🥊 DOJ v RealPage Lawsuit, Where Interest Rates are Headed, and Backflip

RealPage Has Real Problems With DOJ Suit

For a company that was hit with a US Department suit on Aug. 23 alleging its algorithm violates antitrust law, it looks like business as usual at the property management software company RealPage.

There is no mention of the suit on its home page, and only by scrolling down to the bottom of it and clicking on its News link does this statement from June 18 appear on the RealPage Newsroom:

“Starting in October 2022, false and misleading claims about RealPage and its revenue management software have been reported to the media and in legal filings. These factual inaccuracies threaten to undermine the essential benefits RealPage’s solutions provide to both renters and housing providers. In fact, RealPage’s revenue management software contributes to a healthier and more efficient rental housing ecosystem.”

The DOJ has a very different take, saying the company was sued “for its unlawful scheme to decrease competition among landlords in apartment pricing and to monopolize the market for commercial revenue management software that landlords use to price apartments. RealPage’s alleged conduct deprives renters of the benefits of competition on apartment leasing terms and harms millions of Americans.” 

The truth probably falls somewhere between. But it’s clear that RealPage —  which was founded in 1998 and now provides management services to more than 24 million multifamily, commercial, single-family, and vacation rental properties — is facing an attorney general that is none too happy with its business model.

“Americans should not have to pay more in rent because a company has found a new way to scheme with landlords to break the law,” said Attorney General Merrick B. Garland. 

What’s Anti-Competitive and What Are Normal Rent Comps?

The DOJ alleges that RealPage has subverted the free market by getting landlords to share private, competitively sensitive information about rental rates and lease terms to train its algorithmic pricing software. The recommendations that the software spits out on apartment rental pricing and other terms saves landlords the trouble of competing to attract renters based on pricing, discounts, concessions, and other terms. 

Demand for apartments and homes drove up rents and housing prices during the pandemic, but RealPage is accused of pushing landlords to raise rents higher than they would have, Axios reported. A Propublica investigation from 2022 into RealPage and its unwavering algorithm’s drive for higher rents referred to “a new kind of cartel.”

One of the algorithm’s developers told ProPublica that leasing agents had “too much empathy” compared to computer generated pricing.

But it seems that RealPage did more than rely on its algorithm. According to a company spokesman, a property manager will set a price different from RealPage's recommendations more than half the time. The DOJ alleges that when that happens a RealPage “pricing advisor” will call up and ask what's going on, and escalate to a supervisor if they don’t like what they are hearing.

How Not to Put a Bee in Merrick Garland’s Bonnet

Marc Rutzen, Nico Lassaux and Tim Gamble started HelloData.ai to compete with RealPage — make pricing recommendations to apartment owners at the time a renter signs a lease. Yet these founders knew they had to take a different approach given the legal environment.

As long as they priced apartments based on public information, using AI to scrape websites of apartment buildings to calculate rental rates and concessions offered to renters, they figured they would not draw undue attention. HelloData.ai can do the work of dozens of multifamily acquisition analysts by gathering data and plugging it into formulas to determine real time market rates.

HelloData also avoids the term “revenue management.”

“We don’t have a full revenue management solution,” Rutzen told The RealDeal. “We have pricing recommendations, but it’s not integrated with property management software pushing pricing live. We were pursuing that, going the integration route, and we decided to pull back because of the lawsuits.”

The bottom line is that RealPage is going to be fighting the DOJ in court, and companies like HelloData are going to be trying to build their business.

Mortgage Rates Are Falling, but Not Because the Fed is Cutting Rates

By the time this newsletter lands in untold thousands of inboxes across the land, the Fed will have cut its overnight lending rate by 25 or 50 basis points.

Its impact on the 30-year fixed mortgage: pretty much nothing. Because … Can you say “priced in?” 

Mortgage rates have been falling steadily since they hit a high of almost 8% in October, around the time the first Fed rate was under consideration, and are now in the 6.3% range. So it appears the mortgage market has been expecting a rate cut for almost a year and has already moved south. 

