The Alabama Realtor Protection Law

Anyone who has ever bought or sold a house knows just what kind of harrowing and expensive experience it can be.

Along with the phenomenal increase in house prices in recent years, the transaction fees associated with sales have also increased, particularly broker commissions, which are generally assessed as a percentage of a home's price. One lingering question is why these commissions seem to be forever stuck at 6%, in spite of the fact that there are tons of real estate agents and brokers out there supposedly competing against one another. Alex Tabarrok, a blogger over at Marginal Revolution, posted on this topic recently here and here. Other blogs that have taken on the subject are Real Estate Today (here and here), Freedom and Prosperity, Common Sense Wonder, and the AEI-Brookings Daily Reg Report.

Needless to say, the real estate business is in need of a good dose of competition, and that's exactly what traditional real estate brokers fear. As home buyers have sought out ways to lower transaction costs, innovative new businesses have sprung up offering discount real estate services. However, faced with the threat of competition, "traditional" real estate companies have thrown their weight behind legislation to force their new rivals out of business.

Here in Alabama, the Alabama Association of Realtors successfully lobbied the Governor and legislature to pass a so-called "minimum services law" during the recent special session, ensuring that the anti-competitive practices (and the inevitable 6% commissions) of traditional real estate firms will continue for the forseeable future. The law states that:

When accepting an agreement to list an owner's property for sale, the broker or his or her licensee shall, at a minimum, accept delivery of and present to the consumer all offers, counteroffers, and addenda to assist the consumer in negotiating offers, counteroffers, and addenda, and to answer the consumer's questions relating to the transaction.

That means that if you are buying or selling a house in Alabama, you no longer have the option to buy only those services you need from a real estate broker. The law now compels you to purchase a full range of services and pay the associated transaction fees, whether you want them or not.

Alabama isn't alone in succumbing to the pressures of the Realtor Racket. At least a dozen other states have similar laws on the books already or are considering them. Most recently, minimum services requirements have won approval in Missouri, Texas, Oklahoma, and Utah.

In a recent editorial entitled "The Realtor Racket" (subscription required), the Wall Street Journal asked why this was happening.

Why are Governors and state legislatures enacting regulations to make buying and selling homes as expensive as possible?

We ask this question because in recent weeks three normally level-headed Republican Governors -- Matt Blunt of Missouri, Rick Perry of Texas and Bob Riley of Alabama -- have signed into law legislation that protects Realtors from discount competitors.

About a dozen other states have also buckled to the National Association of Realtors lobby. They've effectively become partners in what looks suspiciously like a price-fixing scheme, whereby discounters are prevented by law from charging fees below the industry norm of 5% to 6% of the home sales price. The financial victims of this cartel are middle-income home buyers and sellers who are required to pay brokerage fees that can easily be several thousand dollars above a competitive market price.

Real estate brokers are under increasing price pressure from Web-based home-buying services and other discount brokers. With state lawmakers so often bellyaching about the decline in "affordable housing," one would expect politicians to salute these low-fee entrants to the market.

Instead, state legislatures and real estate commissions -- which happen to be populated by Realtors -- are enacting laws that make price competition illegal and thus treat Realtors as if they are members of a closed shop union.

Alabama's Realtor Protection Law was passed by a vote of 94-1 in the House and 35-0 in the Senate before being signed by Governor Riley. Keep that in mind the next time you set out to buy or sell a home.