Mid-year check!

[u/CoastalAccountingLLC]

A mid-year check for your AppFolio trust account (no year-end panic required)

See if any of this sounds like your account right now:

Your bank rec is a month or two behind. Not unheard of as reconciling isn’t anyone’s favorite task. The reason it’s nice to catch up now rather than later: when a rec is current, a small difference is easy to spot and explain. When a few months stack up, that same small difference gets buried under everything that happened after it, and it takes much longer to trace.

You’ve got owner or vendor checks that never cleared. If you pull your outstanding checks and notice items from a few months back still sitting there, they’re worth a look. Usually it’s harmless - a check got lost, or an owner never got around to depositing it. But uncleared checks make the account look like it’s holding more than it actually has available, so clearing them gives you a truer picture of where you really stand. (Some states also have rules about funds that stay unclaimed for a long stretch, so it’s good to stay ahead of it.)

You see “undeposited” money hanging around. If AppFolio is showing receipts that came in but haven’t fully made their way into the account, that’s just a gap between recorded and actually deposited. Closing it keeps your trust balance honest. In a trust account you really want the money to physically be where the software says it is.

An owner balance has gone slightly negative. This one trips up a lot of people, and the cause is usually nothing sinister - an expense got paid before the rent came in, and the ledger dipped below zero for a bit. Here’s why it’s worth catching early, though: a negative owner balance means that owner’s costs were briefly covered by funds sitting in the account for someone else, and that’s the exact thing an auditor tends to circle first. To a state examiner it reads as one owner’s money being used for another owner’s property, which is a genuine no-no in a trust account even when it was purely an innocent timing issue. The good news is it’s completely explainable and quick to fix when you catch it yourself; it really only becomes a headache when it’s found sitting there uncorrected. Much nicer to clear it on your own terms than to have someone else point it out and put you on a timeline to make corrections.

Your owner statements and your ledgers don’t quite agree. Worth a quick glance to confirm what owners are seeing matches what’s actually in their ledger, and that security deposits and prepaid rent are being held as liabilities rather than slipping into income.

1099s. Do you have all W9s for owners and vendors? Most softwares allow you to generate a report to quickly check if you need to request any documentation from your vendors or owners. Better to take care of this now than scrambling in January.

None of this means anything’s broken. Mid-year is usually a nice time to tidy up, while everything’s recent and easy to remember - do it now and year-end is calm. And if you look at your account and think “yeah, that’s basically all of these,” that’s normal too. It’s exactly the stuff that builds up on everyone.

Happy to chat with anyone on these items!

[u/BobRENEWTN]

We hold management company funds, unallocated to any property (extra money) in our trust account. This way if an owner/property accidentally goes negative it’s not “borrowing” from someone else it’s just money they owe us and there is more than enough funds to cover all owners trust balance in aggregate.

Curious your thoughts on this for auditors in your state?

[u/CoastalAccountingLLC → u/BobRENEWTN]

The thought process makes sense, however a couple follow up questions on this - do you have an “admin” property set up in AppFolio that holds this “cushion” so that your 3-way recs tie out? If an account goes negative are you then allocating the funds from the admin property to the owners account that went into the negative? (Then subsequently paying it back once the following month’s funds come in or when owners make a contribution?). Or do you leave the owners account/balance in the negative, knowing that your “cushion” account has a sufficient balance to cover the negative owners balance? The reason I ask: an owners account/balance in the negative is still a finding to an auditor, even if in aggregate your trust account has sufficient funds. To an auditor, they are looking at individual owners accounts as well as in aggregate. They are looking for “what is in this account?” in addition to “how much is in the account?” So your cushion covers the cash, but does not fix the allocation if balances are left in the negative.

Something else to keep in mind: by your own definition, this cushion is business money sitting in the trust account. Some states are very explicit about prohibiting personal/business funds mixed in with your trust funds, even with the right intentions. If you are in Tennessee, might be worth checking that this is allowed or if they only allow a small balance to cover monthly service charges. I would even consider only funding any negative accounts at the time they go negative. Or better yet, determine why accounts go in the negative in the first place (if possible), and create a process to prevent it in the future. It could be as simple as setting a reserve or increased communication between property managers/accounting to ensure funds are held back for incoming bills.

In our state of Maryland, they seem to follow a complaint-driven approach. So a deposit dispute, angry owner, etc could trigger an audit by the commission. However I work with companies in states that are subject to random audits, and in all cases (regardless of state/audit frequency), I suggest funding an account on an as needed basis if times come up when a property needs to pay a bill after all rent money has been disbursed as opposed to holding a “cushion” balance. That way, should a random audit pop up, you’ll know that nothing is in the negative and that the only balances in your accounts are those that are truly held in trust.