With inflation cooling to 2.5% and unemployment creeping up slightly to 4.2%, the Fed’s incentives to keep its overnight lending rate above 5% have disappeared. No less an authority than Barron’s expects the overnight rate to fall further next year, though at this point it’s hard to say how big a difference it will make, Brian Swint wrote in its daily newsletter on Sept. 15: It also may not matter for how low rates settle when the Fed stops cutting — the current expectation is that they’ll go to about 3% over the next year or so.

J.P. Morgan Economic Research predicts the Federal Reserve (Fed) will lower rates by at least 100 basis points (bps) through the end of 2024, and mortgage rates will eventually follow.

“Mortgages typically price off of longer-term Treasuries, and so at the first order, the decline in the front end of the curve would seem to have a muted impact on mortgage rates — perhaps only around 20 bps,” said Nick Maciunas, Head of Agency MBS Research at J.P. Morgan.

The 10-year Treasury bill serves as a benchmark for the mortgage industry when it sets rates. It has fallen from a recent high of nearly 5% last October — when the 30-year mortgage rate peaked — to about 3.6% this month.

Investors, who can expect to pay rates of 1.5-2% higher to borrow money, will find more homes that pencil with a reasonable return as the interest rate environment returns to normalcy.

Signs of an Awakening Market Are Starting to Bud

If the Fed follows up the September rate cut with more cuts at its final 3 monthly meetings and continues to cut through 2025, the overnight rate would fall into the threes in the next year or so. Mortgage rates could go into the low fives, we think, increasing activity in the housing market.

Maciunas predicts a drop of 60 basis points from today’s 6.35% to 5.75%.

“Primary mortgage rates could fall by as much as 60 bps over the next year, if forwards are realized — and by even more if the rates market begins to price in more cuts than are currently expected,” he said.

Those homeowners who have held off on upsizing or downsizing because they have too-good-to-be-true mortgage rates in the 3% range might decide it’s time to make a move.

This “rate-lock effect” — a historically low interest rate in a higher rate environment — has dissuaded many from trading up (or down) because it would mean a doubling or tripling of their monthly interest payments in some cases.

About 900,000 fewer homes were sold last year than in a typical year, according to a research paper by the Federal Housing Finance Agency. The authors of the paper wrote that the “rate-lock effect “restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability.”

“The starter home for many has become a keeper home, unfortunately,” Susan M. Wachter, a real estate professor at the University of Pennsylvania’s Wharton School and a former assistant secretary at the Department of Housing and Urban Development, told The New York Times.

The Mortgage Bankers Association has reported that mortgage applications ticked up 1.6% in the first week of September, after increasing 3.3% at the end of August, largely driven by the steady decline in 30-year mortgage rates since the middle of the summer.

The ripple effect of the Fed lowering rates will mean American consumers pay less for short-term borrowing, such as car loans, credit card balances and home equity lines of credit. It also means the end of high rates for savings accounts and CDs, and 1-year treasury rates are now just above 4% after paying as much as 5.5% last year.

What This Means for Cap Rates, and Investors

So gone are the days when any bozo could park extra cash in a T-bill and earn about 5%, within shouting distance of the average cap rate of 6.8% across the US on SFR properties, convincing otherwise enthusiastic real estate investors to sit on the sidelines. 

Many investors see a cap rate of 5% (Cap Rate = Net Operating Income / Property Value x 100) as the bare minimum, and depending on the market they can vary from 3.5-8%, though some risky investments can have higher rates. A competitive real estate market, and higher borrowing costs, slowed institutional buying in 2023, but given lower interest rates and lower rates of return on other investments, 2025 looks to be a different story. 

As noted in the last issue of proptext, Blackstone, the world’s largest alternative asset manager, with more than $1 trillion under management, closed on two SFR deals worth $13.5 billion with cap rates just north of 5%.

