Pocket listings are a NO NO California Real Estate Lawyers getting involved

Posted by Danielle Dani Purcell on Wednesday, April 17th, 2013 at 6:30am.

 
 
Pocket Listings
 
    
 
 

Corporate Legal Department
Tel (213) 739-8282
Fax (213) 480-7724
Apr. 4, 2013 

 I.  Introduction
 II.  Pocket Listings
 III.  Pocket Listings and California Real Estate Law
 IV.  Pocket Listings and the REALTOR® Code of Ethics and Standard and Practices
 V.  Pocket Listings and Fair Housing
 VI.  Pocket Listings and Antitrust

I.  Introduction

REALTORS® marketing a property for which they have obtained a listing will generally place that listing on the Multiple Listing Service (MLS).  At times, however, listings are not placed into the MLS.  Listings not placed on the MLS are commonly referred to as “pocket listings”. This article will discuss the various legal issues and risks of pocket listings.  Please note that this article references the California Model Multiple Listing Services Rules (Amended February 2013). REALTORS®, however, must comply with their own local MLS rules.  Many local MLSs adopt the Model MLS Rules in its entirety, whereas other MLSs may have slight variations and may have different numbering systems.

II.  Pocket Listings

Q 1. What is a pocket listing?

A A pocket or off-MLS listing generally refers to a listing agreement that an agent has obtained but does not place on the MLS. A “pocket listing” is not a legally-defined term, and can have other meanings as discussed below.

Q 2. Is a pocket listing legal?

A Yes, a pocket listing can be legal. However, a pocket listing raises a number of legal and practical issues that agents should consider and address as discussed below.

Q 3. Doesn’t a listing broker who is a broker participant of an MLS have to submit all listings to the MLS upon obtaining a signed listing agreement from a seller?

A Generally, yes. A broker participant of an MLS must generally submit new listings for one-to-four residential units and vacant lots located within the MLS service area to the MLS within 2 days after all necessary signatures of the seller(s) have been obtained or at the start date of the listing, whichever is later (Model MLS Rule 7.5). Some local MLSs may have different time frames. However, the Model MLS Rules provide an exception to the mandatory submission requirement if the seller refuses to permit the listing to be disseminated by the MLS. In that instance, the listing broker must submit to the MLS a certification signed by the seller stating that the seller does not authorize the listing to be disseminated by the MLS (Model MLS Rule 7.6).  C.A.R. standard form Seller Instruction to Exclude Listing from the Multiple Listing Service or Internet (Form SEL) serves this purpose. Generally this form should be submitted to the MLS within the time period required for submission of the listing.

Q 4. Some agents obtain listings which they do not place in the MLS, but share the listing information with other agents through informal or formal groups of agents. Is this legal and is it still considered a pocket listing?

A Yes, such groups may be legal assuming they do not violate, for example, anti-discrimination and antitrust laws as discussed below. A listing shared by a broker with only non-MLS groups would still generally be considered a pocket listing as it is not submitted to the MLS.

Q 5. If I have a pocket listing, am I required to present to the seller any offers received from agents who are not in my brokerage or group?

A Yes. A listing agent is generally required to present all offers to the seller under the listing agent’s fiduciary obligation to the seller. A listing agent who is a REALTOR® also has an ethical duty to present “offers and counter-offers objectively and as quickly as possible” under Standard of Practice 1- 6 of the NAR Code of Ethics. So if a buyer’s agent who was not a part of the listing agent’s brokerage or non-MLS group became aware of the listing and presented an offer to the agent with the pocket listing, he or she would generally be obligated to present it to the seller. However, as it is not on the MLS, the listing agent may have no obligation to offer compensation to the buyer’s agent, unless otherwise agreed.

Q 6. I am a buyer’s agent. My client wants to write an offer for a pocket listing. The property is listed for sale as indicated by the listing broker’s “For Sale” sign in the front yard, but the property is not in the MLS, even though the listing broker is a broker participant of our local MLS. What should I do?

A You can check with your local MLS to determine whether the listing broker has submitted a signed seller’s certification not to disseminate the listing in the MLS. If not, you can file a complaint with the MLS for a violation of Model MLS Rule 7.5.

You can also submit your buyer’s offer to the listing agent for the seller’s consideration. Because the property is not in the MLS, you are not entitled to compensation from the listing broker. You should consider entering into a Buyer Representation Agreement – Exclusive (C.A.R. Form BRE) with the buyer to secure your entitlement to compensation. Alternatively, you and the listing broker may enter into a Cooperating Broker Compensation Agreement (C.A.R. Form CBC) to secure your entitlement to compensation.

III. Pocket Listings and California Real Estate Law

Q 7. Could a pocket listing violate the California real estate law?

A Yes. A pocket listing could be deemed as a breach of a listing agent’s fiduciary duty to the seller if the arrangement is made for the benefit of the listing agent only, and is not in the seller’s best interest. To avoid violating the law, a listing agent should make sure that a seller understands the pros and cons of doing a pocket listing, and voluntarily agrees to the pocket listing before withholding the property from the MLS.

