Audits and escrows

Board members and other Michigan REALTORS® have been concerned with the methods used for random audits regarding their escrow accounts. To clarify some concerns, we have reprinted below a February 4, 2003, interview with Mr. Alan J. Schefke, Director of the Administrative Services Division in which the Audit Section is housed.

Q. How do you select brokers to randomly audit?
A. The computer randomly picks approximately 10 percent of all brokers, either statewide or from requested counties.

Q. Does that mean a broker can be audited several years consecutively?
A. Before the audit is scheduled, the staff checks to see if they were audited in the last three years. If they were audited and no violations were found, they are not audited again at that time.
Q. Are there any other reasons that you would not audit a broker?
A. If there were five transactions or fewer in a year, they are not audited. If the broker claims he was not active at all, merely maintaining an active license, the broker is required to send a letter stating that fact (and is not audited).

Q. What do your auditors review during an audit?
A. Our auditors look at deposits, escrow accounts, bookkeeping ledgers and journals, disclosure forms, etc. They look at deal files to make sure all the paperwork is there, including agency disclosure forms. They also make sure that all wall licenses of people connected to the broker
are posted. If the office (or receptionist) area is small, and there isn’t enough room to hang all the licenses, it is permissible to put them in a three-ring binder or other holder visible at the front desk. Auditors also confirm that written policies and procedures are available, per Rule 310(e).

Q. What problems do your audits most often reveal?
A. The problem our auditors find most often involve brokers having their own personal money in the trust account. The law allows them up to $500 of personal money for bank fees, but auditors find thousands of dollars of personal money in the trust account. The money that is supposed to be there is money belonging to others, not their own.

Often the broker won’t know why there is that much money in the account. The auditing staff is concerned about there being too much money in a trust account as well as not enough money, and they do no want any of the money taken out of the account until the broker can prove to whom it belongs.

Q. Current license law states, “A real estate broker shall deposit, within two banking days after the broker has received notice that an offer to purchase is accepted by all parties...” all earnest money deposits into the broker’s trust account. The seller may accept a buyer’s offer
today, but not notify their broker for several days if the contract is mailed out-of-state. This is common in corporateowned homes through relocation departments. Is “verbal” and “written” notification considered the same by your auditors?
A. The auditors do not attempt to enforce that, due to many of the difficulties you just noted.

Q. What if the broker tells your auditor that the day they were notified of the acceptance by all parties is the same day the buyer bottom-lined and dated the purchase agreement? Would two banking days from this bottom-lined date comply with license law for your auditors?
A. If the auditors see a broker’s signature on a purchase agreement, they assume the broker has notice, since he or she signed it. If a salesperson signed it, the auditor has no way to determine when the broker had notice. Auditors look for two banking days from an offer signed by the broker and the buyer. If the broker can show a deposit receipt within two banking days of the buyer’s bottom-line signature and date and tells our auditor this is the day they received notice of acceptance by all parties, it would appear to comply.

The Michigan Board of Real Estate Brokers and Salespersons was created under Article 25 of Public Act 299 of 1980, as amended, to license and regulate the practice of real estate brokers and salespersons in Michigan. The department currently oversees the practice of approximately 39,492 real estate salespersons, 9,298 associate brokers and 11,827 real estate brokers.