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Commission advance companies, loan sharks or helping hand?

Commission advance companies. Loan sharks or helping hand! Nine years ago when TLW and I opened Tutas Towne Realty, Inc., we did it on a shoe string. Actually, I guess it was more of a goose egg, than a shoestring, since we didn't have any money. We opened our business on pure determination and a prayer. We had a lot of confidence, since we had both been in the business for a few years, working for a management company. TLW and I were the only Realtors in the company. Since the company we worked for did short term vacation rentals they did not need a Real Estate license. They had an out of area "rent a Broker" who did nothing more than qualify the company. So TLW and I were on our own. I did all the sales and she took care of all the marketing. We were pretty smart from day one and did a lot of advertising for ourselves and just had the company name in fine print as required by law.

Anyway, a few years into this, we tried to purchase the management company, with the backing of several investors. Unfortunately, this deal fell through, at the last minute, so we decided to leave and do our own thing. So we left and opened Tutas Towne Realty, Inc., in our home. The good thing was, I took all of my listings with me. At that time I had 20 houses and about 50 lots on the market. So we were up an running. The only bad thing was, all the money we had, was spent on incorporating and getting signs. Most of this was put on credit cards. So here we were, new business owners with lots of listings, lots of signs in the ground and no money. But you know, it was very exciting and we were up to the challenge.

Still, we had bills to pay and we needed money to continue our advertising. Our goal was to run our little business as a big corporation and spend lots of money on advertising. We knew this would payoff in the long run. Well, needless to say is was a struggle. We knew if we could just hold on and sell some of our listings we could make it over the hump. We needed cash. As anyone knows that is in business for themselves, cash flow is a must. No cash. No flow. It's as simple as that.

That's about the time I saw an ad in Realtor magazine for a commission advance company. Now this sounded interesting. If I could write a deal and place a property pending, this company would advance me 80% of the commission, for a price. It would cost us, but we could get a check within 24 hours. I liked it. I liked it a lot. There was light at the end of tunnel. Over the next couple of days I wrote a deal on a duplex, I had listed, and decided to test out this commission advance scheme. Well folks, it worked! I sent them a copy of the purchase contract and the next day we received a check for $4,000. We were off and running. We ended up doing this a couple more times, and before we knew it, we were over the hump. Our pipeline was full and we never looked back. Without this company we may not have been able to get our business jump started. So for us, they were a much needed helping hand.

There are quite a few commission advance companies available to Realtors. Some require no qualifying and some you have to complete an application and credit approval process. The non qualifying programs obviously charge the higher fees. The fees vary, but you can count on paying between $300-$500 on a $4,000 advance if it is paid back in 30 days or less. The fee structure varies with the length of the loan. If for some reason the deal doesn't close you can normally substitute another property closing or you have a certain amount of time to pay them back the money. These are basically paycheck advance companies for Realtors. The money is very expensive but can offer a short term solution to a cash flow problem. Here are some links to a few different companies if you are interested in getting more details.

Now folks, just so you know, the interest on these advances, if you figure it out, is real, real high. Like 100% to 200% annually. So they are not a long term solution to money problems. They can, however, be a viable short term solution to cash flow management. They are not for the faint of heart. So read up on them and see if it may be something that can help you get over the hump.

So, commission advance companies, loan shark or helping hand? What say you?

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 12/03/2006 04:01 PM

Comments (52)

commission advance companies, tutas towne realty, inc, opinion

52 Comments on Commission advance companies, loan sharks or helping hand?

DEC

2006

Reserved Parking For #1 The Lovely Wife aka TLW...ROAR!

Man...This is a blast from the past.

One thing you missed. You forgot to mention our first closing. :)

It went like this. We grabbed our check and spilt...

Kidding folks... lol ...

Sorry, I couldn't resist that one. :)

Babe (BB) thanks for the walk down memory lane. I enjoyed going there and looking here.

It was all so worth the walk. :) Nice view!

Here you go Darlin' here's a little marketing for ya...xo

TLW "The Love Wife"...Come On Down To Tutas Towne Your Realtor Friendly Realtors...ROAR!

