Introduction
The early 20th century was a transformative period for the real estate industry in the United States, marked by the formalization of professional standards and the establishment of organizations that would shape the industry for decades. It saw the establishment of practices and standards for determining real estate agent salaries or commissions. Two key developments during this time were the founding of the National Association of Real Estate Exchanges (which would later become the National Association of Realtors or NAR) and the shift towards exclusive representation in real estate transactions. Here’s a closer look at these critical developments:
National Association of Real Estate Exchanges (NAREE) – 1908
Foundation and Purpose
Establishment:
The National Association of Real Estate Exchanges (NAREE) was founded in 1908 in Chicago, Illinois, by a group of real estate professionals who recognized the need for a national organization to represent their interests. The association was created to unite real estate boards from various cities nationwide, creating a unified voice for the industry.
Mission:
The primary mission of the NAREE was to standardize real estate practices, promote ethical conduct, and provide a platform for real estate professionals to share knowledge and best practices. The founders aimed to elevate the profession by ensuring real estate agents operated under ethical guidelines and standards to protect clients and the industry’s integrity.
Professionalization of the Industry
Ethical Standards:
One of the NAREE’s first major initiatives was developing a Code of Ethics, which was adopted in 1913. This code emphasized the importance of fiduciary responsibility, honesty, and fairness in dealings with clients and other real estate professionals. The Code of Ethics set the foundation for the professional conduct expected of real estate agents and remains a cornerstone of the National Association of Realtors (NAR) mission today.
Education and Certification:
The NAREE also played a crucial role in promoting education and certification for real estate professionals. The association established training programs and resources to help agents improve their skills and knowledge, leading to the development of more formalized and standardized practices across the industry. This emphasis on education helped to distinguish real estate agents as professionals with specialized expertise, rather than mere intermediaries.
Advocacy and Influence:
The NAREE quickly became a powerful advocacy group for the real estate industry, lobbying for legislation and regulations that would benefit real estate professionals and property owners. The association influenced public policy on property rights, taxation, and urban development, cementing its role as a critical player in American real estate.
Evolution into the National Association of Realtors (NAR)
Rebranding and Expansion:
In 1916, the National Association of Real Estate Exchanges was rebranded as the National Association of Realtors (NAR). This change reflected the association’s broader mission to represent all real estate professionals, not just those involved in exchanges. The NAR continued to grow, expanding its membership and influence throughout the 20th century.
Impact on the Industry:
The NAR’s influence on the real estate industry cannot be overstated. By the mid-20th century, the NAR had become the largest trade association in the United States, with thousands of members nationwide. The association’s efforts to professionalize the industry, set ethical standards, and advocate for real estate professionals played a crucial role in shaping modern real estate practices.
Exclusive Representation
The Shift from Dual to Exclusive Representation
19th Century Practices:
In the 19th century, it was common for real estate agents to represent both the buyer and the seller in a transaction. This dual agency was often informal, with the agent acting as a middleman to facilitate the deal. While this approach worked in a less regulated and more straightforward market, it posed significant conflicts of interest, as agents could not simultaneously advocate for both parties’ best interests.
Complexity of Transactions:
As real estate transactions became more complex in the early 20th century, the need for more apparent roles and responsibilities became evident. The increasing use of legal contracts, the involvement of banks and mortgage companies, and the growing financial stakes of real estate deals highlighted the potential conflicts inherent in dual agency. Clients began demanding more focused and dedicated representation to protect their interests fully.
Emergence of Exclusive Representation
Fiduciary Responsibility:
The concept of fiduciary duty became central to real estate transactions. In a fiduciary relationship, an agent is legally obligated to act in their client’s best interests with loyalty and care. This legal obligation made it difficult for agents to represent both parties in a transaction without compromising their fiduciary duties.
Buyer’s Agents and Seller’s Agents:
As a result, the practice of exclusive representation began to take shape. Agents started to specialize as either buyer’s agents, representing the interests of the buyer, or seller’s agents, representing the interests of the seller. This specialization allowed agents to provide more focused and effective service, advocating solely for the interests of their respective clients.
Formalization in Contracts:
The move towards exclusive representation was formalized in contracts, where agents clearly outlined their roles and obligations to their clients. This shift helped build trust between agents and clients, provided greater transparency, and reduced potential conflicts of interest.
