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Law & Policy: Professionalism and pocket listings

March 5, 2014

By now pocket listings are a concept most real estate professionals are familiar with, and in some circles they have become something of a dirty word. Lower inventory has created a surge in pocket listings, especially in markets such as Northern California, where as much as 30 percent of all listings are believed to be pocket listings. However, markets across the United States are dealing with this issue more often lately as real estate recovers and demand outpaces supply. Pocket listings can be legal, but agents must proceed cautiously and consider the related risk management concerns they pose.

A pocket listing, off-MLS, or “office exclusive” listing as it is sometimes called, generally refers to a listing in which an agent has a listing agreement and the seller does not authorize the placement of the listing on the MLS. Instead, the agent markets the property through informal networks or new online platforms. MLS rules commonly require agents to place listings on the MLS within two days of receiving a signed agreement. Failure to do so violates MLS rules, garnering the agent significant penalty and fines. Of course, sellers can always elect not to have their property included in the MLS. In these instances, agents must have the seller sign an MLS opt-out form evidencing the seller’s direction not to have the property placed on the MLS.

Suggesting a pocket listing

The REALTOR® Code of Ethics’ Article 1 requires REALTORS® “to promote and protect the interests of the client.” REALTORS® must always keep this in mind when recommending a pocket listing to a client. Even beyond the Code of Ethics, state law generally dictates that real estate agents owe a fiduciary duty to their clients, meaning real estate professionals must place their clients’ interests above their own and act in the best interests of their clients at all times.

Legal risk concerning pocket listings arises when agents or brokers keep listings off the MLS for reasons that are not in the best interest of the client. For example, unlike MLS listings, pocket listings are more likely to result in the agent representing the seller and the buyer, and the outcome would be a higher commission for the agent. This in itself is not illegal or unethical, but if the prospect of a double commission is the reason an agent suggests a pocket listing to the client, then this could violate the Code of Ethics, MLS rules, and laws in most states. In another example, assume brokerages in a high-end market have numerous pocket listings, which creates an aura of exclusivity for their business and attracts high-end clients. This also is not illegal or unethical by itself. Yet if the listings are kept off the MLS in order to boost the brokerage’s reputation, not to benefit the seller-clients, the result can be a violation.

Therefore, prior to recommending and entering into a pocket listing, real estate agents must always ensure that they are doing so because of the anticipated benefits for the seller and not because of any benefit the agent or brokerage might receive.

It cannot be overlooked that Article 3’s duty to “cooperate with other brokers except when cooperation is not in the client’s best interest” is rooted in the premise that broad exposure and cooperative marketing often produces the best results for sellers.

When an agent recommends a pocket listing to a client, it is crucial that he or she thoroughly discuss with the seller the pros and cons of listing a property through the MLS. The agent should go one step further and be sure that the seller understands the benefits being waived by not including the property on the MLS. In general, the MLS offers sellers the greatest exposure of their property, allowing it to be actively marketed to every real estate agent belonging to that MLS. In addition, by listing on the MLS, the property may be downloaded to and displayed on third-party advertising sites used by the general public. Withholding a property from listing on the MLS significantly diminishes these marketing opportunities, which may result in reaching fewer potential buyers and a longer time from listing to selling the property, and, perhaps at the core of most sellers’ minds, it may not yield the highest price for the property.

Yet, there are situations where pocket listings may be appropriate. One example is a seller with privacy concerns. High-profile individuals or celebrities may not want the general public to know they are selling their property. Another situation is when a seller may not want a lot of people coming through the property. In these scenarios, a pocket listing may make sense to protect and maintain the client’s privacy.

Market impact of pocket listings

There is an industry-wide impact of pocket listings. Many times, properties offered as pocket listings are never entered into the MLS once they are sold. This limits the available information about the market and makes it difficult for other agents, buyers, and sellers to determine values of nearby properties, and for appraisers trying to determine the current market value of a particular property. Without this information, an MLS’ database is also compromised because a true and accurate picture of price, sales time, and sales activity is not recorded.

Still, a pocket listing may make sense for a seller. The National Association of REALTORS® has no official policy on pocket listings. The decision to recommend a pocket listing to a seller is subject to a REALTORS®’ adherence to the Code of Ethics requiring the utmost ethical and professional standards. Pocket listings should be used only if the agent has determined that doing so would not compromise the legal and ethical duties they owe to their client.

-- Lesley M. Walker is associate counsel at the National Association of REALTORS®. Contact her at 312-329-8834 or lwalker@realtors.org.

Pocket Listings: A Threat to the Culture of Cooperation? An informal working group convened by NAR in September 2013 to explore pocket listings’ effects on broker cooperation in general concluded that associations could take the following steps to enhance the REALTOR® culture of cooperation: 1) Increase member education about the potential risks inherent in pocket listings,  2) develop sample disclosure and consent forms explaining the possible consequences of withholding property from MLSs, and 3) continued emphasis on the value of cooperation, both informally and through the mechanism of MLSs.