Bryant, a long time ago, when I was in the startup phase of a previous business startup, we had a lot of great ideas, some good customers, but a very long accounts receivable. We were billing, but the collection was taking too long and we needed the cash faster and urgently so we could make payroll. This is called "factoring" in the business world. We used it the same way you did. It got us over the hump and eventually we stopped using them. But we would never have made it without them. Yes, the cost of the interest was really high, but not as high as the cost of failure!

A real estate agent is running a business. You must weigh the benefit against the risk with any decision you make. Choosing a reputable commission advance company at the right time in your business could make a world of difference.

I started my real estate practice with some money in the bank. Seeing other agents struggle, I thought I was way ahead with money to advertise and pay living expenses until the checks started pouring in.

The first year I made $25,000 in commissions and I spent $25,000 in expenses. The second year I spent $25,000 on expenses and made $50,000. The third year, I spent $25,000 in expenses and made $78,000.

Bottom line is, this is an expensive business. If the commission advance helps, it's no worse than selling less expensive homes. The net would be the same.

The only risk I see is the homes not getting to settlement. That could be a sticky wicket.

Being a mortgage loan rep that is asked for financial advice quite often and also someone that sees credit reports, good and bad each day, I would suggest any alternative to this type of loan, first. I constantly talk to people that were sure something would happen, allowing them to pay off their debt and then when it doesn't, they end up with a blemish on their report. I know it worked well for you but I would like to see how many other people did not have such a good experience.

Like all short and long term financial solutions, the situation dictates the required action. Perspective helps in the decision making process.

The solutions we choose today are rarely the ones we chose long ago. Each of us has made decisions based on need. Successful business people learn from all situations and make sure they are in a better position next time.

You gave great perspective on your topic.

It sounds like a commission advance was a good short term solution for you and your situation. Unfortunately, most people are probably not as disciplined as you are, are poor money managers and it becomes a never ending crutch.

Jeff, love this quote:Yes, the cost of the interest was really high, but not as high as the cost of failure! Sometimes we just do what we have to do. Being willing to take the risk(calculated) separates the men from the boys.

Lenn, you were fortunate to have some reserves when you got started. Folks don't understand how expensive it is to run your business properly. I work out of my house by myself and spend more on advertising than a lot of Realtors make. And when it's slow, I spend more. Keeps the business coming in though. Hey, I would much rather write checks than knock on doors.:)

Phillip, you are right, these can be high risk loans if you aren't sure you will have the closing stop pay the money back. But they are also very convenient if used properly.

John it's always about making wise decisions based on your current situation. Fortunately I would never have to use this kind of company now. But at the time is was a quick and useful solution.

My eyes lit up as soon as I saw that it worked for you; then I jumped back into reality. At the moment, my next closing is four months away (now yes, I have two buyers who will write within a few weeks and listings that hopefully will sell butt...) I guess I am lucky because I can get a commission advance from my company at no interest. But it excited me anyway; shows you that I always have to reign myself in......weakest part of my business mind!

Hi everyone TLW Here...ROAR!

I normally don't say a whole lot on these topics. But, I do have something to say on this one.

As Realtors the best thing you can do for yourself is to understand how important Marketing is. It needs to be on your priority list. You have to Brand yourselves. It cost money to do that. Work it into your budget. Why? Because without it your just another Realtor.

Now who in their right mind wants to be just another Realtor?

TLW "The Lovely Wife"...You're Looking At My Branding Right Now. Good Marketing Here...ROAR!

Thanks for the post. I haven't used a commission advance company. I sort of figured any of these early payday companies have a high interest rate for the short term loan. If it will help and works and you can pay it off relatively fast.

If I needed the flow I would definitely use them. I have been lucky enough to keep the flow coming. (knock on wood)

I am glad to see these companies worked for some agents. I usual just delete the emails regarding these type of services.

Loan Officers can do the same. I haven't used it but a few of our LO's did back in March and April.

