Initially when I was mulling over this column, I wrestled with whether the topics are or are not controversial. The word controversy itself seems to carry a lot of weight, perhaps undeservedly. Since I no long own a Funk and Wagnalls, I went to Wikipedia. Wikipedia states that “Controversy is a state of prolonged public dispute or debate, usually concerning a matter of conflicting opinion or point of view.” So there you have it.
In real estate there are a number of controversial topics, two that we’ll address in this column.
Number one is “pocket listings.” Pocket listings refer to situations in which real estate agents purposely keep sales information about a home off the multiple listing services (MLS), and brokers only show that house to people they expect to actually purchase it. Pocket listings are popular in situations where the seller is well-known, wealthy or famous. They prefer the home and their life be kept private and that only serious, vetted buyers tour it.
The National Association of Realtors does not have an official policy on pocket listings, spokesman Walt Molony told CNNMoney. But some real estate boards say they don’t like the practice.
Some housing experts also say pocket listings create a gray area when an agent is able to collect double commission from the deal by acting as the agent for both the buyer and seller. If agents are putting their own economic interest ahead of sellers, it’s a violation of law.
Most real estate agencies in California use a forms library offered through the California Association of Realtors (CAR). Late in 2013, an entire section was added to our listing agreement due to the increase in pocket listings. The new section is inserted as a box to make it stand out on the page and requires sellers and brokers to initial the new language. It states clearly what an MLS is, how the MLS exposes a seller’s property and how a MLS is different from a private listing club. It informs sellers that they may opt out of placing their home on an MLS, while warning them that reducing the exposure of their property may lower the number of offers and negatively impact the sales price.
While I understand the rich and famous may want to avoid publicly listing their home, I can find no other valid reason for pocket listings. If we don’t give the home the most exposure we can, starting with the MLS, and further promoting the home on the Internet and in print media, we reduce the sellers return on equity, which clearly violates our fiduciary duty. If you are considering selling your home and the agent you are interviewing wants to “pocket list” it, I would recommend hiring a different Realtor.
Another brewing controversy has to do with “shadow inventory.”
Shadow inventory is traditionally defined as the number of homes with mortgages that are 90 or more days delinquent and that are believed will move into foreclosure. These homes will ultimately become real estate owned (REO) properties in the for-sale inventory, though they are not yet listed on MLS. Earlier this month, CoreLogic estimated that 1.7 million homes were in the shadow inventory as of January 2014, which is almost half of the 3 million homes in the shadows when inventory peaked in January 2010.
The reason I bring up shadow inventory is that many “well- read” buyers are concerned that if this shadow inventory suddenly floods the market, values will drop.
We can see from CoreLogics numbers that this inventory had dropped by 50 percent in the last four years. That begs the question why? I think the answer is pretty simple: appreciation. We saw the market peak in 2007, drop during 2007 to 2010, and now it’s almost back to the original highs. Those homes that were previously under water and whose loans were delinquent are now in an equity position and the owners have refinanced, modified the loans or sold the homes.
We will always have delinquent loans and we will always have foreclosures. The reality is that more than 90 percent of delinquent homes are never foreclosed on, either because the owners bring them current or sell the homes. Once the home is either current or sold, it’s no longer in the shadows. The remaining small percentage of homes that are delinquent and ultimately foreclosed will either be sold to third parties at auctions or enter the market as a REO.
When the economy was bad, unemployment was high and the market was dominated by short sales and foreclosures, lenders may have held off adding additional foreclosures, causing the rumors of a shadow inventory. In our current economy with low inventory, I don’t see any threat of a shadow inventory and I don’t think we need to worry about lenders dumping homes on the market and killing property values.
