Pet Deposits, a Facebook Ad, and a Side Deal
Kelli is a salesperson licensed under a Sioux Falls managing broker. On her own initiative she takes on property management for two rental houses, collecting a $2,500 security deposit in cash from a tenant and depositing it into her personal checking account "so it doesn't get mixed up with the office money." She runs a Facebook ad reading "3BR/2BA near Pettigrew - call Kelli, 605-555-0134" with no brokerage name. A for-sale-by-owner seller then pays her $1,000 directly to write a purchase agreement and hold the earnest money, and she does not tell her managing broker. When the deal falls apart, the buyer demands the earnest money and the tenant demands the deposit back. The managing broker learns of all of it from the tenant.
1. Evaluate Kelli's handling of the $2,500 security deposit and the $1,000 earnest money.
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Both are serious violations.
Security deposit. Funds received in a real estate transaction or a property management relationship on behalf of a principal are trust funds. They belong in the brokerage's trust account - not the licensee's personal account, and not the operating account. Depositing a client's deposit into a personal checking account is commingling, and once the money is spent or inaccessible it becomes conversion. "Keeping it separate" is exactly backwards: separate from the brokerage's trust account is precisely what is prohibited. Confirm the current trust-account and recordkeeping requirements in SDCL ch. 36-21A and ARSD 20:69, including the required records, reconciliation, and retention period, because the Commission audits these directly.
Earnest money on the FSBO. Same rule, worse facts: Kelli accepted earnest money in a transaction she was not authorized by her brokerage to handle, and she held it outside any trust account. The money must be safeguarded and disbursed only on written release of the parties, court order, or interpleader. She cannot resolve the failed deal by writing a personal check.
Remediation now:
- Deposit all funds into the brokerage's trust account immediately, with a written ledger.
- Disclose everything to the managing broker in writing.
- Do not disburse the earnest money to either party without a signed release.
- Preserve all records - the Commission will want to see the trail, and the brokerage's E&O carrier will too.
2. What is wrong with the Facebook ad and with the $1,000 side agreement, and what rule underlies both?
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Both stem from one principle: a salesperson's real estate activity runs through the employing broker, and the public must be able to identify the responsible brokerage.
The ad. Advertising for a listed or managed property must identify the brokerage by its licensed name; a licensee's personal name and cell number alone does not do that. The supervising broker is responsible for all advertising by licensees in the office, which means ads must be reviewed and approved under office policy before they run. An ad that makes it look like Kelli is an independent brokerage misrepresents her license status - another rule violation on top of the missing brokerage name.
The $1,000 side deal. Writing a purchase agreement for compensation is brokerage activity. Doing it outside her brokerage, without the broker's knowledge, for a fee paid directly to her:
- Bypasses the brokerage agreement and the broker's supervision,
- Deprives the brokerage of the transaction and its records,
- Likely constitutes unlicensed/unapproved brokerage activity and a compensation violation, and
- Leaves the consumer unprotected and uninsured.
A licensee may not accept compensation for brokerage services from anyone other than the employing broker without proper written agreement through the brokerage. If Kelli wanted to help the FSBO seller, the path was an approved transaction brokerage or listing agreement through her broker - not a private invoice.
Check the current advertising and compensation provisions in SDCL ch. 36-21A and ARSD 20:69 for the precise wording and any required disclosure of licensed status.
3. The managing broker now knows everything. What are the broker's obligations, and what exposure does the broker personally face?
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The broker cannot treat this as Kelli's private problem. Supervision is a licensed duty.
Immediate steps:
- Secure the funds. Get the $2,500 and the $1,000 into the brokerage trust account with proper ledger entries, or restore them from Kelli if she has spent them.
- Stop the conduct. Instruct Kelli in writing to cease the property management activity, remove the ad, and route all future activity through the brokerage.
- Investigate and document. Interview Kelli, the tenant, and both FSBO parties; gather the ad, the bank records, and the purchase agreement. Written findings protect the broker and are what the Commission will ask for.
- Notify E&O and counsel. Conversion of trust funds is generally excluded from or triggers notice under E&O policies - report promptly and let the carrier direct handling.
- Self-report to the Commission where the rules require it, and respond fully and promptly to any inquiry. Failure to disclose known trust-fund violations is often treated more harshly than the underlying bookkeeping error.
Broker's exposure: the Commission can discipline the broker for failure to supervise, for inadequate trust-account controls, and for the advertising that ran without approval. Sanctions range from letters of reprimand and fines through suspension or revocation, and can reach the brokerage license as well as the individual. Kelli separately faces discipline for commingling/conversion, unapproved advertising, and unapproved brokerage activity - that is her license, and potentially criminal exposure for the converted deposit.
Because the penalty structure and reporting duties are set by statute and rule, verify the current provisions of SDCL ch. 36-21A and ARSD 20:69 before advising on specific sanctions.