Anatomy of a Commission Advance
As a factor of commission receivables, you can imagine that I hear from a wide variety of agents and brokers with cash flow needs. There are three questions (besides “What does it cost”) that are typically asked of me by new customers:
1) How does it work?
2) What happens if my deal doesn’t close when it’s supposed to?
3) What happens if my deal goes sideways?
The easiest way for me to describe how a commission advance from Commission Express of Western Washington works is to give an example:
Joe is a Re/Max agent and he came to me looking for a commission advance on his transaction which was set to close in 40 days. The inspection contingency had been satisfied, with some fairly minor repairs planned. The buyers would be pursuing a VA loan with nothing down and had put a $1,000 earnest deposit down on their $200,000 purchase. Joe didn’t have any other deals in escrow at the time, but had done 10 transactions in the past year, working as a full-time agent. I asked Joe to go online, to www.commissionexpress.com/WA , and fill out an application online. The application was sent to me and I drew up a set of agreements for him. As a new client, he signed our master agreement (establishing our business relationship and laying out general terms for any commission advances he does with us) and a business purpose declaration (declaring that he was obtaining commission advances from us largely for business purposes).
In addition, he signed a series of transaction related agreements – selling and assigning his commission receivable to us and certifying that there were no liens against it already. Joe’s commission on the sale was $4,200 (70% of the $6,000 commission, since his broker would be retaining 30% of the commission), but he only wanted a $3,000.00 commission advance. So we drew up the documents to purchase only a portion of Joe’s commission – enough to give him a $3,000 advance. Since we were purchasing his receivable, we actually bought more than the amount advanced - $3,842 in this case – and paid for it in 2 installments. The first installment was the commission advance ($3,000) and the second installment (up to $384) we would pay after the receivable was paid to us.
The last document signed was the Notice of Assignment – signed by Joe, his broker, and the settlement rep at the escrow office. Joe also sent me a copy of the purchase and sale agreement (with the inspection contingency signed off), the buyer's loan pre-approval letter, and a copy of the MLS listing showing that the sale is pending. Joe then gave the mortgage broker and the settlement rep a heads-up that I’d be contacting them to validate the information Joe has provided to me.
I made a couple of phone calls, checking on the terms of the transaction and making sure that the buyer had an application in process with the mortgage broker. Everything looked good, so I went to a local branch of Joe’s bank and deposited his commission advance into his bank account. That simple! All happened within a day of getting the application! Joe made sure the commission disbursement instructions directed $3,842 of the commission to Commission Express and we were on our way.
The week of the closing I got a call from Joe – the buyer and seller were signing an extension for another 3 weeks – there were delays in getting the loan application in to the VA, the appraisal didn’t come in until this week and there was a holiday weekend causing backlogs for everyone. I’m sure you’ve experienced these kinds of delays too – it happens. Fortunate for Joe, he got his advance from Commission Express instead of some of the other companies out there – we have a 30 day grace period on every transaction – as long as we receive settlement on the receivable within 30 days of the expected settlement date, the fee doesn’t change. Twenty three days after the expected closing date, we received a check from the escrow company for $3,750.00 and that same day we deposited $375 into Joe’s bank account.
What would have happened if Joe’s deal fell out of escrow instead of an extension? He would have had a few options – he could have replaced his deal with another deal in escrow and if it closed within the grace period on the first contract, Joe still would have received his $384 deposit. Or he could have redeemed his receivable with cash (this happens, just not that frequently). Or, if Joe didn’t have another deal in escrow, we would have waited until his next deal closed – and his broker would cut us a check for the balance due us from that deal.
Most importantly, Joe would have his $3,000 commission advance when his business needed it the most – and set his business up for continued success. The process is that simple and for full-time agents and brokers, it allows them the flexibility to keep investing in their business, even when they experience dips in their cash flow.
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