The third party real estate commission advance company concept turns 20 this year. For real estate agents and brokers not familiar with real estate commission advances, once an agent has a signed contract, they can receive their real estate commission before closing. Different services have slight variations on the concept, but most offer a similar service.
Determining which service is best for a particular agent can be a challenge. Typically, the first time an agent determines a real estate commission advance would benefit their business, they perform a web search to identify a service provider. At first glance, most companies they find appear similar, but there is at least one key difference in how Commission Express operates.
Commission Express operates locally because even the most rookie agent understands real estate is local. Just as someone buying a house in Atlanta wouldn’t use an agent from Boston, why would an agent use a real estate commission advance company located outside of their city or worse, outside of their state? How could a company hundreds or even thousands of miles away understand the intricacies of transactions in your community? The simple answer – they can’t. As a result, advance companies that provide services all across the country from a single office often take higher losses and in turn, pass those losses on to customers.
Commission Express is different and prides itself on providing real estate commission advances through offices in over 25 cities in the United States. We are members of local real estate associations all across the county. We sponsor events for agents in your community. In short, we are part of your local real estate communities and reinvest in it. But you don’t need to take it from us; here is what our customers have to say about it:
If I have an advance on property and the contract falls through, I know the person I am dealing with at Commission Express since we met at a local trade show. I’m not trying to explain a situation to a faceless call center employee that sits who knows where.
- Elaine M. – Keller Williams
I don’t like the idea of giving highly personal information to a website and having to worry about where it is going to end up. With Commission Express, I am reassured the information is only used for obtaining a commission advance because I can walk into the local office before applying.
- Justin C. – Coldwell Banker
They didn’t even check my credit because they based their decision on the strength of my transaction. A company operating out of a call center wouldn’t have understood our local market practices well enough to finish the advance.
- John M. - Prudential
To find a local Commission Express office near you, click here.
One of the many factors regulating success in managing your real estate business is the strategic and effective use of working capital. Adequate working capital is a requirement for any business. Without it, you are out of business. If you don’t have adequate capital, your business suffers. In today’s market, a primary distinction between the agents who are successful and those who are merely surviving is the strategic use of working capital to create income opportunities.
STRATEGIC USE OF WORKING CAPITAL FOR YOUR LISTINGS
-
Rule #1 Not all listings are created equal: In theory, all of your listings have the potential to generate income. In practice, only listings that are highly competitive with the other purchase opportunities available to homebuyers have the potential for immediate income as a sale. The standard for comparing the value of your listing is the combination of location, price, and appeal. If your listing is priced very competitively, located in a desirable area, and shows well; you are in the opportunity game.
-
Rule #2 Not all prospective buyers are created equal: Serious, motivated, and qualified buyers are worthy of your largest investment of time and capital. As with listings, make sure you apply your capital to your best opportunity to maximize your return. Don’t underfund a warranted investment.
SOURCES OF WORKING CAPITAL
-
Ample Commission Earnings (your most desired source of capital)
-
Credit or Loan Debt (potential long-term liability for short-term benefit)
-
Commission Advance (self-liquidating, credit & debt-free leverage)
WHEN TO APPLY WORKING CAPITAL
-
When you have a clearly defined “high return” listing or homebuyer sales opportunity
-
When you have a planned strategy for the use of your valuable capital. The best approach is to build a business plan that is not dictated by the availability of capital, but one that is based on your end goal. Assess your capital options next. Keep in mind that consistency in your plan is important since being highly visible at times and invisible at other times is not effective.
SUMMARY
As a real estate professional, your two most valuable commodities are your time and your working capital. Both are required in some degree for all of your business endeavors. The key to your success in a challenging market is to ensure you have clearly defined and distinguished where you should apply these two valuable assets most abundantly for the best return. It is easy to understand your business will suffer greatly if you don’t spend adequate time running your business. It should be equally evident you will suffer negative consequences if you fail to strategically invest adequate capital in your business.
In our business, giving commission advances to agents and brokers, we see professionals who for a variety of reasons need cash in the short term. While some are trying to take advantage of a sudden business investment opportunity, most are trying to compensate for a gap in their business cash flow. In these challenging economic times, it is more important than ever to manage your business cash flow effectively so that you can keep your business momentum going to capitalize on opportunities. Here are 3 critical steps to managing your cash flow effectively:
1) Have a budget and manage to it:
Every business, big or small, needs a budget which includes your monthly expenses and your expected revenues. Real estate pros have a lengthy list of monthly costs (i.e. desk fees, licenses, subscriptions to systems and marketing channels) as well as a lengthy list of expenses specifically related to each client's transaction (lockboxes, signs, photography, potential staging costs, potentially print ads, auto expenses). Be specific in your budget and understand the costs of the business you do. Then be flexible in managing your budget by being both aware of where you are spending more than expected as well as where you might make up for the deficit (either in added revenue or savings in another expense item).