Q 8. Why does a pocket listing potentially violate the real estate law?

A Real estate licensees have a fiduciary duty to their clients. California law imposes an “obligation of undivided service and loyalty” of an agent to his or her client (Rattray v. Scudder (1946) 28 Cal.2d. 214).  An agent owes a complete duty of the highest good faith in his or her dealing with the client and cannot use the position to his or her own advantage (Thomas v. Snyder (1930) 114 Cal. App. 397, Ward v. Taggart (1959) 51 Cal.2d 736).   Furthermore by statute a listing agent has a “duty of utmost care, integrity, honesty and loyalty” when dealing with the seller and a duty to of “honest and fair dealing and good faith with the seller” (Cal. Civ. Code § 2079.16).

Generally, placing a listing in an MLS advertises the property for sale to a wide range of people to help sellers obtain the highest possible price for their home as they desire. The MLS gives a property very wide exposure and provides an economic incentive, through the offer of compensation to cooperating brokers, for buyer representatives to show their clients the property which is more likely to bring more buyers to the property.

It is possible that after a full discussion of how the MLS works and the particular interests of a seller that a seller may not wish to place his or her property on the MLS.  Typically such reasons can include a desire for privacy and to avoid showing the seller’s home to many prospective buyers and their agents, a desire to keep the sale confidential, such as in the case of, for example, wealthy or celebrity clients, a desire to safeguard the property against vandalism or theft, or the need for a quick sale in order to realize cash quickly for personal or business reasons. However, an agent should still make sure that he or she has discussed with the clients the benefits of placing a property on the MLS and the downsides of not doing so.

While there may be some sellers who opt for limiting the marketing of their property by not placing it in the MLS, the reasons for MLS exclusion are usually not readily apparent and yet, the upside of a pocket listing for the broker is clear. If the listing broker procures a buyer, the brokerage will receive a full commission with no monies having to be paid to a cooperating broker outside the listing brokerage. If the listing broker is sharing the pocket listing with a small group of brokers, there is likely to be a benefit to the broker for being a member of this small club, such as access to certain properties which may benefit the broker’s other clients or the broker’s ability to earn commissions but which do not provide much of a benefit to a particular seller. 

As the upside risk for the broker is so apparent and the benefits of reducing the amount of marketing of a property and the elimination of economic incentives to agents to bring buyers to the seller are not, a listing broker should not agree to a pocket listing unless the seller makes a fully informed decision to not disseminate the listing in the MLS As an additional precaution, the listing broker should be able to articulate why the seller chose to do a pocket listing. The listing broker owes a duty to act in his or her client’s best interest, and potentially violates that fiduciary duty by placing his or her desire for a higher commission above the client’s best interests.

Q 9. What are the consequences to a broker if the broker does not properly perform his duties?

A A broker could face a civil suit and possible liability for monetary damages suffered as a result of the breach of fiduciary duty to the seller, as well as be subject to discipline by the California Department of Real Estate (DRE) for any substantial misrepresentation, fraud, dishonest dealings, negligence or incompetence resulting in the loss or suspension of his or her real estate license (Cal. Bus. and Prof. Code sections 10176 and 10177).

IV.  Pocket Listings and the REALTOR® Code of Ethics and Standard and Practices

Q 10. Could a pocket listing violate the NAR Code of Ethics and Standards of Practice?

A Possibly so. Depending on the conduct of a REALTOR® in obtaining and handling the pocket listing, the REALTOR® could violate Article 1 of the Code of Ethics as well as the Standard of Practice outlined in Standard and Practices 1-12 and possibly Article 3 and the Standards of Practice under that Article (as discussed below).

Q 11. How could a pocket listing violate Article 1 and the associated Standard and Practices?

A Article 1 of the Code of Ethics requires a REALTOR® to “promote and protect the interests of the client.” This obligation is similar to the fiduciary duty under California law that an agent has to his or her client discussed in question 7. Standard of Practice 1-12 also specifically requires a REALTOR® to discuss with the seller’s his or her “company policies regarding cooperation and the amount(s) of any compensation that will be offered to subagents, buyer/tenant agents, and/or brokers acting in legally recognized non-agency capacities”.  Arguably that could extend to explaining to a client that if the MLS is used that compensation may be shared with outside agents while in a true pocket listing it will not and the ramifications of that.

Q 12. How could a pocket listing violate Article 3 of the Code of Ethics and the associated Standards of Practice?

A Article 3 of the Code of Ethics places on a REALTOR® a duty to cooperate.  The requirements of that duty are well defined by Standard of Practice 3-10 which states that the “duty to cooperate established in Article 3 relates to the obligation to share information on listed property, and to make property available to other brokers for showing to prospective purchasers/tenants when it is in the best interests of sellers/landlords.” Consistent with Article 1 and the general fiduciary duty obligations of a REALTOR® a REALTOR® should only restrict information availability and showings by agents from outside the agent’s brokerage regarding a property when it is in the best interests of the client.

