Currently the Sorting Hat looks inside a student’s head and determines the traits that best match one of the Hogwarts houses. These may be traits the student has yet to demonstrate or even be aware they possess. So before the Sorting Hat came into being how did the founders choose students for their houses? They would have needed a way to gain the same insight the Sorting Hat can. So how was this done? Using a magical means of peering into a student’s memories won’t necessarily tell you what the student is capable of in the future. Think of Neville Longbottom for example.

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    I think the Sorting Hat does exactly what you suggest that the founders might have done. It uses Legilimency to examine students' personalities and guess their best House. – Adamant Oct 21 at 18:10
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    This question made me think of how dumb it would be to sort all students of a particular type into one house or another. Ideally you would want a mix of people in each group so that they learn not re-enforce their own shortcomings, stereotypes, and points of views. So that they could learn from people different from themselves. – Mark Rogers Oct 22 at 15:37
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    Bubble sort? Heap sort? – Azor Ahai Oct 22 at 22:13
  • @MarkRogers Of course, that might be exactly what the Sorting Hat is doing - just because they say it puts you in Gryffindor if you're brave doesn't mean it's actually true. How would a scared little kid (like Neville) feel if he was told a magical artifact considers him brave enough to be in the "brave kids club"? – Luaan Oct 23 at 7:21
  • Slytherin is almost always depicted as evil, all the most evil characters get into Slytherin. What was the point of the hat doing that? It's the man behind the scenes creating all the great wizard conflicts. – Mark Rogers Oct 23 at 14:09

When they were still alive, they each chose their house members.

When the Founders were still alive, they had all chosen the students who’d be in their house themselves - the Sorting Hat was created to keep their houses’ values intact when they were dead and couldn’t choose, but when they were alive they’d chosen their own favorites for their houses.

While still alive they did divide
Their favourites from the throng,

Yet how to pick the worthy ones
When they were dead and gone?”

- Harry Potter and the Goblet of Fire, Chapter 12 (The Triwizard Tournament)

However they chose the students for their houses, they would have chosen them themselves. The reason Hogwarts had houses was so each Founder could teach the students they’d prefer.

Now each of these four founders
Formed their own house, for each
Did value different virtues
In the ones they had to teach.
By Gryffindor, the bravest were
Prized far beyond the rest;
For Ravenclaw, the cleverest
Would always be the best;
For Hufflepuff, hard workers were
Most worthy of admission;
And power-hungry Slytherin
Loved those of great ambition.”

- Harry Potter and the Goblet of Fire, Chapter 12 (The Triwizard Tournament)

It’s unclear what exactly their methods in figuring out who was worthy to join their house - but from what the Sorting Hat sings, they did the choosing, through whatever methods, themselves. It’s possible that it was a less “in-depth” Sorting than that of the Sorting Hat. From what the Hat says in his song, it may have even been as simple as the Founders just picking their favorites by choosing which students seem to be most aligned with their preferences. As Valorum suggests in the comments, they might have asked the students who wants to be in their house, to see what the students’ preferences and values are. However, it’s not truly known how they did it.

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    Maybe just a show of hands. "Who wants to be in 'Brave House'? Who wants to be in 'Evil House"? – Valorum Oct 21 at 18:56
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    @Valorum That’s possible too! :) The Sorting Hat chooses students by their values, so the Founders could have asked the students directly. I imagine they’d have the power to reject a student they don’t want, though the students themselves could help Sort themselves. – Bellatrix Oct 21 at 19:05
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    I just imagine each student doing a panel interview with the four founders and having to answer a bunch of esoteric Pottermore-esque questions. "You've just popped a fuchsia Every-Flavor Bean into your mouth. What flavor do you hope it will be?" – David K Oct 22 at 11:51
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    @DavidK - Those "Cosmo quizzes" are eerily accurate – Valorum Oct 22 at 12:09
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    A sorting process doesn’t have to last only a few seconds or minutes like with the hat. It can last the entire school time, by kicking out those who turn out to be unworthy. It might be only an aspect of our modern times that nowadays, a student’s actual school performance matters more than how much he proves to fit to the house’s traits… – Holger Oct 22 at 12:32

I don't see any evidence that the founders actually used magic to choose their students.

Of the three sorting ceremonies we are privy to, the one in Order of the Phoenix is the most explicit about how the founders themselves chose their students:

Said Slytherin, “We’ll teach just those
Whose ancestry is purest.”
Said Ravenclaw, “We’ll teach those whose Intelligence is surest.”
Said Gryffindor, “We’ll teach all those
With brave deeds to their name,”
Said Hufflepuff, “I’ll teach the lot, And treat them just the same.”

