responsibly. If a shortage or other discrepancy appears, contact the Principal Broker of the firm immediately. If the issue is not resolved quickly, please contact the Investigations section of the Real Estate Commission by calling 501 683-8010. The more quickly the consumer acts, the more quickly the Commission can respond and attempt to keep the state’s – and the consumer’s – losses to a minimum.
House to House is distributed weekly by the Arkansas REALTORS® Association. For more information on homeownership in Arkansas, readers may visit www.ArkansasRealtors.com.