Iowa Real Estate Practice Exam

Under Iowa law, what should a broker do with an earnest money deposit received from a buyer?

1. Hold it in the broker's personal account

2. Deposit it in a standard checking account

3. Deposit it into an interest-bearing trust account for the state

4. Return it to the buyer immediately

The correct answer is: Deposit it into an interest-bearing trust account for the state

Under Iowa law, a broker must handle earnest money deposits with care, ensuring that the funds are properly safeguarded and managed according to legal requirements. Depositing the earnest money into an interest-bearing trust account for the state is the correct approach. This ensures that the funds are kept separate from the broker’s personal finances and are held in a secure account specifically designated for client funds. This practice protects the buyer’s money and provides transparency in transactions. The interest generated from the trust account can be beneficial, as it may help cover administrative costs or be used for charitable purposes, depending on the brokerage's policies regarding the disposition of interest. This method aligns with the ethical and legal responsibilities of real estate brokers, ensuring compliance with Iowa's regulations concerning handling client funds. In contrast, holding the earnest money in a personal account would pose significant risks, as it could co-mingle funds and lead to potential legal liabilities. Similarly, using a standard checking account might not offer the necessary protection or separation required for client funds. Returning the earnest money to the buyer immediately would not be appropriate unless specific conditions have been met regarding the transaction's progress, as it would prevent securing the seller's commitment and jeopardize the entire agreement.