I recently hosted the Innovators versus Legislators panel discussion at the REINSW Proptech Lunch. The debate around trust accounts was one of the key issues raised.
New startups are challenging the need for trust accounts in real estate and property management, but agents have been advised to be careful in the regulatory grey area.
The Innovation versus Legislation Future of Proptech lunch hosted recently by REINSW highlighted how new startups like Managed and Our Property feature the latest payment systems that send money directly from tenant to landlord.
The regulation in NSW states that real estate agents who hold trust monies on behalf of clients must adhere to trust legislation. However, the new breed of technology providers, not being real estate agents, do not fall under this law.
Legislation does not apply to new players
Director of industry standards and bonds at NSW Fair Trading, Bjorn Borg said strictly speaking, technology platforms were not covered by legislation governing real estate agents.
“If the agent is not holding the money on behalf of the client because it is being immediately dispersed through the platform, then they’re not technically in breach,” Bjorn said.
“The question for these new providers, then, is really whether or not they are now conducting regulated activity as an agent and, by extension, should they be licenced? If you are making monies, rental monies and things like that, are you then in need of a licence?”
Direct payments preferable
The CEO and founder of Managed, Thom Richards said Managed sends funds directly from tenant to landlord, thereby circumventing the need for a trust.
“Running a trust account, for me, is a very archaic concept,” said Thom. “We've got new platforms coming out to support self-managed landlords in droves where they're not subject to holding funds in a trust account. They're collecting those funds directly from the tenant and paying their bills from their preferred credit through a digital wallet.
“Essentially what we've done is replicate the payment flows that exist in the DIY sector, but add the property manager in as the administrative advisory layer in the middle.”
Managed was established by Thom, a former real estate agent, from his frustration around needing to use eight different products to run his property management team end to end.
“We wanted to go back and essentially consolidate the end-to-end workloads for our property management team, build processes around it, but also take out a lot of the administrative tasks,” Thom said.
It’s been about 18 months since we first turned off the first trust account. We actually set up the very first agency in the country with no trust account, which is very exciting.
Education challenge
“The legislation isn't against us in the way we work – so for us, it's not so much a regulatory challenge but an education challenge,” said Thom.
The current system requires monies from multiple tenants to be pooled into an agent’s trust account which must be rigorously accounted for and audited. If an agent reverses any funds out of the trust account before they have cleared, they risk being in breach of the trust legislation.
“This year was a record year for trust money going missing,” said Bjorn. “We’re on schedule to pay around $211 million in compensation, and that really affects the trust in the marketplace around real estate agents.”
Latest payment technology
The new platforms however use payment and banking gateway technology similar to those used by PayPal or Stripe. Transactions are processed by a central system which then sends the payment direct to the end user.
With a seemingly constant stream of headlines around missing trust monies, the proptechs offer hope that is both easier for agents to manage and better protections for consumers.
“We designed our own tech that actually allows the user to have what we call a virtual account,” said Thom.
“Funds go from the tenant into the virtual account, but they're not available to be dispersed from the virtual account until they're cleared. So, that essentially allows us to bypass the risk of anyone sending their trust account into deficit. You don't breach any legislation and it also means that everyone is clear as to where those transactions are up to at any one point in time.”
Lisa Indge, director at Let’s Rent said she supported the idea of moving away from trust accounts.
“I think it makes complete sense to abolish the trust account. I think there's no reason why we can't just simply transfer from the tenant directly to the owner,” said Lisa who has been an early user of Managed.
More options for tenants and landlords
“It gives the tenant a lot of options in terms of making sure they pay their rent on time and it gets money to the landlord faster while offering greater transparency.”
Thom said the new platforms also offered significant benefits to landlords.
“As an investor, I've got several benefits from my agent not holding my funds, or not touching it in the first place,” he said.
“There is no risk of theft, firstly, and there's no risk of human error, and they're obviously two major parts of the trust account process. It is still very manual. There's also the time side of things. For me, running an offset account, I could have my whole portfolio in Managed App, and I could actually set my offset account to each of my individual properties.
“My funds are leaving the tenant and coming straight into my offset account and accumulating in there, so whether I'm earning X dollars a week, that's now coming into my bank, reducing the interest on my home loan because I'm making advanced payments.
“And I've also got clarity on that cash. I know exactly where it is, I know no one's touched it on the way through, and I can utilise it if need be.”
Should apps be registered?
After the forum, CEO of Our Property, which also runs a direct payment platform, said that their business had made the decision to register as a licensed real estate entity to add an additional layer of comfort.
“We explain ourselves as being like an electronic Armaguard agent,” said Sandy. “You send us to pick up the money from the tenants and drop it off at the number of places where it needs to be delivered, such as landlords, trades vendors, body corporates and the like, all based on instructions entered by the property manager.”
But he said the business had made the decision to register the Our Property Payment system as a licensed entity in order to deliver peace of mind to clients.
“There is general legal consensus that platforms like ours are not regulated by trust accounting legislation because the parties holding the funds are not real estate agents,” Sandy said.
“But we made the decision to register as a licensed entity for the collection of rent. What it means is that our clients do not have to manage a rental trust account - but they still have the protections offered under existing legislation.”