The duty to cooperate, similar to the duty to present all offers to a seller from buyers’ agents, does not require the payment or promise to pay to cooperating broker any compensation. It solely relates to the issues listed in the above paragraph. 

V. Pocket Listings and Fair Housing

Q 13. Could a pocket listing create a risk for a licensee of a fair housing violation?

A Yes.

Q 14. How could a pocket listing create a fair housing issue?

A REALTORS® are aware of their strict legal and ethical duties not to engage in any type of unlawful discrimination.  Therefore, a REALTOR® knows that if a person came up to them and said they did not want the property on the MLS because they did not want to sell to members of a certain group that they could not participate in such an action.  However, there is a risk a fair housing claim based on a claim of disparate impact with pocket listings, even when there is no intent to discriminate.

Q 15. What is disparate impact?

A Under federal law there can be liability under the fair housing laws to a person who engages in a practice that has a discriminatory effect even if there is no intent to discriminate.  The law states that a  “practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.” 24 CFR section 100.500.

Q 16.  How could a pocket listing situation create a disparate impact?

A Here is an example of a disparate impact. A pocket listing is arranged by a brokerage that only makes the listing available to other agents in the brokerage or private group.  If, for example, the location of the pocket listing is in an area which is predominantly made up of a certain racial group and the clients or those who have expressed interest in the services of the brokerage or private group are almost exclusively members of that same racial group, and all of the advertising is directed to clients or those who have expressed interest in the services of the brokerage, the property is most likely going to be sold to a member of that racial group. The pocket listing arrangement in this case is in effect reinforcing segregated housing patterns even though there may be no intent to discriminate. Under this situation, the property is always likely to end up being sold to members of a particular race reinforcing the racial character of the neighborhood. 

The problem in the above example is that the practice of limiting the marketing of the property leads to the buyer almost certainly being a member of a particular group.  If the property were put on the MLS, the property is being marketed to everyone, and no particular group is being targeted. The end buyer after  a listing on the MLS may end up being a member of the dominant group in that neighborhood but that outcome is not predetermined by the practice, it simply reflects who happened to have the best offer or who is interested in the area.

Q 17. Are there defenses to such claims?

A Yes. If a person is able to prove the practice lead to the discriminatory effects discussed above a defendant in such an action can try to defend them by showing that the practice is “necessary to achieve one or more substantial, legitimate, nondiscriminatory interests” of the person engaged in the practice and those “interests could not be served by another practice that has a less discriminatory effect.” 24 CFR section 100.500.   For example, if confronted by such a claim and the claim was accurate i.e it does result in a discriminatory effect, even if there is no intent to discriminate a brokerage or group of brokers would have to articulate the reasons for engaging in the practice that and why those goals could not have been met by using a practice that would not guaranteed a discriminatory impact such as the MLS.

Q 18. What are the possible consequences if there was a finding of a violation of the federal fair housing laws?

A A licensee could face the possible suspension or loss of his or her license and if a civil suit is brought by an individual or by the federal government penalties can include significant fines, including a fine for each violation proved, punitive damages and attorneys’ fees.  (10 CCR 2780, 42 U.S.C.A sections 12188(b) and 12205, 24 CFR 180.671).

VI. Pocket Listings and Antitrust

Q 19. Could a pocket listing raise antitrust concerns?

A A pocket listing on its own is unlikely to raise antitrust issues, however, brokers who have pocket listings and work in groups with other brokers could create antitrust issues depending on the practices those groups engage in.

Q 20. How could a group of brokers with pocket listings violate antitrust laws?

A If competing brokers agree to work together in formal or informal groups that mandate a minimum commission that must be paid, the price-fixing arrangement is generally a per se violation of the antitrust laws, subjecting all participants to potential liability.  Many REALTORS® express frustration that the MLS does not set minimum commission rates for members, and while there are many reasons for that practice, one of the main ones is that a mandatory minimum exposes the MLS to possible prosecution or litigation for violating the antitrust laws.

21.Where can I get additional legal information?

A This legal article is just one of the many legal publications and services offered by C.A.R. to its members. For a complete listing of C.A.R.'s legal products and services, please visit car.org.

Readers who require specific advice should consult an attorney. C.A.R. members requiring legal assistance may contact C.A.R.'s Member Legal Hotline at (213) 739-8282, Monday through Friday, 9 a.m. to 6 p.m. and Saturday, 10 a.m. to 2 p.m. C.A.R. members who are broker-owners, office managers, or Designated REALTORS® may contact the Member Legal Hotline at (213) 739-8350 to receive expedited service. Members may also submit online requests to speak with an attorney on the Member Legal Hotline by going to http://www.car.org/legal/legal-hotline-access/. Written correspondence should be addressed to:

CALIFORNIA ASSOCIATION OF REALTORS®
Corporate Legal Deparment
525 South Virgil Avenue
Los Angeles, CA 90020

Hope You Found This Information Helpful!

Thank You,

Danielle Purcell
Team Laguna Real Estate
Owner/Broker
01063725
949-874-1187

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