Real Estate Business
( Originally Published 1924 )
Indicate the origin of the real estate business as such. What functions are performed by the real estate dealer? Why is it advantageous to have a source of information regarding real estate affairs? In what ways does the real estate dealer create a market for real estate? Why is the function of selling desirable? In what sense may the dealer be said to "create" real estate? How is the real estate dealer better able to secure credit on real estate than the individual owner or purchaser? Indicate the significance of the functions of affording protection to improved property and man-aging property. Distinguish between business and the professions. Is the accumulation of a body of knowledge characteristic of all the professions? How is such knowledge usually transmitted? Point out why there is a feeling of unity in the professions. What means does the profession use for protecting its members in the eyes of the public? How does it enforce its standards upon its own members? Show how the real estate business is rapidly developing a professional nature.
SINCE very early ages real estate has been recognized as one of the forms of private property and as a legitimate object of sale and purchase. As soon as the private right to the exclusive use of real estate was established, it became an object of desire and consequently an object of exchange. It is necessary only to call to mind the essential relationship which real estate has to man's existence to recognize the importance of transactions in real estate.
As soon as transactions become common in any comn.:odity, an opportunity is offered for someone to special-: e and devote at least a part of his time and attention .o facilitating transfers and exchanges of that commodity. Thus there very naturally arose a type of individual whose time and attention were very largely devoted to real estate.
Functions of the Real Estate Dealer. To this group of men specializing in real estate dealing certain functions have been assigned just as certain functions have come to be performed by the merchant, the physician, and the lawyer. The first of these functions is to act as a source of information and counsel on points touching real estate and real estate transactions. The merchant is a specialist in the commodity which he handles. The physician is consulted in matters respecting the health, and the attorney on points involving the law. In like manner the real estate man is expected to be a source of information on all matters connected with the value, transfer, improvement, and use of real estate. It is natural for owners and prospective investors in real estate to seek expert advice regarding the desirability of their investment and the best method of utilizing the real estate they own. Moreover, on account of the durability of real estate, certain methods of procedure have been evolved after long experience, and the owner or investor in real estate may be unfamiliar with such procedure and the difficulties which it involves. To the real estate dealer these methods have become second nature because he is constantly concerned with them, but to the uninitiated who has never purchased, or even to the one who is more accustomed to real estate transactions, these methods are obscure and he naturally turns to the specialist for counsel. This is an important function of the real estate dealer.
Secondly, the real estate dealer creates a market for real estate. A market is created by bringing seller and purchaser together. Without the services of what is known as "middle men," the buyer of any commodity would have to go from person to person and from house to house seeking someone with the commodity to sell, and the seller on the other hand would have to pursue the same course in trying to find a purchaser. This is a simple fact of the market, but it has significance in connection with the real estate business. Without the services of a real estate dealer a man who wished to sell real estate would be obliged to lose valuable time in searching for a purchaser, and the purchaser when he wished to find a seller. The two are brought together when the real estate dealer lists the property of the one and the needs of the other.
One of the methods by which he facilitates the establishment of a market is by furnishing the means of transportation that enable the purchaser to see the property. Inspection is necessary to the sale of a commodity that cannot be standardized, and the only means of inspecting real estate is to visit it. Another practice that expands the market and makes it more complete is the recent multiple listing system that is being used in many real estate boards. By this method the man who lists his property places it in the hands of every member of the board of his city, and when a purchaser expresses a desire to buy, he is able to see at a glance every property that is offered for sale through every member of the board. This is a long step toward creating a more perfect market for real estate, for a perfect market involves an opportunity for all sellers to meet all buyers.
Another function of the market performed by the real estate dealer is that of actually making sales. Salesman-ship is an essential part of the present economic order, and real estate needs selling as much as any other commodity. In other words, when a person wants to buy real estate, just as when he wants to buy any other commodity, he needs to have the points of advantage and the excellence of the alternative purchases before him pointed out; he dislikes to rely upon his own initiative to discover them.
