May032013

Do pocket listings enrich realtors at the seller’s expense?

A pocket listing is a property kept off the MLS for exclusive showing to select buyers. Most often pocket listings are used by agents who want to double-end the deal and make double the commission. In that scenario, the agent is ignoring the inherent conflict of interest in dual agency to make more money. Typically, this arrangement favors the buyer over the seller. The buyer participates to get a good deal, the agent participates to get a double commission and a quick sale, and the seller… well, he gets screwed.

Secret ‘Pocket Listings’ Return in Hot Housing Markets

By CNNMoney | Posted May 2nd 2013 12:30PM

The housing rebound has given new life to an old, but little-known sales practice called “pocket listings,” where agents reserve homes for serious buyers only. Most homes that are put up for sale are posted on databases called multiple listing services (MLS), on which agents share information with one another in order to find buyers. There are open houses on Sunday afternoons and listings posted on real estate websites.

Most MLS’s have rules requiring the agent to post any listings within a short period, generally 3 to 7 days. Unfortunately, there is little oversight, and agents are rarely censured for taking longer to post a listing. Shevy tells me that OCAR is trying to crack down by forcing agents to get their sellers to sign a special form or face a fine.

But with pocket listings, properties are kept under wraps and brokers only show them to people they expect will put money down if the property and the price are right, said Richard Smith, CEO of Realogy, the parent company of Coldwell Banker, Century 21, Better Homes & Gardens and other real estate brokerages. Ideally, the buyer has deep pockets and is willing to pay in cash, fast.

Agents will show pocket listings to anyone with a pulse. Sure, they prefer cash, everyone does, but the idea that pocket listings are reserved for some special clientele within an agents stable of buyers is nonsense.

High-end sellers often don’t want to have the world coming to their property,” said Michael Izquierdo, a Los Angeles-based real estate agent and acquisitions manager for LAPocketListings.com. “When it’s put on the MLS, sometimes the next morning you see people standing outside the property, hoping to talk to the sellers.”

Izquierdo recently got a pocket listing for a $1.2 million home in Mar Vista, Calif., where the sellers wanted to preserve some privacy. They also hoped to heighten interest among buyers by creating an aura of exclusivity.

Buyers do react to exclusivity. Particularly in a supply constrained market like today’s having preferred access to a property is highly sought after.

But pocket listings aren’t just for luxury clients anymore. With the number of buyers far outpacing the number of homes for sale in hot markets like Los Angeles and Manhattan, pocket listings are becoming more common among more moderately-priced homes as well, he said. He has some pocket deals where sellers are asking for as little as $500,000

When Izquierdo gets a pocket listing, he combs his client list for good fits. If he can’t find one, he contacts colleagues to see if they have potential buyers.

Agents do this whether it’s a pocket listing or not.

If the home is overpriced, the seller and agent will find out quickly, said Alex Clark, founder of pocketlistings.net. “I put in the email, ‘Not listed on the MLS,'” he said. “If it’s priced right, there’s a really good chance you can sell it as a pocket listing.”

We do the same for our buyers. I’ve posted these properties here on this site.

If it doesn’t sell, then Clark tries to convince the seller to readjust the price and list it publicly on the MLS. Some sellers, however, aren’t interested in going public. They are purely using the pocket listing to fish for a “make-me-move” deal. “These are not motivated sellers. They’re saying, ‘Get me a good price,'” said Manhattan real estate agent Wei Min Tan.

Unmotivated buyers or sellers are a waste of time for agents. However, those that are desperate for something to do will sometimes take these listings. They will hold open houses at the property hoping to meet some motivated buyers they can work with. This makes the seller feel like they are doing something, and it helps the agent find a client that might make them money. Sometimes sellers come to their senses and lower the price to sell, but if not, the agent is often content to meet new buyers.

Not everyone endorses these pocket deals, however. In New York, the practice could violate the Universal Co-Brokerage Agreement, according to Neil Garfinkel, counsel for the Real Estate Board of New York, the local trade association. Under the agreement, agents must share listings. They can only withhold listings if sellers request they do so.