2) Understand the Timing of your Cash Flows:
For many real estate agents, commission income does not come in at a steady rate - throughout the year commissions are up and down. Some of this is predictable, based on the time of year. You also need to bake in any delays that may occur in closings or settlement from the broker. When making a plan, it doesn't pay to be overly optimistic - be a realist.
3) Be aware of your Sources of Cash at all times:
When you combine your plan in steps 1) and 2) it is likely that you will have a shortage in your cash flow at some time in the year. What is important when these times occur is that you do not deprive your business or yourself at these times. When you deprive your business of cash flow, you limit your opportunities for success not only when you do it but even when your cash flow recovers. Likewise, when you temporarily cut back on your expenses at home, you limit your emotional capital to invest in your business.
So it is important to know what alternatives are available to you to supplement your cash during these dips in revenue. Aside from having a savings account, many agents have a personal line of credit to dip into as needed. Some of these lines of credit have been decreased or eliminated by banks during this credit crunch. For relatively small cash flow gaps ($500 or less), credit card cash advances are a possible solution - but be aware of the fees (4% transaction fees are the norm plus high interest rates on the advance and the usual rule that you will pay off other balances on the card before you start to pay off the high interest rate advance).
For larger sums of money, commission advances are a convenient way to fill in the gaps in your cash flow - by selling your commission receivable on pending transactions you can accelerate the cash flow in your plan and keep up your business momentum. Make sure that you understand the terms and costs of your commission advance - and place those costs into your financial plan.
With a thorough financial plan for your business, you will be ready to generate success year-round and have the peace of mind that goes with it.
One of the more challenging aspects of the real estate market is uneven rate of closings – closings appear to come in spurts and never when agents need them to pay their monthly business expenses. The added complication of predicting when a transaction will close (with all of the appraisal conditions, bank approvals, FHA approvals, inspection items repaired, etc) make a real estate agent’s cash flow a moving target. Having the capital needed to continue operating your business successfully has never been more important. Some agents rely on savings or a spouse’s income to even out the ebb’s and flow’s of their real estate business. Others rely on an increasingly restricted credit line to finance the gaps in their cash flow.
Many agents don’t realize that their own real estate commission receivables can be a source of capital for their business. By selling their commission receivable to a factor, like Commission Express, agents are able to leverage their business assets and obtain the capital they need to market listings, stage homes, market on the internet, or simply relieve their cash flow pressures.
But agents aren’t always sure when a commission advance program is right for their business. Here are a few examples of when Commission Express clients have found a commission advance useful:
1) The agent has their next closing in 30 days but needs to pay a transaction coordinator’s salary, market new listings, and stage a home to keep the cash flow coming in well beyond the next closing. An advance can get the agent through the gap in their income while working to generate revenue potential on the new listings.
2) The agent has the option of taking out a cash advance on their personal credit card to fund their business expenses or sell a portion of their upcoming commission. A commission advance used in the course of the agent’s business is tax deductible and, with Commission Express’s low fees, is less expensive than a credit card cash advance.
3) A full time agent has an unexpected expense (a car repair, an unforeseen tax bill) and wants to keep all of their accounts in good standing. A commission advance will offer the agent the flexibility to pay these expenses on time and allow them to focus on their business instead of their cash flow pressures.
What commission receivables are good candidates for commission factoring? Transactions that have cleared almost all of their contingencies (except for the financing contingency) and the agent has confidence in the closing. It is important that the agent is confident about their abilities to generate income and sees the advance as a way to provide a bridge between now and the next closing.
Commission advances are an important source of capital for any real estate agent’s business – is it time for you to get an advance?
Like most businesses, the typical real estate brokerage has a line of credit with a local bank to smooth out the cash flow peaks and troughs. This enables the brokerage to operate smoothly and uniformly throughout the year. The brokerage can meet its recurring administrative payroll, pay branch office expenses and maintain consistent advertising to recruit new agents. When the brokerage income during the seasonal slow periods fails to meet the expenses, the line of credit kicks in and the brokerage checks are honored. That way, all obligations to vendors and brokerage employees are met. As business increases and income from settlements hits the brokerage bank account, the line of credit is automatically paid down. That’s how it works.
