Author: Jim Hochman, Partner, Schain Banks Kenny & Schwartz
At one time, real estate brokerage was a local business. You obtained a license in your state and worked exclusively in a single market. You were protected under your state’s license law, and if necessary, as long as you were properly licensed, your broker could file suit in the state to collect a commission.
But times have changed. Commercial and even some residential markets have expanded. Your clients are often involved in multiple transactions in many states and want you to be active in all of them. The good news is that several states offer some form of license reciprocity to commercial practitioners. This usually requires you to hold a current license, pay a fee and perhaps pass a state-specific test. However, you must still apply for and receive a reciprocal license. This may not be a practical solution for commercial practitioners who must execute multi-state assignments on short notice.
A much better answer for real estate practitioners is license portability. This lets you offer and perform real estate–licensed services as long as you work in cooperation and according to a written agreement with a local licensee. Portability also allows you to cooperate with out-of-state licensees (OSLs) on assignments in your state and to share fees with them without fear that such conduct would violate Illinois license law. Most state license portability laws open state boundaries only for commercial transactions. In recent years, more states have favored portability only for commercial deals.
Currently, 28 states allow commercial practitioners to enter cooperative agreements, according to my most recent research available. These states permit OSLs to cooperate with a local licensee under a written agreement, enter the state (both physically and electronically, such as by telephone, fax and e-mail) to work on a transaction, and advertise their services in that state.
However, some of these states may also impose limitations on the OSL, so consult your legal counsel for more detail. Another 17 jurisdictions (including the District of Columbia) are classified as physical-location (PL) states. In these states, you can work on a transaction if you remain physically in the state in which you are licensed. PL states prohibit you from visiting a property or negotiating a lease face-to-face in that state.
The remaining six states — categorized as turf states — will not let an OSL conduct business in their states. The only way to represent a client who has interest in properties in these states is to refer the business to a local licensee. Failure to observe applicable license law could lead to a license law violation and discipline, both in your home state and in the state where the property is located.
PORTABILITY IN REAL LIFE
Consider this hypothetical example illustrating the limitations of current license portability. Assume a fast-food franchisor hires you to represent it in acquiring new sites in Indiana, New York, Connecticut, New Jersey and North Carolina. Under current state laws, you can’t handle the assignment the same way in each state.
In Alabama (a cooperative state), you can book a plane ticket and start scouting sites along with your client as soon as you sign a written co-brokerage agreement with a local licensee and meet a few other simple requirements. When the deal closes, you may share your fee with the local company as your negotiated agreement dictates.
In Connecticut you have similar flexibility, though you must show proof that you are also licensed in your home state, and the written agreement with the Connecticut broker must state the share of compensation each party will receive. You must also keep all the escrowed funds in Connecticut. In addition, you will be more dependent on the skill of the local broker, since state law prohibits you from accompanying the prospective buyer or tenant to view the real estate.
North Carolina is even tougher. You must obtain a limited broker’s or salesperson’s license before you can enter the state and work on a transaction. And even with a limited license, you must work in cooperation with a local licensee; in fact, the resident licensee becomes responsible for your actions. This approach is closer to license reciprocity than license portability.
In New York (a PL state), you can’t enter the state to work on the transaction unless you hold a New York real estate license. All the legwork, showings and negotiations must be handled by a New York licensee. All you can do is provide advice and input from home on what your client wants and what terms are acceptable.
But that’s still not as bad as New Jersey. In this turf state, you can’t even consult on your client’s behalf. You have to refer the entire transaction to a New Jersey licensee.
State portability requirements are not always straightforward, so consult your attorney before undertaking a transaction in another state. Failure to observe applicable law and specific states rules could jeopardize your license and your right to collect a fee.