And a few lines later:

For instance, Slytherin
Took only pure-blood wizards
Of great cunning, just like him,
And only those of sharpest mind
Were taught by Ravenclaw
While the bravest and the boldest
Went to daring Gryffindor.
Good Hufflepuff she took the rest,
And taught them all she knew,

The statements enumerated in the first quote are almost all things that can be determined without using the Sorting Hat's magic. Gryffindor would know if a student had brave deeds to their name; Slytherin would know if a student's ancestry was pure; Hufflepuff simply took anyone not wanted by the other three, and Ravenclaw simply had to guess who were the most intelligence. She may have known the students from before and therefore was familiar with their intelligence levels, or she may have even given them a test.

In the second quote we have the additional description that Slytherin only took those of great cunning, so he may have either already known which students were cunning (either because he knew them personally, or because they had reputations), or there might have been a correlation between cunning and pure ancestry, or perhaps again there was some kind of test.

Even though in the other sorting ceremonies there are additional qualities associated with houses (e.g. Slytherin – ambition; Hufflepuff – hard work and loyalty) those are not mentioned in Order of the Phoenix in the explicit description of which students each of the founders took. Thus, it may have been that they ended up with the students with the qualities they valued, even if they didn't have the perfect means of guaranteeing it, or perhaps until the Sorting Hat came along the houses were not actually perfectly divided based on those qualities, precisely because there was no way foolproof way to do so.

It seems that the Sorting Hat may have taken the sorting to a different level by looking into the students' minds and personalities, and taking their own desires and values into account.

Indeed, it seems apparent that the Sorting Hat did not precisely imitate the founders, because it put Voldemort and Snape in Slytherin, and wanted to put Harry in Slytherin, despite the muggle fathers of the former two and the muggle grandparents of the latter.

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    Do many children have "Brave deeds to their name" at age 11? – Valorum Oct 22 at 12:09
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    @Valorum Sure, they can. You just need to adapt the expected level of "brave deeds". For an 11 year old, shooing off a dog, that was trying to catch the house owl, could be considered a brave deed. Standing up to bullies could be considered a brave deed. etc. pp. In fact, in some perspective our young lives are splattered with way more opportunities to be brave, as we are not accustomed yet to how the world and society should behave, neither are our peers. So there is often more direct conflict and "character-revealing" encounters. – Darkwing Oct 22 at 12:54
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    @Valorum It's not clear that in the old days Hogwarts started at 11. It certainly does now in the modern days where it has replaced middle and high school for young witches and wizards, but 1000 years or more ago when Hogwarts was founded neither of those were a thing. Entirely possible they taught both younger children and older teens those days depending on who they could get their hands on. – Cubic Oct 22 at 15:17
  • @Valorum It might be (metaphorically) deeds to their last name, aka them coming from parents known for their deeds. If you don't know much about a person, you might find out a bit about them by learning about the people who raised and taught them. If your dad was a brave monster hunter who protected the weak from magical creatures, surely he ought to have taught his son some of his own values, making him a potential pick for Gryffindor. – Suthek Oct 23 at 11:29

My answer is not supported by canon sources, but just is my take. If I have missed something please let me know.

Like most new schools, Hogwarts started out with few students. As they were so few, they were not sorted and the concept of Houses was not implemented. As the founders went on spreading the news of the new school, they started getting more students. (The recruitment scene in X-Men First Class is what I picture here- Gryffindor and Slytherin together going to pick new students; it is eerily accurate in a way)

One assumption here is that the founders were also teachers in Hogwarts, who came into regular contact with students. But that is not too far fetched. Over time, the founders began to pick their favourites among the students (akin to the Slug Club). And it just so happened, that the students Slytherin picked were mostly purebloods, the ones Ravenclaw picked were mostly very intelligent and so on. So over a few decades, those qualities began to be associated with those groups.

The sorting hat uses the word "favourites", which I think is illuminating-

“While still alive they did divide

Their favourites from the throng,

Yet how to pick the worthy ones

When they were dead and gone?” - Harry Potter and the Goblet of Fire, Chapter 12 (The Triwizard Tournament)

Over time, as the differences among the founders grew, the groups began to be more rigidly separated. And the number of students also became sizable. That's when the Houses started and the sorting too. They probably picked the students themselves or had some tests. We cannot be sure about that. But perhaps they dispensed with that part and started using the sorting hat. That way, the sorting hat was enchanted by each founder according to their ideas, before Slytherin left.

The theory that they picked their favourites is supported by the fact that not all Slytherins were purebloods (eg. Snape; Voldemort may be a special case being Slytherin's blood). Picking favourites does not necessarily follow rigid rules. The Hat's song may just be anecdotal, especially considering this point. Also, the Hat allows you to choose your house, which also could have started according to student's preference whether they wanted to join a group. In book 6, while Slughorn did pick Harry for his Slug Club, Harry was not interested.

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