So they have to sift through instances until they find one that federates exactly how they would? Lol. Or do they have to compromise because they don't actually have the power to choose who they federate with?

You can see the blocklist of any mastodon instance without joining it. You can and should read their policies before joining.

Hosting their own instance makes them admins.

This makes no sense. You are saying that just because you're the admin of an instance you can't be an user?

You can have a single user instance of your own and be done with it. If you don't like someone else choosing what instances defederate, you have that possibility.