California Real Estate SalespersonPractice of Real Estate and DisclosuresMedium
A broker collects an advance fee from a prospective client to cover the cost of advertising a property before any services have been rendered. Under California law, what must the broker do with this advance fee?
- ARetain it as personal compensation once the client signs the listing agreement
- BDeposit it into the trust account and use it only for the purposes specified in the advance fee agreement
- CReturn it within 24 hours if the client later requests a refund
- DDeposit it into the broker's general operating account since it is earned immediately upon receipt
Show answer & explanationAnswer & explanation
Correct answer: B. Deposit it into the trust account and use it only for the purposes specified in the advance fee agreement
Advance fees are trust funds until earned. They must be deposited into the broker's trust account and used strictly according to the terms of the advance fee agreement, which itself may be subject to DRE review.
Why the other options are wrong
- A. A broker cannot simply keep advance fees as personal funds without earning them.
- C. There is no automatic 24-hour refund rule; the fee must be handled per trust fund rules and the agreement.
- D. Advance fees are not automatically earned; they belong to the client until services are performed.
Advance Fee Trust Handling
Fees collected in advance of performing real estate services are trust funds and must be deposited and used only for the specific purposes stated in the advance fee agreement.
- Advance fee agreements may require DRE review before use
- Funds must be deposited into trust account, not general funds
- Broker must account for how advance fees are spent per the agreement
Memory trick: Advance fees stay in trust until they're truly earned.