The chase for yield points to more real estate investment, particularly among smaller investors. With the runup in the stock market over the last 5 years — the S&P 500 has risen 93.01%, higher than its long-term average of 45.87% — we at proptext believe it might be a good time to cash in some of those gains and diversify into real estate. It is one of the most secure alternative investments, one that acts as a hedge against inflation, offers tax advantages, realizes appreciation, and builds generational wealth.

A recent blog post from CFA Institute , a global association of investment professionals, points out that the relations between cap rates and interest rates is “more nuanced than first meets the eye.”

Cap rates don’t always move in conjunction with 10-year Treasuries, and there is a lag time built in. An analysis by Morgan Stanley found that US Treasury yields and cap rates fluctuated between -0.82 and 0.79 from 1983 to 2013, and it found 8 periods in that time frame when corporate bond rates and/or the 10-year US Treasury yield moved up, while cap rates moved in the opposite direction during 5 of those periods. 

There are benefits to real estate regardless of the direction of cap rates, the post points out: “Acquiring real estate assets at an elevated cap rate and exiting at a lower terminal cap rate, with rents at least equivalent, means that the seller of the property has harvested returns in the form of appreciation.”

Columbus, Ohio

Columbus, Ohio, presents a promising opportunity for real estate investors, particularly those interested in single-family rentals (SFR). Intel recently announced plans to build a $28 billion semiconductor manufacturing plant in central Ohio, a development that will boost the local economy and increase demand for housing in the surrounding areas ​(CBUStoday). The plant, once operational, will directly  employ around 3,000 people with an average salary of $135,000, and Intel estimates the two Ohio plants will support an additional 10,000 jobs indirectly. 

Intel had plans to start operations by 2025, based on market conditions and federal aid from the CHIPS Act, which offers semiconductor manufacturing grants and tax credits. That forecast has been updated as Intel reacts to market pressure to turn around its stock price and the new timelines for the “Silicon Heartland” have been pushed to 2027 to 2028, though there’s still uncertainty around ground breaking and when the plant will be operational. 

However, it will be difficult for Intel to pull the plug after receiving tax credits from both Ohio and the federal government. 

Outside of a future in chips, Columbus’ economy is diverse and robust, with employment in education and health (15%), retail and trade (11%), leisure and hospitality (10%), and manufacturing (8%), among the leaders. Since Columbus is also the state capital, there are some 288,000 government employees, or about 16% of the workforce.

The city's strategic location makes it a hub for logistics and distribution, with companies like Bath & Body Works and DHL locating large operations centers there. The financial giant JPMorgan Chase, which employs over 20,000 people, and the insurer Nationwide, with 16,000 workers, are significant contributors (CBUStoday). 

Columbus is also home to The Ohio State University with a total undergraduate enrollment of 46,123. It’s #17 on the list of top public schools according to U.S. News & World report. 

The city's housing market is currently characterized by strong demand, rising prices, and a relatively low supply of homes. As of mid-2024, the median home price in Columbus was around $291,000, a 6.3% increase from the previous year. Homes are selling quickly, averaging just 35 days on the market, and about 47.7% of sales exceed the list price, according to a July report from Norada Real Estate Investments.

Demographics

Population growth is expected to continue at a moderate pace. Workers in Columbus have also been seeing steady income growth. The Intel chip factory, along with the larger re-shoring manufacturing trends, bode well for the future. Data on building permits and housing supply suggests Columbus could see continued rent growth moving forward.

Key Neighborhoods

• Gahanna has been named the hottest ZIP code in America for the second consecutive year, according to Realtor.com. It is located about 8 miles northeast of downtown Columbus and is strategically positioned near the Intel semiconductor manufacturing site in New Albany.

• German Village is known for its historic charm, cobblestone streets, and Victorian-era architecture, making it highly attractive to buyers looking for unique homes with character. The median sale price in this neighborhood is about $540,000​, according to Redfin. 

• North Linden and Olde Towne East are other growing areas. North Linden, located in northern Columbus, is recognized for its parks and historic homes, offering more affordable housing options with a median sale price of $184,000. Olde Towne East is one of the oldest neighborhoods in Columbus, known for its Victorian homes and tree-lined streets, with a median sale price of $345,000​, Redfin data reports.

