Surety Bonds for Real Estate Investors: What You Need to Know

What Real Estate Investors Need to Know About Surety Bonds

Investing in real estate is an effective method of building wealth and creating a diverse portfolio.  Whether you are just curious about real estate investing or have been making these investments for years, you may be wondering if you need to earn a license as a real estate agent or mortgage broker. While investors aren't required to obtain these licenses, they do offer some tangible advantages.

The main benefit of receiving your license is that you gain access to the multiple listing service (MLS). The MLS is a broad database that includes many more real estate listings than you would otherwise have access to. If you wish to advance from being a real estate agent to becoming a real estate broker, you'll need to obtain a surety bond.  Here's everything you need to know about surety bonds and when to purchase one.

What Is a Real Estate Broker?

Real estate brokers start out as licensed agents who can help other people buy or sell a home.  Brokers can manage other real estate agents.  There are many reasons why you should consider obtaining these licenses when investing in real estate.  Along with gaining access to the MLS, you'll be able to represent yourself when buying investment properties.  You will have full control over the transaction and will receive a commission when acting as an agent or broker for any property you buy.

Keep in mind that brokers are required to oversee real estate transactions in a manner that complies with all ethical standards and legal requirements.  You'll need to make sure that you complete all the paperwork and provide the necessary funds.  Real estate agents need to work for a broker, which is why it's best for investors to apply for a broker's license as soon as possible.  Doing so allows you to avoid working for someone else while investing in real estate.

Broker Licensing Requirements

If you believe that earning a broker's license will help you become a better and more experienced investor, there are some requirements you must meet to obtain a license as a real estate broker.  Along with a license, you must submit additional documentation and a real estate broker bond.  Requirements that you'll likely need to meet include:

• Passing a background check
• Providing fingerprints
• Supplying at least one recommendation
• Completing the necessary course

The requirements for real estate broker licensing can vary from state to state.  In most cases, these licenses will last for two to five years before they need to be renewed.  This involves sending in a standard renewal form and real estate broker bond.

What Are Surety Bonds?

As an investor, the type of surety bond you should request is a real estate broker bond.  This bond guarantees that all the properties you manage during real estate transactions will be handled correctly.  It also ensures that you will comply with all the regulations for a broker's license in your state.

In most situations, a real estate broker bond is required when you're applying for a real estate broker license.  This surety bond provides you and the people who might use your services with protection in the event that you engage in fraud or mishandle some of the funds you receive.  It's possible for the obligee to file a claim against your bond.  The state that requires the bond is the obligee.

If a claim is ever made against your bond, the surety company usually manages the situation and determines if the obligee needs to be compensated for the losses they've incurred because of the broker's mistakes.  When the surety decides in favor of the obligee, the broker is tasked with reimbursing the surety provider for all the compensation they've given to the obligee.  If you believe that having a real estate broker license will make you a better investor, it's likely that a surety bond will be necessary.

Are Surety Bonds Available With Bad Credit?

You can be approved for a real estate broker bond even if your credit score is currently lower than you'd like it to be.  Applying for a bad credit surety bond doesn't come with numerous hurdles and obstacles that you must overcome.  All you need to do is pay a higher rate for the bond.  If you have a low credit score, the bond premium that you pay can be around 5%–10%.

The amount of money you spend on a surety bond depends largely on your business or personal credit.  In the event that you have a strong credit score (above 675), the bond premium you pay could be as low as 0.75%–3%.  Let's say you purchase a bond that's valued at $50,000, which is the requirement in most states.  With a good credit score, your premium can range from $375 to $1,500.  If your credit score is below 600, a 5%–10% premium equals a payment of $2,500-$5,000.

Earning a real estate agent or broker license gives you the opportunity to become a more well-rounded investor.