Adapted from a July 2, 2013 blog post by Matthew Rathbun
It’s not a new trend, but rather one that’s simply becoming more ubiquitous. “Pocket Listing” is an industry term indicating that a real estate agent has obtained a listing from a client which will not be entered into the MLS or in which the entry will be delayed. Why would agents do that, you ask? There are a few legitimate reasons, but it’s typically done to the benefit of the listing firm. The better question is, “Why would a seller do that?”
Let’s tackle the legitimate reasons. The first may be that the home simply isn’t ready to show. In order to give advice and counsel, agents must have obtained an agency agreement/disclosure. In Virginia, the law requires that the agreement be in writing. In a typical scenario, the seller selects an agent and trusts the agent to give guidance and to find a buyer. They execute a listing agreement, and decide that the listing agent can bring a buyer should he or she find one, but perhaps the house isn’t ready just yet for prime time. Perhaps it needs work, or there are still tenants in the home. In short, presentation of the house needs to be in the sole control of the lister for now. If this is the case, the listing agreement needs to address when the house would be publicly advertised. In the meantime, there is no offer to co-broker with selling agents, and if a selling agent outside of the lister’s firm were to bring an offer, the agents would need to negotiate compensation in writing separate from the buyer’s offer to purchase.
Remember – there is no agreement to pay the selling agent’s firm commission, outside of the MLS agreement or standing written agreement between the brokers.
the 'Preserving the Client' Argument
Ok, so at this point you’re probably saying, “Well, that’s happened to me. I understand why you might need a pocket listing in the situation above…,” and then you start to ask, “Why else would one take a pocket listing?” Here are some explanations that agents have given:
? “I’m preserving the client’s interest by only seeking out buyers that I know are qualified, and trying to avoid selling agents that are just going to complicate things.”
? “I already had a great buyer that wanted to make an offer. Why put my seller through the headache of letting a ton of people traipse through his house?”
? “Selling agents will try to take as much away from the seller as possible. I’ll find a buyer that just wants a clean transaction.”
There are many other theories out there, but those seem to be the prevailing three. The problem is that all three of these arguments seem to stem from the personal interest of the lister. The last one is clearly a detriment to the buyer.
Of course, none of these theories mention the personal benefit that the lister often enjoys – double the commission. However, selling agents are warned that not all pocket listings enjoy an increased commission. Many listers have variable rate commissions, where they have agreed to reduce the commission should they produce the buyer in the transaction. Additionally, some savvy buyers have elected to represent themselves in return for assistance in closing costs or reduced sales prices when the selling agent commission is removed from the equation.
There is a more hushed, but emerging conversation about the impact of MLS syndication (sending listings to other sites such as Realtor.com, Zillow and Trulia), and how that practice is undermining the industry. The practice of syndication may not be agent-centric, but it is most assuredly seller-friendly.
Legit Practice? One Broker’s View
What’s that you ask? How do I personally feel about pocket listings?
I don’t care for them in most cases. I understand using them for a limited period of time in rare situations, when it’s clearly in the seller’s best interest. However, open competition among buyers is often very much in the seller’s best interest when properly handled by the lister. As the market improves, we’re seeing more and more multiple-offers and escalation clauses. This encourages better offers from buyers and alleviates the question that seeps into most seller’s minds: "I wonder if I could have gotten a better offer, had I waited?"
While many listers may adjust their commission in a pocket listing situation, most do not simply waive the “other side” of the commission, and thus do financially benefit from the elimination of other buyers. Often agents are left with dual agency situations, and many agents do not perform to the letter of the law in dual agency roles.
Others will argue that this practice will collapse the value of the MLS. As this practice nudges forward it will become harder to find buyers the homes they actually want. It will require buyers to enter reluctantly into unholy dual agency relationships to get a home. This practice was deemed archaic in the mid-90s, and I’m not sure why we desire to go back (other than for the financial benefit of the lister).
The Speaking of Real Estate blog took this issue on in a recent post outlining the practice as bad for the industry. This post had a particularly interesting list of comments. Visit go.nvar.com/pocketblog to view the post and comments.
What Should We Do?
If you’re the lister with the pocket listing, ensure that you’ve fully informed the seller of the challenges and benefits of the relationship. Ensure that the seller knows that the listing will not be exposed to buyers outside of the listing firm’s influence, and address how selling agents outside of the firm will be handled should they bring a buyer.
For selling agents – well, good luck. Make sure you address the hazards of dual agency, the benefits of exclusive buyer agency and inform buyers how they should engage should they come across a home that is not in the MLS.
The California Association of Realtors® Can Help
The California Association of Realtors® has released an excellent piece for agents to use when engaging clients. It offers an example of how associations can help their members. To view this resource for agents, visit go.nvar.com/carpocket.
Matthew Rathbun is a Virginia licensed broker and vice president of Coldwell Banker Elite and Coldwell Banker Elite Commercial in Stafford, Virginia. View the entire blog post at go.nvar.com/pocket.