Hidden Risks and Discriminatory Nature of Pocket Listings in Real Estate

September 16, 2024 Wendy Carpenter-Israel

Disadvantages of “Pocket Listings” or “Off-MLS” for Home Sellers and Buyers

In today's real estate market, pocket listings—where agents privately market properties instead of listing them on a public Multiple Listing Service (MLS)—pose significant risks and perpetuate discriminatory practices. These practices negatively impact sellers, homebuyers, and our community. The real estate market should be a level playing field where all buyers and sellers have equal participation opportunities. However, the practice of pocket listings significantly undermines this ideal, perpetuating inequality and discrimination in the housing market.

The real estate industry is undergoing a significant transformation. The Department of Justice, in its regulatory capacity, has recently intervened to reshape commission structures, triggering a multitude of changes. With these changes, buyers and sellers are concerned that pocket listings may rise to new levels in the Washington, DC, Metro Area, and all over the country. Consumers should approach pocket listings cautiously or avoid them altogether because of their economic disadvantages, lack of transparency, and discriminatory implications.

What Are Pocket Listings?

Pocket listings are real estate transactions in which a property is marketed privately rather than listed publicly on the Multiple Listing Service (MLS) or online platforms. Pre-market home sales occur when a homeowner hires a real estate listing agent to sell their property, but the listing agent and sellers choose to keep the listing within a limited network, often sharing it only with select agents, specific buyers, or colleagues within their office.

How “Pocket Listings” and “Off-MLS” are Supposed to Work:

Private Marketing: Instead of advertising the property widely, the listing agent may inform a small, curated group of potential buyers about the home's availability. This group might include clients with whom they have a close relationship, other agents within their brokerage, and other Realtors from other real estate companies, like the Buyer’s Edge, who represent homebuyers.
Speed of Sale: In a hot market, this approach might appeal to sellers who believe their home will sell more quickly and with minimal public exposure or effort.

True Costs and Implications of “Off-MLS” and “Pocket Listings” Properties:

Market Effects on Real Estate: On a larger scale, the prevalence of pocket listings can distort housing market data, as fewer comparable sales are publicly available in real-time and with accurate sales data. This can make it harder for other sellers and buyers to gauge the market value of properties in the area. Moreover, pocket listings frequently serve the brokers' interests more than the sellers'. Brokers might earn larger commissions by "representing both buyer and seller," a situation fraught with conflicts of interest.
For Sellers, Illusion of Convenience and Privacy: Although pocket listings might appear efficient, they limit the pool of potential buyers and can lead to a lower sale price compared to what the property might achieve with exposure to the entire market. Pocket listings can seem appealing, especially to high-profile individuals and politicians who wish to avoid the attention a public listing might attract. However, this so-called convenience comes at a significant cost, often leaving sellers at a disadvantage.
Economic and Competitive Disadvantages: For the average home seller, the privacy of a pocket listing often means sacrificing the chance to reach a broad pool of potential buyers. By limiting the property's exposure, sellers effectively exclude 70% or more of the most qualified buyers. More eyes on a property typically translate to more offers in real estate, potentially driving up the sale price with multiple bidding wars. This Seller's Edge of receiving competitive offers for their home is often lost when pocket listings are the listing agent's sales strategy. Sellers might believe they've secured the best price for their property. Still, they can only determine its actual value if the home is made available to the broader local, national, or international real estate market. Without this wider exposure, there's no way to confirm that the offered price is the highest possible.
For Homebuyers, the Illusion of Exclusivity and Once in a Lifetime Opportunity: Buying a pocket listing also may sound enticing to homebuyers. Don’t be fooled; they are often left purchasing a home with a dual agent or designated buyer's agent, Realtors who all work in the same real estate company with a listing agreement contract with the seller to get the highest price and best terms for their client, the home seller. This scenario leaves homebuyers with no one representing or protecting their best interests in the real estate transaction. You can only determine the actual market value of a home when you market the property to the entire public. Overpaying for a home that may never have had a professional home inspection, comparative market evaluation, advantage of an independent lender and title attorney, or receive expert advice from an experienced Exclusive Buyer's Agent is as financially unsound to homebuyers as it is to sellers who have yet to have the opportunity to learn the market value of their home.
For the Community: Pocket listings can have broad negative impacts. They reduce market transparency and can contribute to housing inequality by restricting access to properties to a select few, often leaving out minority and less-connected buyers. Exclusive real estate networks can perpetuate segregation and economic divides within communities by making specific neighborhoods accessible only to those within these networks.

Regulatory Response Pocket Listings:

To address these concerns, some real estate organizations have implemented policies to reduce the use of pocket listings. For example, the National Association of Realtors' Clear Cooperation Policy mandates that properties must be listed on the MLS within a specific timeframe if they are being marketed to the public, helping to keep the real estate market open and fair for all participants. Yet, despite this, pocket listings have persisted and even increased in some markets. NAR loopholes allow some listing agents to list "coming-soon properties," which delays the public listing and creates a private window for pre-viewing the home.

How Pocket Listings Perpetuate Segregation, Discriminatory Practices,
and Market Exclusivity

Pocket listings' exclusionary nature impacts economic outcomes and fosters a discriminatory housing market. By keeping property sales within a tight-knit network, these listings often exclude minority and less connected buyers, contributing to ongoing segregation and inequality in housing. Such practices reinforce social and economic divides, as properties are more likely to be shown to and purchased by individuals within the same demographic and social circles as the real estate agent. The lack of transparency in these transactions can lead to discriminatory outcomes, where qualified buyers don't get a fair chance to purchase the home of their dreams.

America's housing market has long been shaped by practices that promote racial segregation, such as redlining and discriminatory lending. Pocket listings and Off-MLS, while not overtly racist, contribute to this legacy. Studies show that white real estate agents who dominate the industry tend to have more homogeneous networks.

One critical study, "The Effect of Real Estate Agents' Race on Home Buying Outcomes" by Rachael A. J. Hite, examines how an agent's racial network can impact outcomes for minority clients. In another article, "How America's Real Estate Brokers Still Use Practices That Reinforce Racial Segregation," Elizabeth Korver-Glen writes, "Overall, pocket listings, used in the context of segregated social networks, are one important way that real estate agents still contribute to racial segregation in the housing market, even when no explicit prejudice or mistreatment is observed (or even perhaps consciously intended)."

When a Realtor uses pocket listings, they are likely to show the property to and sell it to buyers within their network—often other white buyers—further excluding minorities from these opportunities.

This exclusion is not just a theoretical problem. Minority homebuyers miss out on potential home purchases simply because they are not in the same networks as those with access to these pocket listings. This practice limits their ability to buy homes and perpetuates neighborhood homogeneity, making it harder for communities to become more diverse and inclusive.

Advocating for Transparency and Fairness When Buying and Selling a Home

Greater transparency and fairness are critical for a healthier real estate market. Sellers and buyers alike should be wary of the allure of pocket listings and instead engage in more open and competitive selling practices that ensure the best financial outcomes and promote a more inclusive and equitable real estate market environment.