In the fourth place, the real estate dealer has a function to perform. in the direct development of property—as one dealer put it, in the actual creation of real estate. The progressiveness of our cities is largely due to the energy and enthusiasm of real estate developers. Certainly to them is due much credit for the beauty of many sections of our cities. In three ways the dealer contributes to the direct development of real estate; first, by developing and adding to our cities new "additions" known as subdivisions; (2) by the construction of buildings both residential and business; (3) by settlement of farm lands. In performing these functions the dealer becomes really creative. In adding and developing subdivisions he sup-plies homes for the families that are the hope of the nation. Subdividers vie with each other in creating idealistic home environment, and some of the suburban subdivisions of prominent cities embody all that is beautiful in a home site. In the construction of commercial buildings, he furnishes accommodations for business and develops his city. In this respect he typifies the American spirit that looks not at the past with an air of reverence, but rather to the future with a dream of achievement—and then he achieves! A building is not allowed to stand very long in one of our cities unless it fulfills the purpose to which the site is best adapted. It must give way to a new and better building. This keeps our cities progressive. In the settlement of farm lands, the developer takes large tracts of cut-over, swampy, and unirrigated lands and by great initiative and daring carves them into farms and makes them to blossom like the rose. As the frontier passes from our country, it becomes increasingly important that we make the best use of what land we have that is adaptable to agricultural uses. Some dealers who are settling farm lands near cities are cutting the wild tracts into small truck farms which are capable of producing several times the amount of produce that would be obtained from large scale farming. Those who use cut-over land are creating farms from land that is now idle but some of which is admirably adapted to agriculture.
Another important function of the real estate dealer is that of securing credit for the purpose of developing lands. This function is increasingly important. The fact that much wealth is present in America does not enable it to be used for the purpose of developing real estate. It must be collected and made available for that purpose. The methods by which the real estate dealer performs this function will be discussed in a later chapter. Whatever means are used for gathering together the large sums of wealth that are necessary today for the utilization of city real estate, the function of assembling is important. And the same function is important in furnishing credit to the tenant farmer, who, with small capital resources, aspires to own his farm. With-out someone to perform the function, much wealth would lie idle or would be dissipated in unproductive uses, which today adds to the prosperity and well-being of the community. Furthermore, the individual who warts to in-vest in real estate or to purchase a home is not able to get in touch with the sources of finance; his credit re-sources are so much smaller than those which the dealer can command that perhaps in the majority of cases he would be unable to invest or to secure his home unless the dealer made provision for his securing credit.
The sixth important function of the real estate dealer is to furnish protection to improved property through the writing of insurance. While the insurance business is to some extent segregated and done by a special group of insurance writers, the amount which is written by real estate offices is very large. The advantages of insurance will be taken up in a later chapter. It is necessary here only to point out that in writing insurance and keeping improved property covered by insurance, the real estate dealer performs a service worthy of compensation.
Seventh, the real estate dealer performs a desirable function in managing property. One who notes the large amount of housing accommodations which are afforded by private capital will appreciate the value of this function. Private capital could not be interested in this enter-prise unless the owners could be relieved from the details of management and yet be assured that their property will be properly cared for and used. The dealer, there-fore, is an important factor in developing housing accommodations inasmuch as he enables them to be supplied by this means. The same is true of business buildings in many instances. Private capital, while it frequently seeks this means of investment, would never do so if obliged to undertake the management of the property.
The last and increasingly important function of the real estate dealer is that of appraising property. As the value of property increases so that larger and larger sums are involved in investing in real estate, it becomes more important that those who seek this type of investment be protected by accurate and scientific appraisal of the properties in which they invest. Furthermore, as the economic organization of society becomes more involved and as the uses to which real estate is put become more highly specialized, the need for expert appraisals is more pressing. When property is all of one type any owner can express an intelligent opinion of the value of other property, basing his judgment upon the value of his own, but the man who owns a retail site has little basis for the judgment of the value of wholesale property or industrial property. Public utilities must be valued upon an almost entirely different basis from any other property. Constant study and careful thought are necessary in order to keep informed regarding the value of different types of property. American cities are dynamic, also, and aspects of value are almost constantly changing. The same is true of the value of agricultural land. Improvements and different methods of utilization cause constant fluctuations of value. No one can be accurately informed about these values without keeping constantly in touch with their movements.
A good illustration of the performance of this function is found in the appraising of property for cities, for charitable purposes, and for other public uses. It is important that such appraisals be accurate in order to protect the interests of society as a whole. Naturally the value in the mind of the owner is greatly exaggerated when he realizes that his property is needed for public purposes, and accurate knowledge of current conditions is necessary for justice to both parties concerned with these appraisals. Still another illustration is found in appraising property for income tax and other such purposes. In justice to the government as well as private individuals concerned, such appraisals should be accurate. The necessity of appraisals for such purposes is increasing with income and inheritance taxes becoming more common. In England the appraisal of real estate is considered of such importance that before engaging in it, a man is required to take a course of training consisting of three years' study and it is considered practically on the basis of a profession. It would not be difficult to conceive of its becoming so here. The variety of interests at stake, including that of society as a whole, war-rants such a prediction.
The Professional Nature .of Real Estate Dealing. As the requirements of the real estate dealer have become more exacting and his work more specialized a tendency toward professionalism has manifested itself. This development in real estate is paralleled by the tendency in other businesses as well. It may be properly asked, there-fore, what distinguishes a profession from a business and whether the practice of real estate dealing manifests enough of the distinguishing characteristics to make it seem reasonable that it will become professional in nature.
