This is a common question with a straight forward answer. Earlier this week we responded to this email inquiry and we’d like to share our answer with readers!
Note Broker Question:
Hi, Can you please tell me if you need a license to be a note broker in Ca.?
Note Buyer Answer:
Thanks for visiting NoteInvestor.com. While I am not an attorney (so unable to give legal advice), I’m happy to share with you my knowledge and resources.
California is one of the few states that have specific laws relating to note brokers and they license them under a similar structure at real estate agents.
Here is some helpful information straight from the Q&A section of the Department of Real Estate (DRE) in California.
Q. – I am not licensed as a real estate broker or real estate salesperson and I am only going to assist private parties who wish to sell their notes (secured by real property) for cash to another party (investor), perhaps in another state. Is a real estate license required if I conduct this activity in California?
A. – The activity described, so-called note brokering, requires a real estate license if performed in California. This includes the solicitation of California note owners, whether in person, by mail, telephone, or other means of communication. One of the definitions of a real estate broker is:
“…a person who, for a compensation or in expectation of a compensation, regardless of the form or time of payment, does or negotiates to do one or more of the following acts for another or others:
.(e) Sells or offers to sell, buys or offers to buy, or exchanges or offers to exchange a real property sales contract, or a promissory note secured directly or collaterally by a lien on real property or on a business opportunity, and performs services for the holders thereof.”
There are companies engaged in the discounted purchase of certain mortgages, primarily those carried back by residential sellers and secured by the transferred real property. The companies hold seminars to recruit people to solicit and negotiate the sale of these mortgages. Seminar attendees are informed that they do not need a real estate license to engage in this activity. In California, this is wrong because the activity fits the definition quoted above. Source: http://www.dre.ca.gov/faq_mlb.html
Editors Note: The DRE has updated their site and moved the Q&A referenced. The items referenced are in Section 10131 of the Business and Professions Code that can be found here: http://www.dre.ca.gov/files/pdf/relaw/2019/relaw.pdf
Here is an excerpt from that California Real Estate Business and Professions Code code:
Broker Definition Continued – Buying/Selling Notes, etc.
10131.1. (a) A real estate broker within the
meaning of this part is also a person who engages
as a principal in the business of making loans or
buying from, selling to, or exchanging with the
public, real property sales contracts or
promissory notes secured directly or collaterally
by liens on real property, or who makes
agreements with the public for the collection of
payments or for the performance of services in
connection with real property sales contracts or
promissory notes secured directly or collaterally
by liens on real property.
(b) As used in this section:
(1) “In the business” means any of the
(A) The acquisition for resale to the
public, and not as an investment, of eight
or more real property sales contracts or
promissory notes secured directly or
collaterally by liens on real property
during a calendar year.
(B) The sale to or exchange with the
public of eight or more real property sales
contracts or promissory notes secured
directly or collaterally by liens on real
BUSINESS AND PROFESSIONS CODE 27
property during a calendar year.
However, no transaction negotiated
through a real estate licensee shall be
considered in determining whether a
person is a real estate broker within the
meaning of this section.
(C) The making of eight or more loans in
a calendar year from the person’s own
funds to the public when those loans are
held or resold and are secured directly or
collaterally by a lien on residential real
property consisting of a single dwelling
unit in a condominium or cooperative or
on any parcel containing only residential
buildings if the total number of units on
the parcel is four or less. However, no
transaction negotiated through a real
estate broker who meets the criteria of
subdivision (a) or (b) of Section 10232
shall be considered in determining
whether a person is a real estate broker
within the meaning of this section.
(2) “Sale,” “resale,” and “exchange” include
every disposition of any interest in a real
property sales contract or promissory note
secured directly or collaterally by a lien on
real property, except the original issuance of
a promissory note by a borrower or a real
property sales contract by a vendor, either of
which is to be secured directly by a lien on
real property owned by the borrower or
(3) “Own funds” means either of the
(A) Cash, corporate capital, or
warehouse credit lines at commercial
banks, savings banks, savings and loan
associations, industrial loan companies,
or other sources that are liability items on
the person’s financial statements,
whether secured or unsecured.
(B) Cash, corporate capital, or warehouse
credit lines at commercial banks, savings
banks, savings and loan associations,
industrial loan companies, or other
sources that are liability items on the
financial statement of an affiliate of the
person, whether secured or unsecured.
(4) “Own funds” does not include funds
provided by a third party to fund a loan on
condition that the third party will
subsequently purchase or accept an
assignment of the loan.
As you can see from above, the California DRE is very clear in their answer! Yes, you need a license in CA to be a note broker.
California has also been known to actively monitor licensing in past years. If you run an ad in a CA paper that you buy notes, it is very likely you will receive a letter from CA DRE asking for your licensing information. It is safest to comply with the law or transact business in states without these requirements.
To you success,
Tracy Z. Rewey
The “NOT” so fine print…This information is not intended as legal or financial advice. Please consult with competent legal counsel pertaining to your individual situation. We are not attorneys at law – nor do we play one on TV 🙂