The MLS’s Campaign Against ‘Pocket Listings’ Is Serious, With $1,500 Penalties

Last November, the National Association of Realtors (NAR) board of directors voted into existence a “Clear Cooperation Policy” (see below). The rule required all MLSs in the country to implement the policy by May 1st of 2021. Although there were some technical delays, the rule is in full force now and our MLS, REcolorado, is enforcing it with substantial fines for violations. (I know because I’m on the Rules & Regulations Committee.) Many MLS members have already received fines starting at $1,500, with only one warning notice given.

The rule basically says that there can be no advertising of any kind for a listing without making the listing active on the MLS so that all members of the MLS have the opportunity to show and sell it.  If a “for sale” sign is put on a listing or there is a social media ad for it, or any other kind of public promotion of the listing, the agent must put it on the MLS within one business day. Currently that means that if the sign or advertising appears in the morning, it must be on the MLS by 6:30 pm the same day.  If it is promoted in the afternoon, it should be on the MLS the following morning.

A listing can be listed on the MLS as “Coming Soon,” but that means no showing by anyone including the listing agent. Once a showing takes place, it must be changed to “Active” immediately, making it available to other MLS members. Also, if it’s “Coming Soon” on the MLS, there must be a Coming Soon sign rider on the yard sign.

Most NAR rules only apply to NAR members (aka “Realtors”), but since NAR requires all MLSs to implement the rule, it does apply to the thousands of agents who do not belong to a Realtor brokerage. 

The policy was intended to reduce the number of “pocket listings.” A pocket listing is one which an agent withholds from the MLS (i.e., keeps in his pocket) in hopes of selling it himself or herself and thereby not sharing the commission with another agent.

With such stringent enforcement of the rule — other MLS violations carry penalties as small as $25 — you’d think there would be a widespread shift away from agents selling their listings before they are shared on the MLS. 

To see if that was the case, I did some analysis of my own, counting the number of closings entered on REcolorado showing zero days on the MLS. I fully expected to see a drop in the number of such closings.

The first day that a listing is on the MLS, it is shown as 0 days in the MLS. If it is changed to pending (or closed) the same day, one can assume that the listing was not active on the MLS long enough for other agents to set a showing and submit an offer.

Much to my surprise, the number of homes listed as closed with zero days on the MLS has only increased over the last 24 months, as shown by the chart below. In fact, the highest number of such closings has occurred since the rule went into effect.

So what gives? This harsh penalty does not appear to be having the desired effect, but maybe some more publicity about it will create more awareness and more compliance. Agents can be suspended from membership in the MLS after enough violations, basically putting them out of business.

After three violations within the same brokerage, the brokerage itself starts getting penalized, with the fine starting at $5,000, so that should certainly increase the in-house training about the rule. I have made sure that my own broker associates are aware of the rule.

Homeowners can, of course, make their own private deals with a buyer and then call upon an agent to handle the paperwork, which is fine, since there’s no advertising or promotion of the listing by the agent.

Also, there’s a “brokerage exclusion” which allows an agent in a large brokerage to tell other agents within that brokerage about the listing, but that cannot include posting it on social media where other buyers could learn about it. These two work-arounds could explain many of the homes contributing to the chart’s high numbers.

Why Is It Called ‘Clear Cooperation Policy’?

The real estate industry is unlike any other industry I know. Through our many Multi-List Services or MLSs, we members agree to “cooperation and compensation.” In other words, each member agrees to share his/her listings with every other member, allowing them to sell that listing to a buyer, and to be compensated by the listing agent by an amount displayed on the MLS.

I like to compare our industry to the new car business. Imagine if you went to a Chevy dealer and described the kind of car you wanted, and the salesman said, “I think the Ford Explorer would be perfect for you.” The salesman takes you to the Ford dealer, gets the keys, and then joins you on a test drive. If you like it, the salesman writes up the contract and presents it to a Ford salesman, who then gives the Chevy salesman half his commission (which the Chevy salesman then splits with his dealership).

That’s how it works in real estate. The commission earned by a buyer’s agent (who is the selling agent)  is called the co-op commission, short for cooperation.

The MLSs have rules requiring a member to put all their listings on the MLS, typically within 3 business days.  NAR’s “Clear Cooperation Policy” tightens that rule to say that any agent who promotes a listing to prospective buyers in any way (including with a sign in the yard or a social media post) must put the listing on the MLS within one business day.

The NAR policy — now an MLS rule — was instigated by members upset that other members were withholding their listings from the MLS until they were sold, further frustrating both the agents and their buyers looking for homes to buy at a time of especially low inventory.

How Listing Agents Handle Bidding Wars: The Good, the Bad and the Ugly

I have written in the past about how we handle multiple offers and bidding wars on our listings using an auction style, which we feel is best for our sellers and most fair to buyers and their agents.

Regrettably, very few listing agents handle multiple offers and bidding wars the way we do. Most are sticking with the “highest and best” approach, in which buyers submit an above-listing-price offer without knowing what other buyers are offering.

Usually agents maintain that their sellers won’t let them reveal the competing offers, but I find that hard to believe. Have they even had an honest discussion with their sellers about that? I have that discussion with every seller who hires me and invariably they agree that full transparency about offers in hand is not only going to net them the highest price for their home but is also fairest to the buyers.

I have written in the past that 4 days on the MLS before going under contract is the “sweet spot” when it comes to netting the best price for sellers, and I have supported that opinion statistically.

However, recently we have modified our policy because of more buyers submitting early offers which are too good to pass up. Do we keep our word not to sell before the 4th day, or take the offer?

Rule #1 is that the seller makes that decision, not us. If the seller wants to accept a particularly sweet offer on day one or day two, we ask for 24 hours’ lead time so that we can notify all other agents who have set showings that our timeline has changed. “We have this great offer, and the seller wants to accept it.” That gives those agents time to accelerate their timeline and compete (or not) with that particularly sweet offer.

Regardless of how an agent handles multiple offers, professional courtesy demands that they communicate with other agents and not just ignore the competing offers. Just call us and say, “My seller has decided to go with a better offer.” Give us a chance to recalibrate and resubmit. That’s best for your seller (to whom you owe “utmost good faith and fidelity”), and it’s only fair to the other bidders.

Sometime soon these bidding wars will subside, and we’ll go back to having a “balanced” market. I’d settle, frankly, for a seller’s market that is not crazy wild!

We are still seeing way too many homes that are selling with zero days on the market, often because the listing agent convinced the seller to accept a contract obtained by the listing agent, thereby allowing the listing agent to keep his or her entire commission instead of sharing it with a buyer’s agent.

The Colorado Real Estate Commission frowns upon this practice and has issued guidance that every listing agent should advise their sellers that they may be leaving money on the table (that is, getting less than they might for their home) if they don’t allow the home to be on the MLS for at least a few days so that all interested buyers have a chance to see it and make an offer.

Along that vein, the National Association of Realtors last November adopted a “Clear Cooperation Policy,” making it a violation to have “pocket listings” not on the MLS so agents can see and show it. On our MLS that carries a $1,500 fine.