How to Set Up an Escrow Account for Security Deposit

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Setting up an escrow account for a security deposit requires you to do a few specific things. Set up an escrow account for a security deposit with help from a real estate and mortgage professional in this free video clip.

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Video Transcript

Hello, my name is Sidney Potter, thank you for joining me, I'm with Potter Equity a small real estate advisory business in Pasadena, California. And I'm here to talk about escrow deposits, more particularly, how to set up an escrow account for a security deposit. Typically you're running a situation if you're a small investment property owner or you're a property manager and/or you work with an escrow company yourself. Now, first and foremost, why would you want to set up an escrow account? Well, there's a couple of reasons for that, first and foremost, some states require it, and these, once again are multi-family units. If they do require it, then you have to keep in mind there's one or two situations here. You may have to set up a separate account for escrow, or you can have what you'd call an umbrella account for escrow. In either situation, the principle concern should be, not to co-mingle funds. Co-mingling funds is bad, bad, bad. You'll either have the department of real estate or the secretary of state that's going to have concerns, and those are the entities, the state entities jurisdiction bureaus that enforce escrow deposit requirements. Now, why would you want to have separate accounts in terms of escrow set up? Well, once again, I said, as noted earlier, some states, in fact all states require it, but in terms of the details that differs by states. How do you set up an account? Well, you go to your bank, or you go to your credit union and they will have a couple of options, either a whole umbrella type of set up account, or they'll allow you to do sub-accounts. When you're doing a sub escrow account, the advantage that, you get to have more control over the account and you individualize the account. Let's say John Smith, in apartment 101, as appose to just a generally big account number. They'll also, these sub-accounts will be identified by the tenant's name, their unit number and their social security numbers. Now once again, some states don't require this, but it may be required. Let me talk about some of the salient points, what I like to call escrow 101for deposits in terms of the setups. One of the reasons why, just from a short point a view, why you'll want to have separate accounts, is, it protects the tenant's money, in the event that, let's say, the Greenwood Apartment Complex found itself in litigation or bankruptcy, state law will require a separate account, that way to protect the tenant's money. It's more of a consumer advocacy perspective, but it's certainly orientated towards the consumer to protect their money, and that's why states actually enforce that. In terms of escrow 101, in terms of deposits, I would recommend you go to Peachtree which is a great software, which to administer and to, that's going to notate the amount of the deposit. If it's a 500 dollar deposit, you will want to note that in your escrow software. It's typically fairly standard on most property managed softwares. You also have the advantage when you do put that deposit amount, at least in terms of your software, not the bank account, it's going to set up another sub-account and give you actual receipt, so you know that money is a liability as appose to a credit. When it comes to setting up the account, either the bank or the credit union, whichever you should choose, state law typically requires that you give a receipt within 30 days to the tenant. The information that's going to be required when you're setting up this account, this escrow account, is that, it will have the tenant's name, it will have the amount, and it will have the bank name. Just as a recap, or rather summary, and things to keep in mind when you're opening up a real estate escrow account, they will typically require the driver's license of the tenant. And the reason why, obviously is to identify where that money goes to. Now some states will require that the interest earned on that particular account, goes to the tenant, and that tenant is given that money after the lease term period has expired. Some states are slightly different with that the accrual of interest actually goes to the property management from where they actually, feasible owner of the property. Most banks don't require a set up fee for escrow accounts, they're fairly business-friendly, and credit unions can be just the same. So with that, I think that was a very quick schematic set up on how to set up an escrow account for security deposits. Wonderful softwares out there, and I think, in fact I'm fairly confident, if you should do a little bit more follow-up on this, you'll find that they're user-friendly. Peachtree for example, Net Suite are great accounting softwares. This is Sidney Potter with Potter Equities, Pasadena, California. I thank you for your time and I'll see you at the finish line. Good day.

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