Articles

September 6, 2024

Mid-20th Century Developments: Real Estate Agent Salary and Practices

Kameron Kang, CEO of homebuyerwallet.com

Introduction

The mid-20th century was a transformative period for the real estate industry in the United States, marked by significant innovations and legal advancements that shaped modern real estate practices. Two of the most crucial developments during this time were creating and widespread adoption of the Multiple Listing Service (MLS) and strengthening legal frameworks surrounding fiduciary duty and agency law.

Multiple Listing Service (MLS)

Origins and Evolution

Early Beginnings:

The concept of sharing property listings among real estate agents dates back to the late 19th and early 20th centuries. In some communities, agents would gather in local offices to exchange information about properties they were trying to sell. However, this was an informal and limited practice, often confined to small, local networks.

Development in the 1950s:

The formalization of the Multiple Listing Service (MLS) in the 1950s revolutionized the real estate industry. The MLS system allowed real estate agents and brokers to share information about properties they had listed with a broader network of agents, increasing the exposure of these properties to potential buyers. This system was facilitated by local real estate boards and associations, many of which were affiliated with the National Association of Realtors (NAR).

Impact on Real Estate Marketing

Increased Collaboration:

The MLS system fostered unprecedented collaboration among real estate agents. By pooling their listings, agents could offer buyers a much more extensive selection of properties, regardless of which agent or brokerage originally listed them. This cooperation helped expedite sales and increased the overall efficiency of the real estate market.

Standardization of Information:

The MLS also standardized the way property information was presented. Listings included essential details such as property dimensions, features, price, and photos, making it easier for agents to compare properties and match buyers with suitable homes. This standardization contributed to the industry’s professionalisation by ensuring all agents had access to accurate and consistent information.

Exclusive Right-to-Sell Agreements:

The rise of the MLS was closely tied to the increasing use of exclusive right-to-sell agreements, where a seller would grant their agent the exclusive right to market the property through the MLS. In exchange, the agent would commit to working diligently to sell the property, knowing they would receive a commission regardless of which agent ultimately found the buyer.

Solidifying the Roles of Buyer’s Agents and Seller’s Agents

Clear Role Definition:

The MLS system helped solidify the distinct roles of buyer and seller agents. The listing agent (representing the seller) would post the property on the MLS, and buyer’s agents could access these listings to find properties matching their clients’ needs. This clear separation of roles reduced conflicts of interest and made the process more transparent for all parties involved.

Commission Sharing:

With the MLS, sharing commissions between listing and buyer’s agents became more formalized. When a property is sold, the commission is typically split between the two agents, incentivizing buyer’s agents to actively search the MLS for properties that would meet their clients’ needs.

Fiduciary Duty and Agency Law

Strengthening of Legal Frameworks

Historical Context:

Before the mid-20th century, the legal concepts surrounding agency in real estate were less formalized. Agents often represented both buyers and sellers in the same transaction, leading to potential conflicts of interest and unclear duties. As real estate transactions became more complex and involved more significant sums of money, the need for more robust legal frameworks became apparent.

Development of Fiduciary Duty:

The mid-20th century saw a significant shift towards recognising fiduciary duty in real estate transactions. A fiduciary duty is a legal obligation that requires an agent to act in their client’s best interest, with loyalty, care, and full disclosure. This concept became central to real estate law during this period, ensuring that agents were legally bound to prioritize their client’s interests above their own.

Critical Elements of Fiduciary Duty

Loyalty: Agents were required to act solely in the best interest of their client, avoid conflicts of interest, and not profit from the transaction without their client’s knowledge and consent.

Confidentiality: Any information shared by the client with the agent had to be kept confidential, even after the transaction was completed unless the client gave explicit permission to share it.

Disclosure: Agents must disclose all material facts about the property or transaction that might affect the client’s decisions. This included any issues with the property, potential legal complications, or other pertinent information.

Obedience: Agents were required to follow their clients’ lawful instructions, even if they personally disagreed with their decisions, as long as those instructions did not violate legal or ethical standards.

Reasonable Care and Diligence: Agents had to exercise competence and care consistent with professional standards, ensuring they performed their duties effectively and protected their clients from potential harm.

Formalization of Agency Relationships

Agency Agreements:

The legal formalization of agency relationships led to the widespread use of written agreements between agents and their clients. These contracts explicitly outlined the agent’s duties, the scope of their authority, and the nature of the fiduciary relationship. This clarity helped protect clients and agents by ensuring all parties understood their rights and obligations.

State Regulations:

Throughout the mid-20th century, state governments began to enact laws that further defined and regulated agency relationships in real estate. These laws often included licensing requirements, continuing education mandates, and standards for ethical behaviour. State real estate commissions were established to oversee these regulations and enforce compliance, ensuring that agents adhere to legal and ethical standards.

Impact on Real Estate Agent Salary and Practices

Professionalization and Trust:

The emphasis on fiduciary duty and agency law professionalized the real estate industry, raising the standard of care expected from agents. Clients became more aware of their rights and more confident in their agents’ ability to represent them effectively. This shift also reduced instances of fraud and misconduct, as agents were held to higher legal and ethical standards.

Summary

The mid-20th century marked a period of significant innovation and legal development in the US real estate industry. The establishment and widespread adoption of the Multiple Listing Service (MLS) transformed how properties were marketed and sold, fostering greater collaboration among agents and solidifying the roles of buyer’s and seller’s agents. Concurrently, the strengthening of fiduciary duty and agency law provided a robust legal framework that formalized the responsibilities of real estate agents, ensuring they acted in the best interests of their clients. These developments laid the groundwork for today’s modern real estate practices, where professionalism, transparency, and client-focused representation are central.

