Pocket Listings

by Mr. Cheap

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In real estate there are listing which can be called “pocket listings“, “in pocket listings”, or “exclusive listings”.  In each case the idea is the same, an agent *DOESN’T* advertise the property in order not to share the commission with another agent (by representing both the buyer and seller) or to only share the commission with agents they have a special relationship with.  The most significant feature of such listings is that they will be kept off of MLS.

Of course, this is helpful to the agent, but the benefit is at the seller’s expense.  By not having the maximum number of potential buyers be aware of the property they are lowering the sale price (supply and demand).  Why any rationale seller would agree to this is beyond me, and I can only assume the agents manage to trick them into believing it’s in the seller’s best interest.

Some agents will try to hustle and take advantage of the period where a listing is forced to be a pocket listing, between when they sign with the seller and when it goes live on MLS.  There’s certainly nothing wrong with this, but it can draw them into ethical compromises if they’re sprinting after the double-commission.  In this situation they should DEFINITELY make it clear to the sellers that the property hasn’t had much exposure (and they don’t need to jump at any offers).  They also shouldn’t stretch out the period between when they get the listing and it’s up on MLS.

This happened to me, from the other side, recently.  I’d been talking to a number of agents (I told them all I was working with other agents and didn’t sign a buyer’s agreement with any of them), and one of them contacted me to show me a property that met my criteria.  I went to see it with her (she was seeing it for the first time to prepare the listing).  After the viewing, we were chatting in the parking lot, and she did her best to get me to put an offer in.  She even showed me e-mail correspondences between her and the seller to prove to me what his thinking about price was.  I would be amazed if this isn’t illegal (since she is betraying private communication with the seller, to whom she has a fiduciary duty).

I was prepared to make an offer, and later that night she left a message for me, in a pretend panic, claiming that she had SOMEHOW convinced her seller to accept my offer, but that ANOTHER buyer had appeared, with the exact same offer I was making (it hadn’t hit MLS at this point) and that I needed to rush over to her house to sign the paperwork ASAP.  I knew she was playing games with me, and told her I was prepared to move forward with an offer, but that I needed due diligence (for her to provide me with comps of the previous sales she told me about which I had used to set the value of the offer) and that I wouldn’t get into a bidding war with the other buyer.  At this point she said “maybe we should just forget about the offer then” and that was the last time I heard from her.

John Reed has written that the practice was illegal when he was an agent in New Jersey years ago.  In Canada I think it is legal (I assume it is, since a lawyer writes about doing it in Ontario), but even if it’s legal I find it terribly unethical.  Some agents discuss the practice here, and thankfully they almost all seem to weigh in against it.

This post was featured in the Consumer Focused Carnival of Real Estate.

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{ 20 comments… read them below or add one }

1 Chris

An interesting article (and experience). I find the house sale/purchase process absolutely unbelieveable here in Ontario in term of what some agents (not all) get away with from both a legal & ethical perspective. Unfortunately, I think that because the majority people do not purchase a large quantity of homes in their lifetime and there always tends to be a certain level of stress surrounding the purchase, most remain ignorant (myself included) around what is or isn’t acceptable in terms of agent behaviour and simply ‘go along for the ride’.

2 Mr. Cheap

Chris: Yes, I think you’re absolutely right that many people involved in a real estate sale feel out of their depth (and some agents take advantage of that).

3 Chris

Two months into house hunting my wife & I realized we were doing more actual house hunting than our agent was and decided we should find a new one that would spend more time on us. Oops, it turns out we had signed an agreement with her that would penalize us financially if we canned her prematurely. Just an example of something you sign as a terrified ‘greenhorn’ that I probably would never do again. I’m sure lots of people have similar stories though…

4 Mr. Cheap

Chris: And your agent probably presented the agreement that would penalize you financially as something “for your protection”. You certainly should have been made aware when you signed it what you were agreeing to (I’d warn anyone you meet looking for an agent against using the one you hooked up with).

Did you end up buying with her, pay to get out of the agreement, convince her to let you out free or wait it out (then buy with another agent)?