• Dublin and Grove City are also expanding suburbs with strong growth indicators. Dublin is particularly notable for its excellent schools and community safety, making it a desirable area for families. The median list price of a home in Dublin is $414,900. Grove City offers a more affordable median home price of $189,900 and provides a mix of community amenities and green spaces​

Fairview, Clover Run

Introducing Fairview, with an expected completion date in October 2024. This new construction offers an attractive rental rate of $2,302 per month on the outskirts of Columbus, roughly 15 minutes to downtown. This new community is a growing part of Columbus metro area. Growth rate has been around 5.8% over the past few years compared to Columbus’ 4.0%.

The Investment Thesis

→ New construction, available October 2024
→ 15 mins to downtown Columbus
→ Higher population growth of 5.8% compared to the larger metro area of 4.0%

 Property Details

 Financial Projections

Interested in Learning More?

*Appreciation based on 4.5% growth rate. 

An Early Start and a Lifelong Commitment to Financial Freedom

Tracy Ngoy got an early start in the real estate game, buying her first house for $410,000 in 2003 in Ladera Ranch, a master-planned community in south Orange County, California.

She remembers the feeling that first purchase evoked. 

“I had just started my career in tech, in software sales,” said Ngoy, who earned a degree in finance from Cal State Fullerton. “I was super excited to qualify for the loan.”

She was selected in the first round of a lottery for the Ladera Ranch development, and she watched as the home prices rose in each of the 10 rounds over the year it took to complete the build.

“It was my first experience in understanding real estate and how appreciation works. It was tangible and it was real,” she said. “Round after round and the homes were going for $15,000 more. It seemed unreal to me at that time. I’m not even living in the house yet and I’m seeing $15,000 appreciation after each round.”

She credits her family, and her friends, with encouraging her to get into real estate and having the confidence to make more deals. (She currently owns 3 properties, and has bought and sold 7 in her life.)

“For me, it’s more cultural, being Asian-American you reach certain thresholds and these are milestones for success — graduate college, land the big job,” she said. “I followed that path without understanding the big economic ramifications.”

Ngoy moved into that first house and then leased it out after she moved to Santa Monica. “I became an accidental landlord just going with the flow,” she said. 

After selling that house for $675,000 two years later, she executed a 1031 exchange to avoid capital gains taxes and bought two properties, one in Altadena and a four-plex in Long Beach. She was only in her late 20s. 

She credits her willingness to take chances for the success she’s had in real estate investing.

“I would not even flinch. I would just go for it and not think of the risk involved,” said Ngoy. “Looking back there was a lot of risk involved.”

She was just back from Burning Man, which she called “the most incredible experience of my life.”

This interview has been condensed and edited for clarity.

What is your special real estate power?

My special real estate power is just having the confidence to pull the trigger and just go for it and not look back. I surround myself with people who are savvy in real estate and understand that this is the path to financial freedom. You have to have a stomach of steel to do it at such a young age.

What was the hardest lesson you learned early on in your real estate journey, and how did you overcome that and persevere?

The hardest lesson for me early on is understanding different kinds of risk and fully understanding how interest rates worked. I leveraged myself too much in my late 20s. I took on a lot of risk. Today I’m cognizant of that and I’m trying to understand different asset classes and how to build my portfolio. I sold my properties in the mid-2000s and some I just broke even and it was a lot of work. 

What advice would you offer to somebody looking to get into real estate or grow a portfolio?

I think it’s very important to understand your risk tolerance. There are so many different approaches to real estate. I have friends looking for an IRR of 12% or 15%, and they are taking a lot more risk. They are dealing with legal issues, squatters, taking on inherent risks that no one else will touch. I’m not comfortable taking on those risks but some people are. You really need to understand your risk tolerance and talk to people who are in the risk group you are looking at. Now I’m much more conservative. I flipped some homes in the 2000s and I prefer not to do that. If you want to be a flipper, talk to flippers and see what works for them.

