Real Estate - Brokerage
( Originally Published 1911 )
Brokerage defined.-Brokerage is a branch of the agency division of the real estate business. The persons most interested, whose property and money are involved in the transactions are the principals : and the broker is the agent of one or both of them. Principals employ brokers to bring about particular transactions, and pay them compensation commensurate with the subject-matter, which is known as commission. A person who is continuously employed to sell real estate is not a broker but a salesman. There are sales brokers and loan brokers. The sales broker is a person who is employed to bring about the sale or exchange of real property. A loan broker is employed to procure loans upon the security of real property.
A broker's requirements.—To achieve success in the brokerage business, it is necessary to cultivate a wide acquaintance, to increase one's circle of customers from time to time among the people with whom one comes in contact. The real estate broker must learn something about values. He must know when and where and at what price a property similar to that which he is trying to sell has been sold. He must have the instinct of salesmanship. A man who is a good salesman can succeed in the brokerage business, and a man who is not a good salesman cannot.
Methods of making sales.—Brokers may find employment in making sales in one or two typical methods.
A broker may come to a person who has property for sale, or of whom he believes that he may be induced to sell property, and seek employment on the plea that he has or expects to find a purchaser for that property; or he may first establish his relations with a prospective purchaser of property of a specific kind, and then seek the property, and having found it, approach the owner in the hope of inducing him to enter into the desired bargain.
It sometimes happens that the broker is the person who conceives the transaction and presents it to both principals. This is the highest class of brokerage, and usually cannot be achieved without going through a long course of apprenticeship.
Agreement as to commission necessary.—In or-der that a broker be entitled to commission for his services, it is necessary that he have an agreement that those services will be paid for. There is no presumption that a volunteer will be paid for his services. It is not necessary that the agreement be in writing, as a contract of employment may be implied from the relations of the parties. If a man who is known as a professional broker, enters into a business relation with one who has property for sale, and accomplishes the bringing about of a sale, a contract may very well be implied.
Obligation of brokers to principals.—The con-tract having been made, a commercial and legal relation has arisen between the two persons which brings with it obligations on the part of both. The obligation of a broker to his employer is that which every agent or employe owes to his employer—fair, honest service. If a principal has confided to a broker his necessity for selling, or the lowest price he will take, the broker owes it to his employer not to betray that confidence. He also owes to his principal the disclosure of anything he knows or may learn during the course of his employment that has a bearing upon the subject-matter of the transaction.
Statements a broker may make.—A broker may make such statements as he believes to be true, and express such opinions as he can defend with relation to the subject-matter of negotiation—in the interests always of his principal. A broker is not required to test the truth of any representations his principal makes, which he has no reason to believe to be untrue. A broker may make comparisons between the transaction in hand and other transactions, but good business ethics require that he shall not violate previous confidences.
Necessity for thorough knowledge of the property.—A broker should never start upon a transaction until he knows as much as can be learned about the property. He should examine it, see what it looks like, the surroundings, what kind of tenants are in the property. He should know its income-bearing possibilities, its speculative aspects, the possibility of increase or decrease in value, the lettings, in what manner the tenants pay rent and what rent they pay.
A broker must know the terms upon which the seller can deliver. He should find out whether or not the thing he is trying to sell is such that it can be used for the purpose for which it is desired. It is not necessary for a broker to search the title before he attempts to sell a property, but it is utterly wasteful to bring about a transaction which will break up just before it is consummated. Much trouble and controversy would be saved by procuring from the seller a memorandum showing just what he has for sale.
Who pays the commission.—It is usual that the contract for compensation be made with the seller; al-though, as the seller figures that out of the price which he receives, he must pay brokerage, economically, in its last analysis, it is the purchaser who pays the commission. In exceptional instances where a broker is employed to purchase a specific property or property of a special character, he may be paid by the purchaser upon an express understanding, and in that case he should approach the seller with the statement that he is employed by the purchaser and intends to look to him for commission. A broker cannot serve two masters. He cannot without the knowledge of his employer take compensation from the other party' to the transaction, and if it be known that a broker does this, he loses his commission.
When commission is earned.—Unless otherwise stipulated as a term of the employment, a broker has earned his commission when he brings to his employer a person willing to enter into the transaction upon the terms prescribed by or acceptable to the principal, provided that such person be able to carry out the transaction or is accepted by the principal as a person capable of carrying it out. "Near" does not count in the brokerage business. There is no pay until the bargain has been made, and there is no pay for "making impressions," as it is called. A broker may have made an impression on the mind of a prospective purchaser and al-most brought about a deal; but later, another broker who is a better salesman or who meets a better financial condition may complete the transaction and earn the commission.
It often happens that a seller is willing to sell a property upon large terms "of credit, and for a very small cash payment, especially in transactions where the property is vacant and intended to be improved. In such cases it is appropriate and often insisted upon, that the purchaser shall be personally acceptable to the seller. If there be no such condition, the broker is entitled to commission when he has brought to the seller a person willing and able to contract to purchase the property upon such terms as the seller will accept. A broker does not have to guarantee the solvency of his purchaser; all that is required is that he be a person of whom it is not notorious that he is insolvent or unable to complete, and one who is able and willing to make the contract. As a matter of commercial practice, it frequently happens that the broker waits for his commission until the title closes, but commission is earned and is due and pay-able at the moment he brings about a meeting of the minds of the parties; and, unless expressly stipulated it is not a condition of the earning of brokerage that a valid and binding contract be made between the principals.
When broker is procuring cause.—In order to save paying commission persons who have been brought into relations by a broker will sometimes get together behind his back and complete the transaction. If the broker can show that this was done in bad faith, he is entitled to commission.
