Politics

Real Power

The real estate lobby is under serious competitive challenge, but no pressure group is better at bending legislatures to its will.
by | June 2006
 

During a hot market, it sometimes seems as if half the people you meet are thinking about getting a real estate license. But what do Realtors dream about doing next? If they live in Utah, they may be dreaming of a career in politics. Chris Kyler, CEO of the Utah Association of Realtors, sounds quite animated as he counts off the many members of his organization who hold high office in the state. "I've got people who are on county commissions, mayors, state senators," Kyler says. "Our lieutenant governor was president of our state association about 20 years ago. Our people are involved in the parties, too. We've got precinct chairs and vice chairs and county delegates throughout the state."

No fewer than 22 people who make their living in real estate also serve as members of the Utah legislature. Not surprisingly, Utah has some of the toughest real estate laws in the country--protecting both private property rights and the business interests of Realtors. When the Realtors hope to get favorable legislation passed, they know there is one legislator in particular who will lend a friendly ear. Al Mansell was president of the Utah Senate until he dropped his leadership role to serve a one-year term as president of the National Association of Realtors. Still in the Senate, Mansell has since sponsored bills avidly sought by his profession. The most important may have been a new law that clamps down on discount brokers who have undercut the larger commissions collected by Realtors. "Did I feel a conflict of interest?" Mansell says. "No, what I felt was a strong push by many of my colleagues."

Mansell's colleagues in the real estate business are capable of providing that strong push in every state in the nation. Realtors have their fights in Congress and at the local level, but much of their lobbying energy is spent in state capitals, which is where they are primarily regulated. Utah might have the most Realtors serving as legislators, but there are Realtors in virtually every legislative district in the country--and they make their presence felt.

There are other interest groups that can match them for geographic spread, such as teachers' unions and restaurant associations. And many other occupations are well represented in the corridors of legislative power. No one finds it unusual when a university administrator, for instance, chairs a committee that oversees her primary employer.

But few lobbies can match the Realtors for numbers, financial wherewithal--and effectiveness. Whenever an issue involves the transfer of property--and that extends to fights over property taxes, roads, schools, utilities, water policy and a whole host of other questions--Realtors come out in force. "You're talking about guys who are on a first-name basis with a lot of legislators," says John Tuccillo, an industry consultant and former chief economist for the National Association of Realtors. "You're talking about access, and once you have access, you can make your point."

Because their industry is now under more competitive pressure than at any time in recent history, Realtors have stepped up their game. Utah is one of 10 states that have approved new laws or regulations over the past two years that require real estate agents to provide a minimum level of services. More states are likely to follow suit. These minimum-service bills pose a direct challenge to the discount brokers who have sprung up in large part on the Internet.

The newcomers present a challenge to Realtors' traditional ability to charge 6 percent commissions on the sale of every home--now worth upwards of $10,000 per sale in most of the country. Web giants such as Google and Craigslist.org have joined the parade of sites that are listing homes, leading some to predict that consumers will increasingly turn to the lower-cost options, making real estate agents obsolete, the way travel agents have become in the era of Internet airline bookings. "Their very profession is about to join the endangered species list," the authors of the popular book "Freakonomics" claimed recently in the New York Times.

But it might be too soon to bet on that scenario, and the reasons are the involvement of Realtors in the political process and the protections they have already crafted to stave off the threat. The many state rules governing their profession, including the newly created ones such as minimum-service requirements, serve as serious barriers to entry, helping Realtors preserve their control over the market.

In the opinion of critics, the rules mean both higher fees for Realtors and higher prices for houses. For Robert Lande, a professor at the University of Baltimore School of Law who is associated with the American Antitrust Institute, the new minimum-service laws are merely the latest phase in a permanent campaign by Realtors to keep a stranglehold on property transactions. "They've got a sweet deal," Lande says. "You fix the rules of the game to insulate each member from hard competition."

Most worrisome from the Realtors' point of view, their critics now include the Federal Trade Commission and the U.S. Department of Justice. Both of these federal agencies accuse Realtors of engaging in anticompetitive practices, and have lobbied against the new state laws. "At a fundamental level, they reduce consumer choice," says John Read, a litigation section chief in Justice's antitrust division. "There are a number of consumers who would like to save some money by not having to pay for mandated services that they're being forced to buy under these bills."

PICKETT'S LAW

There's no disputing that discount brokers are out to change the rules of the game. Many of them will list a house for as little as $500 on a multiple-listing service (MLS)--the database of homes for sale that is the life's blood of the residential real estate industry. Often, that is all the discount broker will do. The homeowner is responsible for hosting the open house, fielding and negotiating bids, and handling all the paperwork. Some discounters will answer questions or perform a limited menu of services for set fees. But Realtors claim they still leave consumers, who don't understand just how complicated the process of selling property really is, exposed and unprotected.

