Over the past couple of months the Real Estate Council of Ontario (RECO) has issued a freeze order, freezing the accounts of three Toronto real estate brokerages. A list of the brokerages can be found on RECO's website.
The Real Estate Council of Ontario is responsible for administering the Real Estate and Business Brokers Act (REBBA) on behalf of the provincial government.
When a real estate brokerage is representing a seller, they are typically responsible for holding the purchaser’s deposit in their Real Estate Trust Account until closing. RECO regularly audits brokerages to ensure that they are operating in accordance with REBBA and one of the key things they look for during an audit is the history of the real estate trust account. The sole purpose of the trust account is to hold deposits for a trade in real estate in trust until the day of closing.
Brokerages are not permitted to use the funds in their real estate trust account for any other purpose. They cannot invest the funds, they can’t use the money to pay for expenses and they can’t use it to assist with short term cash flow problems. The funds in the trust account are the property of the consumer, not the brokerage.
Should RECO find any irregularities with the brokerage’s real estate trust account; they have the power to immediately freeze that brokerage’s accounts. In just over two months RECO has had to freeze the accounts of three Toronto real estate brokerages.
Is this just a coincidence or is it related to the current slowdown in the real estate market?
Because RECO’s investigation into these brokerages is ongoing and not open to the public it’s impossible to say with any certainty what really caused these freeze orders.
Having said that, I don’t think we can rule out the possibility that the slowdown in Toronto’s real estate market may have played some part in these freeze orders. Over the past several years the margins in the real estate brokerage business have been under pressure as new business models emerged that charge agents much lower fees than traditional brokerages. Brokerages with high overhead costs and thin margins may not be well positioned to handle a slowdown in the real estate market. Real estate sales are down by roughly 50% over the past four months which means that revenue for most brokerages is probably down by the same amount. This of course is never a reason for a brokerage to use funds from their real estate trust account but may be one of the factors behind the high number of freeze orders over the past couple of months.
Consumers should note that deposits held by a brokerage in trust are insured. You can see more information about the Consumer Deposit Insurance program on RECO’s website.
February 9, 2009Market |