Pocket Listings – Sellers Beware

What Is A Pocket Listing?

Pocket listings refer to listing agreements that agents obtain with a seller that do not require that the listing be placed into the Multiple Listing Service (MLS).  In other words, it is a listing that an agent keeps in his or her “pocket” rather than advertising publicly.

Pocket listings often come under significant scrutiny.  For example, bankrate.com warns sellers to “be wary of any hard push to offer their home as a pocket listing,” and deadlinenews.com gives sellers a similar warning against pocket listings.   Moneysmartblog.com specifically advises sellers to avoid pocket listings.  Pocket listings are legal, but whether they are in the best interest of the client is debatable, and often depends on the circumstances specific to the seller of the property.

Benefits Of Pocket Listings

There are some circumstances where a pocket listing may make sense.  One of the most significant benefits of a pocket listing is privacy.  Keeping a listing off the MLS essentially blocks the general public from the knowledge that an individual has placed his or her house on the market.  While this may have negative consequences, which are further discussed below, the benefit of privacy can be attractive for individuals who are often under public scrutiny, such as actors, actresses, movie stars, musicians, politicians, etc.  Additionally, temporarily keeping a listing as a pocket listing may allow a seller to make necessary changes or repairs to a property before advertising the listing to the general public.

 The Cost Of Pocket Listings

The potential downside of keeping a property off of the MLS, however, is significant.  The reason pocket listings are often disfavored is the potential significant negative impact on a listing’s eventual sale price.  Like with any other product, one of the ways to increase the potential sale price of a home is to increase demand.  By keeping a listing off of the MLS, sellers significantly reduce their property’s exposure to potential purchasers, thereby decreasing demand.  On the other hand, exposing a listing to the general public often increases demand for a property, resulting in a bidding war, a higher price, better offer terms, and/or a purchaser who is better positioned to close a deal.  In fact, according to a study of Silicon Valley Pocket Listings, homes sold on the MLS generally sell for more than off-market listings.  Thus, sellers should seriously consider whether potentially selling their home for less than the market price is worth the benefit of privacy.

Pocket Listings And Real Estate Agents

There is also one other person who can benefit significantly from a pocket listing – the listing agent.  Typically, when a property is listed on the MLS, the listing agent has agreed to cooperate with other agents and to share a portion of the sale commission with the agent for the buyer.  For example, the typical commission on the sale of residential real property is 5-6%.  If the buyer and seller are represented by different agents, each agent earns 2.5-3% of the sale price.  However, when a listing is not placed on the MLS, the listing agent is typically not required to cooperate with other agents and to share a portion of the commission with the agent for the purchaser.  In other words, the listing agent increases his or her chances of earning “both sides” of the commission rather than sharing a portion with a buyer’s agent.  Moreover, by keeping a listing as a pocket listing, the largest audience that will be reached is the listing agent and his or her own office’s purchasing clients, thereby again reducing the chance that the agent will be required to share the commission.

Due to a pocket listing’s potentially negative impact on the sale price, and because of the agents’ conflicting incentive to keep a listing as a pocket listing, the California Association of Realtors warns its members that “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 very likely to be, among other things, a breach of the listing broker’s fiduciary duty to that seller.”  Real estate agents owe duties of loyalty and good faith to their clients, and those duties may often require that an agent obtain the best and highest price for a property by listing it on the MLS.  Unless a seller has been thoroughly advised of the potential consequences of keeping a property off of the MLS, listing a property as a pocket listing may be a breach of the listing agent’s fiduciary duties to the seller.

Determine Whether A Pocket Listing Is Appropriate For You

In sum, sellers should be extremely cautious when they are approached with the pocket listing concept.  It may make sense for sellers who place significant value of its benefits, i.e. privacy, but otherwise pocket listings may present a situation where a listing agent benefits at the seller’s expense.

If you would like to further discuss how Esquire Real Estate Brokerage, Inc. can help you in the Los Angeles real estate markets, feel free to give us a call at 213-973-9439 or send us an email at info@esquirereb.com.