Real Estate Profession And Its Relationship To The State
( Originally Published 1924 )
What situation formerly existed in the real estate business that brought about a need for state supervision? Why is the real estate man able especially to work social injury? What parallel is there between the action of the state in supervising banks and real estate dealers? Why is the need for state regulation greater than it formerly was? What method of state supervision is best adapted to the real estate business? What are the requirements for a license under the Model Real Estate License Law? What are the offenses for which a license may be revoked? What progress have real estate license laws made?
To a rapidly increasing degree, the influence of government is being felt in real estate practices. Formerly, the only point at which the two touched was in cases of violation of the Criminal Code and consequent prosecution by the state. These were rare and the state generally stood aside and allowed the ordinary operator to pursue his business with no concern. At the present time in sixteen states the government licenses real estate dealers and makes it a criminal offense to engage in the real estate business without the securing of such a license. The requirements for securing a license will be discussed later. In order to appreciate why this change has come, it is necessary to understand the situation formerly existing in the practice of real estate by some dealers.
Abuses Were Formerly Common. In the development of our country a great many abuses have existed in the real estate business. Evidently these are rapidly passing and they will soon be eliminated, but they leave their scars on the profession. Perhaps the chiefest of the malpractices was that of deception. The salesman with a glib tongue and a hypnotic personality can convince many that they should invest in the real estate which he is selling even without seeing it. Thousands have thus been swindled : they have been sold land that was at the bottom of a swamp, desert sands that had no prospect of irrigation, fruit orchards on steep mountain sides, or city lands that existed only in the mind of the salesman or on a fictitious plat. Others have been robbed by false promises or by paying unearned commissions. Improvements have been promised that never materialized and useless properties have been sold at highly inflated values. There is scarcely a community that has not suffered from the misrepresentations of such false promoters and those who have lost their savings through fraud number by thousands. It should be emphasized that this sort of practice has not been universal in the business by any means. There have always been real estate men who have maintained the highest standards of ethics in the conduct of their business. But the deceit and sharp practice of the few cast a cloud of suspicion over the operations of all.
The Basis for State Supervision. While fraud can be practiced in any business, there are certain underlying considerations which contribute to the ease with which it can be practiced in real estate. There is an innate love for the soil in nearly all people and an almost instinctive confidence in the security and stability of its value. Many a person who could never be persuaded to invest in "wild cat" oil stock or other doubtful securities can be persuaded to purchase real estate blindly. Furthermore, the knowledge of real estate values requires a great deal of technical information; the ordinary citizen does not know all the influences which affect the value of real estate. In other words the average person, by the very nature of the case, is unable to protect his own interest when in-vesting in real estate. His situation is similar to that of one who wishes to construct a building and is ignorant of the laws of architecture, or who deposits his money in a bank without being able to interpret its financial statement.
Under these conditions it is entirely legitimate for the state to protect these innocent purchasers by some sort of supervision of the business. Bank depositors are protected by state or federal examination and supervision; the man who conducts a bank must carry on his operations in accordance with principles which have been found by experience to be safe, and he must avoid certain practices which have been found to be fraught with danger. He is entrusted with the funds of others. Because of technical considerations each individual depositor is not capable of protecting his own interests; therefore society protects depositors' interests as a whole. Exactly the same conditions prevail in the real estate business. The real estate dealer or broker manages and commands large funds that belong to others; he is constantly advising regarding the investments of his clients; he stands in a position to cause enormous losses or to, add materially to the prosperity of his community; it is strange that the state has not supervised his activities sooner.
The basis of such action of the state is expressed by the Supreme Court of the State of California as follows:
It is equally true that a lawful and useful occupation may be subjected to regulation in the public interest, and that all regulation involves in some degree a limitation upon the exercise of the right regulated. The test is whether or not the limitation imposed is really by way of regulation only, is one whose purpose and effect go no further than throwing reasonable safeguards in the public interest around the exercise of the right. If the limitation is of this character, its imposition is a proper exercise of the police power resident in the legislature, and whose exercise is one of the latter's most important functions.
Another authority expresses it thus :
The police power of a state is a means of furthering public welfare by protecting the primary social interests of safety, health, order, and morals, and the possession and enjoyment of all rights are subject to such reasonable limitations as may be deemed proper by the governing authority of the country.
