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Commission Advance: Don't Stand in the Payday Loan Line

Dec 14, 2016

Many real estate brokers and agents are experiencing some financial problems keeping their bills paid while waiting for the next commission check.  That’s good news for the “commission advance” industry, but not for the unsuspecting agents.

Most real estate agents do not live in the “Payday Loan” world.  They would be appalled at the thought of standing in line at one of those red-and-yellow buildings with unsuspecting borrowers who are signing up for small loans at outrageous interest rates just to get enough ready cash to avoid eviction from their homes or repossession of their cars.

But the “Payday Loan” business is actually thriving among real estate agents.  It doesn’t use those gaudy red and yellow signs and there are no lines and no bulletproof glass cages.  For real estate agents, the process takes place online under the more dignified name of “commission advance” programs.  But the scheme is very much the same—and the results are just as disastrous.

Payday loan schemes charge an up-front fee of 15 to 20 percent – but that just covers a two-week loan.  The actual APR is 390 to 520 percent.  The fee is deducted from the proceeds of the loan.  Each time the loan is renewed, the same fee is charged.  In many states, there is no limit on the number of times such loans can be renewed.  The Center for Responsible Lending says that 80 percent of payday loan customers take out more than one loan per year and that 90 percent of those repeat borrowers will take out a second loan before their next paycheck.

The Commission Advance Similarity

So how does that compare with the “Commission Advance” programs?  Let’s take a look.

Although the e-mails touting the commission advance programs give little indication regarding the cost of the service, in the FAQ section of the website of one of the most popular, e-Commission, the following statement appears:

“The cost varies depending on the amount of commission you would like to receive and your credit history. Unlike credit cards or lines of credit which are usually unsecured products, eCommission is much easier to obtain because your commission secures your advance. Whether your credit rating is excellent, in the rebuilding process or somewhere in between, our variable fee structure is tailored to meet your expectations. In a typical example, to receive $3,000 from one of your pending commissions on a sale closing in less than 40 days, the cost would be $286.00 plus a refundable reserve.” 

The explanation of the “reserve fee”: 

When you receive an eCommission, the cost is calculated until the day of closing. The reserve fee covers the period after closing and is held back from the net advance that you receive. The reserve provides you with a total of 20 days after the closing date for your eCommission to be repaid by the title / escrow company, attorney or broker. … It is important to understand that a portion of the reserve is refundable to you, depending on how quickly funds are re-paid after closing.”

It’s All About APR

The only way to compare the actual cost of a loan is to figure out the APR.  So let’s calculate the annual percentage rate (APR) for the typical commission advance:

If it costs $286 to borrow $3,000 for 40 days (not counting the amount withheld as the “reserve”), the annual percentage rate, based on a 365-day period, would be 87 percent.

For “Bridge Listing Advances” (based on a minimum of two active listings that are not yet under contract), the money is advanced assuming that one of the two listings will go under contract.  However, the initial fee of $250 on a $3,000 advance covers only the first month.  An “extension fee” of $167 is charged each month thereafter.  If it takes six months for one of the listings to sell and go to closing, the agent would pay fees of nearly $1100 for that six month loan—an APR of 73%.

Compared to the commission advance, taking a cash advance on a credit card, although by far not the best solution, will likely be a lot more advantageous.  Even at an APR of 30 percent for a cash advance, the cost to borrow $3,000 for 40 days would be less than $100.  Waiting six months to repay that advance would cost less than $500.

A Vicious Cycle

And the worst thing about falling into the commission advance trap is that when the next deal finally closes, the money has already been spent.  The agent then needs to put his or her next transaction into hock just to keep afloat.  It’s a vicious cycle, and the agents find themselves singing along with Tennessee Ernie Ford, “I Owe My Soul to the Company Store!”

 (For those of you who weren’t around when “Sixteen Tons” was at the top of the Billboard charts in the mid ‘50s, the chorus of that song about the plight of poor coal miners is: 

You load sixteen tons, what do you get?  Another day older and deeper in debt.  Saint Peter, don't you call me, 'cause I can't go.  I owe my soul to the company store.)