We explore the unscrupulous use of pocket listings and the risks they pose to real estate brokers.
A seller’s objectives and the duty their agent owes them
A homeowner seeking to sell their home typically enters into an exclusive right-to-sell listing agreement employing the services of a real estate broker as their agent to locate a buyer who acquires the property. [See RPI form 102]
The seller’s objectives for the sale of the property are to sell:
- in the shortest amount of time;
- for the highest price; and
- with no disruptions or surprises.
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 multiple listing service (MLS) to stall exposure of the property to agents of potential buyers.
Exclusive listings intentionally delayed on their release into the MLS environment of local brokers and agents are commonly known as pocket listings.
Pocket listings become epidemic as property prices rise
Pocket listings are not new to the real estate industry. In fact, they existed well before the term “pocket listing” entered the vernacular. A classic example of a proper pocket listing is an open listing. In contrast to an exclusive listing, the employment created under an open listing imposes no duty on the seller’s broker to market the listed property for sale or locate a buyer.
Pocket listings work by manufacturing a sense of exclusivity among prospective buyers exposed to the property solely by the seller’s agent. While the environment of a pocket listing demanded by a seller may come across a seller’s agent’s desk occasionally, most sellers want maximum exposure of their property in the effort to locate potential buyers for their homes as soon as possible (ASAP). The reason for hiring an agent is to achieve these goals using the knowledge and expertise of a licensed individual whose conduct is regulated by a state agency.
Unless instructed by the seller, 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 purpose of the 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 for delaying its posting on the MLS. Under these maximizing-value circumstances, it is unlikely any buyer, including those potentially located by the seller’s agent, will have the opportunity to see the home until it is ready to view on the MLS.
However, some seller’s agents (and thus their broker) will hoard a new listing for a week or two, prior to placing it on the MLS for all to view. During this time, the agent pitches the property to fellow agents within their brokerage office, holds an open house or conducts other non-MLS sales promotion in an attempt to “double end” the brokerage fees on the sale.
Here, the seller’s agent (and likely their broker) has prioritized their 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 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 conflict of interest
When property listings are double ended, the broker often becomes a dual agent acting on behalf of both the buyer and seller, a double-edged sword. A dual agent is a broker who simultaneously represents opposing principals in a transaction, either by themselves or through one or more agents they employ, to attain both participants’ goals in the marketplace.
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 state-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.
The dual agency conflict always arises when two agents employed by the same broker each work separately from one another on behalf of a buyer and seller in the same transaction. One agent works on behalf of the seller, the other on behalf of the buyer. Vicariously, their broker is employed to work on behalf of both principals, resulting in a dual agency for all licensees involved. Thus, the agents are limited in their discussion about their knowledge as to just how far the other client will go on the price. [Horiike v. Coldwell Banker Residential Brokerage Company (2016) 1 C4th 1024]
The dual agency arrangement is a common occurrence with pocket listings, limiting advantages to both clients and exposing the broker (and their agents) to liability for breach-of-duty claims.
The elusive, exclusive listing
Treating an exclusive listing of a property as a pocket listing is not only a corrupt idea, but also violates most MLS rules. On one-to-four unit residential property, unless the seller opts out in writing, MLS rules require listings be submitted to the MLS within a certain number of days of taking the listing — typically two days.
Even when a seller requests the agent market their home privately, the seller’s agent has an affirmative duty to voluntarily advise the seller of the consequences of limited (or lack of) exposure to the masses — risking the loss of the best price available in the shortest period of time. In addition, an MLS exclusion form needs to be reviewed and signed by the seller.
Yet, there is no known legitimate or rational reason a seller would want to keep their home off a prospective buyer’s radar when it is ready to be placed on the market. When a seller does want to enter into a pocket listing, they have little purpose for an agent’s services to promote the sale of the property and locate a buyer at today’s prices.
Thus, the only true and likely beneficiary of a pocket listing is the seller’s agent, who collects a double-ended brokerage fee. While this puts the seller’s agent at an advantage, the pocket listing also critically deprives the seller of the full benefits gained by enlisting an agent to sell their home — and simultaneously exposes the agent to liability for a breach of duty.