What happens when a deal takes you out of state? Find out the liberties and limitations California licensees have in surrounding states.
Brokers go home to collect
Real estate investors and job seekers migrate to follow employment and investment opportunities. Looking to follow the business? Read on to brush up on the rules for representing investors and relocating homebuyers in out-of-state markets.
Real estate and licensing laws differ from state to state. Thus, a broker’s right to collect a fee varies from state to state. In order to represent a buyer or seller in an interstate transaction, and obtain a fee in return, a California broker enters into two separate contracts:
- a listing agreement with their buyer or seller; and
- a cooperation agreement with a broker licensed in the state where the property is located.
Consider a California-licensed real estate broker contacted by a California resident to locate a buyer for the seller’s North Carolina property. An exclusive right-to-sell listing agreement is entered into in California to employ the broker to sell the out-of-state property. [See first tuesday Form 102]
The broker locates a buyer through an advertisement published in North Carolina, with or without the help of a North Carolina-licensed broker. The purchase agreement, which includes a brokerage fee provision, is prepared, mailed to and signed by the buyer and delivered to the seller. All steps are handled from the broker’s California office.
Later, the seller cancels the transaction without excuse or justification.
The California broker demands payment of their fee from the seller. The seller rejects the demand, claiming the broker is barred from collecting a fee since the broker is not licensed in North Carolina.
Can the California-licensed broker collect a fee under California law without also holding a North Carolina real estate license?
Yes! The broker performed all significant licensed brokerage services in California. [Consul LTD. v. Solide Enterprises, Inc. (9th Cir. 1986) 802 F2d 1143]
Out-of-state brokerage activity
A California broker avoids transgressing the licensing laws of another state when:
- all brokerage activities are conducted by phone, direct mail, email or fax from California, the state of the broker license [Consul LTD., supra];
- the listing and purchase agreements are negotiated, prepared and handled in the state of the broker license [Gold v. Wolpert (7th Cir. 1989) 876 F2d 1327];
- all brokerage activities and negotiations are completed in the state issuing the broker license and these facts are known to the client when the property is located in a different state [Coldwell Banker & Company v. Karlock (7th Cir. 1982) 686 F2d 596]; and
- the broker limits their out-of-state activity to no more than their property inspection and information gathering. [Coldwell, supra]
However, a California broker who sues in another state to collect their fee will be denied recovery by the out-of-state court when they conduct brokerage activities while physically present in that state, such as:
- showing the property to prospective buyers without being accompanied by a broker licensed in that state [Harrison & Bates, Inc. v. LSR Corp. (1989) 385 SE2d 624];
- negotiating on behalf of the buyer or seller located in that state [Paulson v. Shapiro (7th Cir. 1973) 490 F2d 1; Fields, supra]; or
- negotiating, preparing, signing or delivering the listing or purchase agreements in that state. [Baron & Company, Inc. v. Bank of New Jersey (1981) 504 F.Supp 1199]
Thus, California brokers soliciting and negotiating a transaction across state lines are to:
- physically stay in California, with the exception of property inspections while accompanied by an out-of-state broker;
- conduct all negotiations from California by phone, email, direct mail or fax;
- include a California choice-of-law provision in all fee provisions in purchase agreements [See first tuesday Forms 102 §4.8 and 103 §3.4];
- prepare and send all documents from California;
- require the principals to directly pay them their share of the fee through escrow, not through the out-of-state broker (unless otherwise required by their cooperation statutes); and
- sue to collect any earned and unpaid fee in a California court.
California brokers who negotiate to receive a fee from an out-of-state broker for an out-of-state deal are best served by confirming with the out-of-state real estate agency whether they may:
- be paid a share of any fee collected by the out-of-state broker; or
- travel into the other state to conduct activities such as inspecting, gathering data, showing the property or preparing documents.
Visiting out-of-state property
California brokers are charged with knowing the various types of conditions about the properties they list to sell. This requires brokers to personally inspect and investigate property they have listed for sale. [Jue v. Smiser (1994) 24 CA4th 312]
However, California brokers are typically barred by other states from showing property in those states.
Consider a California broker who is cooperating with an Oregon broker to find a buyer for Oregon property. The California broker is prohibited by Oregon’s real estate agency from personally showing the Oregon property.
However, the California broker may:
- accompany their California client and an Oregon broker on an inspection tour of the Oregon property; and
- allow the Oregon broker to show the property to their California client.