In other words, in whatever a large number of citizens have an interest, the state has an interest. State super-vision of such activities is not depriving a citizen of any rights, for no right exists to pursue a course of conduct that may bring harm to many, even though it be to the advantage of the individual. Furthermore, ample precedent is found for such action. The growing complexity of civilization demands closer and closer state supervision because of the constantly greater and greater opportunity for harm and injustice. Consequently the activity of government in extending its supervisory powers is unavoidable; it is the natural development of government in the evolution of the state. This point is expressed thus by the same eminent. authority:
We have noted that that which is considered of prime social importance and the means by which the ideals of an age are attained vary from generation to generation ; that we have ever changing standards of moral sanctions, social customs, and varying methods of evaluating matters of public welfare, so that an act which in primitive society would be considered within the proper scope of personal discretion might, with the complicated structure of an advanced society, be considered a personal liberty so wrought with social danger as to become a badge of anarchy, a mere license and the proper subject of regulation or prohibition. We have also noted that businesses are subject to the same process of social evaluation and restraint ; that a business which has previously been considered as quite indifferent in social aspect might by its changed circumstances and nature be thought to so affect the public concern or welfare that it becomes the proper subject for regulation and prohibition in the interest of the common good.
Among the various businesses which by their circumstances and nature have now come to be considered as being affected by a public interest so that legislation on behalf of the public welfare has been considered necessary are : ware-house men, milk business, insurance, physicians, detective agencies, banking, locomotive engineers, sale of securities, employment agencies, real estate brokers, cigarette vendors, brokers, barbers, teachers, carriers, dentists, lawyers, pawnbrokers, druggists, laundries, commission merchants, hotel keepers, peddlers, auctioneers and ticket brokers, though one might mention hundreds of other businesses.
The special appropriateness of state supervision of the real estate business arises from the following facts, according to this same authority:
We submit that real estate brokers and salesmen in their capacity as agents are fiduciaries and that all men are not worthy of the trust; that as appraisers they require special knowledge, but all men do not have that special knowledge, and that this business has suffered tremendously by countless frauds that have been perpetrated by the "fly-by-night" real estate men, for example, in the sale of worthless fruit lands in the Isle of Pines and Florida and timber lands in Arkansas.
Method Employed in State Supervision. In those states which at present are regulating the real estate business, regulation has taken the form of a real estate license law. The content of the law varies somewhat from state to state but their general features are the same, following the Model Real Estate License Law prepared by the General Counsel of the National Association of Real Estate Boards, the provisions of which are as follows :1
It is made illegal for any person or corporation to act as a real estate broker or salesman by selling, buying, leasing or renting, or negotiating the sale, purchase, leasing or renting of real estate belonging to others "for a compensation or valuable consideration as a whole or partial vocation." This section is framed so as to include all those who engage in the business as a business. Exceptions are therefore made of all whose duties in other capacities might make it necessary for them to perform the acts covered. The exceptions are designed to cover those who act under power of attorney or per-form the acts of a bona fide attorney at law, and those who act as trustee, receiver, or administrator under any conditions. A distinction is also drawn between salesmen and brokers; the broker is considered as the one who negotiates with others and lists their property and sells It; the salesman is the employee of the broker.
Applications for license must be made in writing and sworn to. There are two types of license issued, a broker's and a salesman's. The broker who applies must have his application recommended by at least two freeholders in the state; the salesman must be vouched for by the broker by whom he is to be employed. Brokers are required to maintain a place of business. It may be their residence, but they must set forth in their application a definite place where they intend to carry on their business. Their proposed address is endorsed on the license and made a part of it, so that the changing of the place of business automatically cancels the license. In cases of bona fide changes in business address, the broker can secure a new license without payment of additional charges. This provision is meant to eliminate the "curb-stone" broker, the real estate broker who operates with-out any definite place of business, and consequently with a minimum of responsibility. He makes up the largest number of "fly-by-night" real estate men, who prey upon the innocence of unsuspecting small investors. Fixing a definite place of business tends to fix responsibility and to raise the standard which the dealer maintains.
The application for a license must also contain a record of former occupation, particularly any former dealings in real estate, the former place of business, former employer in case of a salesman, and other personal in-formation which will enable the authorities to determine the reliability and capability of the applicant. A bond is also required of all applicants, thus insuring that the state will be able to recover from a breach of the law on the part of the licensee. The authorities may require with the application for license also "such other proof as shall be deemed desirable, with due regard to the paramount interests of the public as to the honesty, truthfulness, integrity, and competency of the applicant."
The qualifications for a license are personal entirely and are such that the state is given authority to supervise and control the personnel of the business, entirely apart from the actions and methods which those persons use in the conduct of their business. The power of the state to extend its authority so far has been challenged, but a recent decision of the Supreme Court of the United States inferentially sustains this right.' It is said, however, that the first kind of business to be so regulated is that of real estate. According to the terms of the model law, the only qualifications are "a good reputation for honesty, truthfulness and fair dealing" and competency "to transact the business of a real estate broker or a real estate salesman in such a manner as to safeguard the interests of the public."