In early times there were three distinguished professions which were more or less set apart in the minds of the people as honorable and superior. In the literature of the past, from the time of Aristotle, railings against commerce are not infrequent. In some way commerce seems to have been associated with the common or low. The calling of the physician, the lawyer, and the priest stood apart as especially honorable. It may not be possible to assign full reasons for this attitude, but it was generally prevalent. Today more groups are included in the professional category, but still something of the older attitude clings to the modern conception of a profession.
In the first place, the profession stands apart because it possesses a body of knowledge with which the beginner must become acquainted before he can pose as a member of the profession. In ancient times the three professions were frequently called the "learned professions." The physician was obliged to serve a long apprenticeship to the apothecary before he could dispense drugs on his own prescription. He was supposed to come into the body of knowledge of the physician through his apprenticeship. Lawyers have long been required to pass a bar examination or take a term of apprenticeship in the office of a licensed attorney. Ministers and priests take long pre-scribed courses of study in nearly every denomination.
As a rule the knowledge which is considered thus important is obtained by long experience and consists of generalizations made from the observation of many cases. The novice is given the advantage of the accumulated knowledge and experience of the most able in his profession.
The body of knowledge is eventually collected in text-books and soon instruction in classes appears. The courses and the books take the place of the more tedious and slow method of teaching by experience. So long as the student learns only by the apprenticeship method, his preparation is limited by the cases which actually come under his observation. But when instruction from books in regular courses begins, his information may extend much further than his direct personal observation and embrace the experiences of those who contribute to the literature which he reads. As soon as there is sufficient demand, the subject is included in the curriculum of standard universities and colleges, and the profession is definitely established so far as the accumulation and transmittal of a body of knowledge are concerned.
In time the subjects included in the prescribed course of study which every aspirant must take become standardized. It must be noted, however, that the subjects required cover not only the information which he must have to perform his duties, but additional subjects which may contribute little to his actual practice of his profession., but make him a broader and more capable man. It is not sufficient for the physician to take materia medica and anatomy; he must have some chemistry, physics, and other liberal subjects. The tendency is for the prescribed courses at first to be few, but as the standards in the profession get higher and higher, the number and difficulty of the courses included in the preparation increase. A license to practice . medicine used to be obtained in some of our states after the completion of a four-year course in a medical college with little if any entrance requirement. Today nearly every standard medical school requires some work toward a degree in letters and about five years in the more technical subjects, with provision also made for an interneship, or apprenticeship. Thus by instruction and practice the body of knowledge accumulated by the medical profession is passed on to those who aspire to enter it.
In the second place, the profession is characterized by a feeling of unity or a group consciousness. The man who has studied law has gone through the same courses, deals with the same problems, and meets the same situations day after day which other lawyers meet. The physician understands the problems and experiences of his fellow physician. They have been through the same prescribed course of training, and they have more in common than either of them has with members of any other profession or business. Their common interests and feelings prompt in them a feeling of unity. Soon they begin to consider themselves as not isolated individuals striving against each other for the same patronage, but as members of the same profession trying to build up the interests of the profession as a whole. The physician will always seek to protect the reputation of a member of his profession to the extent that he will seldom express his opinion of the course of treatment prescribed by another physician. Every physician feels that he has a direct responsibility for upholding the reputation of the profession in the eyes of the public, every lawyer feels a like responsibility for the reputation of the legal profession, and every dentist for the dental profession.
Finally, the profession is characterized by the enforcement by the group of certain standards of conduct upon the profession as a whole. Commonly such standards are ethical in nature or have in view the protection of the profession in the eyes of the public. Certain practices are forbidden to the lawyer or to the physician; to indulge in them .is to court the disfavor and ostracism of other members of the profession. An outstanding example of this is seen in the fact that members of the professions never use display advertising. It is considered unethical by the professions. Other common requirements which the profession .makes of its members are illustrated in the fact that the physician is required to handle any case that comes to him regardless of whether he expects to be able to collect his fee. The physician's own desire might be to refuse such cases, but the profession as a whole would frown on that, as would society. The professional man must be moved not altogether by selfish motives ; he must in many cases appear at least to be unselfish. No one objects to paying a doctor's bill, but no one would employ a doctor who they thought was practicing his profession solely for the profit in it. It is a worthy ambition to expect to accumulate a competency in any trade or profession, but the profession must seek also to serve. Through years of evolution society has come to expect that the professional man will be guided by other motives than profit and consequently to despise the doctor or minister who would place the hope of gain above the ideal of service. The possession of the body of knowledge obtained in his studies and apprenticeship entails a duty toward society as a whole; he who is thus equipped cannot apply that knowledge and skill solely as he may desire.