False representations.—If a broker so far for-gets his obligations as to make false representations in order to procure a purchaser, and the seller accept the result of a broker's work and sign the contract knowing of the false representations, then, if the purchaser be relieved of his contract by reason of the false representations, the broker is still entitled to commission. If, on the contrary, the purchaser be relieved of his contract by reason of false representations of which the seller did not know, then no commission is due from the seller.
Good business to see that contract is made.—The broker should try to see to it that the parties not only come to an agreement, but enter into a contract which is binding and enforceable. It is not satisfactory nor conducive to future business to base a claim for commission upon the fact that the broker has brought about a meeting of the minds of the parties, without good evidence to support the contention; and the contract is the highest evidence that can be offered.
Waiting for commission until title closes.—Very often, after the broker has earned his commission and a contract has been made, it will be required of him that he wait for the commission until title closes, and that he stipulate that if the transaction be not completed, he will get no commission. If that agreement be required of the broker, without consideration, it cannot be enforced against him. If a person wants to have it arranged that the broker's commission be not paid until the title closes, he must make that a term of the employment before the broker enters on the work. There may however, be consideration for such an agreement. If a person is willing to sell his property provided he get $1,000 down, and the purchaser has only $500, the broker, in order to bring about the transaction, may agree to wait for his commission until title closes, in consideration of the seller accepting the $500. In that case there is consideration; the seller has changed his position upon the broker's promise, and such an agreement may be enforceable.
Broker not responsible for failure to complete. —If the seller should be unable to complete his contract, having a bad title, or being unable to dispose of his encumbrances; or if, without fault of the broker, the purchaser be unable or unwilling to pay the balance of the purchase price, the broker does not lose any part of his commission. To require it of him is without consideration, and the broker can disaffirm such an agreement and sue for his commission whether the title closes or not.
Splitting commissions.—If, after a broker has earned his commission, the seller should require him to remit any part of it, that also is a condition imposed after commission has been earned and it is without consideration. To divide commissions with principals is reprehensible on the part of the principals to ask, and on the part of the broker to grant. One of the most important things which has brought the real estate business out of disrepute has been the attitude of brokers with regard to giving away part of the commission to principals. There is no objection to brokers dividing commissions among themselves. There may be three or four brokers in a transaction, and it is good business and perfectly proper that they should divide the commission upon any basis upon which they can agree. Usually the two at the ends of the chain get the larger part of the commission, and the other brokers all get a little compensation for bringing the parties together. The payer of commission is liable only to the man with whom he makes the agreement to pay commission, but frequently the other brokers will get orders on the owner from the broker to whom the owner is liable, and thus protect themselves.
Points of difference between sales and exchange business and loan brokerage.—One difference between the business of making sales and exchanges and the loan brokerage business is that in the latter the employment is not to obtain an agreement to make a loan, but to actually get the loan. There is seldom an enforceable contract to make a loan. A lender usually makes no agreement in writing, except that he will accept the application provided that all the things in relation to the loan are acceptable to him or his legal adviser. That does not necessarily mean that the broker never gets commission until the money be actually loaned. If a broker be employed to obtain a loan, and get an acceptance from a responsible lender, but, for some fault or default on the part of the borrower, the loan be not made, the broker is still entitled to his commission.
A man who intends to buy a house regards that as quite an individual transaction. It makes very little difference to a lender which one of any number of parcels of property of the kind upon which he is willing to loan, he finally accepts. A man who has $15,000 to lend on a $25,000 flat house, does not care in what block it is, whether the tenants are of one nationality or the other. All he wants to know is that there is a sufficient margin of equity between the loan and the actual value of the property.
The lender who agrees to make a loan seldom receives any money for the agreement. The only way to make an enforceable consideration for his promise is if by reason of that promise the other party has been led into expenditures or has incurred other obligations which it was known to the lender would be incurred upon the faith of the promise. Unless that state of affairs exists, one difficulty with enforcing a promise to make a loan is that it is a promise without consideration. One of the first and most essential elements of any enforceable contract is that there shall be consideration.
When broker is procuring cause in obtaining loan.—Cases may arise where a broker will get an agreement from a person to make a loan, and the attorney of the lender when he examines the title will make some objection to it. The intending borrower will then go to the person or company who examined his title and is responsible for it, and it may be that they will make or procure the loan for him. There, although the person whom the broker first obtained to make the loan, did not make it, someone else did, and the broker has been the procuring cause and is entitled to commission.
Another peculiarity of the loan brokerage business is that never by any chain of circumstances does it happen that the lender pays commission. The lender quotes a rate of interest, which means a net rate free of all expense to him; and he expects that all expenses of procuring the loan, examining the title and the preparation of all necessary legal instruments and putting them of record will be borne by the borrower.
Agreement subject to prior closing of transaction.—The agreement with regard to brokerage in the loan market, as in the sales market, is usually subject to prior closing of the transaction with somebody else in good faith. Very often a good loan will be in the hands of half a dozen brokers. Lenders as a matter of fairness consider that if they entertain an application for a loan, they entertain it from the man who offers it first, but there is no obligation of any sort on the part of the lender. There is no way that brokers can call lenders to account for any act of favoritism.
Get agreement as to commission.—In the loan business as in the sales business it is important that the broker get a proper agreement as to his compensation, and that it be expressly understood that he will be paid for his efforts. In the sales business it is sometimes difficult for the broker to ask a man who employs him to sell a piece of property for written authorization, but with a loan application there are so many details a broker must tell the intending lender, that it is easy for him to ask the person who is about to employ him to get a loan, to put these details on a blank form.
Rate of commission.—Rates of commission are governed by custom and agreement. There is no legal fixed rate of commissions, but the customary rate in the community will be understood to be the rate, unless there be express agreement for a different one. It is poor business for brokers to accept less than the. customary rate.