The Logic Of The Pocket Listing - Why Not List On The MLS?

The Logic Of The Pocket Listing - Why Not List On The MLS?

There is no shortage of real estate mythology, superstitions, and old wives' tales but one of the strangest concepts is the pocket listing and I think I'm due to weigh in on it since there seems to be an upsurge in the use of this strange technique in the face of a hot real estate market. You see, a pocket listing is a listing that a seller's agent keeps in their pocket and tries to sell without listing it on the MLS - at least initially. But the whole purpose of the MLS is to help you disseminate information about a home to as many people as possible and as simultaneously as possible so why in the world would you not use it? Ay, there's the rub.

I can only come up with one legitimate reason for going the pocket listing route - privacy. Occasionally a seller won't want a lot of people going through their house or even knowing that they are selling. OK. Valid point. But note that Michael Jordan and Oprah Winfrey listed their homes on the MLS. We had a seller once that wanted us to keep their home a pocket listing and we begged them repeatedly to let us list it. A seller gets SO MUCH information just by being on the MLS. It's invaluable.

But what other reasons can there be for not advertising your home to the broadest possible audience? Enter the bizarro Alice-In-Wonderland world of real estate where "logic and proportion have fallen sloppy dead". I can't even begin to explain the logic of going the pocket listing route so I'm going to let someone else do it. From an article about pocket listings that appeared in Crain's last week here is what Thaddeus Wong, @properties' co-founder, had to say about the subject (Note: I am breaking with my own policy of not naming other brokerages or agents because I don't know how else to quote him from the public domain without doing this.):

He disagrees that such listings lead to missed opportunities for sellers, saying the practice creates a sense of urgency that leads to better results.

“You're more likely to find a buyer willing to pay full price or more, and more cooperative with contingencies,” he said.

And what data does he have to prove this? And by what mechanism does this take place? And oh...@properties created an app that allows their agents to share a listing internally. So it's OK to disseminate these listings internally but not more broadly? If some dissemination is good then wouldn't more be better? And what is it about their own agents that make them a suitable audience but not other agents? What am I missing here?

It gets even stranger. According to a Chicago Tribune article on pocket listings that appeared a couple of months ago a San Francisco-based company, called Top Agent Network,  has created a private online community for top-producing agents. According to the founder, David Faudman:

The agents get to go into our website and behind the door, and they can make postings by real estate-specific categories. They might say, I have a buyer that needs (a certain type of house in a certain neighborhood). Or a seller might not want to be on the MLS, and the agent could post information about the house. Or the agent may have a listing that's in the works but isn't officially listed yet, and they can put it out there for other agents in their Top Agent Network area.

OK. So they created an MLS that's not an MLS for listings that don't want to be on the MLS. What am I missing here?

The fact of the matter is that one of the first things an agent with a pocket listing does is send out an email to as many realtors as they can dig up email addresses for. I get these all the time. Clearly, these listing agents want to increase the exposure of their listing. So why isn't it on the MLS?

Can I Be Sure That Pocket Listings Are Bad For Sellers?

Basic logic tells you that pocket listings can't be good for sellers. If there are 3 buyers out there for a property and you find one without listing the property on the MLS what are the odds that that one buyer just happens to be the buyer that is willing to pay the highest price? And what are the odds that that buyer will pay the highest price without the benefit of a multiple bidding situation?

But more importantly there are numerous examples of sellers getting screwed on these deals. Just about every realtor has watched with dismay as a property gets sold before listing at a price that is lower than what one of his/ her buyers would have gladly paid for that same property. In fact, this happened to me earlier this year when I was representing a buyer at the Pinnacle. A great condo hit the market and, although that condo wasn't technically a pocket listing, it had the same modus operandi. Calls to the listing agent (a well known top producer) for a showing were not returned. Three days after it hit the market I was told that an offer had been verbally accepted. When the unit finally closed we were shocked to discover that it had sold under market value. And oh....the listing agent represented the buyer also. Dual agency. A really bad idea.

Based upon their experiences 74% of San Francisco bay area realtors surveyed said that they believed that a property not being on the MLS decreases the chances that it will sell at the highest price.

In an article that recently appeared in Chicago Agent Magazine about pocket listings MRED CEO, Russ Bergeron, said:

...as a marketing tool, these listings have yet to prove their value. As they are not exposed to the full complement of agents found in an MLS, you run the danger of not getting the best price or multiple offers. A recent study by an MLS in Northern California shows that off-MLS listings sell for about 13 percent less than those entered into the MLS.

MRED is the Chicago area MLS and of course they don't like to see realtors going around their system. And as much as I like the fact that he mentions a statistic that supports my argument I can't imagine how you can determine that number. You would have to sell twin properties simultaneously with and without being listed on the MLS. Not possible. But I thought you should hear his perspective nonetheless.

What Benefit Do Pocket Listings Provide To Real Estate Brokerages?

And as if this couldn't get any stranger I can't for the life of me figure out how pocket listings even benefit the real estate brokerage. As numerous articles attempt to explain, the pocket listing allows the brokerage or the agent and their friends to get both sides of the deal - like that Pinnacle condo. So there is some suspicion that this is motivating brokerages to keep their listings internally as pocket listings.

But let me explain something. If a brokerage has a serious seller and buyer then guess what? They are going to get two commissions on those two clients REGARDLESS of whether they transact on the same property or not. Total income is the same! What am I missing here?

I actually tried to explain this to a group of realtors once in a class I took but it was like explaining heliocentrism to 16th century Protestants. They absolutely believe that two clients on different sides of the same property somehow makes the brokerage more money than those same two clients on different sides of different properties. And clearly the people that write on this subject believe the same thing.

The Chicago Area MLS Attempts To Crack Down On Pocket Listings

One day last week when I signed into the MLS I was notified that they had just increased the fine for failing to put listings on the MLS within 72 hours of the effective date of the listing agreement - from $100 to $1000. That's a serious increase so you know they are trying to stop some kind of abuse in this area. But the abuse they are trying to stop is where the listing agent keeps a listing off the MLS WITHOUT THE PERMISSION OF THE SELLER. Wow! That's a bad one. Seller signs a listing agreement thinking that they are going on the MLS but they don't. According to that Crain's article there were apparently 140 fines issued in the last 12 months for just such malfeasance.

However, most of the time agents have the permission of the seller to keep a listing off the MLS, using a special form for this exact purpose. So while 140 fines were issued last year according to Crain's another 500 complaints resulted in no fines precisely because the listing agents had the proper forms signed. So as long as a real estate agent can convince a seller that a pocket listing is the greatest idea since stainless steel appliances there's really nothing anyone can do except try to educate the consumer.

So, sellers beware! Do not let the pocket listing happen to you.

If you want to keep up to date on the Chicago real estate market, get an insider's view of the seamy underbelly of the real estate industry, or you just think I'm the next Kurt Vonnegut you can Subscribe to Getting Real by Email.

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    After 20 years in the corporate world and running an Internet company, Gary started Lucid Realty with his partner, Sari. The company provides full service, while discounting commissions for sellers and giving buyers rebates.

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