If this arrangement is so vital and necessary for the brokerage business to be successful, why is it not necessary for the success of the independent contractor agents (who are indeed running independent businesses w ithinthe brokerage)? Many agents have teams that include employees who need to be paidregularly. Many are “100-percent” agents with office space or desk fees that must be paid monthly. Most have listings that need to be advertised and promoted. All have the standard agent expenses:
- Personal promotion
- Productivity tools
- License fees
- Association dues
- E & O insurance
- Automobile
- Cell phone
- Continuing education
- Self employment tax
Just like the brokerage needs a reliable income stream to pay its expenses, the agents operating their businesses within the brokerage also need a reliable income stream to pay their expenses.The problem is, the professional agent who sells 24 houses a year does not sell two houses a month. If that were the case, the agent would likely not need a business line of credit. But just like the brokerage, the agent’s income during the seasonal (or other) slow periods can fail to meet expenses. In those cases, the agent’s only recourse was to ask the brokerage for an advance on pending commissions. If the brokerage gave the agent an advance and the sale kicked out, the brokerage had the unpleasant experience of collecting the amount owed from the agent. This created an adversarial relationship between the brokerage and agent. If the brokerage was unable to make the advance, the agent would simply have to wait for settlement to meet financial obligations. This often resulted in the agent having a poor credit rating and being unable to qualify for credit cards or other loans. In some cases, it caused the agent to leave the real estate business entirely, which was certainly not good for the brokerage. Obviously, this situation contributed greatly to the turn-over of agents with its concomitant expenses to the brokerage for recruiting and training new agents. But the brokerages in general had little appreciation for the plight of the agents and never addressed the issue.
Things changed in 1992 when a working broker in the Washington, D.C., area, who was a Million Dollar Club Life Member and Top Producer Life Member, had often experienced cash flow problems despite being one of the top income earners in the area. He concluded that if he had a need for a commercial commission advance service, other top agents and working brokers had a similar need. After having had a successful twenty year sales career, John Stedman teamed with Joe Giovannelli, another 20-year broker, to launch Commission Express, the first commercial commission advance company in the country. They spent the next five years developing the protocols and procedures to enable agents to quickly and easily sell their pending commissions (accounts receivable) at a discount. Unlike loans that required a good credit rating and took several days to be approved, their’s was a business to business “sale of an asset” transaction under the Uniform Commercial Code, which has been adopted by all 50 states.
Having fully developed the process, they franchised Commission Express in 1996 to provide fast and reliable commission advance services on a local and personal basis. This enables agents across the country to easily solve their cash flow problems. Since then, Commission Express has provided over 80,000 commission advances totaling more than $400 million through franchised offices in 32 states.
Unlike credit based lenders, Commission Express is a factoring company purchasing accounts receivable primarily on the strength of the asset (commission) being purchased. The agent makes an application online or with forms that are faxed and directs either the real estate company or settlement agent to pay the commission to Commission Express when the transaction settles, typically in 30 to 90 days. The agent is charged a discount of 8 percent to 14 percent. There is a holdback or reserve of 10 percent that is charged should the receivable not be redeemed within the 30 day grace period after the projected settlement date. Otherwise, the holdback is paid to the agent when the receivable is redeemed. The advance of 76 percent to 82 percent is paid to the agent, usually within 2 days, and often the same day that application is made. In most cases, the agent receives a total of 86 percent to 92 percent of the original commission. It’s quick, easy and available even to agents with credit problems due to the irregular income associated with commissioned sales positions. And with the current condition of our banking system, more and more businesses are turning to factoring companies to finance their operations.
Not All Commission Advance Companies are Alike
There are two truths in the real estate business
1) There will always be buyers and sellers of homes
2) Real estate agents will always need cash flow to help their clients buy and sell homes
And thus, commission advances were invented – first by brokers who were trying to help out their agents through the ups and downs of the market and then by independent companies who formed to be a substitute or replacement for these awkward broker relationships. You probably see ads for these independent companies constantly – in your email, on Facebook, in your web searches. They have so many different names, all some variation on “commission” or “advance” that you have to wonder whether there is any difference at all between them. Well, most of them are the same but the exceptions make some exceptional.
Here’s what is true of all commission advance companies:
1) They are factors of receivables – this means that they are in the business of purchasing business receivables at a discount. And all active real estate agents have receivables at one time or another – once the agent gets mutual acceptance on a purchase and sale agreement , they have a commission receivable, due to be paid when the deal closes.
2) They all get a pledge from the agent to settle the receivable if the deal doesn’t close within a specified time period, either with cash or with another commission pledge.
3) They all will charge a fee based on how large the commission advance is and how long the escrow is expected to take.
This is where the similarities end.
