In the beginning, real estate brokers were known as intermediaries Y options. Back then, the usual practice was for a broker to know about a property for sale, but keep it secret from other brokers. It was difficult for these middlemen to charge a fee for their services, so they resorted to tactics that were not always in the seller’s best interest. Optioneers, on the other hand, were generally more successful in collecting their fees because they would tie up the seller’s property in a Purchase option, sell the property to a buyer at a price higher than the option amount, pay the seller the option price, and then pocket the rest.
The first real estate brokerage business was loosely organized and used brokerage methods that were often dishonest, subject to fraud, and took advantage of sellers and buyers. Eventually, a newer concept was developed where the real estate broker is an agent and owes a fiduciary duty to the seller and is paid for their services. This new concept forced the seller and broker relationship to a higher level of service and duty. It also allowed brokers to list properties for sale through contracts. These contracts are what we now call listings. The first forms of listings we call open listings. Open listing is a type of non-exclusive listing agreement that authorizes a real estate broker to offer a property for sale, find a buyer, and receive payment for services at the closing of that transaction.
Other brokers might also have open listings for the same property, but only the broker who actually found the buyer would receive a commission. Also, no broker would be paid a fee if the seller sold the property. Open listing discouraged cooperation between brokers, as each broker could obtain its own open listing. To solve the open-quote problem, the exclusive agency the list became popular.
Exclusive agency listing is a type of listing contract in which the seller offers only the listing brokerage compensation if the buyer obtains it through the efforts of the broker or other real estate brokers. This means that in certain situations, such as for sale by owner, the real estate broker may not receive compensation when the property is sold. In exclusive agency listing, the listing broker or another broker working with the listing broker must procure the buyer in order to claim compensation.
The exclusive listing agency encourages competing brokers to find buyers to list, as the listing broker pays the listing broker’s fees. However, the seller still does not pay a fee when he finds the buyer. The exclusive listing of the agency finally gave rise to the exclusive right of sale list.
The exclusive right of sale agreement, the listing brokerage offers compensation in case of sale, regardless of who acquired the buyer. The exclusive right to sell the listing guarantees that the listing broker will receive payment, even if a competing broker or seller sells the property. It provides the most protection for the listing broker and is considered the best for the seller because the listing broker will put effort and resources into marketing the property as a commission is guaranteed for the life of the agreement.
Even after the exclusive right to sell listings became popular, there was little cooperation between brokerage houses, as a buyer wanting to purchase a specific property would have to deal with the broker who had exclusive listings of interest. It was also made quite clear to all parties that the broker was representing the seller and the buyer had no representation.
In the 1950s there was pressure for more cooperation between brokerage firms. As a result, a broker working with a buyer will contact competing brokers about their inventory and potential matches for their clients. The deals often resulted in the listing agent not knowing the seller or his agent and the listing agent’s only dealings were with the buyer. Suddenly, the concept that the selling brokerage owed its fiduciary duty to only the seller was no longer a neat and logical concept. However, it would be many years before the impracticable agency concepts were worked out and led to buyer representation.
As the 1950s and 1960s progressed, a more formalized cooperative brokerage system, known as the Multiple listing service (MLS), was developed. Through the MLS, the concept of subagency evolved. In a nutshell, this meant that the listing broker was the agent and represented the seller only. The listing brokerage would hire sales associates who were considered subagents from the seller The MLS listing brokerage was required to make the listing available to everything cooperating brokerage within your MLS. These cooperating brokers were also considered sub-agents of the listing broker, who were agents of the seller. If the cooperating brokerage had sales associates, these were subagents of the cooperating brokerage, who were subagents of the listing brokerage, which was the seller’s agent. During this period an agency relationship with a buyer was not possible, as the agency relationship was always with the seller. The only duty a licensee owed a buyer was not to lie when asked questions about a property. The concept of “buyer beware” was really the reality of how the brokerage business operated and buyers were never represented.
The rise of consumerism, as manifested in numerous court decisions, put pressure on the brokerage business to become more concerned with the interests of the buyer. Therefore, licensees working with buyers had an affirmative duty to disclose known matters affecting a property. For example, if the broker knew that a roof was leaking, he would have to disclose this fact. This concept of disclosure was later expanded by the courts to include conditions on the property that brokers should or could have known.
In the 1980s, a government study found that nearly three-quarters of all buyers thought the brokerage they worked with represented them as clients. The same study found that nearly three-quarters of all sellers also thought the collaborating broker represented the buyer’s interests. It soon became clear that the concepts of agency law that industry and government regulators had tried to impose to simplify and clarify agency relationships had not worked. Continued pressure from consumer groups and the courts eventually led to the buyer representation movement of the 1990s.
In 1991, the National Association of REALTORS® formed an advisory group to study agency representation issues. Testimony was received from real estate professionals, industry experts, the public, and state regulatory authorities. The advisory group report made the following recommendations:
NAR’s multiple listing policy should be changed to make subagency offers optional. If a collaborating brokerage did not accept the sub-agency, then the listing brokerage was required to offer compensation to the brokerage representing the buyer.
The NAR would encourage state associations to promote changes in real estate laws and regulations to promote disclosure of agency options. These options would include the seller’s agency, the buyer’s agency and the dual advertised agency. The purpose of this recommendation was to help consumers make informed decisions regarding representation.
The NAR should encourage real estate brokers to adopt written corporate policies that address the management of the agency’s relationships with its clients and consumers.
The NAR would encourage the education of all members on the subject of agency representation. State regulatory agencies would also be encouraged to include agency as a required subject in continuing education requirements for all licensees.
Beginning in 1992, the National Association of REALTORS® adopted the following policy:
“The National Association of REALTORS® recognizes the selling agency, the buying agency, and the dual agency disclosed with informed consent as appropriate forms of consumer representation in real estate transactions. The association respects the need for all REALTORS® to be able to make decisions individual commercials about their companies’ agency practices. In addition, NAR supports freedom of choice and informed consent for consumers or real estate services by creating agency relationships with the real estate licensee.”
These NAR changes to proxy policy changed the way the industry practices. Exclusive right of representation Buyer agreements now allow a buyer to contract with a brokerage to find and negotiate the purchase of real estate. Generally, these agreements are for a specific period and require the buyer to pay a commission at the closing of the real estate transaction. As the buyer’s agent, the buyer’s brokerage owes all fiduciary duties (care, loyalty, disclosure, obedience, and accounting) to its principal, the buyer.