Web site challenges state real estate licensing law

Just a little over two years ago, Ed Williams and Francis Mackay-Smith were running an online listing service that today remains under investigation by the New Hampshire Real Estate Commission for allegedly acting as a real estate broker without a license. Now the two Massachusetts men are executives of another, similar company, suing the state over an alleged threat to their First Amendment rights.

“The state of New Hampshire does not have a right to protect a cartel of real estate agents,” said Mackay-Smith, chief operating officer of ZeroBrokerFees.com, a Beverly, Mass., company offering a listing service to people looking to sell their homes without the services of real estate brokers. “People do have a right to advertise their own homes without paying egregious sums to the Realtors.”

Mackay-Smith and Williams, the chief executive officer, started ZeroBrokerFees.com in January 2005 after both had been fired from ISoldMyHouse.com, then a division of 1-800 East West Mortgage Company. East West itself is a wholly owned subsidiary of Commerce Bank and Trust in Worcester, Mass.

In August 2004, the New Hampshire Association of Realtors filed a complaint alleging ISMH was offering a variety of brokerage services to sellers of New Hampshire properties without a broker’s license, as required by state law. Last month the Real Estate Commission issued a finding that East West Mortgage, doing business as ISoldMyHouse.com, is in violation of a commission order to produce records originally requested by the commission in September 2004. The commission charged the company had “failed to preserve the evidence.”

In U.S. District Court in Concord, meanwhile, Judge James Muirhead recently rejected a motion by Attorney General Kelly Ayotte and the members of the Real Estate Commission to dismiss a suit brought by ZeroBrokerFees.com, asking the court to find portions of the New Hampshire Real Estate Practices Act unconstitutional.

Though no complaint had been filed or action taken against Zero Broker Fees, the plaintiffs claimed that the statute placed them under the threat of prosecution for the exercise of their First Amendment rights. Judge Muirhead’s ruling allows the case to go to trial at some yet unspecified date.

The suit was filed by the Institute for Justice, a libertarian public interest group based in Arlington, Va. The statute defines brokerage activity so broadly that it effectively outlaws constitutionally protected free speech of non-licensees, said Valerie Bayham, a staff attorney with the institute.

The several definitions of a broker include one who lists or offers to list properties for sale or who “assists for compensation in the procuring of prospects.” It also covers anyone who receives an advance fee to promote “the sale of real estate in a publication or data base …”

The law does exempt newspapers and other publications of general circulation.

“The law allows them to discriminate in favor of newspapers and against online advertisers. That violates the First Amendment,” said Bayham, adding that the law protects brokers from competition on the Internet from sale-by-owner transactions. “We think the people who should be deciding how best to sell their properties are the homeowners,” she said.

Paul Griffin, executive vice president of the New Hampshire Association of Realtors, said the services offered by ISMH involved more than the mere posting of ads.

“There are a number of Web sites that provide a way for real estate properties to be advertised the same way they are in the print media,” he said. “Obviously we don’t have an issue with that.”

But ISMH, he said, offered to “assist in the negotiation of transactions, assist in the procurement of prospects. These are the activities we alleged that ISMH engaged that went above and beyond the listing of properties.”

Mackay-Smith said no one at ISMH was involved in the negotiation of real estate transactions while he was there. “We didn’t even know a sale happened until somebody would call and say, ‘Take my ad off, I sold my house.’”

But he does acknowledge that the company screened prospective buyers for the homes, and the company’s Web site did offer to make the listings available to buyer-brokers for a “licensing fee.” And making sure buyers were pre-approved for a mortgage was a way of generating more business for East West.

“The original reason ISoldMyHouse.com was created was to bring mortgage leads to the mortgage company,” Mackay-Smith said.

Conflict of interest?

Between 2002, when ISMH went online, and 2005, East-West mortgage closings went from 250 to 350 a month to 1,200 or 1,300 a month, he said. As is the case now at ZeroBrokerFees.com, the ads for ISMH did not give any direct contact information about the seller. Interested buyers must contact the Web site operators to inquire about the property.

“We don’t feel like we’re acting as broker by shielding callers’ numbers and making sure people calling are pre-approved and have an interest in the house, not someone selling aluminum siding or some broker trying to muscle his way into your house,” said Williams. Sellers often stipulate in the ads that prospective buyers must be pre-approved for a mortgage, he said.

“Who’s going to spend three hours walking you through a house if you’re not pre-approved?” he said. “We want to make sure we have all the ducks in a row. Maybe a judge will see it differently, but I think it’s freedom of speech.”

The New Hampshire Association of Realtors thinks it’s something else, however, and has petitioned the Real Estate Commission for sanctions against East West for alleged violations of the licensing requirement during the time it was running ISoldMyHouse.com.

The commission has determined that a minimum of 775 New Hampshire properties were on the ISoldMyHouse.com Web site between Jan. 1, 2000, and Dec. 31, 2004. Since the Real Estate Practices Act authorizes fines of up to $2,000 per violation, a finding in favor of the Realtors’ complaint could leave East-West liable for more than $1.5 million in fines.

Concord attorney Chris Gallagher, representing East West, argues that the commission has no authority to impose administrative penalties on non-licensees and would have to make its case in a court of law. He also has questioned the fairness of having the Realtors’ complaint heard by the real estate commissioners, when three of the five commissioners are members of that same Realtors’ organization.

A 2005 ruling in Merrimack County Superior Court held that the case fell under the authority of the Real Estate Commission, rather than the Banking Department.

“My position is, they shouldn’t be deciding a case in which the real estate profession is a party,” said Gallagher. RSA 331-A:9 of the New Hampshire Real Estate Practices Act prohibits any commission member from participating in a license action or disciplinary matter “involving the member or a person with whom the member is personally or professionally associated.”

Commission Chairman Arthur Slattery, who will be the “evaluator” of the evidence when the investigation is complete, is the only member of the board to recuse himself from the hearings thus far. Commission members Nancy Leroy and Barbara Heath, who are both members of the New Hampshire Association of Realtors, have participated. Robert Stephen, a Manchester lawyer and member of the commission, has been the presiding officer in the hearings.

“Every commissioner has to make a decision as to whether or not they can be impartial,” said Stephen, when asked about a conflict. “I have every reason to believe that every commissioner sitting on this case has been and will be impartial.”