RealPage, a Texas-based company behind a software called YieldStar, is facing a Department of Justice investigation. The company has been accused of facilitating landlord collusion through its software and driving up rental prices beyond market values.
In October, ProPublica, a nonprofit, investigative news outlet, reported on RealPage and its software. The investigation found that the company’s software does seem to push rents higher than market prices. In one Seattle neighborhood, the outlet found that 70% of apartments were managed by landlords that used the software. Heather Vogell is a reporter with ProPublica and has reported on RealPage. She joins us with details of the outlet’s findings.
Note: This transcript was computer generated and edited by a volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. In October, the nonprofit investigative news outlet ProPublica reported on a company called RealPage. They make software that’s used by landlords to maximize profits. The investigation found that the company’s software does seem to push rents higher than market prices, and it’s very common these days. In one Seattle neighborhood, the outlet found that 70% of apartments were managed by landlords that use this software. After the ProPublica article came out, Democratic lawmakers in the House and the Senate called for a federal investigation. Last week, we learned that the Department of Justice’s antitrust division is in fact looking into the company. Heather Vogell has led the reporting on RealPage for ProPublica and she joins us now, welcome to TOL.
Heather Vogell: Thanks for having me on.
Miller: Can you explain the basics of how this software works?
Vogell: I think all of us have become somewhat familiar with the idea of pricing software, just from having used the internet to buy everything. And we’re used to seeing prices kind of jump around day to day, in ways that are not always clear about exactly why they’re moving the way they are. But what’s different about this particular software is it’s software that’s used by landlords, property managers, and it’s making a decision every night. It takes all the data in that it has on the property, on the apartment that’s being priced. And then also market data in, and that market data includes information from nearby competitors, that is not necessarily public. It’s the actual rent that they are charging to tenants. It’s not what you see on, say, apartments.com, or whatever is the advertised rent. So it takes the actual rent every single day, and it feeds that into this algorithm that spits out a suggested price for the landlord. And most of the time the landlords are adopting those prices. And so the concern is just that this would be a way for landlords in a very small, small geographic area to essentially all raise their prices at the same time. And it might be undercutting price wars, or things like that, that would produce more competitive prices for tenants.
Miller: How do large landlords determine rents if they don’t use software like RealPages?
Vogell: That’s a great question. What I’ve been told is that a number of landlords have either developed their own software that does something similar, although it wouldn’t have the same granular market competitor data, it would probably have something a bit more general. So they’ve either created their own that does something like this, or the old method was essentially to look at the advertised prices, the public prices that are around, and to negotiate with renters. RealPage discourages companies from bargaining with renters and they suggest that landlords stick to the price that the software has suggested.
Miller: That actually gets to one of the key points here, because one of the things you heard from a few different people is that it’s easier, “for property managers or landlords to raise rents if they use this software.” Why is that?
Vogell: I think that there is a sense, there’s a belief that what the software does and what the software is intended to do, is to find this point where you can achieve the maximum amount of rent for the highest occupancy and that highest occupancy may not always be 99% of your building full. There was an earnings call that I found a transcript of, where the former CEO of RealPage was talking about a large property manager, they had 40,000 apartments or something like that. And they traditionally sought occupancy of 97-98% in markets where they were a leader and they started using YieldStar, which was the name that RealPage used for its pricing software. And once they started using YieldStar, they found that they could operate at 94-95% occupancy and actually make more money by raising rents to a certain point. So they would raise the rents, and then not worry if a few more apartments were left empty. There was sort of this optimal spot where you could find that point where you wouldn’t start down this road of lowering your rents to fill up your building, which is something that has traditionally been a practice in the apartment rental market.
Miller: From the people you talk to, one of the engineers of the software said that there’s too much empathy in the past, there has been too much empathy on the part of landlords or property managers. It seems like the argument is that people have an easier time raising rent if they can, in a sense, wash their hands of the moral dimensions by saying, “I didn’t do this, a computer did this.” Is that a fair way to put it?
Vogell: Yeah, I think there’s that aspect of it as well. And what the software developer told me was that, when we talk about property managers, you think, “there are these huge companies, often there’s investors behind them, potentially Wall street investors, private equity, all these things.” But when you actually think of who the tenants are dealing with, they’re dealing with building staff leasing agents. And what this developer told me was that often those leasing agents are essentially peers of the people that they’re renting to, and they would be more likely to empathize and to see eye-to-eye with the renters, perhaps, than the people who are over them, who were running the companies that they work for. And so he said, “there’s too much empathy going on here. We’ve got to get pricing offsite.”
Miller: How widespread is the use of this software? I noted one really striking figure: in one neighborhood in Seattle you looked at, 70% of the units, pricing is based on this software. What do you see in terms of the national picture?
Vogell: We don’t have the national picture. And that’s part of the problem: we don’t know which buildings are using it, which ones aren’t using it. Renters don’t have that information. We really don’t know that. And in that, we actually don’t know, the 50% we know is a potential floor. We looked at one zip code, and found there were little more than 9,000 apartments that were in buildings with five or more units, considered multi-family, and there were 10 property managers that were managing 70% of that market. So it’s a very concentrated market in terms of the number of property managers, there’s not a lot managing a lot of units. And we were able to determine that all 10 of them were using RealPage pricing software, but certainly there could be others that were. And some of those might not use it in every single building. So it’s a really difficult situation, because I think it’s very hard for the consumer to really understand what is behind a lot of these prices.
Miller: So let’s turn to the questions of illegality and the DOJ investigation, because one of the wrinkles here is that the company specifically says that their software “prevents collusion or price fixing.” That’s one of the benefits of using their software, because it makes the landlords who might otherwise engage in price fixing - so their argument goes - less likely to do that. What’s allowed in terms of setting prices and what goes against state or federal laws?
Vogell: I think that’s what we’re seeing evolve, that question. The answer to that question is one that we’re just gonna have to wait for the courts to figure out, I think. What the company says, that it uses aggregated market data from a variety of sources in a legally compliant manner. And this goes back to what other landlords might do if they’re not using the software.
What the company mentioned, something that I’ve heard from a lot of different people, was that a lot of these companies historically have done phone calls to competitors to find out pricing, and have done these sort of informal surveys in order to figure out their prices. And the company’s point was that they thought that was a bigger risk of collusion than their software because the software removes the need to use that to do that sort of thing. I think that the thing that antitrust experts have told me that has jumped out at them about the situation was this use of that private competitor data, in order to inform the prices. There’s a number of other concerns that antitrust experts raised about the company, including the fact that it organizes forums of users who are landlords, property managers who compete with each other, and they get together in invitation-only private sessions at conferences. They have quarterly conference calls, things like that, to talk about RealPages software, including this revenue management software, this pricing software we’re talking about here. So there were a number of potential red flags there for some of the experts that we talked to. But ultimately, I think we’re in new territory because this is an algorithm, and we’re just gonna have to wait and see.
Miller: Heather Vogell, thanks very much for your time today. I appreciate it.
Vogell: Thank you very much.
Miller: Heather Vogell is a reporter at ProPublica, currently focused on the rental housing market. You can read her articles about this rental pricing software tool at our website, OPB.org/thinkoutloud.
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