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Off MLS Marketing: From Pocket Listing to Industry Tsunami

The “pocket listing” is one of the oldest and most contested scenarios in the real estate industry. A seller retains an agent to sell a property and a listing agreement is executed. If it is a classic “Exclusive Right to Sell Agreement,” the broker has already executed a MLS subscriber document specifying that, unless certain conditions are met, the listing will be entered into the MLS within 48 hours, the agent will cooperate with other MLS subscribers and will share (compensate) a portion of the total real estate commission paid by the seller to the agent who brings forth a buyer.

It would appear, however, that this marketing procedure that has been the centerpiece of the American real estate market for almost 50 years, is now facing extinction in the face of a rapidly expanding market segment known as the “off MLS listing.” An increasing number of high production agents are using their power and influence with sellers to generate listings that are exempt from cooperation, compensation and collaboration. Sellers involved in this type of transaction are executing an exception that states that the property shall not be exposed to buyers through the MLS (generally for a time certain or until a specific event occurs). Within the environment created by this arrangement, the aforementioned agreement to work cooperatively, compensate and collaborate with other brokers never matures. This practice, formerly limited to a very few special situations and almost universally seen as questionable, has from time in memorial been referred to as a “pocket listing.”

Traditionally, from a listing agent’s perspective, the rationale for a pocket listing might have ranged from the client’s legitimate desire for privacy or secrecy to constructive discrimination and just plain greed. Indeed, some sellers may have their own reasons for not listing on the MLS, possibly including wanting to sell only to certain “types” of people, not wanting the wrong strangers touring their property or the completion of construction related activities.

The pocket listing has had a lengthy and illustrious history. It would appear that some agents always had “inside” knowledge of pocket listings existing in their own offices but research suggests that most agents probably didn’t. It further appears that the initial “pocket listing” was generated by agents to affect a sale that would have netted him or her “both sides.” It isn’t certain what knowledge brokers have had regarding these practices over the years.

The historic relationship between the MLS and the pocket listing is also unclear. Some MLS systems have attempted to regulate this type of activity by requiring the execution of a written exception by the seller, the agent and even the broker. Other MLSs and REALTOR® organizations actively discourage members from taking pocket listings and/or require execution of a notice relative to the benefits of MLS publicity.

The current California Association of REALTORS®’ consumer education program definitely represents the ultimate activism. Possibly many MLSs have either felt helpless in the face of the problem or simply looked the other way.

The Current Situation

  • The history of the pocket listing is really only marginally relevant to what is happening with this practice in today’s marketplace. Informal research and interviews conducted over the past several weeks has revealed the following with respect to what is now referred to as “off MLS” marketing activities.
  • It is now abundantly clear that the traditional market that so many real estate professionals have so patiently waited to return is gone forever.
  • Current market statistics strongly suggest that, based upon current production levels, housing values and housing related activities, the American housing market has regained a significant level of strength and is indeed executing a “come back” of sorts. One of the most interesting aspects of this dynamic is the question regarding what format will this new market will adopt.
  • It is clear that individuals and entities from a wide range of financial, marketing, brokerage and regulatory elements are dedicating significant efforts, resources and energies to ensure that this new market demonstrates specific characteristics deemed to be advantageous to specific interests.
  • There are apparently some companies that are routinely listing properties as pocket listings (with executed exceptions) before entering the property into the MLS. The most obvious benefit of this arrangement is to allow the company to try to obtain both the listing side and the “selling” side of the commission.
  • There are a growing number of agent and agent networks that are more or less openly advising sellers to execute MLS exception documents for the sole purpose of affecting a sale that is to the clear benefit of the seller. The names attached to this growing practice range from “off MLS,” to “off market,” to “created sales,” to “listing networks,” to “listing parties.” Many of these groups go beyond brokerage boundaries.
  • The research suggests that 15% is the average volume of homes sold “off MLS” across the country. It appears that few MLSs are tracking such statistics. Some MLSs report rates approaching 26% with a smaller number reporting near 35%.
  • The precise number of non-MLS sales within any market is not determinate of the crisis. It is the existence of a set of practices that is rapidly gaining ground, that it seen by some of the most ethical practitioners in the industry as being legitimate and that have the potential to rapidly and negatively impact the stability of the new real estate marketplace.