In some professions, as in that of medicine, for example, a certain ethical standard is maintained by requiring an oath or other public avowal of adherence to the standards set up by the profession. The oath of Hippocrates has long been solemnly administered to those who started out to practice medicine, and every church has some form of ritual which it requires its candidates for the ministry to go through before they become ordained ministers. This is an additional means of enforcing the group standards upon every member.
The Real Estate Business as a Profession. What are the tendencies in real estate practice that make it increasingly professional in nature ? In the first place, the body of knowledge required of the man who enters the business is constantly increasing. In the past it has been possible for anyone to enter the business of real estate without any special training or knowledge. But to an increasing degree, society is demanding that the real estate man, to perform his duties intelligently, be trained. The body of knowledge necessary to enable him to do so is rapidly being accumulated. More literature is being written every day for the enlightenment of the real estate dealer on subjects with which he should be familiar. Gradually a demand for educational courses on real estate subjects is developing so that already a number of colleges and universities are offering standard courses in the practice of real estate. Research being carried on by such organizations as the Institute for Research in Land Economics and Public Utilities is discovering principles with which the real estate dealer of tomorrow must be familiar to succeed. As such information is gathered together in text-books and reference works the courses offered by universities and colleges will become more standardized and society will demand more and more the preparation obtainable through them. Within the last few years such knowledge has become available.
It is interesting to note that in England this movement has progressed further than it has in America. There definite requirements of study have been set up for the man who desires to be an appraiser of property or other-wise to deal in real estate. While the organization of the real estate business is very different in England from its organization in America, the standards which they have set up may soon find their counterpart here. In London there is a College of Estates Management which gives a regular course in real estate practice with a certificate or degree as a reward for finishing the course. Two professional societies exist, The Surveyors' Institute and The Auctioneers' Society and Agents' Institute of the United Kingdom. Each of these institutions provides a long course of study for its members, and the examinations given at the end of the course include such subjects as algebra, chemistry, land problems, etc.
The standard set up by these institutions is high and distinctly of a professional nature. One of them provides that "no member shall become actively connected with any occupation which in the opinion of the Council shall be inconsistent with the practice of the profession" and that "no member shall conduct himself either in his professional capacity or otherwise in such a manner as prejudicially to affect his professional status or the reputation of the Institute." While the Surveyors' Institute is chiefly concerned with the practice of surveying it also includes subjects connected with the valuation of every description of landed and house property and with the managing and development of estates.
The presence of the group consciousness is evident enough in these requirements. A distinct effort is being made and apparently enforced, to protect the profession in the eyes of the public. Means are also being perfected in America for similar protection. The chief of these is the legal requirement for a license to practice real estate, now made in sixteen states and in one province of Canada. For centuries the other professions have been regulated by licenses, and the requirement by the state of a license to practice real estate is a clear recognition on the part of society that the real estate dealer performs a social function which society is interested in having performed with skill.
The spirit of cooperation manifested in real estate practice is also rapidly gaining ground. The National Association of Real Estate Boards is doing pioneer work in this respect. Organization of real estate boards tends to undermine the suspicion and distrust with which one real estate dealer formerly considered his competitor and re-places it with a spirit of fine cooperation. As this spirit increases, the professional standards in the real estate business will also increase.
With such an increase in standards of a professional nature, and with the increased facilities for equipping himself, the young man or student interested in real estate faces a great opportunity. The following chapters will deal with the means by which the real estate man accomplishes his ends and with some of the principles involved in his practice.
I. The specialization of functions brought about by changes in the economic order of society has created a demand for a specialist to devote his time and efforts to dealing in real estate.
2. The functions assigned by society to the specialist in real estate are : (I) acting as a source of information in matters regarding real estate transactions; (2) creating a market for real estate in the sense of enabling buyers and sellers to meet each other and transact business with as little effort and trouble as possible; (3) selling real estate, or pointing out to the prospective purchaser the respective ad-vantages of the alternative purchases; (4) developing real estate, that is, bringing it into use; (5) securing credit for the use of real estate investors and users; (6) furnishing protection of improved real estate by writing insurance on it ; (7) managing property for those who invest in it but do not want to be bothered with the details of management ; (8) appraising property.
3. Certain characteristics distinguish the profession from the business ; chief among these are (1) the development of a body of knowledge; (2) a spirit of unity or group consciousness that causes the individual to feel responsible for the effect of his acts upon the whole group ; (3) the enforcement by the group of certain standards of conduct which the group considers best for them as a whole.
4. The tendency in real estate practice, as in some other kinds of business, is to become increasingly professional. Evidences are seen in the development of textbooks and college and university courses on real estate subjects, in the growing sense of group unity, and in the means taken to protect the profession from practices that will cause it to lose the public esteem and respect.