In some cases, agents may try to convince sellers to use pocket listings in order to double their commissions by acting as agent for both the buyer and the seller. “That’s where it starts to get into the gray area,” said Garfinkel. “If an agent is putting their own economic interest ahead of the seller’s, it’s a violation of state law.”

There isn’t much gray about this practice. It’s not illegal, but it’s certainly unethical.

They may, for example, steer the deal to a buyer they represent even though another broker’s buyer put in a higher bid.

We had this happen to one of our clients recently. He put in an offer $25,000 higher than a competing offer represented by the listing agent. Rather than convince the seller to take the better deal, the agent convinced the seller to take the deal that made the agent more money.

“Most of the time, pocket listings are done ethically and fairly,” said Betty Graham, president of Coldwell Banker Previews International/NRT, Realogy’s luxury brand. Nevertheless, she believes listing the property publicly increases the likelihood that a home will sell for the best price.

The National Association of Realtors does not have an official policy on pocket listings, according to spokesman Walt Molony. But most agents, like Graham, profess that sellers are almost always better off getting as many bids from as many potential buyers as possible.

Dual agency

We represent many buyers. We have a database of 6,000 people who have contacted us over the last four years. Plus, an additional 250 to 300 contact us each month. At any given time, Shevy and his team are working with 25 to 50 buyers actively making bids in the marketplace. What’s not as widely known is that we also have many listings. In fact, of the 45 deals Shevy and his team have either completed or are in escrow in 2013, 23 are buyers and 22 are sellers. As I mentioned previously, pocket listings are a problem because of dual agency. However, there is a compromise that we utilize that mitigates the dual agency problem.

Our method of avoiding the conflict of dual agency is to assign the buyer and the seller to different agents. If an agent has a listing and one of his buyers wants to bid on the property, that buyer is handed off to a different agent to process that bid. Each agent works diligently to represent the interests of their client, even if it means no deal takes place. We do enough business that it’s not worth it to do a few extra deals at the expense of our integrity. It’s a philosophy shared by all the agents on Shevy’s team.

Pocket Listings

We have pocket listings. I have posted many of these on the weekends as exclusive OCHN properties. Shevy also emails these properties to our entire database. Shevy has relationships with two flippers active in Orange County where he handles all of their listings. They believe he adds more value than he costs. One of the ways he adds value is through exposing properties in the renovation process to our extensive database. These flippers work with Shevy because they know our database of prospective buyers is much larger than anyone else’s in the market. Our buyers are aware of these properties before anyone else in the market, and some of these properties have been sold directly to these buyers without going to the MLS.

No Cost Home Sales

We don’t keep pocket listings to double-end the deal. In fact, since we have so many pocket listings, we’ve come up with a unique sales program to leverage our massive buyer database and avoid even the perception of a conflict of interest. If we sell a pocket listing to one of our buyers without implementing our full-service marketing program, we waive the fee on the listing side. We’ll handle the entire transaction for a 3% fee, typical of a buy-side fee.

One of the biggest problems with pocket listings is that there is no compelling reason for a seller to participate. They aren’t obtaining maximum market exposure, and these sellers are often pressured to accept an offer from the listing agent’s buyers so the agent can make 6% instead of 3%. We provide a compelling reason for sellers; we save the seller half the fee. This also makes us impartial and indifferent as to what the seller decides. If the seller wants MLS exposure and full-service marketing, we will do that. It requires more work, but there is a fee on the listing side to compensate. To further leverage our buyer database, we offer a reduced fee if the seller transacts with one of our buyers. The total cost to the seller is comparable to discount brokerages, but they receive full service.

Full-Service Marketing Program

I spent several years working as a consultant land planner. In consulting work, it’s customary to prepare a detailed scope of work to be performed under the contract. For some reason, real estate agents rarely if ever do this (most likely don’t want to be held accountable). When Shevy and I first discussed this program, we decided to clearly detail exactly what services are provided for each seller who signs up. Many agents won’t commit to a detailed scope of work because quite frankly, they don’t want to do any work. Marketing costs time and money, and many agents would rather spend very little time and no money and hope the MLS sells the property for them. We think there’s a better way.

We are very excited about our new program. If you want more details on how our No Cost Home Sales program works, click on the link below.