Are Pocket Listings Making A Comeback?

With the rise in home prices across much of the country the increase in demand has brought us back to an old problem: pocket listings, situations where brokers list a home but have it sold before it can appear on a local MLS system.

“Pocket listings — homes sold outside multiple listing systems — have become extraordinarily popular over the past year,” says industry expert Steve Cook at Real Estate Economy Watch. It’s “creating a secondary residential market place that raises questions about the value and role of the Realtor-run MLS system that has dominated residential real estate for more than a century.”

Pocket listings are tricky because they are plainly allowed in some cases by state regulations and MLS rules. No less important, it’s often difficult to say why they are harmful since the seller is getting the full asking price established by the listing agreement.

Difficult — but not impossible.

Let’s imagine that the Smiths list their home for $300,000 with Broker Jones. The Smiths in this situation will be very happy if their property is quickly sold and Jones delivers: the property is sold within 24 hours for the full asking price.

In selling the property, Jones — a member of the local MLS — did not place the property in the system. This is generally allowed under local MLS rules where brokers typically have a day or two before they are required to enter a home into the system if they are a member.

So, from an MLS perspective, Jones acted within the rules and by doing so did very well for both the Smiths and himself. He listed and sold the property and therefore did not have to split the commission with another broker. Meanwhile, the Smiths got full price.

What’s the harm in this situation?

When a home is listed a seller such as the Smiths can be seen as a “principal” while Jones agrees to act as their “agent.” As their agent, Jones has a “fiduciary” obligation to put the interests of the Smiths before his own interests.

In our example Jones sold the property for the listed price. However, perhaps the listed price was not the highest and best value for the property, something that can only be known with marketplace exposure. In a strong market where the demand for homes is high — and in some cases where there are multiple offers — a home which sells quickly at the listed price may not actually be selling for full value.

MLS Listings Chair and C.A.R. Past-President Robert Bailey says that a study of five California MLS systems found off-MLS properties generally sold for less than homes which had MLS exposure — in some cases significantly less.

So the first problem with a pocket listing is that the fiduciary obligations a broker has to a seller may not be met. Had the property been exposed to a larger pool of potential buyers perhaps the Smiths might have gotten more than $300,000, or better terms.

But what if the broker simply introduces the property to a small group of buyers, people who have bought from the broker before, maybe an investment club or members of a local social group? What if the broker reaches out to a few licensees with whom he has dealt before? What’s the problem with that?

In addition to the issue of maximizing prices, Elizabeth Miller-Bougdanos, senior counsel to the California Association of Realtors said that when marketing is restricted to small groups then questions of discrimination and anti-trust can emerge.

“If competing brokers agree to work together in formal or informal groups that mandate a minimum commission that must be paid, the price-fixing arrangement is generally a per se violation of the antitrust laws, subjecting all participants to potential liability,” she explained.

And, she added, “if agents limit their listing exposure to only certain sectors of the market, it
 may have an alleged discriminatory effect (i.e. reinforcing segregated housing patterns) even when there is no intent to discriminate.” (Parenthesis hers)

Pocket listings have undeniable attractions and in some cases may represent the best-available option for sellers. That said, brokers will have to justify such transactions if questions arise, questions that can be very expensive to defend.

Other articles available in the RealtyTrac Newsroom:
Should Housing Prices Be Higher?
U-Haul: Biggest Population Shift to Pittsburg in 2012
President’s 2014 Budget Foresees $943 Million FHA Bailout

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