The Real Estate Commission –Some History

By: Victor Normand
Published: June 2015

Part I

Owning property or having rights to it meant little to our hunter-gatherer ancestors, then, beginning about 30,000 years ago, it did. The shift to an agrarian society for most of mankind established the importance of having ties to the land. As societies became more advanced, farmers looked to higher authorities to safeguard rights to hold and use the land. Family elders, village leaders, kings and queens and various forms of government provided a means to temporarily or permanently create rights to the land itself or at least the right to farm it. It is from this need to make the possession of land more secure that official order, common law and eventually written law emerged.

The rise of capitalism and the industrialization of the economies heightened the need to organize the ownership and transfer of property for the benefit of individuals and corporations. In the 1850’s, the first real estate brokerages were established in Chicago. From that time on into most of the twentieth century, the relationship between real estate brokers and their clients was simple: listing brokers represented sellers and the agents who worked with buyers were “subagents” of the listing broker. Buyers were unrepresented.

Under this system and into the twentieth century, most real estate listings were “open listings,” allowing anyone to bring a buyer to the seller (still common in many international markets). Not surprisingly, brokers did not market properties or cooperate with other brokers, and sellers could deal directly with buyers, bypassing brokers altogether. The real estate industry was not organized and very much open to speculation. Often, complicated transactions ensued and consumer abuse was common. As a result of all this, real estate brokers and agents were not held in high regard.

The solution to this problem, put forth by the National Association of Real Estate Exchanges (NAREE) (the predecessor of the National Association of Realtors) was to professionalize the brokerage trade. The relationship with clients and between agents would be set forth in an industry code of ethics and individual state licensing laws. The goal was to raise the profession to the level of lawyers, accountants, and architects where brokers would have duties like loyalty, financial accountability, and obedience and good faith dealings.

By taking on these legal responsibilities, brokers expected to have an exclusive agency relationship with clients and be paid a commission for their services regardless of who brought a buyer to the deal. The advent of the exclusive listing aimed to find the correct balance between protecting consumers and fairly compensating real estate brokers and agents. The only flaw in this arrangement was the fact that buyers remained unrepresented. (See the blog “Who’s Looking Out for Me,” February 2015)

This brings us to the matter of explaining in greater detail the real estate commission. Now that we have all the players: Sellers and buyers and their respective brokers and agents, real estate associations and state licensing authorities, we can begin to see the interplay of the commission structure.

To Be Continued in Next Months Blog: The Real Estate Commission – How it Really Works