Iowa Real Estate Practice Exam

If a broker receives earnest money, what is the proper action regarding that money?

1. It should be invested in stocks

2. It should be paid out directly to the seller

3. It must be documented in a trust account ledger

4. It can be used for business expenses

The correct answer is: It must be documented in a trust account ledger

When a broker receives earnest money, the proper action is to document it in a trust account ledger. This is crucial because earnest money serves as a demonstration of the buyer's good faith in a transaction, indicating their intent to follow through with the purchase. By placing these funds into a trust account, the broker ensures that the money is kept separate from their own operational funds and is properly accounted for, adhering to legal and ethical standards. Using a trust account protects both the buyer and the seller, as it provides transparency and accountability regarding the handling of these funds. This process also helps prevent any misuse of the earnest money, ensuring that it is only disbursed according to the terms of the purchase agreement or upon execution of closing, thereby safeguarding all parties involved in the transaction.