The California broker’s best practice is to immediately write a memo to the Oregon broker, thanking them for showing the property to the California client. The memo provides written evidence that the Oregon broker showed the property. It also memorializes whether the California broker was present when the client was shown the Oregon property. [See first tuesday Form 525]
States which permit fee splitting and information sharing with out-of-state brokers rarely permit out-of-state brokers to travel into the state and perform brokerage activity by themselves. Washington, Oregon, Nevada and Arizona have both:
- closed-door statutes; and
- collaboration statutes permitting the exchange of information and fee splitting between home-state and out-of-state brokers. [Revised Code of Washington §18.85.301; Oregon Revised Statutes §696.290; Nevada Revised Statutes §645.605; Arizona Revised Statutes §32-2163]
A California broker seeking to conduct business in Washington, Oregon, Nevada or Arizona has options, depending on how extensive their out-of-state practice is.
To buy, sell or lease Washington real estate, a California broker may either:
- cooperate with a Washington broker; or
- obtain a Washington broker license. [Washington Administrative Code §308-124A-720]
A California broker who cooperates with a Washington broker rather than obtaining a Washington real estate license may not perform any real estate activities within the state of Washington. Instead, the California broker relies on the Washington broker to conduct all real estate activities in Washington. The California broker then shares in a portion of the fees received by the Washington broker. [RCW §18.85.301]
To show properties, conduct negotiations or perform other real estate activities within Washington, a California broker is required to first obtain a Washington broker license. Washington has education and exam requirements. A California license allows brokers to bypass Washington’s education requirements, but still requires them to pass Washington’s state licensing exam. [WAC §308-124A-720]
Oregon’s nonresident broker policies resemble those of Washington. A California broker has an option to either cooperate with an Oregon broker or obtain their own Oregon broker license.
Consider an Oregon broker who enters into an agreement with a California broker to cooperate in finding an Oregon property for a buyer relocating from California to Oregon.
An Oregon property is located and the California broker goes with their buyer to Oregon to investigate the property and conduct negotiations with the seller without the assistance of the Oregon broker. The negotiations lead to the California buyer purchasing the Oregon property. The broker fee is paid by the seller to the Oregon broker as agreed.
On closing, the California broker demands payment of their share of the fee as agreed to be paid by the Oregon broker. The Oregon broker refuses. The California broker sues in an Oregon court of law to collect their share of the fee.
The Oregon broker claims the California broker is barred from collecting a fee from them on the sale of the Oregon property since the California broker is not licensed to perform any brokerage services in Oregon, a “closed-door” state.
The California broker claims they are entitled to collect a fee since Oregon permits the sharing of information and fee splitting between Oregon and out-of-state brokers.
Here, the California broker cannot collect their agreed-to share of the fee under Oregon law. Oregon, like California, does not create an exemption under collaboration statutes to allow an out-of-state broker to perform any brokerage activities (sale negotiations) in Oregon. Oregon merely permits the sharing of information and fee splitting with out-of-state brokers.
Although Oregon brokers may split fees with California brokers, California brokers lose their right to share a fee if they conduct brokerage activities while in Oregon. [Fields v. McNab (1984) 70 OrApp. 154]
California brokers intent on conducting sales negotiations in Oregon need to first obtain an Oregon broker license. Oregon does not waive its education requirements for nonresidents licensed in another state.
To obtain an Oregon broker license, a California broker is to complete the following courses:
- 30 hours of Real Estate Law;
- 30 hours of Real Estate Finance;
- 30 hours of Oregon Real Estate Practices;
- 15 hours of Contracts;
- 15 hours of Agency;
- 20 hours of Real Estate Brokerage; and
- 10 hours of Property Management.
After completing these courses, a California broker needs to pass Oregon’s state licensing exam.
