Pocket Listings
So you thought you were looking at all the houses available in your price range and where you want to buy? Pocket listings by real estate agents prove you wrong. These have been around for years. Also called whisper listings today, this unethical practice persists among many real estate agents. Buyers frequently speak to many real estate agents and provide outlines of specific criteria for buying. After all, buyers want to find the right house in the right location at the right price. Pick up a copy of Winning Mortgage, Winning Home for inside information on real estate agents, due diligence, and secrets of buying and financing a home.
Contract with Sellers
When real estate agents sign a contract with sellers, the contract requires marketing the home to find buyers. Obtaining the best buyer at the best price for the seller is the agent’s primary job. The seller pays a hefty price to make this happen. When a buyer has also talked with that real estate agent and the home fits the buyer criteria, the agent may quietly contact the buyer directly before letting other possible buyers see the offering. Pocketing both sides of a commission makes a good payday for the agent.
Many states strictly prohibit this. But agents still do it. Policing it proves difficult. The National Association of Realtors (NAR) winked at the practice. Only in 2020 did NAR finally adopt a rule to discourage the practice. Whisper listings made directly to select customers haven’t diminished. Bypassing the public marketing of a property hurts the seller and may help the buyer.
Who Does the Agent Work For
A real estate agent has a duty to the client. The client is the seller. However, for many agents, the client becomes the commission. This violates the obligations the agent owes the seller completely. The watered down new NAR policy requires agents add listings to their local database within a business day of publicly advertising the listing. But there is a notable exemption. Listings can still be kept off the database if they are only shared within one brokerage, called an “office exclusive.” The policy was attacked immediately in court by the Top Agent Network. That case may still be in process. The California judge blistered Top Agent Network, but did not outright dismiss the lawsuit. As noted by the judge, “Top Agent Network’s theories for how the policy hurts buyers and sellers are dubious.”
How does the seller get the best buyer at the best price when the information goes only to a limited number of potential buyers? Pocket listings benefit big brokerage houses. These shop listings in-house and advertise to potential clients that they have properties that aren’t available anywhere else. Again, the motivation focuses on commissions at the expense of the client’s interest.
Pocket Listing Effects
One report notes pocket listings accounted for 3% of sales on average in the year ended in March. Redfin estimated that percentage around 2.5% in each of the prior years. A rate of 3% represents roughly 169,000 homes a year. Agents may try to justify the practice using terms like “privacy” or “limiting visitors traipsing through the property” or providing a “better consumer experience.” Perhaps for limited numbers of celebrities or exclusive homes, a screening process may be appropriate. In addition, a seller can authorize how the home is marketed. However, the disclosure must be upfront, clear, in writing, and understood by the seller that the best price may not be obtained. All the justifications reflect code for maximizing keeping commissions in-house. It took Redfin until 2018 to bar the practice in its offices, but what policing occurs? This practice also may disguise racial profiling.
The client likely will remain ignorant of the practice and effect. Who will complain, especially if the practice is hidden?
The Mortgage Tangent
If the brokerage through which you buy a home uses pocket listings, think how that might apply to mortgage referrals and title company referrals. A real estate firm acting unethically by putting commission over a client’s interest in the buy-sell would have no reservations in putting financial interests over buyer interests in a mortgage referral.
In fact, most buyers don’t do research about mortgages and rely on the real estate agent. Perhaps this explains a portion of dissatisfaction and regrets of home buyers found in recent surveys.