How much more trust account abuse can the real estate industry tolerate?

Rental payments running into billions of dollars change hands every month. Around 70 per cent of all rental properties are managed by real estate agents and with good reason. Landlords rely on professional property managers to ensure that their investment property is well-maintained, occupied by the best tenants, and return the right rental values.

But as consumer affairs and fair trading watchdogs weed out the agents that misappropriate funds or mismanage their trust account, the regularity with which these cases hit the headlines casts a shadow over the industry as a whole.

A small but growing percentage of the industry is now adopting technology that ensures theft, error and a lack of compliance can never happen in their agency. I’ll expand on how this works a little later.

Spate of cases point to bigger problems

REB has reported on a number of trust account abuse and audit failure cases in the recent past, highlighting the prevalence of the issue in our industry.

For example, a recent investigation by Queensland’s Office of Fair Trading uncovered trust account failures dating back several years by Phuc Ngoc Nguyen, who operated the company Christopher Midas Pty Ltd (which traded as Julie’s Realty in Sunnybank Hills).

The Office of Fair Trading found that between August 2022 and July 2023, Nguyen received 31 cash payments totalling over $23,280 for real estate property transactions and failed to bank them into the trust account.

Brisbane real estate agent Peter Lakidis was recently jailed after pleading guilty to two counts of fraud after misappropriating over $1.4 million of clients’ money from trust accounts between November 2020 and May 2022 – most of which he spent on gambling.

In NSW, a prominent Hunter Valley real estate director Natasha McElwaine was convicted for 11 offences under the Property and Stock Agents Act after an investigation by NSW Fair Trading discovered that she had fraudulently converted $940,280 of trust money, and kept a further $280,597 outside a trust account. In total, $1,220,877 in funds were subject to prosecution.

Victorian agents have also been subject to disciplinary action by Consumer Affairs Victoria, including Debra Lawry. The previous officer in effective control of Bovicelli Investments Pty Ltd, trading as Ray White Romsey was found to have failed to have the agency’s trust accounts audited within three months at the end of each financial year as legally required.

The watchdog has alleged that Lawry “deliberately failed to meet trust account audit obligations for over four years” and is seeking to suspend or cancel her licence.

It is therefore understandable that the vast majority of real estate professionals want to distance themselves from the minority of bad actors, but that is often hard to achieve. The problem is that theft and misappropriation of rental income – as well as clumsy errors – take place in the trust account.

Could digital payments be the solution?

But agencies are increasingly turning to new technology that enables them to run every aspect of their rent roll without the need to run a trust account.

Now you might be wondering how this could possibly be compliant? Surely every rent roll has to have a trust account? In simple terms, the platform bypasses the agency, taking rental payments directly from tenants to landlords and therefore ensuring the agency never handles a cent of other people’s money.

There is nothing new about secure payment gateways. They have been around for decades.

Elon Musk pioneered digital payments in the late ’90s, eventually selling PayPal to eBay 2002. Almost everyone uses digital payments on a daily basis in their personal life, but it has taken a long time to impact the real estate industry – that changed in 2018.

Six years ago, Managed, a new breed of property management platform, analysed the evolution of secure payments over the last 20 years and successfully adapted a solution for the property management industry. The goal was to build a secure platform that eradicates human error by transferring rental income in real-time while adhering to strict legislative and regulatory requirements.

No manual transfer of rental payments means no need for a trust account for an agency to meet legal requirements as per the Property and Stocks Agent Act. To give you a sense of scale, Managed sees $100 million in monthly transactions and will surpass $3 billion in total flow of funds by the end of the year.

The platform has eliminated the need for manual reconciliations and handles all facets of day-to-day property management, including complete property management workflows, inspections, forms, compliance and maintenance.

While there’s no doubt that the speed and convenience of automating payments is a big drawcard to replacing a trust account (and trust accounting software) with a 360-degree total property management solution like Managed, the guarantee to customers that their money can never be accessed by the agency gives them a distinct advantage in more ways than one.

Digital rental payment platforms such as Managed also mitigate fraud by preventing the misallocation of tenant and owner funds. Furthermore, they reduce the number of investigations required by fair trading and consumer affairs watchdogs and other regulatory bodies, which will strengthen the integrity of the real estate industry.

Embracing innovation and new solutions

With agents combatting emerging threats such as cyber security breaches, scams and the rise of AI, it has become critical for agents to shield their businesses to ensure that they are not vulnerable to increasing external attack.

As I write, Parliament is introducing tranche two of the reforms to enlist real estate agents in the effort to end money laundering. This will have a big impact on the responsibilities and reporting for property managers. Managed already arms its agencies with a digital platform with embedded anti-money laundering and counter-terrorism safeguards.

Property managers now have a choice when it comes to how they manage their clients’ money. Regardless of how transparent and efficient you may be at trust account management, there is now a compelling proposition available that landlord and tenants understand.

It is worth taking the time to understand the alternatives that now exist to trust accounting so that you can make informed decisions as to how you position your property management proposition in a rapidly changing world.

Rohith George is the chief operating officer of Managed.