‘Pocket listings’ legal, but for better or for worse?

pocketlisting

When a real estate broker uses the “pocket listing” strategy to sell a home, you, the seller could end up in the broker’s pocket.

But that’s the nature of the deal.

The special home selling arrangement is called a pocket listing or “pocket deal,” as well as an “off-MLS listing” because the broker figuratively keeps the listing in his or her pocket and does not list the property for sale on the multiple listing service (MLS).

A broker has a fiduciary duty to make sure he or she sells a home for the best price, no matter how the broker lists the home, but because the pocket listing effectively undercuts that duty, there’s a good chance the deal will leave some money on the table.

But that’s fine with some sellers.

The MLS is open to virtually anyone in the market – or not – to buy a home. Potentially, millions. Generally speaking, the larger the buying audience, the greater the selling price, by virtue of the sheer numbers of buyers who will see the listing.

A pocket listing doesn’t get that level of exposure. It’s typically marketed in-house or to a select group of outside brokers and the listing may or may not get online exposure, open house events, or other non-mls advertising.

“Much marketing is done via email, word-of-mouth, phone calls to shoppers in the price range. Sometimes they do web sites for them and create virtual tours. It’s just not on the MLS,” said Brenda Miller a real estate agent with Alain Pinel Realtors in Saratoga.

The seller can choose the level of marketing. He or she can ask a broker to “bring me a buyer” and the seller can select an audience, put the word out, and let brokers scramble for the sale.

No one, however, can line their pocket with a seller’s listing without the seller’s full consent, so the seller had better understand the full ramifications of a pocket listing.

“There is nothing illegal about it as long as it’s communicated to and understood by the seller how the property is going to be marketed. It’s an agreement they are going to keep marketing in house and not put out on the MLS and share it with the world. It won’t show up on the MLS,” said Tom Pool, spokesman for the California Department of Real Estate.

In a comparison of public records and listings on the MLSListings, Inc. service, off-MLS listings increased from 12 percent in 2011 to 15 percent in 2012 to 26 percent of the market in the first quarter of 2013, according to Robert Bailey, 2013 chair of MLSListings, Inc.

MLSListings, Inc. is the MLS for real estate associations and brokers in Monterey, San Benito, San Mateo, Santa Clara, and Santa Cruz counties.

Reasons brokers pocket listings

Sellers engage in pocket listings for a variety of reasons.

Asking price. Most homes that sell with the pocket listing strategy are high-end homes worth millions. They are owned by CEOs, other executives and high-level corporate moguls, celebrities and others who have champagne tastes and champagne money.

“In Silicon Valley, this is happening in the northern area, the 650 area code (the stomping ground of technology-made multi-billionaires), more than in the 408 area code,” said Miller.

They could care less about bidding wars driving up the price and have their minds made up about how much they want for the property – preferably in cash. Low inventories in today’s market and demand from the growing ranks of tech industry, wealth-laden millionaires allow high-end sellers to ask for the stars.

Time on the market. Bidding wars that drive up prices and make for quick sales aren’t universal to all homes in every neighborhood – even in some high end neighborhoods. When a home is listed on the MLS, the MLS publicly ticks off the number of days the property has been on the market.

Wrangling with low-ball bids, buyers who fail to get financing, open house events, tours and other delays that come with conventional marketing techniques can cause those days on market (DOMs) to add up. Too many DOMs and buyers begin to wonder “Why isn’t this dog selling? What’s wrong with it?” Concerns about properties languishing on the market can hurt the seller’s bottom line.

“Sellers are after a specific price point and they don’t want DOMs to get big and push down the price,” said Miller.

Privacy. The media can be relentless. Few want camera crews parked outside their home. If the value of a high end home is any indication, what’s inside is likely valuable as well. Security concerns for sellers who’ve already moved out and up also prevent many high-end sellers from sticking a “For Sale” sign in the front lawn and broadcasting the home is vacant.

Pocket listing concerns

Despite sellers’ explicit wishes, housing market experts question the value of pocket listings, especially in active, thriving, seller’s markets.

“This market is too active for pocket listings. It’s not a smart thing in an active market. You have to give a property enough time and exposure to get top dollar” says Robert Aldana, a real estate agent with Intero Real Estate Services in San Jose.

Other critics say some real estate agents are motivated more by the commission than marketing. A broker who “double ends” the deal – both holds the pocket listing and finds the buyer – doesn’t have to share the big-payday commission. The practice is legal, but questionable in terms of limiting marketing exposure.

“If you pocket the listing and try to double end the deal, you will not be exposing the property to the largest market. If the agent makes sure the seller says ‘That’s okay with me,’ and consents to do that there’s nothing wrong with that. You can debate if it’s in the best interest of the seller and the agent owes a fiduciary duty to serve the client in the best possible way, but I haven’t seen any litigation on the whole issue of pocket listing,” said David Hofmann, an attorney with the Hoge Fenton Jones & Appel law firm in San Jose.

Sales of pocket listings also can impact other home sellers looking for comparable listings – recent sales of like homes are examined to help set the price and appraised value of new listings.

Because a pocket listing isn’t on the MLS, its sale may not be known until it’s a matter of public record – or word gets out. Until then, it can’t be used as a comparable sale and that could unduly cause a like home on the market to be sold for more or less than it’s truly worth.

Pocket listings can also impact financing.

If a listing sells under the radar for more than other comparables, but the lender isn’t aware of the sale, the value of another property for sale could take an appraised value hit large enough for the lender to reject financing. If a pocket listing is included in the comparables, it can help bring up the value of the new listing and help the buyer pass muster with the lender.

Similar problems could arise if the unknown pocket listing sold for less than other comparables.

“Word does get out. Appraisers are finding this information through their networks. Agents talk. It shows up in public records and at title companies. It does affect comparables. It could be bad for me trying to sell the house next door,” says Miller.

About the author

DeadlineNews.Com's Publisher, Executive Editor and Founder, Broderick Perkins, was the first real estate journalist to manage a daily newspaper's online real estate section. He parlayed more than 30 years of old-school journalism into a digital real estate news service offering "News that really hits home!" -- the Silicon Valley bootstrap, DeadlineNews.Com. Network with Broderick Perkins on LinkedIn, FaceBook, Twitter, Google+ and the Bloomberg Business Exchange.

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