Like Mansell in Utah and several of the other sponsors of minimum- service bills, Texas state Representative Joe Pickett has worked in real estate. He says he was inspired to write his bill by his own experience and frustration in dealing with discounters who don't meet their customers' expectations. "It's been kind of a pet peeve of mine," Pickett says. "If you say you're a licensed real estate agent in the state of Texas, there ought to be a minimal number of things that you do." All Pickett's law does, he says, is protect unwary consumers.

But the concern of the federal agencies is that state legislation, once passed, has the effect of shielding Realtors from antitrust complaints. "[Federal] antitrust law does not overrule state law or state agency regulation in most cases," says Norman Hawker, a business professor at Western Michigan University, who organized a symposium on real estate practices for the American Antitrust Institute last fall. "So you're seeing lobbying by Realtors to get laws in place that would probably be illegal if they were private agreements between them, like the full-service laws."

The Department of Justice settled an antitrust case involving commission rebates with the Kentucky Real Estate Commission last year, but still has a suit pending against the National Association of Realtors, challenging the listing rules that Justice says hamper competition. The Realtors changed their rules in answer to the suit, but Justice then filed an amended complaint.

It's unusual, though not unheard of, for federal agencies to involve themselves in the legislative debate over state laws. What is truly rare is for Realtors to face such heavy-hitting opposition. They have been engaged for years in a multimillion-dollar fight in Congress with mortgage bankers, who are seeking their own piece of the real estate action. But at the state level, there's almost never an adversary of much heft standing in opposition to Realtors.

Ask lobbyists for the industry to name a time they failed to get their way and the only sound you hear may be a long pause. Chris Kyler has been with the Utah Association of Realtors during the state's last seven legislative sessions. "Of the bills that we've opposed since 1999, we've been able to defeat 100 percent of them," he says. "We either defeated all of them or we amended them so that it made our position neutral." The group's rate of success on bills it actively supported isn't quite as high, Kyler says, but it's still "well over 90 percent for seven years running."

LITTLE TOOL KITS

Realtors are careful to mix assertions of clout with arguments about sound public policy. They invariably say they are representing not just their own industry but the property rights of homeowners in general, and that those are a fundamental tenet of American democracy. "I don't have to be that skilled as an advocate," Kyler says. "I don't want to sound cocky, but I think the primary reason we win is we're right."

But just in case a legislator might stray from the path of common sense and try to interfere with the inalienable right to pursue property, Kyler has a group of forty Realtors who meet each week to analyze bills in the legislature and their potential effect on the industry.

The association backs up that analysis with a lot of money. During the 2004 election cycle, the Utah Association of Realtors donated $226,930 to state-level political candidates and causes--a figure matched almost dollar for dollar by individual Realtors and other people in the business. That made real estate the largest single donor to Utah politicians that year, except for political parties and self- financing candidates. Nationwide, the real estate industry contributed $69.5 million to state-level campaigns in 2004, making it the fifth- most-generous sector overall. "It's safe to say that when it comes to coordinated giving to political candidates, real estate interests are some of the most focused in the country," says Edwin Bender, of the National Institute on Money in State Politics.

Bill Malkasian, president of the Wisconsin Association of Realtors, brags openly about the impact his group has on state politics and policy. Malkasian's "little tool kit," as he calls it, includes not just the usual hefty campaign contributions but a nonprofit association called the Wisconsin Homeowners Alliance, which conducts polling and keeps the broader public engaged in issues of property rights.

The most recent effort came this spring, after the state Department of Natural Resources decided it wanted to regulate large piers that may cause pollution, especially the so-called big "party platforms." Most piers would have been exempt, but Realtors viewed the new rules as a threat anyway. "We went directly to the public and fought them big time," Malkasian says--and sure enough, legislators voted to block the agency from moving forward with its plan.

There are huge incentives for licensed agents to sign on with the trade group, starting with the listings they gain access to by joining. Realtors sign up with their local, state and national associations simultaneously. The national association now claims close to 1.3 million members--an increase of about 75 percent over the past decade. The massive influx of new members in the face of soaring home prices is one reason why average Realtor income actually hasn't gone up much lately.

Most of the ground rules that govern Realtors today have been in place since the 1920s. It was then that the group registered the brand name of Realtor, which only members can use, and created the familiar 6 percent commission fee structure and the all-important multiple- listing systems. (Because of discounters and other factors, the average commission has shrunk to 5.1 percent in recent years--which is still enough, given rising property prices, to translate into more than $60 billion per year worth of fees nationwide.)

