THE BLOG

Beware of the "Pocket" Pandemic

05/09/2014 03:12 pm ET | Updated Jul 09, 2014

As the market turns, the supply of housing inventory is driving home prices skyward. In Los Angeles for example, inventory is so low, buyers are so desperate to find housing, they are door knocking and making generous offers in hopes of unearthing a homeowner interested in selling. Compounding the inventory issue are fence-sitting-would-be sellers who fear facing the buyer peril -- finding a home and paying way over market value if they sell.

Cue Joseph Heller's wartime depiction of the master conundrum, Catch 22.

With the burgeoning trend of "Pocket Listings" -- the practice of not placing a home on the open market and using the agent to quietly test out market -- these properties are virtually invisible to most buyers and their agents.

This issue has triggered the concern of State Governing Boards of Realtors who promote the accuracy of real estate transactions fearful that erosion of true market transparency creates a disservice to both the brokerage community and the general public.

In this regard, they could be right.

Why pocket a listing

The attraction to sell a home off market is tangible.

Buyer demand is high. Based on this demand, homeowners believe "testing" the market helps them gauge the price their home might command.

What they tell their agent is: "If you can land me a big number with as little aggravation as possible, I'll sell."

Under these circumstances, this unofficial listing allows sellers to enter the marketplace quietly without triggering the days on market (DOM) clock -- a ticking time bomb for any seller hoping to get top dollar. The longer a home sits on the market, the more leverage buyers seem to have in negotiating down the price.

Sellers, especially in Los Angeles, also gravitate to this practice to avoid the open house paradigm and prevent the rumor mill neighbors might spread about why they might be selling their home.
Other reasons notwithstanding, a pocket listing appears far more convenient and attractive to the seller than it really is. In fact, this practice is laced with flaws that should be surfaced.

In a different setting, the following example articulates this issue with decisive clarity. Edward Hopper's painting called "East Wind Over Weehawken," captured global attention when it sold last year. The paintings estimated pre-auction value of $22 to $28 million dollars might have been all they could get if they sold is privately. But taking it to the public market, this piece sold for $40,500,000.

The Representation Factor

Part of the pocket strategy is to invite a few real estate brokers into the mix, offering them a commission if they have the appropriate buyer for the home.

Sellers are in essence dangling a fishing line in the brokerage pond hoping to create a broker feeding frenzy. Having been positioned to win at all costs, the seller's interests may be sacrificed in the process.

Consider human nature.

What happens if two brokers bring offers to buy the home?

At this critical moment when discretion and strategy creates greater gain, who runs point on the negotiation? Neither broker can spearhead the seller side of the negotiation because each broker has a singular vested interest in winning and therefore cannot offer viable strategy and intelligence for the Sellers benefit.

From the buyer perspective:

A buyer entering the Pocket Listing arena must accept that they will potentially pay beyond fair market value for a home. Consider it a "luxury" tax.

When a home goes on the market, a bidding war may ensue (a major frustration in and of itself) that speaks to the ultimate value of the home. Yet buyers will at least have a reference point and the transparency of the marketplace to make a decision that serves their needs and interests.

When buying a Pocket Listing, Buyers are precluded from the natural testing of the market place and must rely on perhaps, only a singular appraisal of the home and the reliance of a broker to interpret the comparable sales in the neighborhood as a guide.

Because brokers are so keen to the attraction of pocket listings, some are even leading with it on their Websites to get buyers to sign on to get their "exclusive" information.

No one brokerage could ever possess all the pocket inventory as brokers rely heavily on each other to cull and sort the viable pocket listing inventory.

Having just heard of this strategy recently, I'm disheartened by the perceived leveraging of information by some brokerages used to seduce buyers.

There is also a legal reality worth considering, which will surface at some point when a disgruntled seller, advised by their agent to keep their listing off the MLS will realize they could have commended a much higher buy price had they made the listing public.

So who wins ultimately in this environment?

Right now, the broker.

Commissions are being paid with less expense and marketing dollars, there are fewer checks and balances to make sure each purchase is at fair market value and as mentioned above, buyer attraction tactics are certainly in play.

As this strategy du jour continues to gain traction, it is imperative that everyone is better educated as to the current and potential pit falls. What are your thoughts about this growing trend? Have you participated in an off market sale and what sort of outcome did you experience? Are you in the process of buying or selling a home and is this a strategy that you are employing?

Nick Segal, President, Founding Partner, Partners Trust Real Estate Brokerage and Acquisitions

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