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 share information (cooperation) with other MLS subscribers and will share a portion of the total real estate commission (compensation) paid by the seller to the agent who brings forth a buyer (collaboration). This marketing standard, which has been the centerpiece of the American real estate market for almost fifty years, is approaching extinction in the face of a rapidly expanding market segment known as the “off MLS listing.”
The Changing Scope of Pocket Listings
The “pocket listing”, which is a listing that is kept off the MLS for a variety of reasons, has had a lengthy and illustrious history, though it has been a rare exception to ‘normal’ practice, and has been, almost universally, questionable. From a listing agent’s perspective the rationale for a pocket listing might range from the client’s legitimate desire for privacy or secrecy, to constructive discrimination, to an effort to net “both sides.” Indeed, some sellers may have their own reasons for not listing on the MLS, including wanting to sell to only certain “types” of people, not wanting the wrong strangers touring their property, or the completion of construction-related activities.
Historically, select agents have had “inside” knowledge of pocket listings in their own offices, yet most agents were left in the dark. It is unclear 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 regarding 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.
Recently, an increasing number of high production agents are using their power and influence with sellers to generate listings that are exempt from the accepted practice of 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). Many of these listings never make it to the MLS before the sale is completed.
The precise number of non-MLS sales within any market is not determinate of the crisis. Rather, it is the existence of a set of practices that are rapidly gaining ground and which are seen by some of the most ethical practitioners in the industry as being legitimate that have the potential to rapidly and negatively impact the stability of the new real estate marketplace.
The Current Situation
The impact of past pocket listings is minor compared to what is happening in today’s marketplace. Informal research and interviews conducted over the past several weeks have revealed the following with respect to what is now referred to as “off MLS” marketing activities:
- 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 their specific interests.
- Some companies 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 agents and agent networks that are more or less openly advising sellers to execute MLS exception documents for the sole purpose of effecting a sale that is to the clear benefit of the seller. The names attached to this growing practice include: “off MLS”, “off market”, “created sales,” “listing networks” and “listing parties.” Many of these groups go beyond brokerage boundaries.
- 15% of homes are 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 Probable Causes Of This Shift
- The traditional real estate marketing 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” listings are suggesting consumer self-election, miscellaneous reasons and frequently manufactured consumer benefits, the fact is that the primary driver of this trend are real estate professionals themselves. There are at least two primary strategies at work here:
1) 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 “scoring both sides” and “rewarding one’s friends that will return the favor in the future.”
2) 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 itself of practitioners and practices which 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 “unintended” consequences of their activities.
The Unintended Consequences
The possible ramifications of “off MLS” marketing activities are both far-reaching and ominous for the future of the market. 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 anyone and everyone 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 decide who are the “right people” to make a housing purchase, 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 the 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.
- Relationships between REALTORS will be strained by eliminating the come-one-come-all exposure currently being practiced.
- 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.
- 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, and that 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.