Among the strategies a property owner could pursue — long-term rental, mid-term rental or short term, (Airbnb), co-living — what works best for you, and why?

It’s hard to know what you are most comfortable with before you do it. I experimented with short-term rentals and decided to try it and I hired a manager to work for me. The projections looked really good and the numbers were looking promising so I got really excited. Plus, I didn’t have to worry about anything because you have a property manager. Then all these miscellaneous fees — linens, cleaning fees, local city tax, plus 25 percent to property management fees — put the total fees closer to 35-40 percent, and I was in the negative. People who do Airbnb and do it themselves can profit, but I had a full-time job so I could not self-manage. My approach did not work so I pivoted, stopped doing Airbnb and did a long-term rental and hired a property manager at 7%. I did not know all this until I experimented.  

What do you think is the biggest issue investors face in 2024 and beyond?

Everybody follows the Fed closely and of course the election. For me, the question is, is there going to be another war? Is there going to be more global uncertainty? That’s a concern I have. It adds another layer of uncertainty. I think Americans are resilient in general and our economy is resilient. If there is greater uncertainty in Europe, the US is more resilient.

Backflip

Backflip is a Denver-based fintech company that aims to simplify the process for real estate investors who specialize in flipping. The platform integrates a range of tools and resources to make the acquisition, renovation, and financing of properties more efficient, giving investors a solution for managing their projects.

A Streamlined Approach to Flipping

Backflip’s platform allows investors to analyze properties, secure funding, and manage their portfolios all in one place. The company emphasizes accessibility, aiming to support a diverse range of users, including those newer to flipping. Through both its mobile and desktop applications, Backflip delivers up-to-date market data and analytics, enabling users to evaluate investment opportunities and make data-driven decisions in real time.

The platform’s app has been called an “analyst in your pocket” because it can compile property data, run comparative analyses (comps), and track the progress of investments. Users can search for potential deals, compare multiple properties, and monitor market trends. The interface allows investors to make informed decisions without relying on external tools or manual processes.

Deeper Look into the Backflip App

The Backflip app is built to serve both experienced investors and those entering the market. Its core features revolve around:

1. Property Evaluation Tools: The app provides real-time data for sourcing and evaluating opportunities. Users can input property details and the app will generate metrics, such as costs, potential profit margins, and time to complete projects.

2. Comparative Market Analysis: Investors can compare properties to others in the area, gaining insights into price trends and neighborhood dynamics. This helps users understand the potential upside of an investment before committing.

3. Project Tracking: Once a property is acquired, users can monitor the renovation process, keeping tabs on timelines and budget allocations. The app also facilitates communication with lenders and contractors, ensuring that all aspects of the project stay aligned.

4. Financing Integration: Investors can apply for bridge loans directly through the platform. Backflip’s underwriting is designed for flips, providing flexible terms to suit short-term investment needs. Users can track their financing status and repayment schedules, making it easier to manage multiple projects simultaneously.

Base Terms & Conditions

Where They’re Headed

In April 2024, Backflip raised $15 million in a Series A funding round led by FirstMark Capital. The funding will support development of its platform and expansion into additional markets. The company’s revenue grew fivefold in 2023, even as broader housing market conditions fluctuated. This growth, along with a net revenue run rate of $10 million, underscores the platform’s relevance to real estate entrepreneurs who need a streamlined, tech-driven solution to navigate the complexities of house flipping.

What This Means for Investors

Backflip’s primary goal is to simplify real estate investing (specifically flipping) for individuals by providing technology and capital solutions that would typically be reserved for larger investors. The vertical integration between the two does improve user experience and streamline, for lack of a less overused word, the process.  By facilitating quicker property analysis, loan access, and project management, Backflip aims to address many of the barriers that investors face in today’s market.

If this sounds like a platform that could be useful for your investing tech stack, head over to Backflip to get started. 

Whiskey: A Hedge Against Market Volatility

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