Like a store that keeps its most exclusive goods hidden from view, any thriving U.S. real estate market these days has stealth inventory. In industry parlance, these are "pocket listings," or sales that are not cataloged on the databases used in the business. So they won't show up if we do a home search on, say, Zillow or Redfin.
Any potential homebuyer should be aware of all the properties available for sale, so it's good to know the basics of pocket listings. But there are numerous cons, as well as pros, when considering these types of sales. Keeping the classic "let the buyer beware" warning firmly in mind, here are the key whats and wherefores about them.
Selling to the elite
Theoretically, homes are "pocket sold" for the convenience of the sellers, who enter into an exclusive sale arrangement with their brokers. Their offer is discreetly passed along to a select group of the broker's clients or contacts -- for example, high-net-worth individuals looking for a specific type of property in a certain area, or in a particular price range.
There are numerous reasons why owners of such properties might not want to go the traditional route of listing the property, fielding offers, and holding open houses for interested parties. Chief among these is, of course, the reduction of hassle. Privately selling a home cuts the number of potential bids that have to be considered, and doesn't require open houses or a series of showings. Sellers can offload their properties quietly and quickly.
Also, for those who want or need to zealously guard their privacy -- like celebrities or other public figures -- a pocket sale can be an effective way to offload the residence without attracting publicity or unwelcome curiosity.
It also tends to save on commissions, because brokers don't need to spend time/resources on activities such as marketing the property, or sifting through a raft of offers. Perhaps more crucially, by sourcing the buyer from its own set of contacts, a broker doesn't need to split the commission with a buyer's agent, as in the typical real estate transaction.
Low hassle, low price?
There's a big downside to such convenience, however. Because a pocket sale is private -- and typically intended to run quickly -- it's almost certain that fewer offers will be made. One potential consequence of this is to lower the sale price.
In a high-value transaction, the money saved on commission might not make up for the difference between the ultimate sale price, and what that property might have fetched if it had been brokered through the open market via Zillow or similar real estate resources. These resources can be powerful -- Zillow is a fine example, as it boasted around 141 million unique users of its mobile apps and websites at the end of its most recently reported quarter.
A pocket sale also raises the risk of conflict of interest on the part of the broker. Licensed agents have a fiduciary duty to find the best deal possible for their clients. As mentioned, pocket listings typically result in lower prices; meanwhile, the broker usually makes a higher commission, in terms of percentage, thanks to the fact that the broker is not splitting the take.
In fact, it very possibly could double up by grabbing a commission from both seller and buyer. That means that there's scope for an unscrupulous agent to push for a pocket sale more for the benefit of its own business than the best financial interests of its client.
As with any method of selling or buying an asset, there are numerous arguments for and against pocket sales. What's difficult to argue against is their increasing popularity. According to REColorado, in 2011, 7% of real estate sales in Denver were of the off-market variety; three years later, that figure had more than doubled, to 15%. Other cities and regions have also recorded notable gains.
If the nation's property market as a whole continues to be strong, with a scarcity of good properties, we can expect pocket listings to increase in popularity. Sellers, after all, might not be concerned with losing a relatively small amount of money against a total sale reaching into the millions of dollars.
Pocket listings, then, are here to stay. And they have their uses. But those considering utilizing them -- sellers in particular, but buyers, too -- need to know the risks, as well as the benefits, of what they're getting into.
Eric Volkman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.