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Pocket Listings: A dying breed or a renewed reality? Is there any benefit, and if so, is it worth the risk?

Though many consider “coming soon” listings to be unlisted properties that will, at some point, be listed on the MLS, in many instances, a “coming soon” listing is never listed on the MLS, much like a pocket listing.  In recent years, the NAR (NAR) has addressed the growing number of pocket  and “coming soon” listings by reiterating that the most important step in advising a seller-client on whether to advertise a property as “coming soon” is to identify the client’s best interests, as defined by that client. A failure to either promote the client’s best interest or to explain the effect of a limited marketing plan, such as ‘coming soon’ advertising, can violate state real estate license laws and regulations and the REALTOR® Code of Ethics.

Yes, it is the client’s “best interest” that is the ultimate objective. This, of course, begs the question of what is your client’s best interest? For most sellers, a client’s “best interest’ is defined as obtaining the highest possible price with the best possible terms of sale.  Assuming this to be true, the crux of the problem then lies in reaching that destination. Which agent’s approach will get us there and how? Assuming a property is sold off the market, who is to say that the client’s objective could not have been better achieved if his or her subject property was put on the MLS?

As far as which approach to take, the more conventional answer is that all agents should put their client’s property on the Multiple Listing Services because it promotes the interests of seller-clients by compiling property information and distributing it to a wide range of buyer-clients who are actively seeking to purchase property in that particular location. Restricting the marketing of a seller’s property to only limited networks, private elite groups or clubs, or even to national websites without also making it available to other area brokers and agents and their buyer-clients results in minimizing the property’s exposure to the widest crowd of potential willing and able buyers, and will not give the seller the best opening to attract offers at the maximum price. This point of view assumes limited exposure would prompt fewer offers, thereby reducing the possibility that your client will get the best and most reasonable price and terms.

Essentially, this more popular school of thought presumes that maximizing exposure of your client’s property to potential buyers best advances your client’s interest… But does it?

Let us consider the alternative.  We are a couple months shy of 2017 and in California—the home of the rich and famous. We live during an age when you can actually buy an iPhone 6 with a pink diamond for $48.5 million and the hottest clubs and restaurants in town have no visible signs or windows. Why? Because they are supposed to be reserved for the elite…perhaps like pocket listings.

It all relates back to Economics 101: Rare things cost more because there are very few of them to have. The very fact that a property is not easily accessible or publicized on the MLS contributes to its rarity.

This is not to say that the rarity of something by itself implies value and cost.  However, I can only speculate that possessing something “off the market” that was never available to the masses, at the very least, appears more valuable by the public and therefore increases the bargaining power of those individual sellers. The very fact that a property is advertised as the city’s “best kept secret” has the potential to increase its social value perhaps more than any all-too-common bidding war that takes place once an MLS listing is posted.  After all, perception is everything. If something appears rare, limited to a few and far in between, it may look like the “deal” buyers have been waiting for all their lives. Perhaps that is why Hollywood always tells you it is who you know that matters most.

Ultimately, to serve your client’s interests, you should start by looking at your client. In an age when social media has admonished any sense of personal privacy, many sellers may prefer to sell their properties off the market, at a desired list price on their own terms, while avoiding nosy neighbors and the massive inconvenience and personal invasion of multiple showings to a parade of strangers trooping through their livingrooms, and sifting through their medicine cabinets and closets.  Some sellers may prefer the off market approach due to their desire to safeguard their property against vandalism or theft. Furthermore, most sellers know how much their homes are worth (if anything, they always think it is worth more than it actually is) so if they obtain their desired price, isn’t the mission accomplished?

The very notion of only showing their home to a few pre-qualified potential buyers may provide them with an incalculable degree of comfort and peace. For some, especially high-profile individuals or celebrities, such benefits help preserve a personal privacy and help them feel “in control” of the inevitable transition.  Similarly, some sellers may be selling a house without equity and do not want to deal with the hassle. Others may have gone through a recent emotional event, such as a death or a family break up. There are also those sellers who may not want to, or cannot, make their home presentable to the public and therefore require a buyer with a unique more personal approach.

