After all the chatter emerging out of Midyear, there really is no shortage of topics to think and talk about. There is merely the shortage of time. But I thought this topic needs to be addressed, and I’m quite surprised none of the usual commentariat has tackled it.
At some point, we are going to have to address the issue of pocket listings and what that means for the industry, no? Let’s get started.
Pocket Listings and the Top Agent Network
We have been hearing for a couple of months now that with the real estate market turning around into a red-hot seller’s market, a number of brokers and agents have begun utilizing the practice of “pocket listings” more and more. Even the mainstream media has caught on to the phenomenon.
These are listings of properties for sale which are not put into the MLS, but marketed either to consumers or to real estate agents privately. Oftentimes, this pre-market marketing would be done during the grace period between taking the listing (i.e., get the listing agreement signed) and publicizing the listing (i.e., input into MLS). The original intent of the grace period is to give the agent time to put together marketing materials such as photographs, staging, writing descriptions, creating brochures, etc. In some cases, the seller requests that the listing be held off-market out of privacy concerns (happens most often in the high-end luxury segment).
To say that the practice of “pocket listings” is controversial in residential real estate would be an understatement. Interestingly, pocket listings are far more common and may indeed be the norm in certain commercial real estate sectors. The saying in commercial used to be, “If it’s on the Internet, there’s something wrong with the property.”
Lo and behold, the trend is upon us. If you’re not familiar with Top Agent Network, you should be. Here’s a video explaining what it is:
And here’s a video from the founder, David Faudman, explaining why he started the company:
Top Agent Network is only the most visible, most organized pocket listings effort out there. Without question, far less formal networks exist in every market. Without a doubt, agents have other agents in their email databases to let them know that a property is about to come on the market. And from a seller’s perspective, I sure would hope that my agent would have as large a private network of other agents as possible to most effectively get the word out about my home for sale.
This post is not about the practice of pocket listings per se. It’s about what results from it.
Some Amazing Facts
Unfortunately, I missed the session at Midyear in which these facts were presented, but I heard about them almost immediately and got a friend to send me his notes from the meeting. Since I did not personally attend, if you have different recollection or different facts, please let us know in the comments.
Well, according to my friend’s notes, here are the facts from one MLS in Northern California (MLSListings).
- 15% of total MLS volume is not on the MLS
- 30% of transactions last year in Contra Costa County was off-MLS
- 6% of transactions in the MLS have days on market of zero.
- 24% of agents in MLS Listings market area are using these off-MLS systems, like Top Agent Network
- The usage of these pocket listings has jumped in recent months. In 2011, 12% of transactions were off-market; in 2012, it was 18%. So far, in the first few months of 2013, that number is 26%.
These are, to put it mildly, astonishing numbers. If 30% of transactions were off-MLS, and 6% were zero-days-on-market transactions (meaning, the deal was done and consummated long before, and the information entered into MLS just for statistical and comp reasons)… that suggests that more than 1 out of 3 sales transactions in Contra Costa County are happening off-MLS.
If these numbers are true, the entire basis of some of the recent debates about the industry, about portals, about syndication, about MLS public websites, about brokerage websites, about IDX… all of those are completely meaningless.
Crack In the Foundation
The fundamental assumption that underlies every single debate in the industry about data syndication, about the value of MLS data, about consumer preference (or lack thereof) for all of the properties, about portals like Trulia and Zillow, about AVM’s, about whatever you want to think about is that all of the properties for sale through a real estate agent is on the MLS.
The assumption of this monopoly power is so important that it formed the basis of arguments in 2006 about perhaps regulating the MLS as a public utility. The assumption forms the basis of major anti-trust lawsuits (i.e.g, the Thompson jurisdictions), that because the MLS is a necessary tool for earning a living in real estate, membership in it cannot be tied to membership in a REALTOR Association. And so on and so forth.
Well, if only 2/3 of the properties for sale in a given area are actually on the MLS, I got news for ya: that assumption is just wrong.
Remember this story about the Redfin-WAVGroup study about data accuracy on Trulia and Zillow? In it, the study concluded that Trulia had 81% and Zillow had 79% of the listings on the MLS, while brokerages had 100% of the listings.
That may still be true, but if the MLS only has 70% of the listings handled by real estate agents, who can say that maybe Trulia and Zillow don’t have more? It is far from unthinkable that a real estate agent wishing to pre-market a listing wouldn’t upload it directly to Zillow with its 50 million monthly uniques, is it? (And as a point of fact, I know of at least a couple of instances where that was precisely what was done, resulting in a full-price offer on the house days before it ever hit the MLS.)
Question of Value
Another astonishing figure we have to address is that 24% — that’s one out of four — agents in the market area are using these off-MLS systems. One out of four.
Well, we know from previous reports that in many if not most MLS’s, half of the members do zero transactions in a given year. We also know that the top quartile is responsible for a disproportionate share of the business done: the 80/20 pareto rule holds strong in real estate. So if 20% of the agents do 80% of the business, and 24% of the agents are using private off-MLS systems… listen, it ain’t a stretch to conclude that every single productive agent is using these systems.
REALTOR Associations have been engaged in soul-searching for the past few years trying to answer the question of, “What is the value of membership?” Association leaders are busy trying to put together one member benefit program after another, but the fundamental benefit they all realize is central to membership is the MLS. Even in Thompson states where membership in the MLS cannot be linked to membership in the Association, a large number of agents join for a variety of reasons (not the least of which is that the price of MLS membership and Association membership is more or less the same).
Well, if all of the producing agents in a given market area are using off-MLS systems… and the producers know that only 64% of the available properties on the market are actually in the MLS… the compelling value proposition of the MLS itself starts to fade.
We know that Top Agent Network purports to take only the top 10% of the agents in a given market, and that their claims of performance are verified. But if 24% is the right number, then there are other systems — including such a simple thing as email lists — that are being used by agents and brokers everywhere.
We have seen at least one MLS take a hardline stance against pocket listings. Seattle’s NWMLS has flatly prohibited any marketing of a listing that has not been entered into the MLS first. Here’s a blogpost very much in favor of the new rule discussing it.
Maybe this new hardline stance would have the desired effect: prevent real estate agents from doing the pocket listing thing. But as we’ve seen with other rules, regs, and even laws… and human nature being what it is… the unintended consequences could be driving the activity underground. Or getting more and more agents to get the seller to agree to a private listing agreement, in which the seller directs the agent not to put the listing into the MLS. Or some other thing we haven’t thought of yet. Human ingenuity is all about finding loopholes, after all; otherwise, the entire profession of tax law wouldn’t exist.
We will see what the result is. But as a general matter, I am skeptical that the stick can accomplish better what the carrot cannot. See, e.g., digital music. Rules and lawsuits didn’t stop illegal filesharing; iTunes, Pandora, and Spotify did.
But what does occur to me is that arguing over the wallpaper in a house might should maybe take a backseat to dealing with the crack in the foundation. Whether MLS, Association, franchise, brokerage, agent, or whomever… it might make sense to pay a bit closer attention to this issue.
Because if the MLS is no longer reliable as a data source, everything else will fall down.
-rsh
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