What happens when a home appears on the market but stays invisible to the MLS as a pocket listing? Controversy, for one thing.
By David Tobenkin
Nothing seems to get REALTORS® heated these days quite like pocket listings. These properties, kept off the MLS and in an agent’s pocket, are both loved and loathed by CRSs.
“I truly believe that it will take only one good lawsuit from a seller who learns that he or she may have gotten more dollars or better terms on the ‘open’ market to make selling agents who use this practice regret it,” says Janet Judd, CRS, a REALTOR® at the St. Louis-based RE/MAX Results office. Judd says she tries very hard not to engage in pocket sales.
On the other hand:
“I do have pocket listings, and believe they can be a great way to increase urgency,” counters Kathleen Novak, CRS, an agent at Howard Hanna Real Estate in Aurora, Ohio. “In a market like the one we are in now, with low inventory, it’s a valuable tool. Every house isn’t right for this marketing technique. But when I have a ‘special’ house (i.e., ideal neighborhood, price and condition), it has been a successful strategy.”
Pocket sales are sales of properties through agent marketing strategies instead of or prior to listing them on the MLS. This keeps the property off the open market for at least a limited amount of time—for better or worse. The ways these properties can be marketed instead run the gamut: listings on the agent’s website or a broker’s website; other, non-MLS real estate listing sites; signs on the property; and informal communications between agents. Often they are identified as “Coming Soon” properties.
While there do not appear to be reliable statistics on the practice, pocket sales generally flourish in hot markets where inventory is in short supply, a common condition in markets across the country.
So why the fuss over them? Many agents argue that they should rarely, if ever, be used because they are not in the best interest of sellers. Properties omitted from the MLS could greatly reduce the pool of potential buyers and very likely the ultimate sales price.
A Lack of Transparency
Some say the practice represents a step backwards for the residential real estate sales profession, from one embracing a level, transparent playing field where all information is shared among buyers and sellers through the MLS, to one in which side-deals are negotiated that work largely to the benefit of deal insiders. These insiders include agents at the same brokerage or agents working both sides of the same deal, while others are excluded.
Judd says she has repeatedly encountered situations in which buyers she represents will see a pocket sale property and tell her, and the listing agent will duck her phone calls and emails.
“I work for a company that pushes them at all costs, and I have very mixed feelings about them, as do my clients,” says Brian Sergi-Curfman, CRS, a Pittsburgh-based agent for Howard Hanna Real Estate. “Agents should always present the pocket listing option to a seller when listing their home, but like any other tool, the pros and the cons should be explained without judgment, steering or self-interest. Companies want to expand market share, and the most abused tool to gain market share is the pocket listing.”
Agents who use them, including Sergi-Curfman, contend that there are some situations in which pocket sales do make sense. They can be a boon for buyers because they could obtain a property without getting into a bidding war or a multiple-offer situation where they can lose the property, says Eric Lemke, CRS, a REALTOR® at HOME Real Estate in Lincoln, Nebraska.
For sellers, there are situations where a pocket sale may still be in their interest even if it doesn’t fetch the highest price, Lemke says, such as when the agent believes that the seller has an asking price that is far too high, given that the property is unlikely to gain interest on the MLS even if placed there. Another situation is where the seller is buying another property under contingency and selling the property quickly is of the essence, Lemke says.
A seller’s desire for control is another reason for pocket sales. “One reason my seller clients choose the pocket sales option is because they desire to limit the practice of strangers walking through their property to only those actually ready, willing and able to buy,” says Cynthia Nash-Frye, CRS, a Libertyville, Illinois-based agent at @properties. “They also sometimes don’t want the world to know that their property is on the market, for health or personal reasons.”
Know the Law and Rules
Agents who do use pocket sales techniques will need to exercise care to comply with relevant legal and professional requirements. A 2014 article by National Association of REALTORS® General Counsel Katherine “Katie” Johnson (nar.realtor/articles/coming-soon-is-it-in-the-seller-s-best-interest) identified some issues to consider before using pocket sales.
“A broker’s decision to market a seller’s property as ‘coming soon’ must always be made based on the client’s informed determination of what best serves the client’s interests,” Johnson noted in the article. “Failing to act in the client’s best interest and failing to disclose the pros and cons of a limited marketing plan, such as ‘coming soon’ advertising, can violate state real estate license laws and regulations, MLS policies, and the REALTOR® Code of Ethics.”
Out of Pocket
Many state and local REALTOR® associations and MLS organizations are adding their own pocket sales guidelines, limitations and documentation requirements.
“This has been such a hot topic that the California Association of REALTORS® lawyers put an MLS advisory into the listing contract so that the sellers know the importance of putting their listings on the MLS so that their property gets the most exposure and therefore the opportunity for the most offers,” says Retta Treanor, CRS, a broker/owner at Hayfork, California-based Big Valley Properties.
“Our MLS (Spokane Association of REALTORS®) has rules on listings being submitted to the MLS, and if you are not submitting to the MLS within one business day of signing a listing contract, you need to file a ‘Waiver of MLS Benefits’ form signed by the seller for the association to have on file,” notes Linda Knaggs, CRS, a Spokane, Washington-based agent at RE/MAX Inland Empire. “If this is not done, you are subject to fines.”
The first step is to see if state law imposes certain standards for the conduct of agents who are involved in such sales or otherwise limits them, particularly regarding disclosures to sellers and other documentation. Some states have expressly addressed the practice, such as the Colorado Department of Regulatory Agencies, Real Estate Division. According to Johnson, in 2014 the Department issued an opinion “clarifying that a licensee’s existing duty to ‘promote the interests of the seller or landlord with the utmost good faith, loyalty, and fidelity’ requires Colorado licensees to advise clients during the negotiation of the listing contract of the benefits or risks of limiting a property’s exposure through ‘coming soon’ advertising.”
In addition, many state license laws impose certain duties on licensees that include duties of care, loyalty, good faith, and honest and fair dealing, Johnson notes. An unsatisfied seller could sue based upon alleged breach of one of these duties. Agents considering becoming involved in such sales will also want to check the rules of their state and local real estate boards and MLS organizations (see sidebar above), and their own brokerages.
It is essential that both agents—particularly the selling agent—convey the upsides and downsides presented by pocket sales to their clients so that the clients can make an informed decision as to whether they should participate in them. Lemke says he also tries to generate some competition for pocket sales properties through non-MLS marketing efforts, is careful to examine comps, and takes other steps to try to make sure that use of a pocket sale does not result in a large reduction in sales price over its MLS potential.
Listen to a California Association of REALTORS® podcast on pocket listings at nar.realtor/podcasts/legal-podcast-pocket-listings.
