A lot of commissioned sales people, such as REALTORS®, don’t live from paycheck to paycheck, but from deal to deal. They literally make nothing until a closing happens. This unpredictable cash flow can cause a dilemma when regular bills need to be paid on a monthly basis. If someone does not save enough money, they might need to carry a balance on their credit card or postpone paying a bill. Others may be able to pay the bills, but want to take advantage of an investment opportunity, home or other purchase and want to monetize this future cash flow before they actually receive it.
The Agent Mindset on Commissions
Virtually any salesperson, be it a real estate agent, a travel agent, someone who sells airplanes, etc., does the math when they sign someone up for a listing agreement or a purchase contract, even if there are contingencies or the sale is not fully consummated. If the real estate agent knows the house is worth about $300,000, the seller is listing at 6% for at or just barely over fair market value, and the seller seems realistic and motivated, the salesperson is already going to be thinking: I will make $9,000 if there is a buyers agent and $18,000 if I double-end it.
The truth is that with the Internet and the MLS system, the biggest hurdle to a listing agent earning money is not knowing how to market strategically, or cold calling potential buyers, or other tasks. If you can convince a seller to sign a listing agreement with you on a typical home that is priced realistically, you will be able to sell the home and earn a commission, REGARDLESS of what marketing legwork you put in after that (there are flat fee MLS companies that operate on the premise that all other marketing is a waste and the MLS sells home, period). To be successful, you have to have an optimistic mindset, so someone who is overly conservative and does not even think about the possibility of a commission until after the deal is closed and it is paid to them, probably is not going to fit the profile of a successful agent.
When is it Safe to Lend Money Against a Commission
There are a few different established companies that lend against a future commission. A few examples are: eCommission, Commission Express, and Advanced Commission. They generally lend against your future commission amount minus about 12%-18%. They require the borrower to have a real estate license and have an under contract listing that is in escrow and scheduled to close in no more than 120 days. That short time frame makes the actual annual percentage rate astronomically high. Someone could compete against these national lenders by offering a better rate or taking on more perceived risk.
National lenders are not going to understand fully the local market. They are more prone to make mistakes. For instance, a property might be slightly overvalued and unlikely to appraise. The buyer’s agent or buyer’s lender might have a bad reputation and a bad track record of deals that often fall out of escrow. They will not loan against properties that are not yet in escrow. However, someone who is local and understood the market might be willing to lend money on a listing that is not under contract because they are extremely confident that it will go under contract soon. They might know that an entry level deal in Arcadia in Phoenix, or West Hollywood, or the East Bay in Northern California is going to get multiple offers within the first few days of being listed. They also might be able to avoid deals that are in contract but unlikely to find a new buyer if they fall out of escrow.