Why Are Pocket Listings Banned?

Why are pocket listings banned? Explaining the reasoning behind the National Association of Realtors (NAR) banning pocket listings.

Q: You recently answered a question about a home seller paying the commission to an agent for a “pocket listing.” You bypass the larger issue and the reason that so-called pocket listings are against the National Association of Realtors (NAR) rules. “Pocket listings” are against Fair Housing rules. You should put an addendum to your answer addressing that issue.

A: Thank you for your question. You bring up a good point about pocket listings: when real estate listing agents use pocket listings, they deny the general population of the ability to view and bid on properties that should be on the market.

We’ve written about pocket listings and the NAR passing a rule that prohibits pocket listings several times this year. A pocket listing is when a homeowner hires a real estate agent to sell their home but the listing does not show up in any multiple listing service or in any online listing of homes for sale. The listing agent effectively keeps the listing for themselves (and their own customers) and markets the home privately to other agents who are often in the agent’s own office or company or specific people before the world gets the right to view and bid on the home.

We believe pocket listings are a disservice to buyers and sellers. And, the current overheated state of the residential market shows exactly why.

Pocket Listings in a Hot Market

In a hot market, a pocket listing might enable homeowners to unload their homes quickly to a buyer that the listing agent already has or finds through word of mouth in the listing agent’s office. That sounds good, right? But such a quick, “insider” sale might deprive the seller of a higher price that the seller might get by having all interested buyers in the marketplace know about the home and be able to tour it and bid on it.

Pocket Listings in a Slow Market

What about using a pocket listing in a slow market? It’s a basic economics question: The more people who see the property, the higher the chance that there will be more interest in it, allowing the homeowner to sell for more money. Indeed, the listing agent might test the waters and see what the market might bear with a higher sales price. If the market responds negatively to the higher price, the listing agent can later lower the price of the home to the point where it becomes competitive.

No matter whether the market is fast, slow or (in the words of Goldilocks) “just right,” pocket listings do not give the homeowner the benefit of having every possible buyer see that the home is for sale. The homeowner only gets a narrow slice of the market, and that slice is determined by the listing broker.

Now, we have heard arguments from listing brokers that say that some homes are better off sold through pocket listings, in particular high end homes or homes of the rich and famous. Again, we disagree. Many agents of extremely high-end listings say that pocket listings at these price levels rarely work. We know of a top agent in Atlanta who advertises her listings (which are all multi-million dollar listings, some of which listed at prices over $10 million) globally. More often than not, she sells to an out-of-town buyer.

Your point is that pocket listings deprive the market as a whole of these listings and that listing brokers might intentionally or unintentionally market these homes in a way that deprives specific groups of buyers from even knowing about these properties, let alone making an offer. This is the essence of discrimination in housing, no matter the price point, which is illegal under the Fair Housing Act.

When we claim to have a marketplace for homes, we should make sure that it is a fair marketplace for all and that all homebuyers and home sellers have an equal chance to buy and sell homes in the market. Thank you for your comment.