This is not to say there are not major pitfalls to refraining from posting a property on the MLS.  Aside from exposing your client to the risk of selling his or her property for far less than you could have had you listed the property on the MLS, you also expose yourself to potential ethical violations and future litigation.

Pursuant to Article Two of the Code of Ethics of the NAR, “REALTORS® shall avoid exaggeration, misrepresentation, or concealment of pertinent facts relating to the property or the transaction. Accordingly, it can be reckless at best, and an ethical violation at worst, to overestimate the value of a property to a buyer by overstating the marketable effect of its “x-factor” characteristics, such as it being an exclusive pocket listing that others do not have access to. An agent could be exposed to liability if his or her seller-client return after closing with a lawsuit for failure to use “reasonable skill and care” and the failure of “taking no action which is adverse or detrimental” to their client’s interests. Such allegations would be based on the premise that the agent did not seek to obtain the highest possible price for his or her client because the client did not understand that the marketing of the property might not achieve the highest price.

Further, pocket listings usually lead to more dual agencies since the broker typically only advertises the property to his or her clients.  Dual agency is where the brokerage represents both the buyer and seller in the same transaction. In this instance, failing to post a listing on the MLS could lead to accusations for breaching your fiduciary duties to both sides for, what everyone will say is, the sole purpose of making twice the commission. This scenario could potentially expose you to future litigation by new buyers who—let’s face it— are often solely suffering from the signs and symptoms of a clinical illness commonly referred to as “buyer’s remorse.” If you are the dual agent for a pocket listing, a buyer-client may allege that you did not seek to obtain the best price for him or her, which would be based on the premise that, had the property been posted on the MLS, the market would have drove the price down to what it should have been and to what you, the dual agent, should have demanded from the seller on behalf of the buyer.  In this scenario, the buyer would likely accuse you of violating California license laws that impose certain duties on licensees including the duties of care, loyalty, good faith, and honest and fair dealing.

Other potential pitfalls of choosing to advertise a property as a pocket listing could occur due to that property’s particular characteristics.  Some properties—such as probate, short sales and trust sales—are not suitable for pocket listings. For example, some people may want to avoid putting their property on the market if it involves a short sale due to the potential shame or embarrassment of having to do so. However, banks will often refuse to approve a short sale that has not been on the MLS for at least 3 weeks due to the high risk involved.  This may even be the case if you and your seller-client decide to have the property appraised. Furthermore, pocket listings are not suitable for trust sales because it is difficult to predict whether the involved beneficiaries will be pleased with the purchase price.  Furthermore, should litigation ensue, the Courts will also be unable to determine if the property was sold for the market price.

Ultimately, whether or not you post your client’s property on the MLS is your client’s choice. Rather than make this monumental decision on your client’s behalf, your duty is to instead provide as much information as possible so to enable your client to make the decision that is best for him or her. Such information, includes but is not limited to, market data and information that impact price, market comparables, property appraisals, current and recent trends, and buyer behavior. This type of information can help your clients understand the implications of various alternatives of marketing the property so that they can knowingly determine the option that best serves their interests.  It is also your responsibility to make sure your client takes into consideration their type of property because pocket listings are not suitable for all purposes.

For many, posting a property on the MLS before selling it will always be the best method; it is the quintessential example of the phrase, “if it ain’t broke, don’t fix it.”  For others, modern times require new more effective techniques that will make a property look more appealing to that one qualified buyer. Either way, the choice is that of the sellers. But if your clients decide that “coming soon” advertising is in their best interest, make sure they sign an opt out form that clearly sets out the fact that that they fully understand the possible implications and consequences of not posting their property on the MLS.

Read more on our ClaimPrevent® Summary: Real Estate Licensee Responsibilities When Creating New Listings

About the Author
Hila Golchet
Hila Golchet, Attorney
Manning & Kass | Ellrod, Ramirez, Trester LLP

Hila Golchet is an associate in the Los Angeles office of Manning & Kass and member of the firm’s Professional Liability and Real Estate Teams. Ms. Golchet, a West Los Angeles native, holds a certified real estate brokers license. She graduated summa cum laude from UCLA with a BA in political science and public affairs/public policy. She earned her JD degree at Southwestern Law School’s two year honors law program, where she graduated in the top 15%.

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