The idea of selling a home without ever listing it can be appealing to many. Similarly, ringing the doorbell on the “perfect home” and finding an owner willing to sell can put a broad smile on a buyer’s face. The risks however, routinely make buying and selling “pocket listings” dangerous to a person’s financial well being; particularly for sellers.

The term pocket listing typically refers to an agreement between a seller and real estate broker that allows the broker to market the property outside of the MLS. The property is advertised through the broker’s “network” and a buyer is targeted by what amounts to “word of mouth”.  There are a number of caution points for any seller contemplating a pocket listing:

• The home may sell for less than market value. How is the sale price being established? Is the seller depending on the agent to stipulate price? Don’t rely solely on a prelisting appraisal; there are many buyer and seller variables that cannot be accounted for by an appraiser.  If the home isn’t exposed to the maximum number of potential buyers (usually accomplished via the MLS) how can the seller be confident that the best price was received? When a shortage of quality listings exist, multiple offers and bidding wars might be seen – which doesn’t happen without adequate exposure.
• What are the motivations for a seller to consider a pocket listing? If the idea is to save on agent commissions, the expectation is often different than the reality. A 4% commission might be 1-2% less than market and appear like a bargain but a seller should look at the big picture. Agents soliciting pocket listings typically already have a buyer lined up so the conventional agent split doesn’t apply. So while the total fee might be less than market, it’s more for the agent since they keep it all. It’s also not uncommon for pocket listings to have clauses that address fees due in the event a buyer’s agent is involved. It’s not uncommon for the end result to be a commission that approaches the norm and a selling price below market.
• There is simply no suitable substitute for the exposure obtained by the MLS. A pocket listing – like homes offered for sale by owner – simply cannot compete with a traditionally listed home. The major public real estate sites pull information from the MLS. Facebook, Twitter, Pinterest…might have someone interested in a home but home buyers look where the homes are. It’s worth noting that an estimated 45% of home buyers in 2013 initially found the home they bought searching the internet, not through their agent.
• Sellers make have to make unnecessary repairs or concessions. Potential issues that plague a “normal” sale will be present with pocket listings as well. However, a competitive environment provides options to a seller. Repair issues, appraisal problems or other challenges can better be negotiated or ignored when there are multiple interested buyers.

Home buyers that go the pocket listing route also have concerns to address. Most, if not all negotiating power vanishes if the buyer shows great interest in a home. Buyers that ask agents to stuff mailboxes in a particular community enter the game at a significant disadvantage. Buyers should consider:

• Who represents the buyer’s interests? If the buyer is working under a buyer brokerage agreement will the commission split fully compensate their agent? If not, who is responsible for the short fall? Unrepresented buyers are walking into trouble; there are not many things dumber than buying a home without being represented by an experienced agent. Even with a pocket listing, the agent represents the seller.
• Is the price accurate? What research has been done and by whom to establish a reasonable market value for the home?
• Who is writing the offer? Is the seller’s agent setting the tempo for the deal and establishing the parameters? What stipulations, time frames and escape clauses are going into the offer?
• Can the buyer remove emotion from the transaction? When buyers directly approach owners to inquire about home or instruct their agents to canvas an area looking for owners interested in selling they hamper their ability to negotiate. This type of action places buyers in a position of perceived weakness almost immediately – the seller has something the buyer wants and there’s no doubt about that since the buyer initiated contact.

The real estate industry is wrestling with many questions around pocket listings; the National Association of Realtors doesn’t have a formal policy at this time. Questions and issues are on the table including the responsibility of the listing agent to ensure that the best interests of the seller are maintained and proper disclosure to all parties about dual agency. Many in the industry prefer to have as many listings in the MLS as possible to aid in the appraisal process; appraisers rely most on the MLS and sales not included are often neglected by appraisers.

Pocket listings present pitfalls to both sellers and buyers. Many consumer groups and advisors highly recommend avoiding them for the reasons noted. Basic business reinforces that maximum exposure to a targeted audience typically results in the best price for a product. Similarly, a buyer approaching the owner of an unlisted home immediately places themselves at a negotiating disadvantage. While pocket listings remain a popular topic of conversation, the disadvantages and potential pitfall – especially for sellers – far outweigh the potential upsides.

- See more at: http://hankmillerteam.com/2014/03/28/what-is-a-pocket-listing/#sthash.BrVpeqHP.dpuf