“I don’t want to chase money from a desperate person”: Commission advancers pull back on broker lending
Transaction volume has plummeted since mid-March for the alternative financing service that provides agents with cash upfront for in-contract deals
In an industry of independent contractors whose fortunes hang on the ebb and flow of dealmaking, little-known commission advancing companies provide a key source of liquidity for residential brokers in need of cash between closings.
But with the coronavirus crisis having slammed the brakes on most home sales, this alternative financing channel is also facing unprecedented stress. And just like landlords and lenders across the country in recent weeks, commission advance companies are having tough conversations with the brokers who now owe them money.
“We have a client right now with Corcoran, and she called us up to say she needs the money real bad and her closing is delayed,” said Dino Liso, president of Commission Express in New York. “And she’s in default with us [Commission Express offers a 30-day grace period for payments] which means she would lose a lot of money. I said to her, ‘Don’t worry about it. Just worry about your health. Let’s get the deal closed, and we’ll figure it out later.”
The basic concept of commission advances is straightforward. A broker with a deal in contract sells the right to collect the commission to a third party in exchange for the cash up-front. Usually, about 90 percent of in-contract deals will close on time, in a couple of months. Fees range typically from around 5 to 15 percent of the advanced commission. If one deal falls through, a broker can roll the obligation over to another pending deal.
But the pandemic has created uncertainty for in-contract deals in the pipeline. While more brokers may now need a cash advance to help tide them over amid the economic tumult, commission advance firms are also wary of how solid a new deal may be.
“When someone comes to me and they’re really desperate for the money, it’s not that I don’t want to lend them the money — I don’t want to chase money from a desperate person,” Liso said. “So we try to stay away from that type of transaction.”
Commission advancers said the coronavirus outbreak has led their business to drop by half industry-wide. Advances that are still being made are largely going to established agents at national brokerages that have long-standing relationships with commission advancing companies.
“We have seen an increase in our affiliates using commission advance services over the last three weeks, particularly in states hit harder by Covid-19, such as California and New York,” said RE/MAX spokesperson Nick Bailey. RE/MAX counts companies like eCommission and Premier Commission as part of its “approved suppliers” program, a list of vetted business service providers.
Besides the rising uncertainty surrounding in-contract deals, the general slowdown in residential markets is also taking a toll on the early payday business.
“Agents need deals to go pending in order to utilize our service, and if deals aren’t going pending then they don’t have anything to advance on,” said Stuart Clapick, manager of Arizona-based Residential Advance. “I would say that the industry right now is down 50 to 60 percent in total volume.”
A spokesperson for Corcoran Group — whose brokers have also tapped the service — said the use of commission advances is a personal choice. “Giving them this alternative empowers our agents to make strategic decisions that work best for them,” the spokesperson said. Like other brokerages in recent weeks, Corcoran has enacted across-the-board pay cuts, furloughed some staff and suspended ad budgets for April.
In mid-March, broker Edward DiMotta turned to a commission advance when he found himself in need of cash. The co-owner of La Rosa Realty’s St. Petersburg, Florida office was contending with owners at a couple of his listings who were refusing to allow showings. That was casting doubt on his upcoming deal pipeline.
“The main thing is I wanted to keep my credit good, not use up my reserves and then have nothing to pay the bills with,” DiMotta said.
Typically, he would have turned to La Rosa’s in-house commission advancing service, which he had used in the past to cover startup costs for his new franchise. But with that spigot suddenly turned off, DiMotta turned to eCommission, which provided the $4,000 cash advance on one of his in-contract deals; he paid a fee of about $600, amounting to 15 percent. The deal closed two weeks later.
“It’s good, it’s quick, and it wasn’t a big hit for us,” DiMotta said, while noting that eCommission’s fee — which included a 25-percent discount offered to new customers — was about twice as much as the in-house service.
While DiMotta’s deal closed in a matter of weeks, the coronavirus is making such fast turnarounds less common, and commission advancers have had to adjust their approach to new deals.
Closing on a residential sale is contingent on a variety of factors, almost all of which have been complicated by the coronavirus and social distancing measures. Mortgage approvals, appraisals, employment verification, and co-op board signoffs are more uncertain than they were a month ago.
And the proliferation of “coronavirus clauses” in residential contracts nationwide means that buyers can still delay or terminate deals due to events beyond their control.
“Generally, what we’ve seen is definitely an increase in demand from [agents] we wouldn’t have seen before or considered before, and also a downshift in the type of transaction that we would want to advance on,” said Jake Kuchek, director of California-based Express Cash Flow, a company that does commission advances across the country. His firm has now placed a greater emphasis on minimizing risk.
