Unlocking Financial Freedom: Understanding How a Commission Received in Advance Works
A commission received in advance is a financial arrangement that plays a crucial role in the real estate industry, providing real estate agents with a means to gain early access to a portion of their pending commission earnings. This practice helps agents manage their finances, invest in their businesses, or cover expenses without having to wait for the closing day of a real estate transaction. In this comprehensive guide, we'll explore how a commission advance works in 7 simple steps and delve deeper into the various aspects of this financial tool.
1. Sign up and submit an application:
The journey of obtaining a commission advance begins with the first step of signing up and submitting an application to a reputable commission advance company. In this application, you'll typically be required to provide your essential personal information, including your name, address, phone number, and bank account details. Furthermore, you'll need to furnish specific details about the pending real estate transaction for which you're seeking an advance. This information includes the expected closing date, the net commission you'll receive, and the amount of commission you wish to advance.
It's worth noting that most commission advance companies allow agents to access up to 75% of their net commission. This ensures that additional funds remain available at the time of closing to cover transaction fees and any minor adjustments in the commission payout. During this initial stage, the commission advance company will also disclose the fees that will be due at the closing of the transaction if everything proceeds as planned.
2. Sign off on the transaction:
Similar to an agreement of sale, a commission advance is a legally binding contract. To gain approval for a commission advance, agents must sign off on and agree to the terms of the advance. These terms primarily revolve around the commitment to repay the advanced amount, along with associated fees, when the transaction reaches its closing stage. By agreeing to this contract, agents essentially sell a portion of their expected commission earnings at a discounted rate to the commission advance company, which enables them to access funds in advance.
3. Get your broker's approval:
Commission advance companies often require the approval of the agent's broker before granting a real estate commission advance. Since brokers are responsible for handling commission payments, they are typically required to sign a contract. This contract obligates the broker to disburse the advanced amount, including any applicable fees, directly to the commission advance company upon the completion of the real estate deal.
It's important to note that there may be cases where title or escrow entities can sign off in place of a broker. The specific requirements can vary by state, brokerage policies, and, in some instances, the preferences of individual brokers.
4. Final review:
One key advantage of commission advances is that they do not have an impact on an agent's credit score. Nevertheless, commission advance companies still conduct a thorough review of the agent's application, adhering to their own underwriting standards and guidelines. During this review process, several factors are taken into consideration to determine the amount of money the company is willing to advance. These factors may include the agent's production history and the expected closing date of the transaction. Additionally, the commission advance company may reach out to the title company or closing agent associated with the sale to verify the transaction details.
5. Access your commissions early:
Upon the approval of your commission advance application, the commission advance company will promptly transfer the approved funds directly to your bank account. This transfer is typically executed through an ACH (Automated Clearing House) transfer, with the funds arriving in your account on the following business day. For those in need of even quicker access, there is usually an option to request a wire transfer for an additional fee, resulting in the funds reaching your bank account within an hour.
The use of a commission advance is flexible, and you can allocate the funds in a manner that aligns with your financial needs. Whether you choose to reinvest the advance in your real estate business, allocate it toward advertising, stage a property, or simply use it for expenses, it's important to note that commission advance fees are typically tax deductible, offering potential financial benefits.
6. Repay the advance:
The process of repaying a commission advance is relatively straightforward. The advanced amount, along with any applicable fees, is typically repaid by your broker, or in some cases, by title or escrow, upon the successful closing of the real estate transaction. It's important to be aware that the fee associated with the commission advance may vary based on the amount advanced, the closing date of the transaction, and your transaction history. In situations where the closing is delayed, you should expect higher fees for the advance. Some commission advance companies may offer a grace period for delayed closings, so it's advisable to carefully review the terms and conditions of your agreement or directly contact the advance company to understand their specific policies.
7. Repeat as needed:
One of the notable advantages of utilizing a commission advance is its flexibility. Agents have the freedom to use this financial tool as needed, allowing them to effectively manage their cash flow in the real estate industry. For example, if unforeseen financial circumstances arise, agents can opt to take an advance on a single transaction, providing them with the financial stability they require during challenging times.
FAQs:
What happens if my deal falls through? In the event that a real estate deal falls through, most commission advance companies offer a straightforward solution. Agents can repay the advance using the proceeds from their next successful closing. However, it's essential to be aware of the fee structure, as some commission advance companies may impose substantial fees in the event of a significant delay.
What happens if a deal is delayed? Commission advance companies typically incorporate a grace period during which agents can repay the advance without incurring additional fees. However, if the closing is delayed beyond this grace period, significant fees may be added. To ensure a clear understanding of the terms and conditions, it's advisable to conduct a detailed review before deciding to work with a commission advance company.
What types of deals can I submit? Agents should carefully review the terms and conditions or frequently asked questions (FAQs) of the commission advance company to confirm whether their specific transaction type is eligible for an advance. While most commission advance companies accept residential transactions, it's possible that they may not support certain transaction types, such as commercial transactions, land transactions, short sales, new constructions, or leases.
Conclusion:
In conclusion, a commission received in advance is a valuable financial tool for real estate agents, providing them with the flexibility to manage their cash flow effectively. The process of obtaining a commission advance is relatively straightforward, beginning with a simple application. After applying, agents agree to the terms of the advance, with broker approval often required. Commission advance companies typically charge a percentage fee, which can vary based on factors such as the advance amount, closing date, and transaction history. Upon completing the application and securing broker approval, the commission advance company conducts a final review before transferring the funds to the agent's account. Repayment is facilitated by the broker or other relevant parties upon the deal's closure.
The versatility of commission advances allows agents to access their commissions when needed, enabling them to navigate the financial aspects of their real estate business with confidence. As with any financial transaction, it's crucial for agents to be well-informed about the terms, conditions, and potential fees associated with commission advances.
Please note: this post discusses the process of getting a traditional commission advance for informational purposes. Advancing your commission with Tongo is faster, less expensive, and more flexible than a traditional commission advance. Plus, Tongo does not require brokers to sign off. For more information on Tongo click here.