Rent-calculating software biz accused of colluding with 'cartel' of landlords

The maker of an algorithm that calculates the optimum rent to charge for homes has been accused of causing an unfair and artificial hike in costs for tenants.

Texas-based RealPage and nine real-estate giants have been hit with a lawsuit that claims the software developer formed a "cartel" with the landlords to drive up rent in cities where housing is in high demand in the US.

Outside of things like rent control, setting rent is a balancing act involving supply and demand. Set it too low and you may not cover the mortgage and other costs (if applicable) as well as miss out on profit. Set it too high and you'll price yourself out of the market. Wouldn't it be handy if there was some kind of app that could automatically identify a sweet spot for rent on a per-home basis?

The lawsuit, brought by five renters this month, claimed the nine property-managing giants competed against one another prior to 2016, but found a way to collude with one another via a third party: RealPage. It is claimed RealPage's software was used by the group to collectively set rent and ensure none of them undercut each other, thus inflating costs for tenants.

The plaintiffs in the case, filed in San Diego, California, are Sherry Bason, Lois Winn, Georges Emmanuel Njong Diboki, Julia Sims, and Sophia Woodland. They are together suing, in which could turn into a class action suit, the managers of hundreds of thousands of apartments: Greystar, Lincoln Property Co, FPI Management, Mid-America Apartment Communities, Avenue5 Residential, Equity Residential, Essex Property Trust, Thrive Communities Management, and Securities Properties.

"Beginning in approximately 2016, and potentially earlier, [the] lessors replaced their independent pricing and supply decisions with collusion," according to the federal district court complaint [PDF].

"Lessors agreed to use a common third party that collected real-time pricing and supply levels, and then used that data to make unit-specific pricing and supply recommendations. Lessors also agreed to follow these recommendations, on the expectation that competing Lessors would do the same."

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RealPage's algorithm, dubbed YieldStar, calculated how apartments should be priced depending on various factors including location and demand. Property managers using the software are free to accept or reject the algorithm's suggestions, though they are heavily encouraged in regular calls with RealPage to follow its pricing, it is claimed. Following an investigation that sparked the above lawsuit, ProPublica reported the code ingests data including rent for surrounding homes to figure out an optimal price.

"Machines quickly learn the only way to win is to push prices above competitive levels," Maurice Stucke, a University of Tennessee law professor and a former prosecutor in the Justice Department's antitrust division, told the publication. 

YieldStar thus increases rental prices, it is claimed. Indeed, according to the lawsuit, RealPage boasted that its software drives "rental rate improvements, year over year, between 5 percent and 12 percent in every market."

If numerous property owners use the same software to price apartments, it stifles competition and raises average rental costs in a city, the lawsuit stated. Renters suffer by having to pay more while landlords benefit by helping each other raise market prices, the plaintiffs alleged. They accused RealPage of breaking Section 1 of the Sherman Act, which states agreements that reasonably restrict trade are illegal; it's claimed RealPage and the real-estate giants were all knowingly on the same page when it came to using the software.

And there's another facet to the lawsuit: RealPage, it is claimed, helped landlords, through a feed of information, keep an optimum number of properties vacant at any one time so as to avoid oversupply, and drive up demand and therefore prices.

A spokesperson for RealPage denied the lawsuit's allegations, and in a statement to The Register claimed ProPublica's reporting was inaccurate and misleading.

"RealPage's revenue management software is purposely built to be legally compliant," a representative told us.

"RealPage is aware of the lawsuit. We strongly deny the allegations and will vigorously defend against the lawsuit. Beyond that, we do not comment on pending litigation."

A full statement from the biz can be found here, in which it argues its code "eliminates" the risk of collusion by recommend fair rates for the market. The property giants did not respond to earlier requests for comment. ®