Real Estate Agent Compensation in the Mid-20th Century

During the mid-20th century, compensation for real estate agents became more standardized and formalized, reflecting the increasing professionalization of the industry and the adoption of new systems like the Multiple Listing Service (MLS). Here’s a detailed look at how real estate agents were compensated during this period:

Commission-Based Compensation

Standard Commission Rates

Prevailing Commission Rates:

By the mid-20th century, the commission-based compensation model was the dominant payment method for real estate agents. The typical commission rate during this time ranged from 5% to 6% of the property’s sale price. This rate was generally consistent across the country, though there could be some regional variations depending on the local market conditions.

Standardization through MLS:

The advent of the MLS further solidified these commission rates. Since the MLS facilitated the sharing of listings among agents, it also standardized how commissions were divided between the listing agent (representing the seller) and the cooperating agent (often representing the buyer). Typically, the commission was split 50/50 between the agents or their brokerages, meaning each agent would receive around 2.5% to 3% of the sale price.

Commission Splits with Brokers

Broker-Agent Relationships:

Most real estate agents worked under the supervision of a licensed broker, who provided office space, marketing resources, legal oversight, and other support services. In return, brokers received a portion of the commission earned by the agent on each sale.

Typical Commission Splits:

The typical split between the broker and the agent was often 50/50, but this could vary depending on the agent’s experience, productivity, and the brokerage’s policies. More experienced or high-performing agents could negotiate better splits, such as 60/40 or even 70/30, in favour of the agent. Some brokerages also offered tiered commission splits, where the agent’s share would increase as they reached certain sales thresholds.

Influence of the MLS on Compensation

Cooperation and Commission Sharing

Co-Brokerage Agreements:

The MLS system encouraged cooperation between different brokerages by facilitating co-brokerage agreements. Under these agreements, the listing broker would offer a share of the commission to any cooperating broker who brought a buyer to the table. This practice ensured that buyer’s agents were compensated for their efforts, even if they were not the ones who initially secured the listing.

Commission Offers in MLS Listings:

Listings in the MLS typically included details about the commission offered to cooperating brokers. This transparency helped standardize compensation practices across different markets and made it easier for agents to understand what they would earn from any transaction.

Impact on Buyer’s Agents

Incentives for Buyer’s Agents:

The development of the MLS and the practice of commission sharing provided solid incentives for agents to represent buyers. Since buyer’s agents could access the full range of available properties through the MLS and be assured of receiving a commission if they secured a sale, this role became increasingly attractive and viable as a career path.

Commission Negotiation:

While the seller’s agent usually determined the commission split offered to the buyer’s agent, there was still room for negotiation. In competitive markets, buyer’s agents might negotiate for a higher split, especially if working with high-value clients or properties.

Alternative Compensation Models

Flat Fees and Reduced Commissions

Emergence of Discount Brokerages:

Although commission-based compensation was the norm, the mid-20th century also saw the emergence of discount brokerages that offered lower commission rates or flat-fee services. These brokerages catered to cost-conscious sellers willing to sacrifice some services for lower costs.

Flat-Fee Services:

Some agents or brokerages began offering flat-fee services for specific tasks, such as listing a property on the MLS or providing essential marketing support. These services were often targeted at sellers who preferred to handle most of the transactions themselves but needed access to specific professional resources.

Retainers and Hourly Fees

Retainer Fees:

Some agents or brokers charge retainer fees in more complex or high-value transactions, particularly in commercial real estate. These fees are paid upfront and guarantee the agent’s services for a specific period or project. Retainers are often deducted from the final commission but provide agents with a measure of financial security during lengthy transactions.

Hourly Fees:

While less common in residential real estate, some agents, particularly those offering consulting services or working in commercial real estate, charged hourly fees for their time. This model was used when a transaction required extensive research, negotiation, or specialized expertise.

Increased Regulation and Consumer Protection

Licensing and Ethical Standards

State Licensing Requirements:

As the real estate industry became more regulated, state governments began to impose stricter licensing requirements on agents and brokers. These regulations often included minimum education and experience requirements, exams, and ongoing professional development. The increased regulation helped ensure that agents were competent and knowledgeable, supporting the commission-based compensation model by maintaining consumer trust.

Ethical Standards:

The National Association of Realtors (NAR) significantly promoted ethical standards within the industry. The NAR’s Code of Ethics, first adopted in 1913 and continually updated, provided guidelines for fair and honest dealings with clients, which helped maintain the integrity of commission-based compensation.

Impact on the Real Estate Industry

Professionalization and Trust

Increased Professionalism:

The mid-20th century saw a significant increase in real estate agents’ professionalism. The standardization of commission rates, the widespread adoption of the MLS, and the strengthening of fiduciary duties and agency law all contributed to this trend. As a result, real estate became a more respected and trusted profession, with agents earning a reputation for providing valuable services that justified their commissions.

Consumer Awareness:

Consumers became more aware of the value real estate agents brought to the transaction, including their market knowledge, negotiation skills, and ability to navigate complex legal and financial processes. This awareness helped to solidify the acceptance of commission-based compensation as a fair and reasonable way to pay for real estate services.

Summary

During the mid-20th century, real estate agent salary and compensation were predominantly commission-based, with standard rates typically ranging from 5% to 6% of the property’s sale price. The advent of the MLS further standardized these rates and facilitated commission-sharing between listing and buyer’s agents. Broker-agent relationships often involve a commission split, with brokers providing support services in exchange for a portion of the commission. Alternative compensation models, such as flat fees and retainers, emerged but remained less common. The professionalization of the industry, driven by increased regulation and ethical standards, helped to reinforce the commission-based model as the primary means of compensation for real estate agents during this period.