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Pocket Listings: Do the Risks Outweigh the Benefits?

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By Fredric W. Trester

In another case a 90-year-old owner of a commercial building debated whether to fix the building up and rent it, or sell it. His property manager had the building appraised for between $2.6 million “as is,” and $3.2 million fixed up. The property manager brought in a buyer (who was later learned to be his cousin) who offered $2.5 million. A week following the close of escrow the buyer flipped the property for $4.2 million. The agent was paid a fee by his cousin on the flip.

In the first case the agent was alleged to be negligent in determining a price. In the second case the argument was made that there was a breach of the duty of loyalty in that the agent put his interests before that of the seller.

Potential risks arise also where an agent advertises the property but does not put it in the MLS, seeking only to sell to principals. In that situation, buyer’s agents lose the incentive to bring offers.

Buyers also can overpay for pocket listed properties if their agents do not value the property properly.

The lesson here is that it is the agent must explain in writing all of the consequence of a pocket listing, and obtain informed consent before marketing the property as a pocket. The agent should also keep all of his/her comps showing how the price was obtained.

2. NAR Code of Ethics

Pocket listings could result in violations of the NAR Code of Ethics. Article 1 requires that agents present all offers and counter offers objectively and quickly as possible to a seller. Further, Article 1 requires the Realtor® to “promote and protect the interests of the client.” Further, Article 3 requires cooperation between brokers (although it does not obligate listing agents to compensate other brokers). This includes a “duty to cooperate…,” i.e., the obligation to share information on a listed property.

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