The stupidity of free-market chic ... in real estate.

• Author: Lesley, Elizabeth

The Stupidity of Free-Market Chic . . . . . . in Real Estate

Ralph Colburn has been selling a certain commodity in Idaho for decades. Until recently, he had a bustling office in Boise. Like any sharp businessman, he looked around for a piece of the market overlooked by his competitors. Seizing upon the opportunity he saw, he advertised that something new had come to Ada County. Ralph hit upon something the market was eager for--something that saved his customers money. Business was good. But Ralph's competitors weren't so happy. They pulled him in, tired him before their private tribunal, and drove him out of business. That left Ralph bankrupt at age 73.

Ralph was selling (pick one):

1. new cars

2. stocks and bonds

3. potatoes

4. houses

Unfortunately for hapless Ralph, the answer is d)--he was selling residential real estate, an industry controlled at almost every level by the National Association of Realtors (NAR) and its thousands of local boards. So great is the control that the NAR tries to exert that it treats the term for its members as a registered trademark requiring capitalization: Realtor. Part of that control is a stipulation in the NAR code of ethics that in essence prohibits Realtors from competing with each otehr, a condition that by definition makes the NAR a cartel.

In 1988, after nearly a decade as a Realtor, Ralph broke from the Realtors' mandated practices and started advertising as a "buyer's broker." Almost all Realtors represent the seller--even those who drive the house-hunting buyer around to look for a home. The agent who helps the buyer find a home then splits a commission--usually 6 or 7 percent of the selling price--with the agent who worked with the seller from the beginning and listed the house for sale.

When both agents in the transaction represent the seller, both are legally bound to do everything in their power to see that the seller gets the highest price. Splitting the commission obviously leads to this result as well. But Ralph didn't want to represent the seller--he thought it unfair, misleading, and probably illegal.

"There are more than 700 Realtors in Ada County," Ralph's ad read, with a photo. "Here's part of them--all nice folks. All dedicated and obligated to sellers! How many are dedicated to the best interest of the buyer? Ralph Colburn."

Pretty tame stuff, right? But the "nice folks" in Boise didn't much like Ralph telling customers that most Realtors represent the seller. A 1983 Federal Trade Commission (FTC) study found that nearly 75 percent of buyers and sellers didn't understand that the broker who helped the buyer find a home wasn't representing the buyer. So in millions of deals, year after year, buyers have been confiding financial information to the broker--even disclosing their highest bidding price--not knowing that the broker is obligated by law to relay that intention to the seller and make sure the seller gets the highest price possible.

Monopoly money

The local Realtor board "hearing" that hurled Ralph into bankruptcy court faulted him for seeking "unfair advantage over other Realtors" and failing to "avoid controversies with other Realtors." The Boise Board of Realtors also found that Ralph broke the rule that read, "The Realtor shall not publicly disparage the business practice of a competitor nor volunteer an opinion of a competitor's transaction."

Imagine the glee of big automative manufacturers, large Wall Street firms, and potato barons if they were told they could quash the pesky competitive threats of upstarts, unfettered by any significant market force or government intervention.

But the National Association of Realtors is unique. The linchpin holding the whole organization together is the network of thousands of Realtor-run multiple listing services (MLSs), which catalog properties for sale.

"If you're going to be in residential housing sales, you have to be a member of some kind of MLS," explains Colburn in his Idaho twang. Membership in the NAR is compulsory if a broker wants access to an MLS. That rule has made the NAR the largest trade association in the world, with about 820,000 members.

The NAR's control over the country's MLSs--which handle about 80 percent of all home sales--has been picked at halfheartedly by various agencies for years, but with little real change, and with no lessening of the Realtors' stranglehold on the industry.

During the Carter administration, Paul Roark, now staff attorney with the FTC's regional office in Los Angeles, led a team of FTC investigators that began looking into the Realtors' influence over the real estate industry. When the voluminous study was finished, the Reagan administration stalled its release for years, then failed to take any real action on the study's findings. "The primary issue for Realtors is the maintenance and control of the MLSs," Roark explains.

To get access to an MLS a broker must join and pay dues to the NAR, its state association, and a local Realtor board. The NAR's share of those dues totaled $57.8 million in 1989 alone. The NAR's total revenues that year were $106.8 million, according to Dale Stinton, the NAR's comptroller.

Those revenue figures don't include what the Realtors' aggressive political action...