Impact on the Real Estate Industry
Improved Client Trust:
Adopting exclusive representation significantly improved trust between clients and real estate agents. Clients felt more confident that their agents advocated for their best interests, leading to stronger relationships and more successful transactions.
Increased Regulation:
The shift also paved the way for increased regulation of the real estate industry. As exclusive representation became the norm, states began to pass laws and regulations governing the duties and responsibilities of real estate agents, further formalizing the profession and protecting consumers.
Foundation for Modern Real Estate Agent Salary and Practice:
The move towards exclusive representation laid the foundation for modern real estate practices. Today, exclusive representation is the standard in the industry, with clear distinctions between buyer’s agents and seller’s agents and legal protections in place to ensure that agents fulfil their fiduciary duties.
Summary
The early 20th century was a period of significant change and professionalization in the US real estate industry. The founding of the National Association of Real Estate Exchanges in 1908 marked the beginning of a concerted effort to standardize practices, establish ethical guidelines, and advocate for the interests of real estate professionals. Concurrently, the shift towards exclusive representation reflected the growing complexity of real estate transactions and the need for clear fiduciary duties. These developments set the stage for the modern real estate industry, where professionalism, ethical conduct, and client-focused representation are central tenets.
Real Estate Agent Compensation in the Early 20th Century
During the early 20th century, compensation for real estate agents evolved alongside the professionalization of the industry and the establishment of organizations like the National Association of Real Estate Exchanges (NAREE), which later became the National Association of Realtors (NAR). Here’s a detailed look at how real estate agents were compensated during this period:
Commission-Based Compensation
Standardization of Commission Rates
Emerging Standard Rates:
As the real estate industry became more organized, particularly with the founding of NAREE in 1908, there was a move toward standardizing commission rates. Before this period, commission rates varied widely, often negotiated on a case-by-case basis. However, by the early 20th century, it became common for commissions to be set at around 5% to 6% of the property’s sale price. This rate began to be widely accepted as a standard, though it could still vary depending on local market conditions, the complexity of the transaction, and the nature of the property.
Commission Splits:
The concept of splitting commissions between the listing agent (representing the seller) and the cooperating agent (often representing the buyer) became more formalized. Typically, the commission would be split 50/50 between the agents or their respective brokerages. This practice encouraged cooperation among agents and laid the groundwork for developing Multiple Listing Services (MLS), which would later become widespread.
Broker-Agent Compensation
Broker-Agent Relationships:
During this time, real estate agents typically worked under the supervision of a licensed broker. The broker was responsible for the transactions and legal compliance, while agents acted as representatives in the field. Compensation for agents often involved splitting the commission with the broker. The typical arrangement was for the broker to take a significant portion of the commission (usually 50% or more) in exchange for providing office space, marketing support, training, and legal oversight.
Variability in Splits:
The specific split between broker and agent could vary depending on the broker’s policies, experience, and the volume of business the agent generated. More experienced and successful agents could negotiate better splits, sometimes retaining a more significant percentage of the commission.
Emergence of Buyer’s Agents
Compensation for Exclusive Buyer Representation
Introduction of Buyer’s Agents:
As exclusive representation took hold, buyer’s agents emerged as a distinct role in real estate transactions. These agents represented buyers’ interests exclusively, a departure from the earlier practice where one agent might represent both parties.
Commission Structure for Buyer’s Agents:
Buyer’s agents were typically compensated through a portion of the commission paid by the seller. This payment structure was usually agreed upon when the property was listed, with the seller’s agent (or listing broker) offering a commission split to any cooperating agent who brought a buyer. This split was around half the total commission, meaning that a buyer’s agent might receive a compensation of 2.5% to 3% of the sale price.
Buyer-Broker Agreements:
In some cases, buyer agents began to use buyer-broker agreements, which formalized the relationship between the buyer and the agent. These agreements sometimes included provisions for the buyer to pay a commission if the seller was not offering a sufficient commission. However, this was less common, as the prevailing practice was for the seller to cover the agent’s commission.
Flat Fees and Other Compensation Models
Flat Fee Arrangements
Alternative to Commission:
While commissions were the most common compensation, some agents or brokerages offered flat fee services. In these cases, the agent would charge a fixed fee for specific services, such as listing the property or handling certain aspects of the transaction. This fee was agreed upon upfront and did not vary with the property’s sale price.
