Company that makes rent-setting software for landlords sued for collusion

RealPage worked with some of the nation’s largest landlords to raise rents, says lawsuit.

Read the whole story

 

[JohnDeL]

This one will definitely end up going to the California Supreme Court. I doubt that it becomes a federal case though; if all of the landlords' properties are in Sacramento (as implied in the article), then interstate commerce isn't involved.

IMHO, it is collusion and should be against the law. Whether or not it will be found to be collusion and against the law is a toss-up at this point, given the quality of some of the judges on the bench.

 

[JohnDeL]

In a whole lot of industries, there is a sort of "soft cartel" anyhow. I mean, I do hope they bust this app and the landlords using it, but. . .

In most industries, there is at the minimum, all participants tracking the pricing of "the market" and raising prices accordingly.

I won't deny there are some industries like that, but I used to work for a company selling a commodity with only a few big vendors, and we tried pushing through price increases combined with a press release announcing the increase to the market. Instead of following our lead, our competitors dropped prices slightly, and we ended up losing 80% of our volume for the quarter. Didn't get it back until we reversed course and dropped prices below where we'd been before the announced price increase. And we had something like 30% market share before the announcement.

There are times when our prices and competitors prices all went up at the same time, but it was usually when someone's plant was down for whatever reason (repairs, normal upkeep, the olympics shuttering plants in china, etc.). Supply/demand economics do still work most of the time.

Airlines and other large businesses often do this sort of price signaling. Southwest will raise (or, less frequently, lower) the price on a given route and wait to see if their competitors match the change in price. If they do, then the new price becomes the new price.

 

[JohnDeL]

This one will definitely end up going to the California Supreme Court. I doubt that it becomes a federal case though; if all of the landlords' properties are in Sacramento (as implied in the article), then interstate commerce isn't involved.

Per the complaint, the suit was filed in federal court. One of the plaintiffs lives in Washington and most of the named defendants are incorporated and headquartered in other states so interstate commerce is definitely involved.

Not necessarily. If I live in DC but sell watermelons in Texas and the watermelons are grown in Texas, then it isn't interstate commerce. And I expect that the plaintiff's lawyers will use an argument fairly close to that in a motion to have the case dismissed.

 

[JohnDeL]

This one will definitely end up going to the California Supreme Court. I doubt that it becomes a federal case though; if all of the landlords' properties are in Sacramento (as implied in the article), then interstate commerce isn't involved.

Per the complaint, the suit was filed in federal court. One of the plaintiffs lives in Washington and most of the named defendants are incorporated and headquartered in other states so interstate commerce is definitely involved.

Not necessarily. If I live in DC but sell watermelons in Texas and the watermelons are grown in Texas, then it isn't interstate commerce. And I expect that the plaintiff's lawyers will use an argument fairly close to that in a motion to have the case dismissed.

Yeah I don't think you realize how much the courts have stretched the interstate clause over the decades.

A farmers growing wheat for personal consumption that would never be sold to anyone even in state was ruled to fall under interstate commerce clause because the wheat he didn't sell would have an impact on wheat prices.

Production quotas under the Agricultural Adjustment Act of 1938 were constitutionally applied to agricultural production that was consumed purely intrastate because its effect upon interstate commerce placed it within the power of Congress to regulate under the Commerce Clause.

https://en.wikipedia.org/wiki/Wickard_v._Filburn

What you stated may have been the original intent but hasn't been true for 80+ years now. Personally I am not really sure the ICC should be that broad but it is water under the bridge now.

Fair enough. This isn't my field, so I don't really keep up with the changes in it.

And it should be noted that I emphatically do not believe that what the landlords are doing should be legal.

I'm just pointing out the tactics that I expect the landlords' lawyers and the software company's lawyers to use.

 

[JohnDeL]

What I was suggesting was that if an algorithm is telling landlords to up their rent to $1200/mo, why not just have everyone up it to $1500? Or $2000?

Or is the algorithm essentially including estimates of rates in which tenants will fail to be able to pay and have to get evicted (which has costs to the landlords)?

IE
@$1200 expect 1% eviction rates
@$1250 expect 3% eviction rates
@$1300 expect 7% eviction rates
@$1350 expect 15% eviction rates
@$1400 expect 30% eviction rates
@$1450 expect 50% eviction rates
@$1500 expect 90% eviction rates

And then does some math to figure out what the highest rate is, where once you include the eviction costs, the total is the highest...?

It bases the eviction rates on the number of evictions at that price point for that demographic in that area, which is something it can do thanks to the fact that all of those landlords are sharing all of that data with RealPage. Thanks to regression to the mean, while the data from one leasing company might be skewed when all of them are put into the same pot you get a much truer picture of what is happening.

To see this in action, flip a coin four times and count the number of times it comes up heads. You should get an about equal number of heads and tails but can easily get four heads or four tails because the sample is so small. Now flip twenty coins four times each and count the total number of heads you get. Odds are, this time you got a number that is very close to 40 heads (somewhere between 32 and 48) and if you get 80 heads you know that the coins are biased.

Now imagine doing that with rental prices. That's the power of this tool.

The other thing that is getting hidden is that this tool can easily be used to discriminate against certain groups. "The algorithm says that in order to rent to you, we need to have a higher deposit because you are more likely to default" is more defensible in court than "we require blacks to give us an extra month's deposit".

To me that feels like somethign that would be high value to landlords with small numbers of units though. Once you are one of the big dog with hundreds or thousands of units in the area (which my impression is largely the companies using the data), it feels like your own data likely gets you 90-95% of the way there anyways.

Except that the large landlord is likely to have their properties spread across a variety of locales, each of which will have its own optimization function based on demographics, location, etc. So you might get 80% of the way there but not 95%. And when you are talking about millions per month in rent income, that adds up fast!

What this company does is let you coordinate with every other property owner in a given area to maximize revenue for all of you. That such coordination is collusion is just a technicality (right, sure).

So does it suddenly become OK if RealPage pivots to only using a particular landlord's data for that landlord? Then it is largely the same rent-setting without it looking like collusion.

If they do that, then they lose the "killer app" part of the app.