Licenses are issued for one year, upon the payment of a small fee. Upon the expiration of a license, a nominal charge is made for the issuance of a new one to take its place.
Before a license is refused, or a license is revoked, the authorities must hold a hearing at which the applicant for the license is represented and given an opportunity to present his case. The power of subpoena is given the authorities charged with the enforcement of the law, and the hearings must be conducted in a fair manner. But the findings of the authorities in regard to facts are final. The Supreme Court may review each case, however, upon appeal by the applicant or licensee, to determine questions of law.
A license is revocable for the following offenses:
"(a) Making any substantial misrepresentation ; (b) Making any false promises of a character likely to influence, persuade, or induce; (c) Pursuing a continued and flagrant course of misrepresentation, or making of false promises through agents or salesmen or advertising or otherwise; or (d) Acting for more than one party in a transaction without the knowledge of all parties for whom he acts; or (e) Accepting a commission or valuable consideration as a real estate salesman for the performance of any of the acts specified in this Act, from any person, except his employer, who must be a licensed real estate broker ; or (f) Representing or attempting to represent a real estate broker other than the employer, without the express knowledge and consent of the employer; or (g) Failing, within a reasonable time, to account for or to remit any moneys coming into his possession which belong to others; or (h( Being unworthy or incompetent to act as a real estate broker or salesman in such a manner as to safeguard the interests of the public; or (i) Paying a commission or valuable consideration to any person for acts or services performed in violation of this Act; or (j) Any other conduct, whether of the same or a different character from that here-in-before specified, which constitutes improper, fraudulent, or dishonest dealing."
In addition to the revocation of the license, penalties are attached to the violation of the act, and the proceeds of all fines and license fees are used to defray the expenses of enforcing the act.
The power and duty of enforcing the act are vested in a Commission created by it. The Commission consists of three persons appointed by the Governor, and holding office under the usual conditions. The act specifies, how-ever, that each commissioner shall be a person who has been actively engaged in the real estate business for at least ten years prior to his appointment.
Growth and Development of the Movement. It should be noted that the demand for state supervision has arisen from the ranks of the real estate dealers themselves led by the National Association of Real Estate Boards. While the public has the greatest interest at stake, sentiment has not crystallized in the community at large to the extent of demanding legislative action. The real estate dealers who recognize the responsibility and the possibilities for evil in the activities of irresponsible brokers and operators have consistently urged state supervision and are gradually gaining ground. This attitude is hopeful and commendable. While state super-vision will eliminate the grossest evils, the standards of the business can be raised to the level of a profession only through the insistence of its own members.
The growth of the movement has been phenomenal. The first act of this kind was passed June 1, 1917, by the Legislature of California. This act was declared unconstitutional, but another was passed by the same state in 1919 which has stood the test of constitutionality before the State Supreme Court. Since that time fifteen states and one of the provinces of Canada have enacted such a law. On the whole, the operation of these laws has been satisfactory and has resulted in large savings to the investors of the state. It has also had a noticeable effect in nearly every case in raising standards of the business. A number of commissioners report that applications are frequently withdrawn after they have been made when it is found that the applicant is obliged to pass a test. It is felt by the commissioners that these withdrawals probably represent those who would become unscrupulous or incompetent dealers.
A tendency is also noted to raise the requirements for the license. In Wisconsin, an informal oral test is held wherever the Commission is in doubt as to the qualification of an applicant. The tendency is every-where to increase the difficulty of the test as rapidly as public opinion will support such action. Public sentiment should support this development. Although a man should be free to engage in such pursuits as he desires, he should never be at liberty to do so at the expense of society. The more rigid the requirements of the license law, the more incompetency and unscrupulousness will be kept out. In no case will the honest and competent applicant find it difficult to obtain a license.
1. The basis for state regulation of the real estate business is found in dishonest practices that were formerly common in the business and in the position of trust and power in which the real estate man is placed. People instinctively trust real estate investments ; they are not always in a position to protect themselves when they come to invest in real estate.
2. The right of the state to regulate the real estate business rests in the police power that enables the state to regulate any affair in which the interests of society as a whole are paramount. The interests of the individual can never transcend the interests of society as a whole.
3. The regulation of the real estate business has come about through the passage in sixteen states and one province of Canada of a real estate license law compelling every broker and salesman of real estate to secure a license from a state commissioner. In order to secure a license a person must establish his "honesty, truthfulness, integrity and competency."
4. Licenses are revocable by the Commissioner for any act of misrepresentation or dishonest dealing.
5. The standards for securing a license are constantly being raised. As soon as public sentiment will support such action, the standards in nearly every state will be raised to include a written examination of competency. Already the laws operate to keep dishonest and incompetent dealers out of the business as well as securing the revocation of a con - siderable number of licenses every year.