5 Four Pillars

Chris, the problem is that an agent isn’t going to spend time with a client if they don’t have some sort of possibility that they will get paid. If there is no contract then what is to stop someone from using an agent to get access to open houses and MLS info and then just negotiating on their own with a selling agent (and leaving the first agent high and dry)?

6 Henry

Mr Cheap: I have been quite convinced by Mr Garth Turner on his greaterfool.ca about a potential real estate correction in Canada. I am just wondering if there are significant flaws in Mr Turner’s analysis.

7 Chris

As our main complaint was simply the amount of legwork she was putting in, we gave her a friendly nudge and then just grit our teeth until we found a place a few weeks later. I don’t accuse her of being unethical, but she didn’t add much value to the process. Live & learn.

In a similar vein, after reading the book ‘Freakonomics’, specifically the chapter on why most real estate agents are not truly incented to spend the time to get sellers the maximum price for their home, I am convinced the entire compensation system is flawed. It’s one of those processes people admit is in need of repair (like air travel), but nobody knows how go about overhauling a well-entrenched system.

8 Four Pillars

Chris – That situation is pretty bad if the agent agrees to help you look for a house, you sign the contract but they don’t do the work. In that case I would ask to break the contract but she/he might not have any incentive to do so.

9 Chris

Four Pillars, if I can flip your argument around – our main complaint was that she WASN’T spending the time on us, so why should she get paid? We attended 3 open houses, of which all 3 were sourced by my wife, not our agent. The reality is that she made several thousand dollars for doing SFA. I’m not saying I know a better way of doing things, all I know is that she got paid for our work.

10 Chris

On a happier note, we love the house we bought and hope we don’t have to move for a long, long time! ;)

11 Thicken My Wallet

The lawyer you link to is listed as “not practicing law- employed” with his employer being a real estate broker so take anything he says legally with a grain of salt.

I think the issue is two-fold. As someone stated, real estate agents will not provide good service if they don’t think you will buy or be reasonable in selling. Every service provider encounters a situation where there is a client they don’t want and the best way to fire them is to have them terminate you.

The larger, more fundamental, issue is why is MLS a monopoly? If anyone had access to the listings, the leverage the industry has is gone (pocket listing or no pocket listing) and agents would have to provide good service since consumers can vote with their feet. Accountants compete against book-kepers and the internet. Lawyers against paralegals and their internet. Doctors against alternative forms of medicine. Why is the public denied access to an alternative to the MLS system? I would not consider the real estate industry to be any more special than the legal, medical or accounting industry.

Does this not strike you as utterly unreasonable?

My friend made an interesting observations the other day about real estate agents. Most people tend to see them on the trustworthy scale slightly above used car salespeople. Something for the industry to think about if that is popular perception.

12 Mr. Cheap

Henry: I don’t think I could pick out any particular flaws in his analysis, however a lot of Mr. Turner’s work is quite speculative. People are constantly predicting doomsday economic scenarios, usually with a very good story to back them up, and the actually doomsday scenarios seems to blindside most of the experts (how many people REALLY saw the subprime meltdown coming? Did they publicly discuss it, with specifics, beforehand and place a large bet on the outcome? I’d put Andrew Lahde in this camp, but not too many others).

There certainly will be a real estate downturn in the future (many of them actually). At a big one, perhaps this one, Mr. Turner will probably claim credit for predicting it. I don’t think I buy his entire doomsday scenario (I own a condo and would be selling it if I did), but based on the fact that fair market rent tells us what people are willing to pay for shelter. This is a basement on what we’d expect real estate to be worth (if people can own for a comparable price compared to renting they’ll probably do so). Vacation homes and McMansions in the suburbs may take a big hit, but I think the typical single family home that costs a bit more than the equivalent rent SHOULD hold up ok.

I also don’t buy the whole “buy buy buy real estate, it’s GRRR-EAT!” outlook. There’s nothing special about it (other than it being an investment you can live in : which is factored into the price). Overall, it seems to me that the current price for real estate as an investment is still too high (in Waterloo and Toronto anyways). I’d *LOVE* a GT style meltdown (I’d start buying).