Criteria for Choosing a Commission Advance Company
Are they convenient and local? Most commission advance companies serve every state from one location (often in Texas or Florida) out of a call center. Some even try to spoof their websites to make you think they are local (BlahBlahBlah Advance of Seattle) – but their toll free number goes to Texas or Florida. They don’t understand your real estate market, they don’t aim to build a relationship with you – they are simply interested in collecting when the receivable closes. You won’t be picking up a check from these folks or meeting them at your local realtor association meetings. Except for one.
Do they respect the challenges of meeting a closing date? Most commission advance companies offer some grace period beyond the expected settlement date, during which the cost of the advance doesn’t change. But, these grace periods can be as little as 5 days and usually extend to only 20 days. Except for one.
Is the cost of the commission advance easily understood? It is typical for advance companies to charge underwriting or application fees, on top of the discount fee. Then there is often a reserve retained by the company to pay for late fees or extension fees. Once the grace period is over, the reserve is reduced (or sometimes the reserve is reduced during the grace period!), increasing the actual cost of the commission advance. If you or your broker wants a check instead of a deposit into an account – another fee. Some will charge a fee to get the money to you (a “transfer fee”). The fees pile can pile up, making it more difficult to understand the real cost of the advance. Except for one company.
How quickly can I get my funds? With most companies operating out of a call center, the funding of your advance is almost always at least a day away. And with ACH transmissions (the most common approach used by these companies), the funds may not be available for 2 – 3 days. That is, except for one company.
That company is Commission Express of Western Washington. We are:
A) LOCAL – Located in Seattle, WA we serve brokers in Washington, where we are licensed to operate (unlike those out of state companies), pay taxes (unlike those out of state companies), comply with WA state laws (unlike those out of state companies), live and understand the local real estate market.
B) COSTS ARE LOW AND EASILY UNDERSTOOD – Commission Express charges a simple discount fee based on the size of the receivable and when the transaction will close. No underwriting fees. No transfer fees. No application fees. And your reserve is refunded in full if your receivable is redeemed by end of the grace period.
C) A GRACE PERIOD THAT RESPECTS YOUR BUSINESS – Commission Express has a grace period of 30 days after the expected settlement date. Is your lender requesting more documentation at the last minute? Is there a delay in getting a certificate of occupancy on new construction? Are the repairs agreed to after inspection still being completed? Then you’ll extend your contract 7, 15, even 25 days and not have to worry about paying more money for your commission advance.
D) YOU RECEIVE YOUR FUNDS PROMPTLY – Because we are local, you can pick your check up at our office. Or you can ask us to make a deposit into your bank account at a local branch – no charge. If you are concerned about your bank placing a hold on a deposit, we will wire transfer funds into your account (for a small reimbursement fee). Many of our clients receive their funds the same day as their application. No other commission advance company can make that happen.
A homebuyer wouldn’t choose a broker from out of town, without knowledge or respect for the local market and regulations. Why should you choose a business partner to support your cash flow needs who isn’t from your market? Do your own research but remember to call your local cash flow partner – Commission Express of Western Washington.
I got a call a couple of weeks ago from an agent who was seeking a $5,000 commission advance on a pending transaction. While $5,000 is a bit above average for an advance, it is not uncommon. But then the agent proceeded to tell me what they planned to use the advance for - they had an opportunity to get a 25% on their advertising for the next year if they paid for it up front. What a great opportunity! They were going to save $1,700 by spending $459 on a commission advance. Who wouldn't invest $459 to get $1,700 back - that's an incredible return on investment.
We are all in business to get a return on our investment. While much of our investment is in the form of blood, sweat and tears, we inevitably have to put cash into our business to get the returns we desire. Some of our cash flows are expected - our monthly fees, our dues or insurance, the gas for the car. But other expenses come periodically - staging a new home that you just listed, sending out postcards to a community where you just found a buyer for a home, setting up a new website. And some expenses are related to opportunities that just come out of the blue - that great new million dollar listing, that new REO contract you can get if you can handle all those listings - or that great discount on your ad buy for the year!
Real estate cash flows rarely follow your expense patterns - but that doesn't mean you should pass up the business opportunities when they present themselves. My client understood how to leverage her existing commission receivables so that she could make more money in her business. She chose to sell her commission receivable to Commission Express and for a modest tax deductible fee she was able to save her business money and start stimulating new business for the coming year.
You can too - when your next business opportunity presents itself, consider how you can leverage the working capital of your pending commission receivables to infuse cash flow into your business. Make a call to Commission Express of Western Washington to discover how to take advantage of your business opportunities with a commission advance.
Commission Express of Western Washington
4500 9th Avenue NE, Ste 300
Seattle, WA 98105
Phone: 206-829-2440 FAX: 206-357-9355