The Anatomy of a License Portability Transaction
So what options does a broker have if they can't transact across state lines? The broker has 3 main options: 1) Refer the transaction to a broker who is licensed in the transaction state. 2) Obtain a license in the transaction state. 3) Enlist a ‘broker of record’ who is licensed in the transaction state and then 'co-broke' the transaction with them. Let’s examine the 3 options: 1) Refer the TransactionWhile this may be a way to generate some easy referral income, its far less profitable than if the broker took an active role and actually brokered the transaction. And, a broker wants to help their client, not refer business out to another broker. So this isn't an ideal option. 2) Obtain a License While this may seem to be the best solution, its actually the least efficient. Pursuing a real estate license is a time-consuming and expensive process. It requires filling out paperwork, submitting fingerprints/background checks, taking real estate courses, meeting experience requirements, sitting for exams, and paying fees. It also takes attention away from what brokers do best, which is brokering and marketing deals.
3) Enlist a Licensed Broker of RecordThis involves finding a broker who is licensed in the transaction state and then entering into a co-brokerage agreement with them. This allows the out-of-state broker to ensure compliance with the law, while avoiding the full licensing requirements required by the transaction state, yet still serving their client. This option not only saves the out-of-state broker the time, expense, and hassle of obtaining a license, it avoids having to refer out transactions and maximizes commission income. Most importantly, the out-of-state broker can focus on what they do best, which is brokering and marketing deals.
Portability LawSo now that we’ve established the fact that enlisting the services of broker of record is the best option, let’s examine the legal basis upon which an out-of-state broker can engage in a transaction in another state without an actual license in that state. License portability laws are what govern the ability of brokers licensed in one state to engage in transactions in another state. These laws vary widely across the country. However, in nearly all states out-of-state brokers can engage in transactions in another state as long as the out-of-state broker enters into a written co-brokerage agreement with a broker who is licensed in the transaction state. Many states also have additional requirements beyond simply executing a written co-brokerage agreement, such as filing the following types of documents with the state's regulatory agency; a copy of the co-brokerage agreement, a consent-to-jurisdiction form, or submitting an out-of-state licensee application which must first be approved by the regulatory agency before getting involved in a transaction. Since every state has different requirements, its important to select a broker of record who is well-versed in the various license portability laws across the country. Skipping a required step can be costly. Regulatory fines typically range from $300-$10,000 depending on the nature of the violation. Lastly, its important to understand that the relationship between the broker of record and the out-of-state broker is a contractual arrangement. This is distinctly different from the customary broker-salesperson relationship, in which the salesperson ‘hangs their license’ with a broker and then that relationship is "registered" with the state's regulatory agency.
Co-Brokerage AgreementIn nearly every state where license portability is recognized, the out-of-state broker must enter into a written co-brokerage agreement with the broker of record. Where a written agreement is not explicitly required, it’s very much the prudent thing to do anyway. It explains the relationship, identifies how fees will be split, and makes it clear to the out-of-state broker which activities are permitted/prohibited.
Once the out-of-state broker has executed a written co-brokerage agreement with the broker of record, the out-of-state broker has taken the first step in maintaining regulatory compliance. While permitted/prohibited activities vary depending on the state, the out-of-state broker may perform most, if not all, of the brokerage activities in the transaction state that would normally require a license. Also worth noting, the broker of record incurs significant risk by assuming responsibility for the out-of-state broker. In every state where portability is recognized, the broker of record is responsible for the overseeing the activities of the out-of-state broker. As a result, the broker of record must ensure that the out-of-state broker is acting in accordance with the law and only performing permitted activities (negotiating, advertising, handling of trusts funds, etc.) for the protection of both parties and the client. This is another reason why it’s important to have an experienced broker of record who understands the nuances of license portability laws in every state.
Client-Related Transaction FormsThe next step in the process is for the broker and broker of record to start filling out the appropriate client-related forms and disclosures. Some forms may be required, some may be optional. Some of these forms may include; listing agreement, buyer representation agreement, agency disclosure, letter of intent, purchase agreement, disclosures, or notices.
Since the transaction involves the aspect of license portability, regulatory agencies often require that the forms contain certain elements and disclosures. For example, the out-of-state broker may need to disclose the fact that they're not a licensee in the transaction state, but that the broker of record IS a licensee in the transaction state, and that the broker of record is responsible for the out-of-state broker and that both are subject to compliance with the real estate licensing laws of the transaction state. Or, the listing agreement may need to address how trust funds must be handled or how dual agency situations are handled and whether its even legal in the transaction state. Some states also require that certain client forms contain notices that all contracts must be construed under the laws of the transaction state and that the courts of the transaction state shall have jurisdiction over any disputes. These are all important issues that must be addressed in the relevant client-related forms to ensure regulatory compliance.
An experienced broker of record will use transaction-tested forms that the out-of-state broker can use (instead of generic forms that likely won't address various requirements). If the broker of record has a good system down (through the use of forms, checklists, and procedures), then their involvement in the transaction can be kept to a minimum. This allows the out-of-state broker to handle the transaction as they normally would, without constant interruption throughout the transaction process by the broker of record. This is obviously preferable for all parties to ensure smooth transactions and high close rates.
SettlementIn most states, an out-of-state broker's commission can be disbursed directly by the settlement company to the out-of-state broker. If the broker of record is working with an out-of-state salesperson instead of a broker (which is also legal in most states), then the settlement company or broker of record must disburse the salesperson's commission to their home state broker. In turn, the home state broker would then pay the out-of-state salesperson. This particular requirement is a function of the transaction state's licensing laws as well as the out-of-state salesperson's home state licensing laws. Otherwise, the broker of record and the salesperson may be in violation of licensing laws - not only in the transaction state, but also in the salesperson's home state. Post-Settlement After closing, the out-of-state broker and the broker of record will need to follow record-retention laws for the transaction state. Since state laws vary on this point (3 years is the most common record-retention requirement), a good rule of thumb is to maintain all files for at least 5 years. In addition, nearly all regulatory agencies allow brokers to maintain digital files on services such as Dropbox, so record-retention is a much easier task than in the past. Conclusion License portability transactions can be incredibly helpful in leveraging a broker's reach across state lines. It allows the broker to cast a much wider net in where they can help clients and foster new relationships. At the same time, its important to have the guidance of a trusted broker of record who understands license portability laws and the various nuances among them. If you're looking for a broker of record for your out-of-state transactions and would like us to help, please visit the Onboarding page and begin the process by completing a licensee profile sheet.