Chris: That would burn me as well, but I guess ultimately the seller paid her not you (and it would have been tough to get her half of the commission out of the selling agent), so you probably came out ok (and, as you say, most importantly you love the house).

One way to avoid issues like this is to, at least at the start, only sign an agreement for a shorter period of time (perhaps 1 month). If you like the agent and they’re doing a good job you could extend it for a longer term.

Mike: I agree it’s reasonable for agents to want a signed agreement to protect themselves (and I have no problem with this, it’s a dirty trick to use an agent them screw them out of their commission). I just think agents should be honest that this is what the agreement is about (and, ideally, to actually do their job as Chris’ apparently didn’t).

13 Mr. Cheap

TWM: I noticed that but wanted to be careful how much I bashed someone with a law degree ;-).

I think the MLS monopoly is in the middle of being broke up naturally. Either an alternative listing site will take off (one of the for sale by owner sites), or they’ll band together with a unified format and become serious competition.

I’d be SHOCKED if in a decade MLS was considered anything close to a monopoly.

14 jesse

Total confidence scam. This happens on a regular basis with presale condos. Lineups, “sold out” premium units, and callbacks a few days later after the fictitious buyer reneges. The whole thing is a racket. Back away. The only solution is not to play the game, Prof. Falken.

15 jesse

Chris: “Im not saying I know a better way of doing things, all I know is that she got paid for our work.”

I know how you can do better. Have the agent state in writing what level of service she will provide and ensure there is a clause allowing you to terminate should you be unhappy with the service and she does not take measures to correct and exceed your expectations. Don’t be afraid to write a letter to her superiors if you are really unhappy and don’t be afraid to bring in another agent to write the offer for you. It will piss her off but she won’t have a leg to stand on if she wasn’t doing her job.

Not pleasant to deal with for sure but we’re talking laziness and borderline dishonesty that is costing you your time and money.

16 Chris

A good point Jesse, and one I will definitely consider the next time ’round.
Thanks!

17 Henry

Mr Cheap: Thank you for your response.

Both Ontario and BC are harmonizing the GST with PST to create HST. To me, it is a major tax increase and I believe harmonization will have a negative impact on both Ontario and BC’s economy in the short run. Maybe Ontario and BC real estate will correct as a result of that. So many variables in the economy needs to be factored in and can affect the real estate market. Economics is highly behavior based and people are not rational.

18 Four Pillars

Henry, I can’t see a small tax increase causing a big problem for the economy and housing market.

The two big factors for house prices (in my humble opinion) are:

1) Employment rates – If less people are working then very few people will buy and some people will lose their house. Therefore the prices will go down. If unemployment gets well into double digits then I think that will cause real estate to drop.

2) Interest rates – Most people buy house and finance a good part of the house. If interest rates go way up then the amount they can finance will go down and that will reduce demand for houses as well.

19 Henry

Mike, I am not ignoring employment rates or interests rates. They are probably the most important factors.

Rather I am factoring in an increase in the sales tax. For many people, this might not be a small tax increase, since Canada has a consumption economy. Utility bills and gasoline prices will go up. All professional fees will go up. Restaurant prices in BC will go up by 7%. In BC, there was a way to avoid the 7% PST by saying that you are buying the item as a gift for a young person. Now this is not avoidable. I believe HST harmonization will have a bigger impact in BC and BC has a very bubbly real estate market. The underground economy is big in BC and taxes would literally increase by 140% for some people, which is actually fair for those who pay their income taxes. I am just saying the HST cannot be ignored as a price shock. This price shock also effect all new real estate purchases, which may have a direct impact on all real estate transactions.

Nevertheless, HST will increase efficiency in the long run. There will be probably be a short term price shock. You never know when or how bubbles will blow up. Short term price shock may be one of the factors that can break the bubble.

20 Melanie Reformed Spender

Henry: The effect of the HST here in Atlantic Canada was pretty much imperceptible. Your province’s experience may vary, of course.

TMW: people can vote with their feet, as Mr. Cheap discussed. It’s more work, but very much a possibility. As a side note, using an agent in my area is pretty rare because everyone knows everyone’s business and the rumor mill is better advertising than an agent would have access to!

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