The Probable Cause:

  • A strong argument can be made to support the claim that the traditional real estate marketing system, while far from perfect, has maintained a reasonable level of function and competence over the past several decades.
  • Moreover, this same system is making a significant effort to accommodate the emerging influence and interests of a more powerful consumer, the enhanced role of the Internet, new applied technologies, expanded regulation, new Internet based players and new brokerage business models.
  • All though many of the practitioners of “off MLS” practices are suggesting consumer self-election, miscellaneous reasons and frequently manufactured consumer benefits, the fact is that the primary drivers of these trends are real estate professionals themselves. There are at least two primary strategies at work here.
  • Arguably the most powerful strategy is being employed by “off MLS” real estate professionals who are totally focused on maximizing their incomes. Nothing can reach this objective as quickly as either “scoring both sides” and “rewarding one’s friends” that will return the favor in the future.”
  • The second strategy appears to be coming from those real estate professionals who have lost their confidence in organized real estate’s and/or the industry’s willingness or ability to cleanse it of those practitioners and practices are inconsistent with the creation, legitimization and practice of ethical standards in the marketplace. There may be nothing that will achieve this result as effectively as denying marginal, unprofessional and unethical practitioners the listings they need to protract their incompetence.
  • Unfortunately however, whatever their financial motivations or however noble their efforts may be it seems clear that neither of these groups have taken the time to either project or anticipate the ramifications and “unintended” consequences of their activities.

The possible ramifications of “off MLS” marketing activities are both far-reaching and ominous for the future of the market, as we know it today.

Consider the following:

  • The loss of the MLS’s credibility as a data source in the home search process
  • The loss of the MLS’s credibility within the appraisal process
  • The deterioration of the credibility of the REALTOR® in the eyes of the American consumer
  • The overall REALTOR® value proposition in the eyes of everyone and anyone in the real estate space.  After all, less work might mean less compensation
  • Potential anti-trust violations. The new listing networks are in fact groups of competitors that, it can be argued, are attempting to impact pricing, competition and market conditions.
  • Potential Fair Housing violations. Any time there is a process that undertakes to unilaterally decides who the “right people” to make a housing purchase are the potential for a fair housing violation cannot be far behind.
  • Potential civil liability issues. Sooner or later suits will be filed by consumers who allege that they would have benefited from rising prices had their property been listed in MLS.
  • The potential of government regulation or even a governmental takeover of the MLS as a critical national economic system.
  • In the final analysis, perhaps no outcome will be as critical as the impact of the “off MLS” situation on organized real estate and the REALTOR® culture
  • As an agent driven condition massive “off MLS” listings will dramatically affect the way REALTORS® interact with each other and their clients
  • The practice of not exposing a seller’s home to the entire REALTOR® community changes the legal balance and thus the relative liability of both agents and brokers.
  • Relationships between REALTORS® will be strained, by eliminating the come one, come all exposure currently being practiced
  • The basic concept of putting sellers and REALTORS® in a position to determine who has the right to buy a particular property and/or by establishing the demographic profile of the buyer a seller wishes to deal with is fraught with potential legal, regulatory and social issues
  • One of the key elements of the current REALTOR® interactive community is the sharing of information in a manner that benefits both buyers and sellers. Creating a parallel “off market” environment cannot help but create a process that undermines what the public gets to see or know about properties, neighborhoods, and conditions related to the sale
  • Traditional REALTOR® MLS practices have been subject to at least minimal levels of transparency and rule-making. It is readily apparent that the new “off MLS” practices will, to a great extent, be developed on a transaction-by-transaction basis.
  • Some experts suggest that the current agent/broker relationship lacks the fundamental universal accountability relationship between brokers and agents the creation of listing parties, networks or “created sales” will further erode the situation potentially to a point of total dysfunction.
  • The very nature of current “off MLS” practices suggests that they will quickly come under review by errors and omissions carriers especially if consumer lawsuits are generated. It seems likely that such a review would generate a rate increase for all REALTORS®.
  • The current “off MLS” situation is, for the most part, being practiced by REALTORS® who represent the most professional and productive of REALTOR® ranks in most markets. These are the top agents. One can only imagine what will occur when these practice are undertaken by the legions of agents who fall far below this status. The term “wild west” comes to mind.

The utilization of “off MLS” practices has the potential of threatening the security and safety of every American.  This is a situation that must be immediately addressed and solved by the very highest levels of authority and expertise within our industry. Thanks to those who are already on the front lines of this critical battle.

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