Why real estate trust accounts may be a thing of the past

A single real estate agency may hold hundreds of thousands, sometimes millions, of dollars in their trust accounts with less financial oversight than you might think and making them ripe targets for cyber crime.

And after a series of real estate trust account breaches and scams, isn’t it time we found another way to secure this money?

Current challenges and emerging risks

While the vast majority of real estate agents operate with integrity and professionalism, the existing ecosystem still faces significant challenges with theft and bad actors. Recent years have seen a surge in public awareness of agent fraud and embezzlement, casting a shadow over the industry’s integrity. In 2021 alone, a NSW Fair Trading investigation resulted in penalties totalling $173,500 for 20 agents, with eight licence cancellations and nine disqualifications.

My own firsthand encounter with this issue occurred when my wife and I entrusted an agent to manage our investment property in Parkes, NSW. In a distressing revelation, we discovered that despite our belief that the tenant was struggling financially, they were in fact making regular payments. Instead, funds meant for necessary property maintenance were siphoned off by the agent, leaving us and other property owners out of pocket. This agent too spent time behind bars, but the damage was already done to so many lives.

This experience opened my eyes to the intricate triangular relationship between the agent or property manager and their clients on both sides of the contract: the vendor and landlord or buyers and tenants, highlighting the critical need for transparent communication and accountability.

While the legal consequences for perpetrators typically involve jail time, fines and professional sanctions, the ramifications extend far beyond mere punishment. The ripple effects on agencies and the industry as a whole –including financial losses, operational disruptions and reputational harm – are enduring. Moreover, the toll on victims, ranging from the depletion of life savings to pervasive financial hardship, is undeniably devastating.

The need for new technology in an ever-changing industry

Emerging risks such as increasing scams, the rise of AI and international criminal syndicates targeting high-value transactions necessitate a reevaluation of our approach. Therefore, it’s evident that robust safeguards are urgently needed to protect the substantial sums entrusted to potentially unscrupulous individuals within the real estate industry. We must build new technologies designed for the new world, not merely improve on past systems.

A trust account is essentially an intermediary holding account that attracts fees and management costs, plus it takes time to move funds in and out of it. The funds in it belong to the clients, whether that’s a deposit for the sale of a property or rent that is yet to be disbursed to a landlord, but the real estate agency is the keyholder. It’s clear that the fewer people who have access to the money, the less risk there is of that money being misused or mistakenly transferred – so what’s the solution?

Redefining trust through security

Replacing property trust accounts in Australia with a system that enables the parties to transact directly, with money only ever passing through a regulated payment service provider, offers several benefits. It removes the risks of theft and fraud, mismanagement and misappropriation, and can also promote better efficiency and reduce operating costs for an agency.

Direct transactions mean both parties have direct line of sight on their money at all times, which increases transparency. The money no longer passes through a small businesses trust account, removing the risk of human error. This in turn removes the regulatory burden associated with monitoring and auditing trust accounts. A decentralised ledger could revolutionise accountability within the industry. It would keep each party accountable, and digital technology could ensure regulatory compliance, suitable checks and balances for the movement of money, as well as real-time updates and complete visibility of the flow of funds.

In many cases, faster transactions would also assist the buying and selling process as it reduces the time it takes for funds to be cleared and deposited. It should also support better customer service by enabling agents and property managers to focus more on the clients’ emotional needs while eliminating their fiduciary risk.

Embrace innovation to ensure a secure future

There’s no doubt that trust will continue to be eroded in real estate trust accounts following years of misuse and misappropriation, not to mention the increase of scams. The only way to regain trust in the process is to introduce an alternative with security and transparency at the fore; if we can use digital technology to create a pipeline that moves money in real time, based on the underlying contracts, according to regulatory guard rails, then that transforms real estate dealings for the better. Trust accounts will soon be a thing of the past. We need to embrace the technology we have to safeguard real estate transactions for the future.

Jeremy Hastings is the founder and managing director of Hutly.