Back in 2019, I wrote a post titled Pass Clear Cooperation Policy, But Address the Gaping Loophole. In that post, I pointed out that because of the office exclusive loophole, Clear Cooperation Policy creates bizarre new incentives:
In the FAQ that accompanied Policy 8.0, we are told that this policy does not affect “office exclusive listings” at all. From NAR’s webpage on Policy 8.0:
Does Policy Statement 8.0 prohibit office exclusives?
No. “Office exclusive” listings are an important option for sellers concerned about privacy and wide exposure of their property being for sale. In an office exclusive listing, direct promotion of the listing between the brokers and licensees affiliated with the listing brokerage, and one-to-one promotion between these licensees and their clients, is not considered public advertising.
Common examples include divorce situations and celebrity clients. It allows the listing broker to market a property among the brokers and licensees affiliated with the listing brokerage. If office exclusive listings are displayed or advertised to the general public, however, those listings must also be submitted to the MLS for cooperation.
It’s important to recognize that the office exclusive is actually a brokerage exclusive; a brokerage with 10 offices can aggregate all of the exclusive listings and take advantage of that. Further, note that office exclusives are not subject to the MLS rule requiring mandatory submission of the listing to the MLS.
That loophole not only preserves most of the value of exclusive inventory strategies, I argue that it creates a new safe harbor for such strategies.
Here we are in 2021, and Clear Cooperation Policy is mandatory “law of the land” in MLS world. So what has been the result?
Some Data from Redfin
According to a post by Glenn Kelman on Redfin.com, “pocket listings” are up 67% from 2019 to 2021:
It turns out you can put a number on whether the housing market has gotten more or less fair to people of color; it has gotten much less fair. In a November 2019 fair-housing initiative, the National Association of Realtors moved to ban so-called pocketing listings, where real estate agents tell only a select group of buyers about a home for sale. But since then, the number of homes sold without being marketed to the public has increased 67%, from 2.4% to 4.0%, and may still get worse; the rate risen every month in 2021.
In Some Markets, 10% of Listings Are Pocketed
In markets with a long history of exclusive neighborhoods, like Chicago, or markets where one brokerage has significant share, like Minneapolis or Columbus, the largest brokerages are pocketing more than 10% of their listings. One in ten homes may not sound so bad, but the problem is that the homes being sold in secret are often the ones everybody wants, often in mostly white neighborhoods.
Now… Glenn Kelman frames this as a fair housing problem, as a racial discrimination problem, but frankly, that’s both confusing the issue and obscuring the real problem. In fact, I think using the phrase “pocket listings” obscures the real problem, because office exclusives are not pocket listings. No, office exclusives are sanctioned by the Clear Cooperation Policy rules by name.
Once you get past the distracting rhetoric about race, it turns out that Clear Cooperation Policy is a disaster in the making. So I do support what Glenn suggests, which was my original recommendation back in 2019: close the office exclusive loophole.
NAR Can Give Its Pocket-Listing Ban Teeth: The National Association of Realtors has already banned agents at different brokerages from sharing pocket listings with one another via Facebook groups or email lists. But this well-intentioned policy had the unintended consequence of creating a monopoly on a monopolistic practice, favoring the big brokerages who can still pocket listings within their own brokerage, in what are known as “office exclusives.” The big brokerages could end pocket listings today, just by looking for the offices selling a large number of listings that are never marketed to the public. At its November conference, the NAR could support these brokers by closing the office-exclusive loophole industry wide.
With the crazy seller’s market we are now in, and I think will be in for the foreseeable future, unless this loophole is closed, we can expect more double digit YOY increases in “pocket listings.”
Why Pocket Listings Will Rise
As I wrote in previous posts on the subject, office exclusives will go up over time because of the incentives. It has little to do with double ending deals, it definitely has nothing to do with racism, and it has everything to do with the realities of brokerage operations. Here’s what I wrote in 2019:
What so many people have missed about exclusive inventory strategies is that they are not about doing deals. At the level of the individual agent, or the not-so-sharp brokerage operator, these strategies might actually be about double-ending transactions, but for smart brokerages, exclusive inventory strategies are about creating a FOMO (Fear Of Missing Out) effect in consumers and agents to create competitive advantage.
Buyers sign up for your emails out of fear that they might miss out on an exclusive. You use this database of buyers to recruit agents, who fear that they might be missing out on leads and worry about competing against your agent who can walk into a listing appointment talking about the 5,000 buyers you have in your database. Those agents bring listings with them, which you use to begin the cycle again. This “network effect” is the superpower that Andrew Flachner so eloquently outlined in his post about using buyer data and exclusive listings to gain a competitive advantage.
And just in case you can’t connect the dots, the brokerages who can most effectively use Office Exclusives as a competitive lever are the big brokerages with lots of agents and lots of listings. The small independent is screwed. The boutique brokerage? Screwed. The small 3-person brokerages that makes up the vast majority of the Participants in any given MLS? Screwed. Nobody really cares about your seven Office Exclusive listings, not when the top five Big Box Brokerages in town have several thousand. Oh by the way, your IDX feed is now short several thousand listings.
Given the desperation of buyers today, do we really think they’re not signing up for those emails? If they start signing up for those emails, do we really think that the brokerages aren’t going to use them for a competitive advantage in recruiting, in getting listings, in everything else?
Exclusive inventory –> exclusive buyers –> exclusive sellers –> recruiting advantage –> exclusive inventory. FOMO and the beneficial cycle of the network effect gets going. This was quite literally Compass’s business plan a couple of years ago, and I suspect that it remains an important part of their now-public business plan. And if Compass saw the benefits, then so did every other big brokerage in the country.
I’m actually a bit surprised that Redfin said only 10% of transactions in Minneapolis and Columbus are being done as office exclusives. I would have thought it would have been higher.
Glenn is correct that big brokerages could end the practice today; I just don’t see why they would.
Glenn might be correct that NAR could end the practice by closing the office exclusive loophole… but that’s a bit of a dicier proposition… since big brokerages could theoretically just leave REALTOR MLSs in response. Commercial real estate has operated for centuries without NAR and the MLS… and CoStar is in the game now.
Maybe that’s why Glenn talks so much about race, to pressure big brokerages to do something that is so clearly against their self-interest.
Disaster in the Making
So, I now believe that as currently written and adopted, Clear Cooperation Policy is a disaster in the making. It limits marketing options for brokers and agents by basically eliminating Coming Soon, but incentivizes the pursuit of office exclusives… which might be worse. The policy has created a clear safe harbor for that practice, which is in the best interests of brokerages to pursue.
FOMO and network effect are powerful things, and brokerages who are suffering from decreasing profitability year after year would be fools not to look to take advantage of those. That doesn’t make them racists; it makes them businesspeople trying to stay in business.
But that doesn’t change the fact that the current Clear Cooperation Policy will lead to more, not fewer, “pocket listings” as time goes on. Give it enough time and runway, and it will eventually become far more than 10% of transactions. How long can the MLS wait before it is rendered irrelevant? 30% of transactions? 50%? 70%? You don’t have that much time.
Until a more permanent solution can be found, I agree 100% with Glenn that NAR should remove the office exclusive loophole as soon as possible. At the very least, that loophole should be made an optional provision, rather than a mandatory one. If the industry is going to go against exclusivity, then it needs to go against exclusivity… then deal with the issues that will arise from that change.