The California Association of Realtors, in response to numerous reports about properties being sold as pocket listings, recently issued a warning to its 160,000 members.
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“For a listing agent to arrange for a pocket listing to bolster the listing office’s own compensation and disregard the typical seller’s interest to procure the highest and best offer is likely to be, among other things, a breach of the listing broker’s fiduciary duty to the seller.”
The term “pocket listing” can refer to different situations. According to CAR’s legal department, a pocket listing is a valid listing agreement with a seller but one the agent does not place into MLS. Another use of the term is when an agent does not have a listing contract with the seller but knows of a situation where the seller would be willing to sell if presented with an offer. Without a valid listing agreement, most agents wouldn’t normally give this type of pocket listing a second thought but with the scarcity of homes for sale, more agents are showing their clients unlisted properties. That can create misunderstandings.
Here’s an example:
While attending a Chamber of Commerce mixer another agent told me about a pocket listing she had on a vineyard in Somerset. It wasn’t listed but she knew the owners and told me the price they would accept. After previewing the property, my client offered full price, all cash. His offer was promptly rejected by the sellers saying they had decided not to sell and the other agent misunderstood their previous discussions regarding the price. While the other agent shrugged off the situation, my client understandably blamed me for misrepresenting the property’s availability and its price.
Another type of pocket listing is where the agent advertises “coming soon” or “not yet listed.” Soliciting buyers for an unlisted property enables the agent to “double end” (collect both the listing and selling commission) rather than placing the listing in MLS and making it available to buyers represented by other agents.
REO listing agents are notorious pocket listers. They may know weeks in advance of receiving the actual signed listing that they have been assigned the property. At which time they place a sign on the property and a notice to interested parties to contact them with any questions.
The pocket listings that generate the most amount of controversy is where an agent has a signed listing agreement but withholds imputing the information into the Multiple Listing Service. This practice is prohibited by our MLS which generally require all listings to be submitted into MLS within two business days and for good reasons.
The more folks who know about a property for sale, the faster it will sell and at a higher price. Withholding listings from wide general distribution through the MLS limits the number of offers and the price sellers receive. Pocket listing could also violate the California real estate law by being a breach of a listing agent’s fiduciary duty to the seller if the arrangement is viewed as benefiting the listing agent at the expense of their client.
Pocket listings exist in all types of markets but are most problematic when there is a shortage of inventory — as we have today. It is frustrating for most agents who willingly share their listings and information with others only to be excluded from the same opportunity. It can also cost sellers serious money when they don’t have the benefits from maximum exposure of their property for sale.
There are agents who will make the argument in favor of pocket listings, claiming they are justified by special circumstances or privacy issues. Often, sellers are not terribly serious about selling but would consider selling if the right offer came around. Others have a fear of commitment and may not be ready to sign a full listing contract.
While there may be the occasional justification for pocket listings, generally they are a bad idea for sellers and a potential liability for agents, which is why the California Association of Realtors sent out the “legal alert” to its membership. After all, who really benefits from pocket listings? Are the agents withholding the information from general distribution for the sellers benefit or to “double end” a sale?
The greed factor is at play here. Let’s say I know a homeowner who wants to sell and I anticipate their home will sell quickly at the listing price that I suggested. In fact, I have buyers who would be interested. Rather than submitting the listing to MLS, I convince the sellers they don’t need the interruptions and inconveniences of agents and curious looky-loos traipsing through their home at all hours. Why don’t we just keep this listing between us and if my buyer buys the house, perhaps I will pick up the escrow fee. What’s the harm? The house gets sold and I end up with both the listing and selling side of the commission.
Although there may be some rare exceptions, a property is either for sale or it isn’t. If it is, then it’s the agent’s duty to ensure the seller gets the highest price possible and that can only happen in a free and open market.
Ken Calhoon is a real estate broker in El Dorado County. He can be reached at kencalhoon.com.