You know ... A few years ago Derek & I helped build a super successful RE team. Man! It was great - We did so well that we were able to take our whole team and their families (19 people total) on a 7-day cruise over the new year!

But it wasn't all "contracts and closings!" Without going into too much detail, certain things "happened" that we were not ok with, and so we handed over the whole team - everything -to a "partner" and started back from square one.

Faith. That is all we had (of course besides our education, experience, talent and good looks...). Nothing else. We left the office and came home. (We call it "Kitchen Counter Contract Class"). We had a few scattered closings - but nothing much. We knew we were better off "on our own" - so we took our goose egg and worked our butts off to make it hatch.

We battled our egos about the Comission Advancers. It is hard going from so successful to, well not so much - but our egos didn't pay the bills - and the advance made all the difference in the world. It is definately a calculated risk - and should never be used as a crutch. But, in some cases ... it can be a helping hand.

Thanks for the wonderful post, again, Bryant!

Bryant..... interesting and I am glad it worked out. And at times, you have to do what you have to do.

Brian Brady..... your link didn't work. I was curious to what companies are out there.....

Sometimes any interest rate is OK if you need some cash right now.

There are situations where $5.00 today is worth as much as $20.00 a week from today.

I've done real estate deals on credit cards before and would do it again if I thought it was a good deal.

DEC

2006

http://www.mortgagecommissionlink.com/faq.htm

Hi Bryant, I can really relate to your post as well as Jeff's comment about "the cost of the interest was really high, but not as high as the cost of failure"...

Your story reminded me of an earlier time in my life where I tried to expand my business too fast and in a matter of months I went from making buckets of money to taking cash advances from my Mastercard to cover my condo payments. :-(

Failure wasn't an option for me either so I did what I had to do to survive and get through the rough patch. It's times like these that were kind of scary to live through but I look back on as a really good learning experience.

Been there, done that. Definitely a needed relief in tight times, but like you counsel, not a long term loan product. Great info for agents, Bryant. Thanks!

The company you got the advance from. Was the salesman's name lefty?

Congratulations on having the guts to go for it and the skills and dedication to succeed.

Late last year we debated factoring about, well a lot, in receivables. At the time we investigated these companies. I absolutely hate loans unless there is no other way. Cash can come in and then go out with the last thought being the loan. Ultimately we stuck it out and were ok.

The reason we stayed on the fence was that, about 2 months before our crunch, we ran an auction where the previous agent stayed working the deal. She had the property in contract before calling us. She took an advance on the commission from the deal that fell through. The seller wouldn't take the high bid at auction. The property was on the market for another year before closing. The advance was about $20,000.

Remembering this, the commission advances and other types of "I would like a loan" type loans are really debated. I think we would NEED the loan before going that route.

Thanks for the information. I have wondered about the service and the pros and cons. I have not used such a service, but its always niece to have a chain of backup plans.

I saw we save our money and go into this. Geez, 100% to 200% profit... It seems a bit steep.

As long as you treat it as a short term solution. It is not something for those that only look at short term and do not plan ahead. Obviuosly it works. Look how successful you became, because you took a chance! Kudos!

Very interesting comments. It seems successful people have the same attitude. We do what we need to do to keep moving forward. These loans are not for desperate Realtors. They are for Realtors who know they will succeed but just need a little financial help.

One of the things I liked about it was it forced me to pay the loan back out of my closing. Where if it were a bank loan or credit card advance, I probably would have not paid it back as quickly and it would have ended up costing me more money in the long run. That to me was a big plus and a deciding factor.

BB,

These companies are Factors,which make a living on the spread. There are tons of companies out there that loan money on commission, accounts recievable,cars ect.

People get in jams and many times Banks won`t waste their time or effort to assist...

Don`t get me started on banks,,,,

Hi Broker Bryant

It sounds as though your timing was well planned and the calculated risk was worth taking. You had everything in place properly to succeed which is why with HARD WORK you have succeeded and now mentor others. There is risk in any undertaking. Weighing out the bridge between start up and success is what you have written about so well! Thank You!

