What would happen and possible consequences if I just pulled the trigger?

Question

I previously posted questions on this channel about lending money on the paperstac platform. Decided getting the licenses to be a lender in different states wasn't worth it.

However, my question is, what would/could happen if I just went ahead and did one small deal? Will it go through? Will any of the parties to the transaction inquire if I have the licenses to conduct this business?  If the lender defaults, will the fact that I purchased the loan as an individual with no licenses compromise my capability to collect/foreclose?

Thank you in advance.

John Neufer · Answer

Hi Carlo,

I have been originating private money and commercial notes for close to 10 years.

My understanding is that you don't need a license to buy any paper (notes).

You only need a license to originate paper if the loan falls under the TILA RESPA guidelines. Basically, if you are lending on someone primary residence is when things get sticky with disclosure laws, timelines, terms, etc.

The easiest way to avoid the licensing issues is to simply lend money, or buy paper on investment properties. 90% of the states do not require a license to originate, lend, or buy and sell paper if the subject property is Non Owner Occupied, ie: Business Purpose Real Estate, ie Investment Property.

That is what all the hard money lenders do, and it allows them to lend nationwide without getting tagged for licensing issues.

States that do require a license to lend/broker on 1-4 Resi Investment Properties:

CA, ID, OR, NV, AZ, UTStates that do require a license to lend/broker on 5+ Multi/Mixed Use or Commercial properties:

CA, ID, OR, NV, AZ

**not legal advice - do your own research.

Carlo D. · Answer

Thank you @Ned Carey That's all I needed to hear to put the final nail in the coffin. Thank you very. much for your insights. Much appreciated.

Carlo D. · Answer

Thank you @John Neufer  I actually finished chatting with Brett from Paperstac and he says going through a Servicer alleviates alot of the license requirements as well. I'll also seek legal consultation. But thank you for chiming in.

Patrick Roberts · Answer

This is a bad idea. My brief understanding of the licensing laws regarding debt collection in a couple states is that not being licensed could prevent you from enforcing the debt, but I'm not an expert here. You'd basically be unsecured, and the only true way mitigate risk on unsecured debt is diversification. You'll be completely concentrated in one asset. You'd be better off just investing in one of the many note funds rather than straight-up gambling for a couple hundred extra bps.

In the general environment right now, state regulators are looking for every excuse to go after "real estate investors". Just look at the myriad of laws, regulations, and bans passed or proposed for seller financing, wholesaling, and lending in the past two years. If caught, best case scenario is you'd get a cease and desist letter from the state regulator and probably fined. 0% chance this is worth it. If a license is required and you don't want to be licensed, do business in another state.

A final point - foreclosing is generally a legal process involving attorneys. I suspect you'll have a hard time getting an attorney to assist you in an activity you're engaging in illegally. The is the basis that SC is using to go after wholesalers at the moment - passing a "ban" that's murky at best and then daring the attorneys to test it.

Ned Carey · Answer

@Carlo D.  The reality is if you just do one deal, I suspect you are not likely to be "caught".  However if you do It might mean both a loss due to the note being uncollectible or even go to jail for not haveing the apropriate license. Both of these are unlikely but do you want to take that risk?

It also greatly epends on state laws. You said "Out of state". Well which state? some have strict laws, my guess is some may even have no laws.

My guess is no one will question you when you buy a note. The problem becomes when you try to collect and someone challenges it.

I am not an attorney just my experienced investor's guess.

What would happen and possible consequences if I just pulled the trigger?

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