Factoring Commissions: How It Really Works Most of us like to get paid for our work, the sooner the better. But in real estate this is a major problem because brokers are routinely paid weeks and months after their work is completed. In the usual case, brokers are hired to find a buyer or locate a property consistent with client requirements. Brokers who list homes, for example, generally earn a fee when they find a purchaser who is "ready, willing and able" to buy. The catch is that a transaction signed today may not settle for 30 to 60 days into the future, and sometimes longer. The result is while the broker's work is done, the broker's fee is sitting idle somewhere in the paperwork until closing. Working now and getting paid at some distant moment can produce significant cashflow problems. Keeping a healthy amount of liquid cash for slack times is one solution, as is short-term borrowing. But another choice to look at the commission fees from real estate transaction agreements as assets that can be financed. Usually when we think of "financing" we think of "loans," but the solution to delayed commission payments is to "factor" them. In broad terms, factoring works like this: - Future commissions are seen as accounts receivable with a given market value.
- A "factor" such as a company or individual buys the accounts receivable. There is no loan. Because there is no loan, the usual rules which relate to lending do not apply.
- The value represented by the accounts receivable are now due to the factor.
- The accounts receivable are an asset for which the factor pays cash -- but at a discount.
- Because the factor is not making a loan, the broker's credit is untouched. Factors are interested in the quality of the asset, not who gets the check or their credit rating.
Given marketplace experience, factors take a few extra steps to protect their interests. First, factors won't buy a contract for the full amount of the commission -- instead a broker might get 70 to 85 percent of the fee up-front, with the balance -- called the "hold back" or "reserve" -- paid at the time of closing, less any discount or fees. Second, if the licensee is a salesperson or an associate broker, the factor will require an assignment from the supervising broker to transfer ownership of the fee. Factors argue that they have substantial risk when buying accounts receivable, and thus are entitled to a significant discount, such as $1 per day per $1,000 outstanding (that's $365 a year per $1,000 on an annualized basis) or a percentage, say 8 percent of the commission amount for an asset outstanding 60 days (on $1,000 an 8 percent discount would be $80 over 60 days, or $480 per year). The usual formula is the longer the term of the account receivable, the greater the risk, and thus the higher the discount. These are considerable discounts, and yet factors may still be attractive to brokers in certain circumstances. Factors can convert accounts receivable into real cash in a day or two, and the actual out-of-pocket cash expense of selling to a factor -- as opposed to the percentage amount -- may be acceptable. Also, the cost of factoring services can be tax-deductible -- for specifics check with a tax professional. Once an account receivable has been sold the factor owns an asset. But what happens if the deal falls through? In this situation, the broker has promised to deliver an asset but has failed to perform. The problem can be resolved by paying back the factor (buying back the asset), getting a loan from the factor or a third party, or trading the fee earned from one agreement for the fee to be earned in a future agreement. There are now several sources willing to purchase realty commissions, so it's possible to compare terms. Those who buy such assets include: Agent's Equity
Commission Advance
Commission Connection
Commission Express
eCommission.com
UpFront Commssions
The Common-Sense Mortgage The latest edition of The Common-Sense Mortgage -- in its second printing since September -- is now available in bookstores online and off. In print for nearly 15 years and widely recognized as the standard consumer guide to real estate financing, it's described by syndicated columnist Robert Bruss as "an encyclopedic, detailed summary of just about everything real-estate investors, agents, lenders and borrowers want and need to know about mortgages." "On my scale of one to 10," says Bruss, "this superb book rates a 10." "This continues to be the most, lucid, comprehensive treatment of the subject on the market," says The Real Estate Professional. "If you want solid, reliable information about residential real estate financing, written in a thoughtful, convincing style, this is your source." For additional information, press here.
Question Of The Week Q We have withdrawn from a purchase because the financing we wanted was unavailable. Now the sellers refuse to give back our deposit. What can we do? A Contact a local attorney who handles real estate matters and have your purchase agreement reviewed. For instance, is there a financial contingency which gives you a right to withdraw from the transaction without penalty? Are there other clauses which would allow you to withdraw? If the deposit is being held by a realty broker, is it in an escrow (trust) account? Is your approval required before the money can be released to the sellers? Weekly Resource One of the funniest programs on public radio -- or any radio -- is Car Talk. Car Talk also has a site which includes useful auto repair tips as well as some of the, er, more curious content online. For a good chuckle, take a look at their listing of the 10 Worst Cars of the Millenium. | 
