You may have noticed that discussions on this topic rarely mention property management outside of large apartments, despite it being a major part of the housing and real estate landscape, and you would be on to something. It’s not a major issue in the non-apartment rental investment and property management industries, but does come up in some minor situations. That could change because in both major cases, as we’ll outline below, similar mechanisms do exist. However, they are nowhere near as pervasive or impactful on the single-family rental market, or even the smaller multi-family market.
Because we have always charted a unique course, intentionally steering away from our competitor’s tools, none of the recent headlines affect MoveZen.
First, let’s nail down what’s at issue with these lawsuits.
One primary topic is price-fixing rental rates using algorithmic software, primarily RealPage. Apartment companies feed real-time leasing data to RealPage, and they use it to recommend a proper rental rate to their customers, daily in most cases. That may seem harmless, and it certainly is not the major factor driving up rental rates (long-term poor FED policy regarding interest rates is a major one), but it sure sounds like price fixing to us. That said, efficiently setting prices is usually considered a good thing, so it is not clear that simply receiving rate information alone would be a problem for consumers.
More importantly, in the court cases, the prosecutors provided large amounts of data that showed fascinating changes in the rental market as “more” companies joined the program. The Atlantic article below mentions that there was little increase in gross margins when one community in a small area joined. They increased by 38% once another large community was onboard. That’s the kind of chart that sways juries, and it did.
Is Your Rent an Antitrust Violation? – The Atlantic
There are several different cases, but the original is running through the appeals process. So far we have not seen anyone seriously come to their defense, and that’s usually when opinion shifts enough that court cases do as well.
Standing on its own, efficient rental rate pricing is a good thing. Pricing a home too high for example and letting it sit empty for 6 months (common) is not much different from lighting thousands of dollars on fire because nothing productive whatsoever occurs during that time. At least when landlords reduce the price the residents save money that they can then put to use in the economy. The landlord also benefits because that strategy is the best and most consistent way to secure high-quality residents. Vacancy is an insidious cost that does nothing but devour resources. We consider it to be the number two mistake landlords make second only to lack of discipline with resident selection
What truly caught our attention then was how often the software recommended removing units from the market entirely and accepting much more vacancy than multi-family managers had been known for in the past. In effect, if the supply was too high in a given area, the software would recommend a maximum number of units to advertise in hopes of smoothing out slow periods. Unfortunately, those slow periods are precisely when sharper value-hunting renters tend to secure apartments in particular. So they essentially remove any opportunity to find a great value when shopping with RealPage customers. Most likely the recommendations are correct by a small percentage, but that’s a big gripe Gen Z in particular rightfully has. How often these days do businesses sometimes with clear duopolies harm their communities to increase margins by half a percent?
Multi-family investors have one major problem that single-family investors don’t, if they reduce the rent on future listings below what current residents are paying, it can turn the relationship negative fast. At a minimum, they will all demand a reduction as soon as their leases renew.
Imagine if you have a 300-unit complex and rents dropped 10% year over year. That’s likely pushing $45,000 a month if you were to reduce all units at once, or well over half a million annually which is the most effective way to measure rental performance. So we can certainly appreciate the hesitancy.
We’ve had some of our multi-family investors take this issue too far however, and will often lose thousands of dollars on vacant units when they could have simply honored the reductions for renewing residents, and even offering renewals a couple of months early. Likely securing them for 12+ months more on average, in uncertain times, and in most cases with only minor reductions in net annual income if any. Most often the landlords eventually break and reduce the price anyway.
Why isn’t MoveZen affected by this issue? For one we don’t use RealPage. However, several algorithms are frequently used in our industry. Appfolio, our property management software, includes one for free that we used for a few months years ago but dropped because it was simply ineffective. RentRange is another common provider that you have likely seen at some point as most larger urban property management companies use it to recommend rental rates to owners before they sign up, and presumably to set the final marketing offer price. Not unlike RealPage. There are major differences in the way that they operate, but the bigger issue is probably that they are terrible. From the sounds of it, RealPage is extremely accurate and effective and shows almost instant results in the raw data. Given how segmented smaller multi-family and especially single-family investors and management companies are, the effects are dramatically mitigated as well as nearly impossible to nail down. With large apartment complexes, it’s much different. RealPage itself operates on massive amounts of data that are readily available to be subpoenaed, and many of their customer companies are behemoths in their own right ie GreyStar, Camden, AvalonBay. Two subpoenas can land a prosecutor troves of damning charts that juries find compelling. As the community sizes decline the data is less useful, fewer people use them, fewer people commit to them, and they are overall less effective.