Bryant- Thank you for this post. I have been very curious about these services but have not really checked them out as I didnt need them. As a single mom and realtor however, there are times when you have to do what you have to do to keep on the track. I too like this approach because it is expensive but it is short term and you dont have to worry about paying off a bank for the next three years.

Like so many others have already said, the key is discipline and using it as a patch and not a crutch. When I've been in the hole, first couple of years in the business when the expenses outran the commission, it was tempting. But i've never taken out one because of the deals that go south all the time. i've borrowed on credit cards and home equity and 401K and everything else, and hopefully won't have to go that road ever again! You know, knowing how many deals don't hit the closing table, these guys probably aren't charging enough in interest...they take on a lot of risk! Would be nice if agents who are having a dry spell could read this and think through both ends of the position of using these guys.

It sounds like you answered your own question. It worked for you and your company. These companies make alot of money off the interest but there needs to be some kind of cap on them. I believe they are useful in situations like yours, but what would have happened if your deal went south and you had no backup? There inlies the problem with those companies. High risk and high penalities. Congrats on your positive experience but everyone should be careful with advance companies and make sure they read all disclosure on penalties for being late.

Cash flow (i.e. the lack thereof) is (if I recall reading this correctly) the NUMBER ONE reason fledgling REALTORS leave the business. How important this obviously is. It's just like any 'credit', though, to be used wisely and only when the deal is real. Coming from a corporate brokerage background we deal with higher dollar amounts, but I remember a guy at one of my old firms that put in a few phony deals to the company billing hopper and asked for some commission advances (internally at the company). The company owner had hired him as a favor for his brother (who was not a dead beat, this guy was though, but his brother had a hugely successful firm). I think he was over $100,000 in hock on the phony deals before it caught up with him when he couldn't get any deals to actually close...

My question is who's doing these types of loans? My suspicion is that a large portion of people accessing these loans are part of the 90% who leave the business before the start of their 5th year. I'm not convinced that many of the newer agents really have the discipline to pay these loans off quickly.

Bryant - I agree they can be an effective stopgap measure. The trouble is, many people get stuck in the gap.

I have seen many of my deals close on a wing and a prayer. This kind of borrowing especially in a market with such a surplus of listings makes me very hesitant. I guess if the deal is very strong it may be an option.

Bryant,

I'm glad this worked out for you and I can understand where it was a "good thing" in your case. Also, you mention further down that it "made" you pay it out of the closing, which you might not have done if it was a charge card.

My opinion is like Leigh Brown, Dave Rosenmarkel and Rebekah Peters. New Agents should thread very carefully before using this type of thing. I would like to think that if someone were planning to use this (or even a charge card), they think very carefully about how committed they are to this business. You have to be a motivated agent to be able to use this tool safely.

We are all glad it worked for you cause here you are!!! Incidentally, my neice is the manager of one in Orlando:)

Bryant, if there weren't a market for these services, those companies wouldn't exist but I, for one, am tired of having to delete their spam e-mails and dump their unsolicited letters.

Bryant - Great Blog - And I agree - these companies can be great ways to load level cash flow in the real estate business.

Bryant,

Thanks for the tips. I was always curious how these companies operated. Sounds like a good SHORT TERM solution for some.

Bryant, a draw versus commission is common in the mortgage industry, but I did not realize that Realtors are able to get commission advances on their listings.

Excellent Post Bryant. Scary though. I don't think (Remember I am a NY) that I could ever trust something like that though. I think that I would probably use a credit card first and pay back. To me a credit card it just "buying me 30 days" I charge and use and pay all back. I dont have much cash on me (I have the buring a hole in my pocket syndrome). If there is a time that I fail to pay all of my charge back - I remove the card from my wallet. I refuse to use it. I hate credit card balances but use credit cards 95% of the time. So, what I am saying is if you know that you are going to have a closing - it might be better to link a credit card to a checking account and do a transfer if you have to - in tight situations and then when the check comes pay that back.

Hi Christine, I'm fortunate I don't have to worry about these things anymore. But at the time, I only had one credit card and it was full. Things were very very tight. WE could have maybe stopped spending money on advertising but when you first get started in business that's the last thing you want to do. However I knew with 70 listings I just needed to buy some time. And it worked.

