Comparison of "Brokering" Between Wholesale, Note Investing

[Dustin Verley]

I was curious how the two compare. I'm aware that in wholesaling, one must tread lightly on the side of "brokering", especially without a RE license as this opens up potential doors for legal issues. But how does this compare to "Note Brokering" - or clearly the practice of connecting a note seller to a note buyer and collecting a commission.

With that said, does note brokering pose a legal issue as well if you're not in possession of a RE license? Granted, you are brokering a promissory note and not the physical property, but the note is secured by that particular note.

[Don Konipol]

The answer to your question will depend on whether the note is residential owner occupied, residential non owner occupied, or commercial.  it may further depend on which state the property is located in, and possibly which state the person you are selling the note to is located in.

Some of the legal aspects depend on how you are set up.  if we are talking about pure brokering, and not selling fractionalized participations, you shouldn't have to worry about securities law compliance.  if you do broker fractionalized interests then you may be selling a security; compliance will depend on if the transaction is intrastate or interstate.

So, assuming you are brokering whole commercial real estate notes, 37 states have no mortgage broker licensing for commercial mortgage loans.  11 states have commercial mortgage broker licensing for new loans, which may or may not be enforced for brokering existing mortgage loans. 2 states (California and New York) require a real estate broker license, not a mortgage broker license, to broker commercial loans.

If the loans being brokered are residential owner occupied, almost all states require you to hold a residential mortgage brokers license.  This license is not to be confused with the residential mortgage originators license, which is a license mandated by the Federal Safe Act and pertaining to new residential loans on owner occupied property. However, mortgage brokers originating residential o/o loans also hold the residential mortgage brokers license from each state that they are active in.

The state requirements for brokering non owner occupied residential mortgages are all over the board. Some states require the residential mortgage broker license, some require the commercial mortgage broker license and some no license at all.

Many 'brokers' operate as 'finder' with no regard for licensing.  In most states licensing laws for after market note brokering either do not apply, are rarely enforced if they do apply, or have minimal consequences if enforced.  Further, in the states where they do apply, there are often exemptions available for 3 or fewer transactions per calendar year.