7 Key Considerations Before Getting a Commission Advance
If you're a real estate agent, chances are you've heard of commission advances. A commission advance is a financial product that provides real estate agents with access to their future commissions once a deal goes pending. This can be helpful for agents that need cash flow to cover expenses or invest in their businesses. However, before you decide to get a commission advance, there are some things to consider.
The Cost of the Commission Advance
One of the main things to consider before getting a commission advance is the cost. Commission advances typically come with fees, which range from 5% to 15% of the amount being advanced. These fees can add up quickly especially if you're getting multiple advances over the course of a year. Before you decide to get a commission advance, make sure you understand the fees and how they will impact your bottom line. Also be sure to read the terms and conditions closely as some companies have hidden fees. Another thing to be aware of is how the advance company handles delayed or cancelled deals. Most have some version of a grace period, but others may immediately start adding on late fees.
Broker involvement
Another important factor to consider is broker involvement. Typically brokers will be required by the advance company to sign a document called a Notice of Assignment (NOA) before funds can be advanced. The NOA requires the broker to disburse the advanced amount plus any fees directly to the commission advance company when a deal closes. In some cases, the NOA can be signed by a representative of the title or escrow company however this varies by state and brokerage.
Your Cash Flow Needs
The main reason real estate agents consider getting commission advances is to cover cash flow needs. If you're struggling to make ends meet, or if you have a big expense coming up that you can't afford to pay for out of pocket, a commission advance may be a good option. However, before you get an advance, make sure you have a clear understanding of your cash flow needs and how much money you need to cover your expenses.
The Timing of Your Closing
Commission advances are typically only available for deals that have already been signed and are waiting to close. If you're expecting a sale to close soon, a commission advance can provide you with the cash you need to cover expenses while you wait for the sale to close. However, if the sale is still in the negotiation phase, or if there are delays in the closing process, you may not be eligible for a commission advance. Some companies can approve listing advances where an advance can be obtained by having an exclusive listing agreement.
The Reputation of the Commission Advance Provider
When seeking out a commission advance, it's important to consider the reputation of the provider. There are many providers out there, and not all of them are reputable. Before you sign up for a commission advance, do your research and make sure the provider is trustworthy and has a good track record.
Your Ability to Pay Back the Advance
Commission advances are not free money – they are similar to a loan in that they need to be paid back when the deal closes. Before you get an advance, make sure you have a plan for how you will pay it back. Consider your future commission earnings and make sure you'll be able to cover the repayment amount, as well as any additional fees or interest
In conclusion, commission advances can be a helpful financial tool for real estate agents, but they're not right for everyone. Before getting an advance, consider the factors mentioned and with careful consideration, you can make an informed decision about whether a commission advance is right for you.