How do commission advances work?
There’s no question that a career in real estate can resemble a roller coaster ride – especially for new agents learning how to fill their pipelines. Agents will have a lot of ups and downs in their businesses. Successful closings tend to come in clusters with gaps in between. One way some agents bridge the income gaps between closings is through the use of commission advances.
So just what are commission advances and should agents use them often – or shy away?
What is a commission advance?
A commission advance is a type financial service. Basically, you and your broker agree to sell a portion of a pending commission to a third party. When you do this, you are able to access cash from your commission in advance of closing.
How much does a commission advance cost?
If you’re considering taking a commission advance on an upcoming deal, this is a good time to shop around. Fees for advances vary widely, and can range anywhere from 5 – 25 percent. Most companies fees will depend on you sales production (how many other deals do you have in escrow, for example), how far out the contract is from closing (a 30 day close will have lower fees than a 120 day close), and what other costs are involved. Some companies will charge additional fees like holdback fees, processing fees, or wire transfer fees on top of the quoted rate for the advance. Make sure you know exactly how much the advance will cost before you agree to take it.
What are the advantages of taking a commission advance?
As an independent contractor, you often need your future cash to be able to operate and promote your business today. Some agents will use advances to pay office expenses, operate or promote their businesses, or paying estimated taxes on time.
What are the disadvantages?
Cost, mainly. Depending on the service provider and the contract, fees can range from around $200 to over $1000 per transaction. If the transaction doesn’t close, you or your broker will have to be able to pay the advance back from another transaction within a grace period or you’ll incur fees.
Many brokers have preferred advance commission service providers, and you can find a lot of them with an online search. Ask your broker for recommendations and do your homework before you decide whether an advance is the best financial decision for you.