Background. People with an “institutional memory” of the real estate brokerage business over the past 30-40 years will say that pocket listings have always been around. For real estate newbies, a “pocket listing” is one that the broker does not place into the local multiple listing service (“MLS”) – at least not at first. There may be a variety of valid reasons a seller would not want their listing to be published, such as privacy, confidentiality, safety, etc. So, from time-to-time, sellers will agree to permit their broker to withhold the listing from the MLS, and instead, limit dissemination perhaps to a few fellow agents, those in the company, or use some other select group. This is perfectly legal, assuming that: (a) It conforms to the local MLS rules: and (b) Has been fully explained to the seller.
The Big Secret: Whisper Listings. For the past year or so, the real estate marketplace, both locally and nationally, have been plagued by a very low inventory of available homes. Over the course of 2013, values in the Portland-Metro area increased over 12% – i.e. a percentage point a month. As a result, a new phenomenon has begun to appear throughout the country. A sort of “hybrid” pocket listing, where a seller agrees with their broker to keep the property out of the local MLS for a period of time, and promote it to a limited or select audience as “coming soon,” or words to that effect. Alternatively, the home is kept out of the MLS for a period of time for the broker to market it as an “office exclusive.” A more beguiling term for these hybrids is “whisper listings,” i.e. those marketed by word of mouth. All MLSs require that listings either be published promptly after the contract has been inked, or have a client-signed authorization not to do so. How many brokers with whisper listing actually comply with this rule is unknown.
The Rationale: Creating Demand. If one asked those involved in the practice of whisper listings or office exclusives, their rationale is that it maximizes excitement and anticipation, thereby ginning up a greater demand and ultimately higher prices. Perhaps the hope is to create the same frenetic activity that accompanies a pre-Christmas Walmart Midnight Sale. [Of course, in the real estate marketplace, buyers just have “bidding wars” to determine who gets the property. At Walmart, they are real wars, using shopping carts as battering rams, large handbags as truncheons, and small children to run interference.] Of course, the ultimate question is do whisper listings work? Is the client better off going that route, rather than the “old fashioned way,” i.e. just listing the property on the MLS and letting market forces take control?
It is problematic whether, in fact, the real estate market works best when homes are not exposed to all potential buyers. One important group, the appraisal industry, would likely argue “no”; even if an appraiser knows of a sale that closed without exposure on the MLS, they may not use it as a comparable property in their fair market value analysis. The reason? It was not exposed to the entire marketplace, thus making the price suspect and unavailable for use as a valid comp.
The Unspoken Issue: Economic Self Interest. All real estate brokers have certain legal responsibilities to their clients. Those duties have either been set out in the licensing statutes, such as Oregon’s law at ORS 696.800 – 696.820, or are contained in state precedent, i.e. the case law that imposes “fiduciary duties” on brokers, such as full disclosure, honesty, reasonable care and diligence, confidentiality, loyalty, etc.
These duties, plus the real estate industry’s commission structure, create dual risks when properties are kept out of the local MLS: (a) Such exclusion may minimize a home’s exposure to the full marketplace, i.e. those thousands of other agents viewing the local MLS information; and (b) It potentially maximizes commissions to the broker or broker’s company engaging in the practice.
Here’s why: The commission agreed upon between a seller and broker in the listing agreement is a fixed percentage that is applied against the gross sales price paid at closing. If the property is listed on the MLS, the listing broker is required to disclose to all other brokers what portion of that commission [expressed as a percentage or fixed fee] will be shared with the agent who brings in the buyer with the successful offer. This disclosure is called the “offer of compensation.” After a buyer agent submits an buyer’s offer to the listing agent, it cannot be altered by the listing broker without the consent of the buyer’s broker. What this means is that the minute a listing goes live on the MLS, it is fair game for all other brokers in that MLS to bring their clients to view the property in the hopes of putting an offer together that will be acceptable to the seller. Oregon law requires that a listing broker must submit all offers received to the seller. In effect, the listing agent may not act as a “gatekeeper” deciding which offers the seller will or will not see.
So what happens if the property is not put into the MLS, or is put in only after the broker or the broker’s company has had every opportunity to find a buyer of their own? Assuming that the listing broker makes the proper disclosures required under the applicable agency law, it is quite possible that: (a) The listing broker could serve as a “disclosed limited agent” [see, ORS 696.815] and secure “both sides” of the real estate commission – not having to share it with anyone else; or (b) The buyer’s agent is in the same office as the listing agent, thus sharing it only between the two of them. The more the real estate brokerage keeps its sales “in house” the better its commission numbers are, the happier its agents are, and the more money there is for the company – not to mention the bragging rights of having higher “revenue per agent” numbers than the shop down the street.
The Quandary: Self-Interest vs. Client Interest. What’s an ethical broker to do? On the one hand, there may be perfectly good reasons to keep the property out of the MLS – at least for a while – but on the other hand, there is a real risk that the seller may not get the highest and best offer, given the limited audience of buyers. When this risk is coupled with the appearance that the decision to limit listing exposure may have been driven by the economic self-interest of the listing agent or his/her company, it is enough to keep one up nights. Remember, to many consumers, appearance is their reality.
Conclusion – Office Policy and Full Disclosure. Fortunately, there is an answer, and it’s relatively straight-forward. First, keep in mind that pocket listings, whisper listings, and similar contrivances, are not per se’ illegal, assuming that all applicable agency disclosure laws and MLS rules are observed. But, it is not enough that the seller consent to the arrangement; it must be an “informed consent,” i.e. given when all of the issues discussed above have been fully explained.
So for brokers and brokerages engaged in these types of listing arrangements, it would be wise to have legal counsel draft a clear office policy detailing the do’s and don’ts of the practice, and develop a client “advisory” or similar document, detailing the good, bad, and ugly sides of the issue. That way a seller can never be heard to say that they did not fully understand, or that their broker failed to tell them the full story. [For a current discussion of pocket and similar listings, go to the following discussion on Inman News here.]
