By Robert L. Cain, Copyright 2024, Cain Publications, Inc.
Rental owners and managers, the top ones, know their properties and the areas those properties sit in. They are in the best position to know what their units should rent for. They know that in part by surveying the rents of comparable properties. It can take time and figuring to do a proper job, but they know what the best comparable properties are and how they relate to their own properties.
Along comes RealPage, the property management and software company, offering algorithms that figure “optimum” rents for clients’ properties. Their company’s “products manage everything from marketing to pricing and other property operations,” and do what can best be described as a rent survey on steroids. They come up with rents for rental properties based on the data they accumulate about properties comparable to the one the subscribing rental owner owns.
But the company uses an “unlawful scheme to decrease competition among landlords in apartment pricing,” says the Department of Justice (DOJ) in its complaint. Attorney General Merrick Garland wrote, “We allege that RealPage’s pricing algorithm enables landlords to share confidential, competitively sensitive information and align their rents.”
RealPage suggests to subscribing landlords that they need to either raise rents, keep them the same, or lower them to be competitive. How RealPage’s conduct “undermines fair pricing” they don’t say. If rents are too high, renters will go on to the next property where rents are more reasonable. Too low, and landlords lose money.
Does anyone care about how RealPage does its business except RealPage itself?
Rent surveys done by rental owners accomplish the same thing except they don’t have as much hard data as does RealPage’s algorithm. RealPage uses “proprietary data,” something owners don’t have access to, and may reflect appropriate rents or not. “Landlords agree to share their competitively sensitive data with RealPage in return for pricing recommendations and decisions that are the result of combining and analyzing competitors’ sensitive data.” The DOJ says that is anti-competitive.
DOJ uses the Sherman Antitrust Act as the basis of their claim. That says in part in Section 1 “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.” And in Section 2 “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”
Does RealPage create a monopoly? Their market penetration according to their publication, “The Real Story” amounts to only 7 percent of rental owners and managers, a long way from even a 50 percent market penetration much less a monopoly. But exaggeration by the federal government might be expected.
Taken to its logical conclusion, a rent survey is okay as long as you keep it to yourself. Suspect and maybe falling under the suspicious eyes of the DOJ might be if a rental owner shared his rental data with fellow owners at, say, a rental housing association meeting. That’s certainly non-public data. Would that be illegal or is that simply free speech? DOJ could have a better case against a rental owner there than in a filing against a company with only a seven percent market penetration.
Again, does anyone care? It appears that the DOJ assumed that no one could find any reason to care about what RealPage did so they threw in the idea that RealPage’s service raised rents to make them unaffordable. But the suit never explains how RealPage would be artificially raising rents and making housing less affordable, and by extension how rental owners’ rent surveys would.
Would the RealPage system work any better than a rental owner’s own knowledge and research? Landlords know their properties and their tenants better than any machine or most skillfully written artificial intelligence (AI) code could. Rental owners aim to optimize rents and that has to be done on a unit-by-unit basis, not a one-size-fits-all system.
Optimizing rents could well result in one unit in a complex renting for more or less than another because of location, features, quality, and any number of other factors. Something no AI-generated data could accomplish.
For example, landlords may not be looking for 100 percent because that’s a money loser. If you owned 50 units and were charging an average of $500 a month rent for each unit (just an example, I know rents are higher than that just about everywhere. Plug in your own numbers.) and at that rent maintained 100 percent occupancy, that would give an EGI (Effective Gross Income) (Gross rents less $0 vacancy allowance) of $25,000 a month or $300,000 a year.
To optimize rents, the idea is to increase EGI over $300,000. Suppose the rent survey discovered that the average rent for your units should be $575? Raising rents to the average would increase the Scheduled Gross Income (SGI) to $345,000, but would result in some vacancies. Some rents may be just fine, others may be too low or too high. Discover the market rents for each property and each unit. Once you have that, you can calculate the likelihood and cost of vacancies.
That’s the way successful rental owners think and calculate. They might take RealPage’s data and see how it fits their properties, but they know what their properties will bear and at what rate their rents will do best.
The whole idea behind rent surveys is planning for profits. At the same time, by using a rent survey, you can determine average rents and from those optimum rents for a property. Always ask “what will the market bear and still make me money?”
The point is, numbers mean nothing in and of themselves. They only mean something when related to what the numbers have calculated. While RealPage’s numbers might give an idea what rents should be, it is up to rental owners to determine if they accurately reflect the rents for all the units in a property.
Sponsored by Zip Reports where they do employment and rental screening. Contact Robert L. Cain at bob@cainpublications.com