“We kind of have our own matrix of what gets approved and what the fees are in a normal real estate market, and we’re obviously changing that quite a bit during this time,” he added. “We wouldn’t do any advances in New York right now.”
Only about 20 percent of in-contract deals are now closing on time or within a 10-day grace period — compared to what had been an on-time closing rate of at least 85 percent, he added.
Ashley Joffe, managing principal of New York-based Premier Commission said its policy is now to “batten down” underwriting without raising fees.
eCommission, widely regarded as the largest player in the industry, has also held off on raising fees. The company claims to have “funded” over $1 billion in commission advances over its 20 years in the business. But CEO Sean Whaling said agents “should look carefully at their pending pipeline, choose the sale with the highest confidence in closing, and be prepared to substitute a different transaction if the current crisis impacts their closing.”
Commission Express’ Liso says his franchise has shifted to mainly “collection mode.” He added, “we’re getting a lot of calls for commissions advances, but we’re reluctant at this point to take on any more business unless it’s a 1031 exchange” with a high likelihood of closing.
“If things go on and on and on, the poor guy I gave ten grand to has to pay us back 16, 17 thousand,” Liso said, referring to the increased amount owed following a default.
Need for speed
Various government measures enacted in response to the coronavirus crisis, including parts of the historic $2 trillion federal stimulus package, give struggling brokers a wider range of options for dealing with immediate cash flow concerns.
Before the crisis, brokers did have other options, such as borrowing from a bank. But such financing has always been harder to qualify for than a commission advance.
“Commission advances are more costly, but not if your time is valuable,” said Jonathan Edelstein, a partner at New York-based Concord Commission Advance. With a bank loan or the stimulus program, he said, “you’re spending countless hours doing homework, collecting documents, applying, and then once that’s all done, you’re still waiting and praying for a ‘yes.’”
Many commission advance firms say their services are delivered in a matter of hours with just a few clicks of a mouse. But that was before the virus crippled the economy, cutting deeply into home sales across the U.S.
Like a loan, but not
Some commission advance companies interviewed for this story referred to their services informally as “lending” or “loans.” But from a legal standpoint, there’s an important difference.
“It would be illegal to do what we do if it was a loan,” Liso said, noting that the returns on commissions advances, when extrapolated to a full year, are typically far above interest rates allowed by usury laws. “It’s a factoring arrangement — we’re purchasing a receivable.” Doctors and lawyers, he added, “factor their receivables. the garment industry and large companies factor their receivables, and this is the same thing.”
Commission advance companies have qualification requirements far less stringent than do banks, and more tailored to the real estate industry — such as a broker’s license and Multiple Listing Service history.
Unlike traditional lenders, commission advance firms have fewer options if a broker is unable to pay up — a fact that justifies higher returns, in the industry’s view. Though the laws vary from state to state, because the service is generally held to be distinct from lending, it is not subject to usury laws that limit the amount of interest a company can charge, though there have been legal challenges.
In 2016, VIP Limousine Services sought to defend a lawsuit filed by New York-based Platinum Rapid Funding Group. The Oklahoma-based limo company argued that a cash advance it received from Platinum was usurious. A New York State Supreme Court judge dismissed the argument, saying while the repayment requirement was onerous, it was not usurious because it did not “constitute a loan or forbearance.”
But not all jurisdictions see things the same way. In 2013, an Ohio court ruled that real estate commission advances are loans, and the practice remains illegal in that state.
“We really try to find receivables that we know are going to close,” Liso said, meaning in-contract deals. “We’re not a payday company. A lot of companies do that, but we don’t.”
The business model in its current form has been around for about two decades. The two biggest and oldest names are eCommission and Commission Express. Operating on a franchise basis, Commission Express’ New York shop was its second in the country after Washington, D.C. Meanwhile, eCommission is now owned by private equity firm Lightyear Capital and has an endorsement from Barbara Corcoran.
The 2008 recession forced many of the commission advance companies out of business, eCommision’s Whaling said. “Housing and mortgages led that crisis,” and smaller companies without adequate capitalization or experience disappeared. Since then, new providers have entered the space, which has been growing, largely under the radar.
Another survivor of the recession was Atlanta-based RealCommissions, founded in 2004. “We tend to be more conservative than the other commission advance service providers, and that is why we were successful in surviving the 2008-2009 financial crisis,” founder and CEO David Siegelman said. “And fortunately we’ve been growing rapidly since that time.”
While the coronavirus represents perhaps the commission advance industry’s toughest test, Residential Advance’s Clapick said he was optimistic.
“Our forecast is that the real estate market will likely recover relatively quickly,” he said. Because the economic turmoil isn’t centralized in real estate the same way it was over a decade ago, Clapick said, he expects “to see a resurgence in demand when this is over.”