They are also terrible at their primary goal, setting an efficient price. We have multitudes of article about the backward-looking nature of rental rate algorithms. We have to assume RealPage has figured that issue out, but no others we’ve ever tried have come close. It probably lies in the fact that they get daily updates on a much higher volume and homogenous market. Most single-family algorithm prices are set using last season’s rates, and since rates swing 10% from season to season that is a major problem.
This is why these suits will not affect MoveZen, we don’t run with the crowd. We don’t accept vacancy to avoid reducing rent within reason, because we know reduced rent attracts premier happy residents who stay in place longer. We don’t use algorithms to set prices, we have 20 years of experience, why would we let a bot do one of the single most important duties we have? That by the way is one of the issues at hand with RealPage is that they tend to be better than the best professionals at setting prices, and plaintiffs argued there’s only one possible reason for that. Because they have an unfair advantage via shared data across competing communities.
We’ve done thousands of personalized rate estimates across NC and SC. We use a proprietary model specifically applying our 20 years of experience to the upcoming seasonal swings for various property types and forecast the future expected rent. Not the rent at the literal peak of the market annually which is around July 4th. From there, rates decline into fall. This is such a common issue that the owners who have vacant homes for a few weeks leading up to July 4th rarely rent their homes before October because they refuse to accept (likely due to reading algorithms) that the market has slowed, and those rates are too high for late summer / early fall. That also outlines another major difference in highly efficient multi-family investors and the often emotional mistakes mom-and-pop investors are much more likely to make. Since so much emotion creeps into single-family investing the algorithms have much less effect. Don’t tell me anything bot! Unless it’s good news of course.
As for other companies if they are truly national then we’d certainly stop using those more popular tools. We were surprised to see that Appfolio still has theirs available. It seems like they may be taking a risk although it again is not very useful. Should that change, as it likely will pretty quickly, they and similar large organizations will probably already be too late.
The other issue is quite a bit more complex and tends to have more of an effect on homeowners. In highly simplified form brokers have long operated on a shared commission basis where you hire a listing agent, and then that agent through a series of contracts arranged through their “MLS” Membership agrees to split the commission with other agents who help them sell it, often called bringing the buyer.
At some point in their search many buyers have heard the term you don’t have to pay me, the seller pays the commission. If that sounded too good to be true it was because it is. At the end of the day, that subtle deflection is the heart of the matter. Why foster a complex back-end arrangement and deflection policy for hundreds of thousands of agents who play a large role in the economy? The courts have decided and appear unlikely to backtrack.
Unlike many outsiders though, our company understands well that buyers’ agency is brutal, so the implication that the average agent is overpaid is flat-out wrong. It’s partially why we took the property management path in the first place. Real estate sales is tough except for a select few that hit on a very specific model, or have relationships for other reasons that would open any doors.
So if buyers agents are getting hammered, then who’s winning?
In the past, it was probably the brokerages themselves, not the brokers. We read a lot of negativity on this topic from upset agents, but what they tend to miss is that the brokerages were taking them to the woodshed for decades, providing nearly nothing but a name. The system, especially in certain cities dramatically favored listing agents over buyer agents as well. So in effect a handful ate very well while the masses fought over scraps. That further expanded as a winner-take-all economy combined with technology and turbocharged the consolidation of listings with modern automated listings services.
The irony is that it was the arcane policies of the MLS system that opened the door for “Opendoor” and similar massive consolidated listing operations. If I’m not listing with my neighborhood broker anyways then why list with your brokerage at all? They became a commodity, then it’s all about price.
Modern brokerages have figured it out and have been repairing much of the damage. The awkward commission splits were still there, and they still tended to benefit a handful of heavy hitters, but at least smaller neighborhood brokers were being given a chance to thrive, which is a crucial first step in this upcoming transition. If they cannot thrive, the industry becomes a corporate machine from top to bottom and this lawsuit would actually have a very negative effect on customers in the long run. We already know corporations seek to dominate their industries at any cost, 24/7. 365 days, year after year. There is a very real chance these lawsuits could kill off the typical neighborhood broker and that is bad for customers. The brokers were not the problem it was the brokerages, typically the older ones, and they are mostly gone now. Ending the commission-sharing process was the logical next step.
20 years ago brokerages charged all but a handful of top producers massive dues and focused on pure volume at the cost of nearly everything else. Those outdated models are falling by the wayside everywhere you look. After recently doing research for our own unique property management brokerage model, we were surprised to read of entry-level brokerage costs that were relatively small flat fees, rather than a massive percentage of the sales price which has long been the standard.
