What Does Commingling in Real Estate Mean?

As a real estate agent, you are legally responsible for managing your client's funds throughout the transaction process. 

That’s why agents and their clients have a fiduciary relationship, and agents have a legal obligation to handle clients’ funds properly. 

Commingling is a term you’ll likely see on your real estate exam and is an example of mismanaging your client's money in the real estate transaction. 

If you’re unfamiliar, make sure you take the time to learn what commingling is and how you can avoid it. 

What is Commingling?

Real estate commingling is the act of mixing the client’s funds with the broker’s own funds. This is illegal and occurs when a broker or real estate agent fails to properly handle their client’s funds, such as by failing to deposit them into a designated trust account or deliver them to an authorized escrow holder within the mandated time frame.

The mixing of funds like this should be avoided at all costs and is considered a serious violation of a broker’s fiduciary duty. It can have serious legal consequences, including having a license suspended or revoked.

There are a few legal ways to combine funds in real estate investing, but these situations are not considered commingling under real estate licensing law. For example, individual investors may contribute funds to a real estate investment trust (REIT) or participate in a crowdfunding project where money is intentionally pooled for investment purposes.

Commingling is allowed when funds are intentionally combined for investment purposes. However, when it comes to the broker and agent relationship and the handling of client trust funds, commingling is not legal.

Why is Commingling Illegal in Real Estate?

Commingling occurs when the client’s money is not handled correctly and is mixed with the broker’s funds. While each state differs, mixing funds between a broker and their clients is usually illegal. This is because brokers and agents owe fiduciary duties to their clients and are required to follow specific real estate laws and regulations governing the handling of trust funds.

While acting as a fiduciary, a broker or agent must manage client funds according to the law and applicable real estate codes. While commingling refers to the improper mixing of funds, conversion refers to using a client’s money for something other than its intended purpose. When funds are commingled, it is not uncommon for conversion to also occur. Conversion may constitute theft and is punishable under the law.

In California, commingling and conversion are grounds for disciplinary action by the Department of Real Estate, which may include license suspension or revocation, depending on the circumstances, the amount involved, and the licensee’s prior history.

If commingling and subsequent conversion occur, agents may be found in breach of their fiduciary responsibility and may lose their license. For this reason, agents must follow all proper trust fund handling procedures to avoid violations.

How Can You Avoid Commingling Funds?

To avoid commingling funds, it is best to keep separate bank accounts for your business or investment activities and your personal funds. This minimizes the risk of accidentally using client or investment money for personal expenses.

There are several simple ways you can avoid commingling funds:

• Follow the proper escrow process when transacting with clients, or ensure client funds are handled through a properly designated trust account
• Set up an LLC or separate entity for your investment properties to keep business and personal funds distinct
• Create and maintain a trust account to hold client funds or security deposits when permitted by law
• Keep meticulous records to track all transactions, and invest in appropriate bookkeeping software to ensure all trust and business funds are properly categorized and accounted for
• Establish a system of checks and balances to ensure client funds are deposited and disbursed correctly
• Educate your team on the proper procedures for collecting and handling client funds
• Run a monthly three-way reconciliation of the trust-account ledger, check register, and bank statement, and have it reviewed by the broker of record
• When in doubt, seek guidance from your broker of record or a qualified real estate attorney

How is Money Transferred to All Parties in a Real Estate Transaction?

To avoid the commingling of funds in real estate transactions, client funds are typically held by a neutral third party until the contract terms are fulfilled. Keeping funds with a third party is known as escrow, and there are multiple types of escrow arrangements that a buyer or seller may encounter during a transaction.

The primary purpose of escrow is to keep a client’s money separate and prevent it from being mixed with other clients’ funds or with a broker’s personal or operating funds. When a client is ready to make an offer on a property, the real estate agent may collect the earnest money deposit and ensure it is delivered to an authorized escrow holder or properly designated trust account until the transaction closes.

In California, earnest money deposits are typically delivered to the escrow holder within three business days of offer acceptance, unless otherwise agreed to in writing (per Cal. Bus. & Prof. Code §10145 and Commissioner’s Regulation §2832).

The escrow process often lasts about 30 days, though timelines vary depending on financing, inspections, and contractual terms. Escrow is considered complete when all conditions have been satisfied and the transaction is ready to close.

At settlement, the buyer usually submits the down payment and closing costs by cashier’s check or wire transfer. Once all required funds have been received, escrow can close. The escrow holder is then responsible for disbursing funds to the appropriate parties according to the escrow instructions.

After closing, it is also common for homeowners to have a mortgage escrow account, which is separate from the real estate transaction escrow. This type of escrow allows the lender to collect additional funds with the monthly mortgage payment to cover expenses such as property taxes and insurance premiums on behalf of the homeowner.

Final Thoughts on Commingling in Real Estate

Commingling can be a complicated topic. Agents should be aware of the consequences of combining funds and should take all steps to follow the proper escrow procedure. 

Talk to your real estate broker or a lawyer to confirm if you’re ever unsure of the proper way to deposit or handle your client's funds. 

Your real estate exam will cover in-depth your fiduciary relationship with clients. Make sure you take the time to study commingling for your real estate exam. 

You’ll stay informed and ensure you handle your client’s funds the right way, every time.