Are ‘pocket listings’ in a home seller’s best interest?

What San Diego home sellers wouldn’t want their house promoted to the universe of buyers? Putting a house “out there” is the best way to get the market exposure, take advantage of the competition and achieve the highest selling price.

The first step toward this goal is usually to have the home added to the multiple listing service (MLS). Active real estate agents generally belong to the MLS, the main vehicle used to market listing properties to other agents and potential buyers.

However, in today’s local housing market — with a low inventory and buyers clamoring to take advantage of low interest rates and beat rising prices — sellers are looking for any advantage.

Generally, a listing broker has an obligation to submit new listings to the MLS within two days after obtaining a signed listing agreement from a seller. Sometimes, however, a seller, for reasons of privacy — such as a celebrity or a judge, or if they’re not totally serious about selling — may have an agreement with an agent to market the property to only a select few potential buyers. This is known as a “pocket listing”; it’s figuratively in the agent’s “pocket.”

What does this mean for sellers? Not listing on the MLS could mean fewer people see your listing, and that could mean less competition and possibly a lower selling price. If you're buying a home, you might have fewer homes to choose from and in a market where inventory is low, it may be that much harder for you to find a home to buy.

That’s not to say pocket listings are illegal. A listing agent who fully discloses the pros and cons to the home seller and has them sign a standard seller exclusion form is not violating a law. But it’s important to note that under California law, all real estate agents have a duty to do more than the minimum required.

Specifically, agents have an “obligation of undivided service and loyalty” to their clients and to use “utmost care, integrity, honesty and loyalty” in their good faith dealings with sellers. Many real estate professionals believe that off-MLS listings may not be in the best interest of the seller — particularly if a client does not know about the benefits of marketing his or her property through the MLS.

Realtors, as distinguished from real estate licensees, have a further obligation under their code of ethics to “promote and protect the interests of the client,” to present offers and counteroffers objectively and as quickly as possible, and restrict information and showings only when it’s in the best interest of the clients.

Maybe the most important consideration for sellers in regard to pocket listings is that the property will get less exposure and fewer offers. This can be an important consideration when low inventory results in multiple offers above the asking price.

In addition, pocket listings could also be affecting real estate values. If off-market listings are not entered into the MLS database when the property is sold, certain listings may not able to be used as comparable sales in appraisals (although the MLS is not the only source of appraisal data). Without the complete picture, it could be harder to determine a buyer’s ideal listing price, a seller’s competitive offer or an accurate current market value.

The California Association of Realtors provides these tips to consumers to protect their interests if their listing agent suggests an off-market listing:

• Ask your Realtor about the pros and cons of selling your home off-market.

• Your agent may ask you to sign a standard seller exclusion form. Be sure you fully understand what you are signing and the possible adverse consequences outlined in the form of not listing your property on the MLS.

• Ask your agent to show your home and present all offers from both inside and outside his or her network. That may increase the chances of obtaining a more accurate selling price and could help avoid any potential for violations of fair housing laws.

Home sellers and buyers should always do their homework when it comes to pocket listings. Working with a knowledgeable real estate agent — particularly a Realtor who adheres to a strict code of ethics — is one of the best ways to avoid pitfalls.

Lee is board president of the San Diego Association of Realtors.

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