Target Market:
Flat fee arrangements were more common in certain markets or with specific types of properties, such as lower-value homes or transactions where the seller wanted to reduce costs. These arrangements provided a more predictable expense for clients but were less lucrative for agents than commission-based deals.
Retainers and Advances
Retainer Fees:
In more complex or high-value transactions, agents or brokers might charge a retainer fee upfront. This retainer was usually non-refundable and credited against the commission upon the sale’s completion. Retainers were more common in commercial real estate or when the agent invested significant time and resources without guaranteeing a sale.
Advance Payments:
Some agents, particularly those representing buyers in exclusive arrangements, might request advance payments to cover their costs during the search and negotiation process. This was less common but provided a way for agents to secure compensation even if a transaction did not close.
Brokerage Fees and Office Contributions
Desk Fees and Office Contributions
Agent Contributions to Office Costs:
Many brokerages in the early 20th century required agents to contribute to the costs of running the office through a flat desk fee or by covering a portion of marketing expenses. These contributions were often deducted from the agent’s commission split. In return, agents received access to office space, administrative support, and marketing resources.
Shared Marketing Costs:
Agents were often responsible for sharing the costs of advertising and marketing listings, particularly in competitive urban markets. This practice incentivized agents to promote their properties and generate leads actively.
Summary
During the early 20th century, real estate compensation structures became more standardized and formalized as the industry professionalized. Commission-based compensation, typically around 5% to 6% of the sale price, became the norm, with commissions being split between the listing and cooperating agents. The role of buyer’s agents emerged, and with it, the practice of exclusive representation, where agents represented either the buyer or the seller, but not both. Alternative compensation models, such as flat fees and retainers, were also used, particularly in specialized markets or high-value transactions. Brokerages often required agents to contribute to office costs through desk fees or shared marketing expenses, reflecting the growing complexity and professionalization of the real estate industry.
Further Reading and Information
Books and Historical Studies
-
“Land Use, Environment, and Social Change: The Shaping of Island County, Washington” by Richard White (1980)
Description: This book provides an in-depth look at land use and real estate practices during the early 20th century, including compensation models. While it focuses on a specific region, it offers broader insights into real estate trends across the United States.
Where to Find: Available in academic libraries or through major booksellers.
-
“The Birth of American Real Estate: Land, Law, and the Emergence of Market Practices in the United States” by Stuart Banner (2002)
Description: Stuart Banner’s work explores the legal and economic evolution of the American real estate market, including the development of compensation structures and the professionalization of the industry.
Where to Find: Available in university libraries and through booksellers like Amazon or Google Books.
-
“The History of Real Estate Commissions in the United States” by Thomas J. Miceli (1997)
Description: This study provides a detailed historical analysis of how real estate commissions evolved in the US, focusing on the early 20th century’s shift toward standardized rates and the introduction of buyer representation.
Where to Find: Often found in academic journals related to economics and business history. It may be accessible through JSTOR or other scholarly databases.
Journal Articles
-
“The Origins of the American Real Estate Industry: The Development of Real Estate Brokerage and the Role of the National Association of Realtors” by Mark A. Weiss (1987)
Description: This article examines the early development of real estate brokerage in the US and the role of NAR in standardizing compensation practices. It provides insights into the shift towards commission-based pay and the emergence of buyer’s agents.
Where to Find: Available in academic journals focused on real estate or economic history, such as the Journal of Real Estate Research. Often accessible through databases like JSTOR or ProQuest.
-
“Evolution of Real Estate Practices in the Early 20th Century” by Paul W. Gates (1971)
Description: Gates explores how real estate practices, including agent compensation, evolved as the industry became more regulated and professionalized in the early 1900s.
Where to Find: Published in historical journals or available through academic libraries, often accessible via databases like JSTOR.
Historical Documents and Primary Sources
-
“Proceedings of the National Association of Real Estate Exchanges” (1908-1916)
Description: These proceedings provide firsthand insights into the discussions and decisions made by the early NAREE, including topics related to commissions, ethical standards, and the formalization of real estate practices.
Where to Find: Available in specialized archives, historical societies, or through digital collections at institutions like the Library of Congress.
-
“National Association of Realtors: Historical Archives”
Description: The NAR’s historical archives contain records, reports, and publications from the early 20th century, documenting the evolution of compensation structures and the industry’s professionalisation.
Where to Find: Accessible through the National Association of Realtors official website or by contacting their historical department for specific documents.
