“Everybody knows, the rent is too damn high, and we allege that this is one of the reasons why.”
Merrick Garland, Attorney General
On August 23rd, the U.S. Department of Justice sued RealPage over its algorithmic pricing systems, which the DOJ alleges are an anticompetitive scheme. ProPublica kicked off this debate nearly two years ago with a report accusing RealPage and various landlords of anti-competitive behavior. Since then, many lawsuits have been filed, but this is by far the most serious step with the most serious consequences for RealPage and others in the rental housing industry.
Revenue management and pricing systems are omnipresent in travel, perhaps most notably, but also in many other industries. We interact with them every time we buy a plane ticket or book a hotel room and a good portion of the time we buy anything from an online merchant.
It’s important to understand that the DOJ does not seem to be challenging the concept of revenue management more generally.
So, what’s different about this situation? Why multifamily revenue management systems and why now? Are landlords being unfairly targeted?
I’ve been reading and watching a wide variety of sources, but whenever possible I always come back to the source materials to understand what’s going on. In the DOJ video announcing the lawsuit, at about 1:45, you can hear Attorney General Merrick Garland call out what’s different here, which is that:
“Competing landlords agree to submit to RealPage, on a daily basis, their most sensitive, non-public information, including rental rates, lease terms and projected vacancies.”
They continue, quoting a RealPage customer, at about 2:50: “…[the] algorithm uses proprietary data from other subscribers to suggest rents and terms. That’s classic price fixing.”
The objection here does not appear to be that landlords are using smart software to try to figure out prices. The objection is that RealPage and landlords are using:
1. “Non-public information”, from;
2. “Competing landlords”, to;
3. “Suggest rents and terms,” and;
4. That “these are not just recommendations.”
Here Garland alleges that RealPage is monitoring compliance with the recommendations in prices and policies with the goal of ensuring that landlords use the recommendations.
It will take years for this to work its way through the system and to come to a conclusion. I am not a lawyer and I won’t comment on the merits of the case or whether I think the DOJ is justified in filing this lawsuit.
Regardless of its merits, this lawsuit and those that precede it have created uncertainty and increased risk for many who work with rent data who are now wondering whether they have liability and what they can do now to avoid future issues.
While the DOJ has not gotten specific on any landlords or others who may be named in the investigation, there are certainly many others who are already enmeshed in this from earlier lawsuits from Attorneys General from various states and Washington DC. Others may be included in the future.
Regardless of whether your organization may be named in the near or long term, there are steps you can take to avoid engaging in potentially anticompetitive behavior. And, the good news is that these steps will actually result in an improved understanding of the market.
Here are four basic steps you can take immediately to cut out what appear to be the primary sources of concern.
1. Stay Out of Other People’s Business
Let’s start at the core of this thing. Your company’s private information is private. Keep it private and make sure your company isn’t collecting private information from other companies. Here’s some specific actions to take:
- If you’re buying “closed rent” or “contracted rent” data from anyone, stop taking delivery of, and working with, that data immediately.
- If your property managers are calling or visiting competitive sites to get their rent data, put a stop to that process immediately.
- If you’re participating in surveys by which you share your confidential data with others, stop providing that information immediately.
2. Know Your Sources
If you’re not sure about where your vendor is getting their data and whether or not it might be confidential information, make sure they can provide clear line of site to the source for each individual data point (not the summary analysis–the underlying data points), and that your own audit of that data can confirm that the source data is public. If they can’t tell you where they’re getting specific data points, then you should assume they’re using legacy sources that incorporate non-public information as that was the norm for much of our history. And, you need to stop working with them immediately.
In recent weeks, I’ve heard a lot of variations on this last theme from data buyers/users who have been asking their vendors, and unfortunately, many of the discussions result in some variation of “Trust us, we talked to our lawyers and it’s fine.”
I’m sure you know this already, but that isn’t going to be good enough. You need to get much more concrete. And when in doubt, find a different data partner.
3. Only Buy The Good Stuff
Buy and use only data that was made publically available before it gets to you. This means going without contracted rents, but, and I know this may be surprising, that’s actually good news.
Primarily, this is because contracted rents have never been a very useful data point. While the industry has converged around that as “the truth” about rents, contracted rents are not market rents.
Contracted rents have a ton of complexity in them that is usually specific to the renter, not to the rental unit.
The renter has three big dogs? The rent is going to be different from the market rent.
The renter wants a 16-month lease? The rent is going to be different from the market rent.
The landlord throws in a weekend getaway at a resort that they also own? Not going to show up in the contracted rent, but it is valuable to the renter and may result in a non-market rent.
The reality is that contracted rent contains a dog’s breakfast of other information that is not market rent and actively makes it more difficult to set rent appropriately.
Instead, you want to isolate a standardized data point that you can legally work with – and that’s the final asking rent, as posted for public consumption on rental listing sites like Dwellsy.
4. Set Your Own Rent
If you want to be extra careful (and extra good at setting rents), take only recommendations for rents from vendors as input to your own rent-setting process. There has never been an accurate and effective “easy button” for rents and this is a forcing mechanism for abandoning the illusion that there was.
Got a consistently useful source for pricing recommendations? That’s great, assuming you know the source of the data and it’s 100% public domain or your own info.
Using comparable as a starting point? Make sure they’re publicly disclosed rent comps, but that’s also a fantastic way to start.
Either way, those comps or that recommendation is your starting point, and from there you can build into a pricing strategy by combining that information with the non-public, unique information that only your organization knows about your properties.
Does that unit have a uniquely amazing view because it happens to look between two other buildings? Is it the unit that’s optimally located for parking or other amenities? Does that unit turn over every single year for some reason no one fully understands?
Maybe one of those factors means an extra $200 more or $100 less in rent per month – and I promise you, those facts are not written down anywhere. You can only access that knowledge as a result of the intimate relationship that an owner or operator has with their property.
With the very human, tangible, unique nature of rental homes and apartments, pricing algorithms may be good at scale for finding averages across thousands of rentals, but they’ll always be, at best, a suggestion for a pricing strategy at the individual unit level.
While this situation is forcing us to change, the good news is that it is a forcing function for all of us to get better at pricing our rentals.