For decades, Realtors tried to keep the multiple listings--and commissions--all to themselves. As a condition for joining the association and getting access to the multiple listings, real estate agents had to agree to a set of terms or code of ethics, a provision of which inevitably would be an agreement to charge a commission of at least a certain amount. "These were just naked price-fixing agreements," says Hawker, the business professor. But they were eventually brought to a halt by a pair of U.S. Supreme Court decisions that found Realtors enjoyed no special exclusion from federal antitrust laws.

If overt price-fixing has gone out of style, however, Realtors still have many tricks up their sleeve to bring mavericks back into line. Real estate agents who try to foster new business models threatening the commission structure have generally been brought to heel through boycotts and other pressure tactics. Court outcomes in cases alleging such behavior have been mixed, but complaints from the 1970s would sound familiar to the discount brokers of 2006 trying to use the Internet as a means of challenging Realtors' power.

After the New Mexico Real Estate Commission approved minimum service regulations in February, "I had to turn down business immediately," says Donald Blunkett, a discount broker with operations in several Western states. "Long term, I may have to exit New Mexico as a market. Prices are going to be definitely higher."

ONE VOICE

Realtors have lost a few minor property-rights battles recently, over bills requiring that sellers disclose whether a registered sex offender lives nearby or whether their properties once housed meth labs. A number of states also have found property-transfer taxes a relatively painless way to raise money during recent budget crunches. "That's certainly one of those hidden taxes that legislators don't have to talk about too loudly," says Susan Dioury, of the Minnesota Association of Realtors, "so that's an easy one to raise."

But Realtors are still mostly getting their way, whether in bills that affect them directly or broader fights over growth restrictions and other land-use policies. They are a strikingly coherent organization, considering that theirs is a profession of small groups of practitioners locked in constant competition with one another.

Most Realtor lobbying is handled by volunteer members and state association staff, rather than hired contract lobbyists. They often have prominent figures on staff, such as former bar association presidents or ex-members of state real estate commissions. But even when it comes time for the non-professionals to lobby, Realtors are well-equipped to exploit the relationships they form with politicians and regulators. They tend to be natural salesmen accustomed to persuasion and negotiating transactions between third parties--very good, Mansell says, at bringing parties together, whether it's buyers and sellers, or members of the legislature. "House or Senate," he says, "it's a negotiating system."

Realtors in fact, often get much of the negotiating work out of the way well before a policy idea reaches the legislative stage. In many states, the crucial decisions are made by the real estate commission, and you'd be hard-pressed to find a real estate commission in any state that is not dominated by people who are active in the business. In some states, the presence of real estate agents on the commission is required by statute. Often, the individuals serving as commissioners have been recommended to the governor by the state Association of Realtors.

In a sense, Realtors are both the buyers and sellers when it comes to formulating the policies that govern their profession. In Louisiana, two of the three state commissioners also serve as members of the state Realtors association's committee on legislation. Things aren't always that cozy, but it's normal for commissioners to work hand in glove with the Realtors' lobby in setting and proposing policy. And once a bill is drafted by the state commission, it's seldom challenged by legislators--or anyone else, since there's rarely an effective, organized counterweight to the Realtors on issues concerning their business.

Occasionally, a seemingly compliant state commission throws the industry an unexpected curve. The Idaho commission did that this year when it refused to sign off on a minimum-services bill after hearing from U.S. Department of Justice representatives that it might be a restraint of trade. The commission asked the state Realtors association if it could live with a version that would allow consumers to waive the minimum-service requirements if they so desired. The association said no, and so the bill was never introduced.

But that may not be the end of the story in Idaho. There is speculation that the Idaho Association of Realtors will add a question on minimum service legislation to the list of questions it asks prospective commissioners when it comes time for new appointments--and that those who fail to register enthusiasm for the concept are unlikely to be chosen.

It may not happen, but the fact that many in Idaho expect it points up that Realtors are in fact scrupulous about monitoring the people who make decisions that affect their business--and try to have friendly people making those decisions whenever possible. "When you get too many in there, it can be a challenge from a PR standpoint," says Kyler, of his association's hefty representation in the Utah legislature. "You don't want it to look like you're taking over the body, and we're not."

For the Realtors' opponents, however, it sometimes does look like they've managed to take over, or at least certainly influence, every important legislature and regulating body. "It's an industry where rules are being set up and governed by its own biggest players," complains Pat Lashinsky, of the discount brokerage ZipRealty, which is based in Emeryville, California, just across the bay from San Francisco--a market where the median house price now tops $660,000. With commissions on Bay Area home sales exceeding $40,000, Lashinsky thinks that consumers will inevitably embrace different business models that can save them thousands of dollars.

But Realtors have proven themselves not just vigilant but adaptable in answering every challenge to their way of doing business. To the extent that they are able to preserve their advantages over the long haul, they will have their friends in state government largely to thank. "If they can't fix the specific prices, they can at least control the terms on which their competitors are doing business," says Hawker. "So far, the lobbying has been a pretty effective way of doing that."

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