Why Private Listing Networks Are a Bad Idea.

In this recent post on the blog, I was pretty clear about my opinion of selling a home “off-market”, or in other words, forgoing the Multiple Listing Service. In a nutshell, my belief is that in a very select number of instances, it's the right thing to do — especially when it's the seller who initiates that conversation, and the trajectory of the sale aligns best with their needs.

However, I firmly believe selling homes off the MLS is a practice that is being seriously abused by many agents in this industry, and that's just not good for home sellers. But rather than rectify the problem, most of the nation's largest real estate brokerages are actually leaning into this trend by encouraging the number of off-market sales through what are known as Private Listing Networks, or PLN's.

What is a PLN?

To understand the ramifications of PLN's, it's important to first review the role that the MLS plays in the selling of residential real estate, and the important rules that all real estate agents must adhere to when representing a seller.

At the moment you, as a seller, sign a listing agreement with a Realtor who belongs to a local Multiple Listing Service (MLS), your agent is obligated to enter your home on the MLS within 48-72 hours (depending on the MLS). The reason this rule was created was to prevent an unscrupulous agent from pocketing the listing and only showing it to his or her own buyers, which is where the term “pocket listing” came from.

For obvious reasons, it's just about impossible to put a home on the MLS that soon after the contract is signed. There are always tasks such as painting, cleaning, and landscaping that need to be done prior to presenting the property in its best light to prospective buyers. That's why there is an exclusion clause in the contract that enables, with everyone's consent, the listing agent to delay the launch of the property onto the MLS to some future date.

During that “delay” period when the home is not listed on the MLS, regardless of whether it's a few days or a few months, the current MLS rules prohibit the public marketing of that property in any manner — social media websites, etc.. In the event that the existence of that listing is made public, it must be put on the MLS the very next day. The agent, however, is allowed to share the listing details with other agents in the same brokerage without having to put the listing on the MLS.

This is where the abuse starts.

Several of the nationwide mega-brokerages appear to be using off-market properties as a way to enhance their bottom line, despite how they spin the practice in public. How? These brokerages are encouraging, and in some cases, monetarily incentivizing their agents to convince their sellers to agree to actively market their home within the brokerage during the preparation period before it hits the MLS. The rationale that is explained to the seller is that this practice allows the agent to “test” their proposed sales price and the desirability of the home without accumulating days on the market, and it also hides any price changes from the public — both of which would normally be clearly disclosed if the home were listed on the MLS. These are often referred to as Office Exclusive or Private Exclusive listings.

You can see where this is going… Not long after the listing is signed, and before it goes to the MLS as originally intended, the seller gets a call from their listing agent who gleefully informs them that they received an offer for their home….from another agent in the same office. What a surprise!! The brokerage certainly benefits from this practice because it collects both the buyer and seller commissions, which is referred to as double-ending, and that is extremely attractive in a real estate market that has been contracting for several decades.

Now, imagine this scenario replicating itself thousands of times within the same mega-brokerage. Suddenly, the brokerage has its own cache of private listings that only they can see, and they aggressively market that fact to prospective buyers — “work with us, and you'll get to see all of these listings that no one else can see“.

Welcome to the dark world of Private Listing Networks.

Why It's Bad for Sellers.

There are a lot of reasons why this approach hurts sellers. First of all, the rationale to convince them to even take this path is hugely flawed. If the listing agent needs to “test” their proposed listing price, then they are not the “local experts” they claim to be. That's not to say that I don't get a quick second opinion on one of my listings before I take a listing to market — all of the top agents do. But when you look at top agents who service San Carlos (and I'm one of them), most of us come from different brokerages, not the same one. So, who is the listing agent really calling on to test their list price?

Second, the practice of hiding the number of days the home has been listed or any price changes that may have occurred is a decidedly anti-transparent action from an industry that has long been under fire for its lack of transparency.

But the real problem is that it puts the seller in an awkward and sometimes difficult situation that they might not have been expecting; whether to accept an offer before going to market, rather than testing the market with a full-exposure marketing plan, which was their plan all along. It puts the seller in the exact “what-if” scenario that I highlighted in my original post about off-market listings — “what would have happened if we took it to market?”

This is not just my opinion. In a newsletter that I get every week, an agent from one of the mega-brokerages that is aggressively pushing their PLN as a way to scoop up buyers states the following:

“I walk you through how private seller networks give my clients access to homes that aren’t on public sites. You’ll see what makes these listings so powerful and how they can help you avoid bidding wars.” 

As a seller of the largest asset you probably own, why in the world would you knowingly prevent a bidding war? It doesn't make sense.

Why It's Bad for Buyers.

At first blush, the prospect of getting an inside look at listings that other buyers can't see sounds enticing. What's wrong with a competitive advantage, right? But you have to remember that the whole intention of creating a Multiple Listing Service in the first place was to create an open market that ensures that everyone — buyers, sellers, and agents alike — gets to see all of the homes that are for sale.

If Brokerage A starts hoarding its listings as a competitive advantage, it's a no-brainer to expect that Brokerages B, C, and D will follow suit, just to be able to compete. The end result is that what was an open and transparent market is suddenly transformed into a fragmented, hidden market controlled by a few exclusive groups.

The kicker? You only get to be a member of one group. And that's not transparency. Not even close.

Key Takeaways.

I was only able to scratch the surface of the battle of PLNs that is taking place right now in both boardrooms and courtrooms. But here are the key points to remember:

• Selling a home off-market, or off-MLS, makes sense for a small fraction of home sellers today. You need to understand the tradeoffs of forgoing full exposure, and it should be your decision, not your agent's.
• In my opinion, the practice of selling a home before it hits the MLS is being widely abused by agents.
• When a brokerage hoards its private listings and then encourages its agents to use this hidden inventory as bait to attract buyers “to avoid bidding wars”, then it hurts sellers.
• PLNs also create a virtual firewall that makes it impossible for the average buyer in the market to see ALL of the homes that are for sale — even if they are working with an agent.

In the end, if your ultimate goal is to get the best possible price for your home with the best terms, then an open market that guarantees full exposure is still the best way to go. There's nothing wrong with other agents or buyers seeing your property before it hits the MLS. But if there's no good reason to do so, then resist the obvious push to sell your listing before it ever sees the light of day.