We appreciate the challenges our colleagues are facing, including those new brokerages that are charging very low fees to the average community brokers required to transform this payment model. Unfortunately for most, it’s barely enough to get by. They are now watching their entire business model come heavily under fire, and it’s largely due to the sins of their forbears. These brokerages were already driving costs down for consumers dramatically, but their effect was muted in a world that moves slowly and is dominated by a few huge players. The justice department sped it up dramatically and long term it’s likely for the best. Short term it could decimate these small brokerages and brokers operating on tiny margins.
Because we’re residential property managers, that’s our focus. Commercial agents use similar methods, however, their clients tend to be sophisticated businesses, not consumers and so far all the news we’ve read has pertained to housing consumers. They also tend to be both sales agents and leasing / property managers, something that is surprisingly rare in residential real estate and that barrier creates complications in that sales agents rarely understand the investment side of housing well.
One tool that has helped our fast-growing company to deal with constant change and uncertainty is imagining what we would be doing 5 or 10 years from now.
We envision a world where real estate agents are true housing experts, not just the narrow world of a strict residential sales procedure, and can satisfy all their neighborhood housing needs from sales to property management, to contract negotiation, to showings, a la carte. Consumers will be able to select their agent based on a proven skillset, reputation, neighborhood influence etc, and then choose the service they need from a clearly priced menu. Brokers can opt to provide certain services, but not others and consumers can choose their best fit based on these specialities.
Thinking about the march of time, all industries have moved to a “specialist” model. The general sales agent is likely going to be the main casualty. As with commercial you are likely to see agents judged on tracked and measured performance data, knowledge of a fast-changing (and not slowing anytime soon) economic and technology world, and less simply due to affiliation. Most likely consumers will hire these brokers using a simple menu of flat fee pricing for most services, possibly even long-term rental management. We keep an open mind about our industry as well.
The relationships will begin in a very transactional manner, but a true housing expert that fits your needs will still be worth their weight in gold, probably utilized more often than just to buy or sell every 5 years, and will hopefully bud into a true long term relationship based on choice and merit, not a blurry line that pays the biggest players first and foremost, to literally have them split it with our “community” brokers.
Clear, upfront, and transparent pricing is generally considered to be a good thing. The problem though is that most neighborhood brokerages are not particularly prepared with the funds and procedures needed to effect these dramatic changes so quickly, but private equity funds and other untethered competitors such as Zillow and Opendoor will. It’s likely to do major damage to the industry in the short term. Unfortunately, while saving consumers comparatively little. We are linking an article that shows where commissions have already declined quite a bit, but inflation across the board as declined so it’s likely for that reason, not these suits that haven’t even taken effect yet. As we began this article the brokerage commission issue was one of many inflated costs involved in buying a home now, and all of them are still barely a drop in the bucket compared to the long-term damage the FED has done and will do.
What’s happened to real estate commissions since the big settlement (axios.com)
What do we mean by that?
In a few years, we will have an epidemic housing shortage.
Why houses are so expensive, explained in one chart (axios.com)
This was brought on by many things but the primary culprit is the interventions the FED introduced to prop up the market in 2005, again in 2009, again in 2020, and again with the next major recession once the world realizes there is no way out but years of stagflation. There is simply no other path that makes sense except perhaps if AI improves productivity to never-before-seen levels.
The exact process of how those bailouts led to a housing shortage is fit for a university research paper, but over the years we’ve all watched those effects roll from industry to industry, typically ending with a handful of massive corporations (or private equity funds) controlling the vast majority of the power and doing private equity kinds of things.
Economies slow, it’s unavoidable and when that happens if inflation has not been tamed the FED will be forced to cut rates and accept inflation to avoid crashing the entire global economy with a 10+% natural rate. We are not predicting hyperinflation, somehow relative to the rest of the world we are in decent shape. Instead, we’re likely to see a short and shallow recession followed by persistently high rates and inflation, similar to the past few years but a fair amount worse.
Why would the FED not be able to bring rates down when they were so successful in the past?
JPMorgan’s Jamie Dimon warns inflation and interest rates may stay higher (cnbc.com)
What the most powerful banker since JP Morgan himself is telling us here is that due to poorly run global governments (all parties) continuing to borrow incessantly from their people / future, eventually people are going to stop lending them money so freely and demand higher interest rates to pay the higher costs they have, and so on. This was a long ridiculed boogeyman in the 2010’s, but we already had one major brush with exactly that, and we are inclined to believe Mr. Dimon and the mountain of evidence he is basing those concerns on. It is likely just getting started.
High prices, high interest rates, and corporations with massive control over everything we do including modern AI technology. When you put it that way the $1000 you’re saving every 5 years on a community broker’s commission isn’t going to matter much.
Are online prices higher because of pricing algorithms? | Brookings
Unfortunately in this case these are literally our homes, our lives, and the government is the only one that can stop it, and that’s particularly concerning since the more likely outcome is that they join together.
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