Pocket listings might be the hottest controversy in real estate today. That's because many home sellers are attracted to the perceived benefits of selling a house outside of the brokers' multiple-listing service, or MLS. But the practice has some significant downsides for sellers as well.
Traditionally, the term "pocket listing" referred to a situation in which a property seller and real estate broker signed a listing agreement that allowed the broker to offer the property for sale, but keep the information out of the MLS and, figuratively, keep the information in his or her pocket. Nowadays, the term is sometimes used more broadly to refer to properties that are offered for sale without a listing agreement or use of the MLS.
Privacy or price?
A pocket listing can be attractive to sellers because it potentially offers greater privacy, convenience and flexibility than an MLS listing, according to Alexander Clark, an agent at Zephyr Real Estate in San Francisco, and founder of PocketListings.net, a website that promotes pocket listings.
"Most of the people who go the pocket listing route do so because of privacy. That's why a lot of movie stars, wealthy people and high-profile people sell their property without sharing it on the multiple-listing service," Clark says.
A pocket listing also can allow sellers time to repair and stage their property, resolve personal concerns they may have about selling their home and even price-test the market before they commit to a sale, explains Wendy Furth, a Realtor and assistant manager at Rodeo Realty in Calabasas, Calif.
"One reason a seller might want to stay as a pocket is because they figure (the broker) can just fish for buyers. It's perceived as being no-muss, no-fuss, no for-sale sign, no open houses, just find a buyer," she says.
The main reason for not doing a pocket listing
The downside -- and it's a big one -- is that a pocket listing loses exposure to other real estate brokers, and oftentimes the public. MLS exposure can mean multiple offers, a bidding war, a higher price, more attractive terms or a buyer who's better positioned to close the deal.
"The more people who see the house, the higher the price will go," Furth says. "By having it be a pocket listing, no one will know anything about it. That's a great way to not have a huge audience for the property."
Still, sellers might be tempted by the lower commission brokers typically accept for a pocket listing. Rather than 5 percent or 6 percent of the sale price, the seller might pay something more like 4 percent. However, remember that commissions are always negotiable.
A lower commission for a pocket listing might seem like a considerable saving for the seller, but it's the broker who stands to reap more benefit, says Douglas R. Miller, an attorney and executive director of Consumer Advocates in American Real Estate, a nonprofit group in Navarre, Minn., that seeks to educate consumers about conflicts of interest in real estate.
That's because brokers typically split commissions between the seller's side and the buyer's side of the transaction. A pocket listing means the seller's broker is more likely to retain the full amount, rather than a portion. Sure, 4 percent is less than 5 percent or 6 percent, but it's also more than 2 percent or 3 percent.
Miller takes an especially dim view of pocket listings, which he describes as "self-serving," "self-dealing" and "one of the worst business practices in residential real estate." He says these deals don't work out financially for sellers because what's saved in a lower commission might well be lost -- and then some -- in a lower price.
Is anyone looking?
Miller disagrees with the notion, espoused by some brokers, that other marketing strategies can make up for keeping a listing out of the MLS and even nab a higher price.
"Social media? Exclusive website? Who cares, if no one is looking in those places to buy homes? They aren't," he says. "The first thing sellers should be demanding of their broker is a marketing plan that includes not only the MLS, but also the top buyer-frequented national websites."
Assess the broker's motives
The bottom line is that homeowners should be wary of any hard push to offer their home as a pocket listing, potentially giving one broker control over both sides of the transaction and a good shot at what's known in the real estate business as a "double end" or "double pop" commission.
"If someone is coming up to you to try to get a pocket listing, you have to ask, 'What are your intentions? Are you going to offer compensation, commission, to another agent if they bring a buyer? Are we going to sign a listing agreement?'" Clark says. "If they want to say, 'If I find you a buyer, will you pay me this amount and not sign anything?' Then watch out."
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