Should Real Estate Agents Get Commission Advances?

 Joseph Giovannelli  |    January 13, 2010

The following is a paid advertisement and is not necessarily representative of the opinions of the Wisconsin REALTORS® Association.

Like most businesses, the typical real estate brokerage has a line of credit with a local bank to smooth out the cash flow peaks and troughs. This enables the brokerage to operate smoothly and uniformly throughout the year. The brokerage can meet its recurring administrative payroll, pay branch office expenses and maintain consistent advertising to recruit new agents. When the brokerage income during the seasonal slow periods fails to meet the expenses, the line of credit kicks in and the brokerage checks are honored. That way, all obligations to vendors and brokerage employees are met. As business increases and income from settlements hits the brokerage bank account, the line of credit is automatically paid down. That’s how it works.

If this arrangement is so vital and necessary for the brokerage business to be successful, why is it not necessary for the success  of the independent contractor agents (who are indeed running independent businesses within the brokerage)? Many agents have teams that include employees who need to be paid regularly. Many are “100-percent” agents with office space or desk fees that must be paid monthly. Most have listings that need to be advertised and promoted. All have the standard agent expenses:

  • Personal promotion
  • Productivity tools
  • License fees
  • Association dues
  • E&O insurance
  • Automobile
  • Cell phone
  • Continuing education
  • Self employment tax

Just like the brokerage needs a reliable income stream to pay its expenses, the agents operating  their businesses within the brokerage also need a reliable income stream to pay their expenses.The problem is, the professional agent who sells 24 houses a year does not sell two houses a month. If that were the case, the agent would likely not need a business line of credit. But just like the brokerage, the agent’s income during the seasonal (or other) slow periods can fail to meet expenses. In those cases, the agent’s only recourse was to ask the brokerage for an advance on pending commissions. If the brokerage gave the agent an advance and the sale kicked out, the brokerage had the unpleasant experience of collecting the amount owed from the agent. This created an adversarial relationship between the brokerage and agent. If the brokerage was unable to make the advance, the agent would simply have to wait for settlement to meet financial obligations. This often resulted in the agent having a poor credit rating and being unable to qualify for credit cards or other loans. In some cases, it caused the agent to leave the real estate business entirely, which was certainly not good for the brokerage. Obviously, this situation contributed greatly to the turn-over of agents with its concomitant expenses to the brokerage for recruiting and training new agents. But the brokerages in general had little appreciation for the plight of the agents and never addressed the issue.

Things changed in 1992 when a working broker in the Washington, D.C., area, who was a Million Dollar Club Life Member and Top Producer Life Member, had often experienced cash flow problems despite being one of the top income earners in the area. He concluded that if he had a need for a commercial commission advance service, other top agents and working brokers had a similar need. After having had a successful twenty year sales career, John Stedman teamed with Joe Giovannelli, another 20-year broker, to launch Commission Express, the first commercial commission advance company in the country. They spent the next five years developing the protocols and procedures to enable agents to quickly and easily sell their pending commissions (accounts receivable) at a discount. Unlike loans that required a good credit rating and took several days to be approved, their’s was a business to business “sale of an asset” transaction under the Uniform Commercial Code, which has been adopted by all 50 states.

Having fully developed the process, they franchised Commission Express in 1996 to provide fast and reliable commission advance services on a local and personal basis. This enables agents across the country to easily solve their cash flow problems. Since then, Commission Express has provided over 80,000 commission advances totaling more than $400 million through franchised offices in 32 states.

Unlike credit based lenders, Commission Express is a factoring company purchasing accounts receivable primarily on the strength of the asset (commission) being purchased. The agent makes an application online or with forms that are faxed and directs either the real estate company or settlement agent to pay the commission to Commission Express when the transaction settles, typically in 30 to 90 days. The agent is charged a discount of 8 percent to 14 percent. There is a holdback or reserve of 10 percent that is charged should the receivable not be redeemed within the 30 day grace period after the projected settlement date. Otherwise, the holdback is paid to the agent when the receivable is redeemed. The advance of 76 percent to 82 percent is paid to the agent, usually within 2 days, and often the same day that application is made. In most cases, the agent receives a total of 86 percent to 92 percent of the original commission. It’s quick, easy and available even to agents with credit problems due to the irregular income associated with commissioned sales positions. And with the current condition of our banking system, more and more businesses are turning to factoring companies to finance their operations.

Joseph Giovannelli is a licensed real estate broker. He was first licensed in 1971 and over the next 38 years owned his own companies and managed offices for several of the largest companies in the Washington, DC area. He is co-founder and currently serves as Vice President of Commission Express National, Inc.

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