The many pitfalls of pocket listings

This article examines the risky business of pocket listings, and the drawbacks for sellers, buyers — and brokers.

The “Listing” of a secret double ends the fee

A pocket listing is an exclusive listing with an intentionally delayed release into the multiple listing service (MLS) environment of local brokers.

Pocket listings work as a marketing tool by manufacturing a sense of exclusivity among the few potential buyers exposed to the property solely by the seller’s agent.

Brokers who take on pocket listings find they essentially double their fees on a transaction by representing both buyer and seller (how nice). It also gains them the reputation of being well-connected and “in the know.”

This type of dual agent is a broker who simultaneously represents the best interest of opposing parties in a transaction, e.g., both the buyer and seller. This encompasses both the broker and the agents they employ. [See RPI Form 117]

Sellers who opt for pocket listing treatment do so to:

• skip the inconvenience of prepping their home for sale, including completing improvements and getting the home show-ready to open it to the MLS marketplace;
• limit interested buyers to the broker’s “vetted” shortlist of buyers to gain a veil of privacy (excluding the competitive “rabble” from viewing the home); and
• “test” the market for pricing before going to the effort of an MLS posted listing — a tactic selected during a housing market downturn when an illusionary seller is unlikely to receive their preconceived price.

For buyers, the motive to pursue a pocket listing is usually sheer desperation, sweetened by the knowledge they alone are worthy enough to view an off-market listing.

For example, pocket listings are most common during a seller’s market, characterized by:

• low MLS inventory;
• rising home prices; and
• high buyer demand and competition.

During these desperate times for buyers fueled by fear of missing out (FOMO), getting a chance at a property before the general public is like winning the lottery when notified of a pocket listing held off market by their broker.

Sounds like a win-win-win situation. But are pocket listings ever worth it for buyers — or sellers?

Sellers, buyers lose out with pocket listings

Sellers who allow their broker to float a pocket listing end up getting fewer views, meaning their home is likely to sell for a lower price with less favorable terms than had they opened it up to competition among all buyers of all brokers and agents.

The seller’s aim is to at least get fair market value (FMV), defined as the most probable price a property would bring on the open market, given prudent, knowledgeable and willing buyers and sellers. That is not capable when the property is not exposed to the market, as that is how FMV is established.

A pocket listing has no open market as the marketing of the home is not open — known — to the marketplace. Worse, the word is willing buyers — in the plural, as a single willing buyer alone does not establish market value.

On the other side of the transaction, buyers as a whole miss out when pocket listings take up a chunk of the market, as the majority of pocket listings are not available to them, resulting in a lower MLS inventory of housing options which distorts pricing in general.

Related article:

California’s for sale inventory: a symptom of homebuyer demand

 In 2021, the California Regional MLS (CRMLS) introduced a “Coming Soon” feature which sidestepped some of these concerns.

This feature allows agents to advertise their listings on the MLS for up to 21 days before the property is “officially” available in the market. Thus, persistent buyers who are unconnected to the broker are typically able to twist their way into a pre-listing showing (though, under CRMLS rules, performing tours and soliciting offers are prohibited during the Coming Soon phase).

Still, what’s to stop a broker with a Coming Soon property announcement from privately negotiating offers within their own personal network? An agent very well knows the 21-day Coming Soon period can be used to capture an unrepresented buyer — an in-house prospect — and double-end the transaction. Déjà vu.

The pocket listing environment is a bit like the Wild West. Rarefied oversight of pocket listings leaves relatively powerless buyers and sellers— who rarely possess the experience necessary to realize the advantages they lose with a pocket listing — to the devices of the gatekeepers for entry into property transactions with little to no protection. 

When the broker pushes a pocket listing

The real estate broker employed as the seller’s agent has, by agency law, taken on a fiduciary duty of utmost care, integrity, honesty and loyalty in dealings with the seller. [Calif. Civil Code §§2079 et seq.]

In a contradiction to this agency rule, a not uncommon activity of seller’s agents during times of high buyer demand and low availability of inventory is to delay the publication of a new exclusive listing on the MLS to stall exposure of the property to agents of potential buyers.

Unless instructed by the seller with a need to delay the listing’s release to the MLS, failure to use all readily available methods and media to promptly expose the property-for-sale to potential buyers is a breach of the seller’s agent’s fiduciary duty to take reasonable steps to locate a buyer — the stated purpose of the broker’s employment.

Occasionally, posting a listing to the MLS is reasonably postponed due to demands of the seller.

For example, the seller may want to make repairs or declutter the house prior to exposing it to the public — a legitimate financial reason accommodated by delaying its posting on the MLS. Under these maximizing-value circumstances, it is unlikely any buyer, including those potentially known to the seller’s agent, will have the opportunity to see the home until it is ready to view on the MLS. Thus, the term pocket listing does not apply in these reasonable circumstances for delaying the listing’s release.

However, some agents (and thus their brokers) will hoard a new listing for a week or a month or two, prior to placing it on the MLS for all to view. Leasing agents commonly use this strategy in developing recessions when warehousing becomes available, such as 2022 and 2023.

During this time, the agent pitches the property to other agents within their brokerage office, holds an open house or conducts other non-MLS sales promotion in an attempt for the office to “double end” the brokerage fees on the sale.  A for sale or lease sign is often set on the property advising users who drive by to call the seller’s agent.

Related article:

Dual agency explained

Here, the seller’s agent (and likely their broker) has prioritized their own needs for personal income enhancement over the needs of their client. This is an activity not in the best interest of their seller client for obtaining the highest price in the real estate market — a breach of their fiduciary duty to their client.

The seller’s agent owes the seller a duty of care to make a competent due diligence presentation of the property to attain the highest price for their property.

A pocket listing denies the seller access to the largest audience of competitive prospective buyers. In fact, it becomes impossible for a seller’s agent to meet their duty of care when subjecting a property under an exclusive employment to a pocket listing environment. As an agent, they have failed to make the property available to as many potential buyers ASAP. [CC § 2079.16]

The limitations of dual agency

While pocket listings may seem desirable to agents due to the possibility of a double-ended fee or to generate a second resale fee, these agents are in danger of breaking the cardinal rule: putting their individual interests above their client’s best interests. This stems from the issue of conflicts in dual agency, when a broker represents opposing principals in the same transaction.

Why is dual agency problematic? Though a dual agent needs to work diligently on behalf of both clients, they are prevented from fully negotiating on behalf of either client, unable to simultaneously negotiate the highest and best price for the seller, and the lowest and best price for the buyer.

Both the buyer and seller are clients of the dual agent. Thus, the dual agent (meaning the broker) owes a fiduciary duty to both principals they represent through their services or the services of their agents.

This dual agency naturally creates a conflict of interest, which the agent is mandated to promptly disclose to each client. The agent needs to obtain client approval before continuing negotiations on the clients’ behalf. [See RPI Form 117; CC §2079.17]

Further, the dual agency inherently limits the benefits obtainable by the principals. Though the dual agent is duty-bound to work diligently on behalf of both clients, the agent is prevented from actually achieving the full advantages of negotiations for either client.

Like the opposing ends of a teeter-totter, a natural inability exists to simultaneously negotiate the highest and best price for the seller, and the lowest and best price for the buyer.

Thus, clients of a dual agent generally do not receive the full range of benefits available from an agent who negotiates a purchase agreement as the exclusive agent of the client. It is for this reason the dual agency environment, even when handled properly, exposes the broker to breach-of-duty claims when a client becomes disgruntled with the results.

Related article:

Buyer breach of contract in a decreasing price environment: Seller remedies