What do you do with the interest that accumulates on money that’s being held in a trust account? In real estate, it’s often that we are holding money for a client. Usually trust money for a transaction, that’s being held just in escrow until the transaction completes. So, for example, if I put in an offer on a home that I want to buy, I usually put in an amount of money toward earnest, which you would talk to an attorney to see how much you want to do.
But say, for example, you choose to put in 1% of a transaction. If you had a $600,000 house that would be $6,000 in earnest that you put in there. Okay. So, $6,000 sitting in a bank account for a month might accumulate a little bit of interest. It’s not a lot. But, you know, if you’re going to invest your money, you want it somewhere where it’s going to be making money, right?
Where Does this Interest Go?
So, if a buyer puts their money in the trust account for this transaction, but they want that money to still contribute interest for them and kind of grow wealth for them, then in Utah, the law says that if the earnest money is going to accumulate interest, you have to have both parties agree where that interest is going to go.
And so, in this case, in a home purchase, the buyer and the seller both together have to agree on where that interest is going to go. And now that could quickly become a dispute of whose money is that? I mean, while it’s in earnest and trust it technically is the buyer’s money, but it’s also having to be held to hold the transaction in case something goes wrong. It could go to the seller if the transaction falls apart, depending on what happened.
So, does the seller get that interest? Does the buyer get that interest? Whatever they agree to is fine, but since they don’t know each other, it might be hard to get them to come to an agreement.
UARHOF as a Solution
And so, one of the solutions that they found in Utah, that they proposed was they created a charity called UARHOF. The Utah Association of Realtors Housing Opportunity Fund, I believe is what it’s called. They set it up specifically to take donations and use those funds to support first time homebuyers, people having a difficult time buying a house and using those funds to kind of help the community.
They said if real estate transactions are collecting interest that isn’t going anywhere, why don’t we take that interest and put it into this charity? And that might be something that a buyer and a seller would be more readily able to agree on in order to let the interest go where they both would agree. So, they set up this charity. And if you’re a member of the Utah Association of Realtors, they have an exclusive representation agreement on the buyer side that includes in the contract, it says as the buyer you agree to put interest in the trust account into UARHOF.
And if they have that on the seller side, too, then that would be exactly what we need to do. So, if both the seller and buyer are using these UAR approved forms, then it’s already built in there that they agree that that’s where the interest is going to go. But if either side is not using that agreement that already has that in there, then how do you come to that agreement?
That’s where the addendum to the real estate purchase contract comes in. There’s a UARHOF addendum to the real estate purchase contract where the buyer and seller can both sign and agree that the interest that is collected on the real estate trust account, while it’s sitting in escrow, can go to this charity and contribute to this cause for affordable housing and things like that.
The Decision is on the Brokerage Level
So kind of a brilliant idea, but I’m guessing that a lot of brokerages, the agents don’t set up the brokerage trust account, the broker sets up the brokerage trust account, and they would set up whether the interest on that account goes to this Housing Opportunity Fund or not.
Okay, so it’s on the brokerage level. They get to decide how they set up their accounts, but if their trust account is set up to send that interest to the Housing Opportunity Fund, and either the buyer or seller have not signed to agree to that, then they might be breaking license law. They would be taking money that potentially is owed to the buyer or seller and siphoning it off to some other organization.
And so this may be something that agents need to keep track of. When they enter a new offer, either as a buyer or the seller, they need to check their records and their agency agreements and see if their clients have agreed to donate that money. Agents should check with their brokerage if their brokerage trust account is donating those funds to the Housing Opportunity Fund.
Making Sure Both Sides Agree
And in modern transactions, a lot of agents and clients choose to put their trust funds in a title company trust account. If they choose to do that, is their interest being collected on the escrow account at the title company? They would need to check with them. And if they are donating that interest, then the buyer and seller would need to agree where that’s going.
And so, if you don’t know if your buyer and seller have agreed to that, if you know that your client has agreed to it but you don’t know if the other side has agreed to it, you could be doing a little bit of breaking of license law. That’s something you ought to check on and get that REPC addendum that talks about giving permission for UARHOF for the Utah Association of Realtors Housing Opportunity Fund, and make sure that you get that signed for both the buyer and the seller to make sure that they both agree on where that interest is going.
In the real estate license course for new agents, we do talk about these rules that a broker has to hold money in trust, has to be separate from the brokerage funds, and if there’s interest, they have to get permission from the buyer and the seller for where that interest is going to go. So that’s something that we do teach all real estate licensees. And it’s something that probably comes up all the time, but agents just aren’t realizing it.
So, get those contracts signed people, and take care of your clients.