While Oregon has reciprocity agreements with some states, California is not one of them. [ORS §696.265; Oregon Administrative Rule §863-014-0080]
Nevada permits interstate cooperation, but requires out-of-state brokers who wish to conduct Nevada brokerage activity on behalf of California buyers to first obtain a certificate of cooperation from Nevada’s Real Estate Commissioner. [Nev. Rev. Stat. §645.605; Nev. Adm. Code §645.185]
California brokers who acquire a Nevada certificate of cooperation must work under the supervision of a Nevada broker. Under Nevada’s collaboration statutes, the Nevada broker is to be in charge of the interstate transaction at all times, including:
- accompanying the California broker and the California client to view the property;
- negotiating transactions with Nevada buyers;
- co-signing all documents dealing with the Nevada property transaction in cooperation with the California broker; and
- handling, accounting for and keeping records of all fees received in the cooperative transaction. [Nev. Adm. Code §645.185]
California brokers interested in obtaining a certificate of cooperation may write or call the Nevada Real Estate Division at:
2501 E. Sahara, Suite 102
Las Vegas, NV 89104
Brokers need to submit an application, a copy of the broker’s California Bureau of Real Estate (BRE) license with a certified license history, fingerprints and a $150 filing fee to obtain a one-year Nevada certificate of cooperation. [Nev. Adm. Code §645.180]
Arizona allows California brokers to share information and split fees with Arizona brokers. However, the California broker is to first sign a written cooperation agreement with the Arizona broker, specifying the responsibilities of both brokers and the limitations of the California broker under the agreement. [ARS §32-2163]
Alternatively, Arizona also allows out-of-state brokers to obtain an Arizona broker license. A minimum of 27 hours of pre-licensing education specific to Arizona real estate law and practice is required. After completing the education requirement, the applicant is also required to pass Arizona’s state licensing exam. [Ariz. Rev. Stat. §32-2125.02]
Brokers interested in obtaining an Arizona nonresident broker license may contact the Arizona Department of Real Estate at:
2910 North 44th Street, Suite 100
Phoenix, AZ 85018
Which court does the broker use?
Sometimes, buyers and sellers who have agreed to pay a broker a fee breach their agreement to pay. The seller typically breaches by canceling unilateral escrow instructions for payment of the fee to which the buyer did not consent (otherwise escrow will not close).
Brokers collecting their fee on an interstate transaction have the ability to sue in:
- federal courts, when the amount of the fee exceeds $75,000 [28 United States Code §1332];
- courts in the state which issued the broker’s license; or
- courts in a state related to the transaction, where the broker does not hold a license.
However, a broker always first attempts to collect their fee through the courts in the state of their licensing since:
- state courts often dismiss actions brought by out-of-state licensees [Fields, supra; Beggs v. Lowe (1973) 89 Nev. 547]; and
- the broker will receive more favorable treatment from courts in the state of their licensing.
For an example of home-court favoritism, consider a California BRE-licensed broker who lists Arizona property for sale. The broker does not hold an Arizona license, but goes to Arizona to:
- prepare and sign the listing agreement with the seller, an Arizona resident; and
- conduct sale negotiations with a California buyer who is relocating.
The purchase agreement is prepared in California and forwarded for signatures to each party in their respective state. The escrow instructions are drafted in Arizona, but escrow is opened with an escrow company in California.
However, the buyer cancels escrow before closing based on a misrepresentation by the seller, the broker’s client.
The broker demands the Arizona seller pay their fee since the broker fully performed their duties and had fully earned their fee under their listing agreement with the seller.
The seller refuses to pay the brokerage fee, claiming the Arizona-signed listing agreement was invalid since the broker was not licensed in Arizona to:
- solicit sellers; or
- handle any negotiations or documents.
The seller further claims the broker cannot sue in California since substantial brokerage activity occurred in Arizona.
The California broker sues the seller in a California court to collect their fee.
Despite all the broker’s activities in Arizona, which were improper under Arizona law, the California court held the broker was able to sue the out-of-state seller in California under California law since the most substantial brokerage activity — the preparation of the purchase agreement — occurred in California. [Cochran v. Ellsworth (1954) 126 CA2d 429]
Thus, an out-of-state principal may be compelled to appear before a California court of law when:
- they are sued by a resident real estate broker licensed in California, a fact known to the seller; and
- the California broker performed significant brokerage activities in California. [University Financing Consultants, Inc. v. Barouche (1983) 148 CA3d 1165]
Brokers involved in interstate real estate transactions are best served by including a choice-of-law provision in their listing and purchase agreements with their clients (be they buyers, sellers, landlords, tenants, borrowers or lenders). A California choice-of-law provision mandates that disputes arising from the brokerage fee arrangements are to be decided based on California law, even if litigated in federal or out-of-state courts. [See first tuesday Forms 102 §4.8 and 103 §3.4]