"Christine aka NY Chic"...I didn't trust it at first. Naturally I read all the fine print. Now bear in mind we had lots of listings when all this happened. Add that to self control and hard work and we had a good game plan. :) TLW...ROAR!

BB and TLW - the key term would be SELF CONTROL. I can say that I see alot of my agents in my offices that spend before they get. and I am NOT talking about on advertising - they tend to pre spend and by the time the closing comes the money is gone in three folds. If by chance that for some reason the deal does not close - LIKE TODAY - the agent is filled with panic - LIKE TODAY. The agent paid bills BEFORE they even got the closing check - KNOWING that I cant pay them for 3 more days. So now they have in theif gut - fret. I hate this. I will admit - I prespend - I know where my closing money is going to go - but I do not write anything until I have the CLEARED bank check in my hand.

IF like you said have SELF control - then yes - I would agree, but if one on my agents came to me and asked me to sign off for them - I would have to refuse.

NOW, you were in a different situation than most of my agents - you had listings and more than one deal going - some of my agents.. don't.

I think that the situations are apples to oranges and you two work as a team - and TLW has a gun, so - I highly doubt that either would spend more and get into a hole. But my agents just might. Get my drift? I totally get yours. And like BB said at the time it was needed to be done and it worked in your favor!

Broker Bryant _ I cringe when I see the terms... but there were times early in my career when I needed my credit cards to get through the winter... and would run out of room... blind faith and determination are what kept me going. Sometimes this business is not for the faint of heart, especially when you are broke and trying to build it.

Bryant, You saw the challenge and you found the solution. And the RE industry is fortunate to have you!

www.homerome.com

Baltmore,Md

DEC

2006

I know a few friends who tried this and were happy they did. I was always afraid to try it and had decided that the easiest option instead was to work on rentals which paid fairly quick.

"Christine aka NY Chic"

I understand perfectly what you are saying. Without self control or discipline with a cash advance they are financially screwed.

I would not sign off if they had no deals either. How in the world will they pay back the cash advance? No collateral there. :)

It is so important for new agents to understand that spending before they fill the pipeline will not work.

Hey they can always file bankruptcy and start over. :) Ha. Ha.

Bet I could have talk you into signing off. I have another Ha Ha for that one. :) I could give you my guns as collateral!

TLW "The Lovely Wife"...This Is A Touchy Topic. Cool Or Is That But?...ROAR!

Enlightening, I've been getting e-mail solicitations (which I usually delete) but it may have caught my attention if I was in a bind. If used as a tool, anything can work, just know how to use it and be disciplined about it.

FEB

2007

Bryant,

You might want to add the folks at www.commissioncapital.com to your list, I just settled my second advance from them. Besides getting me through a tough patch, they were very responsive and really seemed to appreciate the challenges that realtors face.

THanks Steve, I happy to hear you had success with them as well. A commission advance was eesential when I first started my biz. I very handy option if handled correctly.

AUG

2007

Will keep this in mind. I have learned allot of what we "need" vs "want" during this -- no cash flow time. I have actually gotten used to cutting back and back and back and I still manage to have a smile on my face and in my heart because I know that God has my back. So I am pretty good at relaxing and letting tomorrow bring me "whatever". I know its already alright.

I have noted the commission companies and I will use them if I need to and will pass on the information. Again,you have shared a good tip with us.

You are so right, this is our business and we have to be smart about how we run it. Resources are key. Thanks.

SEP

2007

This is a service that I certainly would be interested in. However, it would be very scary for me. In my 4th month of business (July) I had 5 closings scheduled. Not a single one of them made it to closing... I ended up with zero. At this point in my career it would have ruined me if I had taken out this type of loan. I'm very low on cash, and only had 2 closings that next month (totaling about $3800.00 in commissions).

SEP

You forgot the oldest commission factoring company of them all. Commission Express started the whole Real Estate commission factoring concept back in 1992. Their website is www.commissionexpress.com

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