As a real estate agent, you’re used to working on commission. Though a commission-based compensation structure is rewarding, it can also be stressful knowing you have a deal in the works but need to wait until closing day to get paid. A commission advance gives you early access to your pending commissions — essentially, you’re selling part of your commission at a discount. Using a real estate commission advance allows you to tap into your commissions early to invest in your business or cover personal expenses. Here’s how a commission advance works in 7 simple steps:
Sign up and submit an application
The first step in getting a commission advance is signing up and submitting an application. You’ll provide your name, address, phone number, and bank account information. You’ll also share the details of your pending transaction that you want to take an advance on, including the expected closing date, your net commission and how much of your commission you would like to advance. Generally, advance companies will permit agents to access up to 75% of their net commission. This is to leave additional funds available at closing for fees and minor changes in commission payout. During this stage, the commission advance company will also share the fees that will be due at closing if everything proceeds as planned.
Sign off on the transaction
Like an agreement of sale, a commission advance is a legal contract. Before you earn approval for a commission advance, you’ll have to sign off and agree to the terms of the advance — namely, the promise to pay the advance amount plus fees when the transaction closes. By agreeing to this contract, an agent is essentially selling a portion of their pending commission, at a discount, to the advance company.
Get your broker’s approval
Commission advance companies require your broker’s approval before approving a real estate commission advance. Since your broker handles your commissions, they often need to sign a contract that obligates them to disburse the advanced amount plus fees directly to the commission advance company when the deal closes. There are some cases in which title or escrow may sign off in place of a broker. Please note this will vary by state, brokerage and, in some cases, your broker’s preference.
If you are a managing broker that produces and is interested in getting a commission advance, most advance companies will require that title or escrow signs off on the contract and agrees to disburse funds to the advance company directly when the deal closes.
Unlike a loan, a commission advance doesn’t impact your credit score. However, most commission advance companies will still review your application closely using their own underwriting standards and guidelines. During the review process, the company may look at several factors to determine how much money they’re willing to advance, including your production history and the transaction’s closing date. They may also contact the title company or closing agent for your sale to confirm the details of the transaction.
Access your commissions early
Once the commission advance company approves your application, they’ll send the approved funds directly to your account. This is generally done via an ACH transfer which will arrive the following business day. For an additional fee, you can request to have the funds wired which will arrive in your bank account within an hour. You can spend a commission advance the same way you’d spend any other earnings, including investing in your business or covering personal expenses. Whether you choose to spend your commission advance on business expenses like advertising or staging a house or just for covering everyday expenses, commission advance fees are always tax deductible.
Repay the advance
With a commission advance, the advanced amount plus fees will should be sent to the advance company by your broker or either by title or escrow. The more money you advance and the longer you take to pay back those funds, the greater the fee. So, if you have a later closing date, you can expect to pay higher fees for your advance. In the case of a delayed closing, some commission advance companies may offer a grace period. Check the terms of the agreement or contact the advance company directly to find out if they have a grace period. Also note, many advance companies have hidden fees so it is best to take your time reading over the terms before moving forward with an advance.
Repeat as needed
One of the perks of a commission advance is that you can use it when you need it. For example, if you need to access your commission early due to unforeseen circumstances, you can take an advance on a single transaction. A real estate commission advance is there when you need it to help you manage your cashflows.
What happens if my deal falls through?
In the event your deal falls through, most advance companies will simply allow you to repay using proceeds from your next closing. It is important to be aware of the fee structure as many advance companies can add substantial fees in the event of a significant delay.
What happens if a deal is delayed?
In most cases, advance companies have a grace period during which you can repay with no additional fees added. In the event your closing is delayed beyond the grace period, as mentioned, substantial fees may be added. It’s best to conduct a detailed review of all terms and conditions before deciding to work with an advance company.
What types of deals can I submit?
Be sure to check the terms and conditions or FAQs before submitting your deal to confirm that your transaction type is accepted by the advance company. Almost all advance companies accept residential transactions, however they may not accept commercial transactions, land transactions, short sales, new constructions or leases.
A real estate commission advance can be a valuable tool for agents seeking more control over their cash flow. Getting a commission advance is a relatively straightforward process that begins with a short application. After you apply, you’ll agree to the terms of the advance, and, in many cases, your broker will have to sign off, too. Commission advance companies typically charge a percentage fee that can vary based on the size of the advance, the closing date, and your transaction history. Then, with the complete application and your broker’s approval, the commission advance company will conduct a final review before sending the funds to your account. Once the deal is closed, your broker will then pay back the advanced amount, along with any fees.
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.