Beware of Pocket Listings
A pocket listing is when a property is not advertised on the multiple listing service (MLS). This can occur in a couple of different ways. One way is when the seller signs a listing agreement and either (a) opts out of MLS advertising – this is also commonly referred to as an office exclusive listing or (b) a property is advertised as “coming soon” and the property sells before the property is marketed on the MLS. Another way is when the seller and agent do not have a listing agreement. Instead, the seller and agent have an understanding that the seller will sell the property if the right offer is presented.
Due to the inherent dangers with pocket listings, real estate agents should understand the legal, ethical and industry issues related to pocket listings.
Office exclusive listings are prohibited by MLS unless the seller opts out
MLS rules usually require agents to file listings on the MLS within two days of receiving a signed agreement. And, in the event the seller opts out of marketing their property on the MLS, the seller is then typically required to provide written authorization confirming the seller’s decision to opt out. Significantly, if the seller does not opt out and the listing is not filed on the MLS, the agent is probably in violation of MLS rules and could be subjected to significant penalties and fines.
Is a pocket listing ethical?
Article 1 of the Code of Ethics requires that REALTORS® “protect and promote the interests of their client.” Accordingly, it can be argued that the agent is violating Article 1 if a property is not marketed to a larger audience via the MLS so that the seller can receive more competitive offers. Additionally, the valuation of a property may not be as accurate because the seller does not have the benefit of the use of MLS comparables.
Moreover, Article 3 of the Code of Ethics places a duty to cooperate on REALTORS®. Arguably, if an agent has a pocket listing and does not file the listing on the MLS for broader exposure and allow for cooperative marketing, the agent is not cooperating with other REALTORS®.
Is a pocket listing legal?
Arizona allows pocket listings. However, agents should proceed with caution and consider the related risk management concerns pocket listings pose.
Arizona law provides that “[a] licensee owes a fiduciary duty to the client and shall protect and promote the client’s interests.” A.A.C. R4-28-1101(A). Similar to the argument for Article 1, less exposure could limit competitive offers thereby appearing as though the agent did not “protect and promote the client’s interests.” With regard to fiduciary duty, the agent must place their client’s interests above their own. Because a pocket listing could be perceived to benefit the agent (dual agency) over the seller, it could be determined that the agent breached their fiduciary duty.
Furthermore, if an agent limits listing exposure to only certain markets, it may have a discriminatory effect even if there was no intent to discriminate. And, if the agent belongs to a “pocket listing club” that sets the minimum commission to participate, it amounts to a price-fixing arrangement and violates federal antitrust regulations.
Keeping properties from the MLS may skew market value. In other words, because pocket listings are never entered into the MLS database once they are sold, it limits the available information about the market and makes it difficult for other agents, buyers and sellers to determine values of nearby properties. Likewise, an appraiser’s appraisal may be compromised with limited information.
If the agent markets a property as “coming soon” via a sign with a “coming soon” rider, the agent must first obtain the seller’s written authority. Typically, written authority is issued with an employment agreement which, in turn, may trigger the requirement for the property to be listed in the MLS.
A changing market could cause the seller to not receive the highest and best offer if the property is not marketed on the MLS.
Benefits of MLS
Generally, it is in the seller’s best interest to market the property to as large of a forum as possible. MLS provides that kind of exposure. Additionally, marketing via the MLS is not only open to all REALTORS® that participate with that MLS but MLS feeds are usually provided to a larger pool of consumers by way of the internet.
Brokers should educate their agents
Although they are not the same, the terminology for pocket listings and coming soon listings are sometimes used interchangeably. Because using the wrong terminology could convey the wrong information, brokers should educate their agents regarding the differences between the listings.
Additionally, brokers should educate their agents regarding the pros and cons of a pocket listing. An educated agent will be able to provide their seller with the necessary information to make an informed decision.
Finally, brokers may want to consider updating their policies and procedures to address pocket listings.
For more information on pocket listings, go to http://www.realtor.org/topics/mls.