San Francisco real estate’s trend of having properties sell off the market among exclusive (or just lucky) agents and their clients to the exclusion of everyone else.

Wooziness and insider trading feature prominently in Steven Soderbergh’s film Side Effects but you don’t have to go to a theater near you to feel a bit  woozy when you hear about San Francisco’s blossoming real estate market. For us agents, it’s been a dizzying year of bidding wars, preemptive offers and lost properties because someone else comes along with an all-cash, contingency-free offer that will close … oh wait, it closed yesterday.

Wait a minute, yesterday? Yes, yesterday.

The phenomenon of the “off-market” or “pocket listing” was always there in the real estate marketplace but it’s now accounting for a significant portion of residential sales in the city. We’re not talking about a private sale or an unsolicited offer. No, we’re talking about agents marketing properties to a select group or network of agents, clients or buyers only. No MLS. No Trulia. No Redfin, etc. The entire transactions is complete with most if not all the standard MLS disclosure forms, inspections and financing. Identical bar one thing: the general public was unaware of its existence.

The properties that sell ‘off market’ is both a parallel and shadow market alongside the officially-kosher Multiple Listing Service (MLS), which is the main clearinghouse for residential listings for homes for sale. If we were trading commodities or stocks this way I suspect the SEC would be knocking on the door cuffs in hand. But not when it comes to houses there is no requirement that a perfectly solvent seller place his or her home into the MLS.

Is this shadow market a good thing? Ever being the lawyer, I would beging with that the answer depends on who you are and if your agent is  an exclusive enough network to get to hear about these opportunities (or is just plain lucky).

Sellers have legitimate reasons for wanting to keep their home ‘off-market’ Many don’t like open houses. Perhaps the agent is worried about the dreaded “days on market” metric (the notion that the longer something sits on the market without selling that there must be something wrong with it —like the price for example). The argument is as illogical as it is useful strangely. It’s illogical because people are entering and exiting the market all the time. So while it may be stale to Sally, it’s new to Sue. Sue having just decided she’s going to buy a house while Sally having looked for more than a year. The argument is useful to Sue’s new agent though. Mr. or Miss Agent will take note and highlight the high DOM and argue there’s something wrong with the property. Who’s right? 

The other oft-cited reasons for why it’s best to keep a listing in your pocket include sellers who only want to ‘test’ the market or the fact that some sellers are just more private than the next person.

In the end, it’s the seller’s agent’s job to honor the twin goals of following client instructions balanced against getting the best offer possible. It is on that second point — getting the best offers possible — that buyers can get the short end of the stick. “If only I had known about that house,” a buyer may say. “I would have bought it.” But what they don’t understand is that there was no way for anyone else apart from those cloistered select few to find out that X house was going to be sold.

So, unless your agent happens to a part of ever-changing exclusive networks, they may be in the dark just as much as you are. Is buying this way a good thing? Only you and the circumstances can say. I think it’s certainly sub-optimal from an economics perspective from the seller’s point of view because not everyone who’s in the market got to bid on it; nor did anyone get to say the price was too high by letting it sit on the market for too long. But if you and your agent were lucky enough to get the property without having to engage in a bidding war then the answer is likely “Yes.”  But if you missed out then it would be a resounding “No.”  

But consider that it could be worse: there’s no MLS at all in New York City.  What do you think? 

 

(I want to note two things (1) despite the fact I’m on the local MLS Committee, the opinons here are mine only based on my observation and experiences; they aren’t necessarily anyone else’s views).