A Few Thoughts About Rentals

This morning, I woke up to not one but two emails about Rental Beast, a new startup that proposes to become the MLS for rentals and integrate it with existing MLSs. One was from WAV Group, doing their PR thing, so I didn’t pay a whole lot of attention. But the second one was from Drew Meyers at Geek Estate Mastermind (which you should join) so I paid attention to that one.

It’s an interesting idea, and one whose time has… well… I don’t know. On the one hand, one is tempted to exclaim, “What took you so long?” It seems like such an obvious idea. But… on the other hand, I know this industry, which makes me think that this is a few years too late and a couple of billion dollars short.

Let me explain.

The Problem with Rentals for Traditional Real Estate

Several years ago, I had the idea to start a new type of real estate brokerage that was centered around rentals. For those newer readers who don’t know, I got my start in real estate on the commercial side working for first, a boutique commercial investment firm, and then for Coldwell Banker Commercial. And I have long thought that property management was woefully ignored by residential real estate brokers.

See, in commercial, the way I learned things, companies did property management not for the money (because it wasn’t much in relation to the PITA it was) but to “control the property.” If you’re, say, CBRE and you manage a big Class A office building, it means you know everything about that building. That knowledge then lets you know when’s the right time to go to the owner and suggest a sale, a 1031 exchange, a refinance, or whatever. It’s theoretically possible that the owner would choose to list with some other brokerage (in commercial, the brokerage matters) but it’s highly unlikely.

I reasoned that applying the same logic to residential would work: do rentals, control the inventory, know everything about the property, then you’re the guy to list the home. At the same time, do rentals, know everything about the renter (right off the bat, you know their credit score, their income, if they have kids, pets, etc.), maintain that relationship with the renter, and you have the inside edge when it comes for them to buy.

I knew, of course, that rentals paid way less than sales. A few hundred dollars, maybe a thousand dollars, instead of the tens of thousands that sales offered. But I figured there was little competition, and it was possible to be rather profitable using W2 agents. I knew that technology existed to make the process more efficient and more consumer-friendly, but it wasn’t widespread in residential.

So I took the idea to a large local broker, who expressed some initial interest. Then after a discussion, he turned it down. The reasoning was simple: rentals didn’t pay enough, and he’d rather have his agents do more sphere and farming for the bigger payday. Plus, property management was a major pain in the ass with high legal risk.

It didn’t matter that a rental specialist making $1,000 per rental could do ten of them a month, for $10K in commissions; meanwhile, most of his agents were doing two transactions a year. Doing leasing was only for the newbies and the desperate, and he didn’t want to recruit newbies and the desperate.

I didn’t feel like launching a brand new brokerage at the time, so it went into the giant bin of “Smart Business Ideas That Never Got Off the Ground” that I keep on my computer.

Newbies and the Desperate

So we come to the first problem with rentals in residential real estate. As Drew Meyers points out in his email newsletter:

The business model is lacking in many markets (i.e., no way to make money). In some markets (Chicago, Miami, SF, etc), agents can earn as much as a month of rent for placing a tenant into a unit. New York is its own beast, but the Department of State banned the historically high brokerage fees–though that decision has been temporarily halted by a judge (GEM discussion here).

…

And, a big percentage of agents don’t play the long game. They’re too busy collecting a commission check to pay the rent to make decisions that will pay off years down the road.

Let’s be fair: a big percentage of agents aren’t busy collecting a commission check. They’re too busy dreaming about collecting a big commission check. Alternatively, they’re too busy going to kids’ soccer practices, because they’re part-timers at best, to be showing apartments and writing up leases.

The problem this raises, of course, is expertise and service. There are fantastic agents who work with renters — people who really know the local area, know the market, can advise renters on which house or apartment is solid and which is not. But let’s be honest: those agents are working with buyers, not renters, for the most part. In most brokerages, leasing is handed off to new agents to build experience, not to provide top notch service. Think of it as going to get your hair cut at the cosmetology school: it’s cheap for a reason.

Sunny and I used great agents when we were nomads traveling the country and renting, because we (a) know the value of great agents, and (b) know some great agents who were willing to really help us. But most consumers aren’t Sunny and Rob; if they’re going to get crappy service, they can get that from the in-house property management leasing agent, and many times don’t know the difference in levels of real estate services available.

The Industry Has Never Cared

The second problem, again as Drew Meyers points out, is that the industry as a whole has never really cared about rentals:

There’s no way to serve renters on the front-end—i.e., IDX enables any home buyer to search a comprehensive listing set directly on a website, but no such capability exists for delivering a rental search.

On the back-end, the lack of a critical mass of rentals populated in the MLS means it escapes regular workflow.

That’s true, of course, but not entirely. I have seen IDX with rentals, because the MLS provides rentals. Problem is that the MLS has just a tiny fraction of the rentals on the market. After all, most rental listings aren’t taken by real estate agents who are members of the local MLS; they’re taken by property managers or by the owner who try to rent it out themselves.

Which is why the rental space is dominated by big portals (again, Drew noted this as well) like Zillow, Apartments.com (owned by CoStar), and others.

Rentals in the MLS: An Idea Whose Time Has Past?

So we get to Rental Beast, which Drew says is “a significant offering announced this week [which] stands to change all of that.”

I don’t know about that.

If Rental Beast had come along say… in 2000 or even 2010, I could see it being a significant offering that changes everything. In 2020?

Let me give you an example. The press release for Rental Beast says:

Rental Beast seamlessly integrates with MLS platforms, allowing agents direct access to more than 8 million non-MLS listings, the largest number of verified online rental listings available, directly sourced from property owners and managers, and updated in real-time. The new MLS program from Rental Beast also provides Apply Now, an FCRA-compliant online application engine, accessible by clicking a button next to any rental listing within an MLS. By using the Apply Now feature, listing agents and property owners receive fast and secure access to applicant credit checks, eviction history, and background information (where applicable) to guide decisions.

This kind of technology has long been available; it was available when I was thinking about trying to start a rental-focused brokerage. But that was then.

Today, we have the behemoth of residential real estate, Zillow, fully invested in rental technology. From HousingWire, dateline April, 2020:

Zillow has launched a new technology tool to help smooth the renting process during COVID-19. Now, renters can search, find, apply and lease a home entirely via Zillow Rentals.

For a flat fee, renters can submit an application through Zillow and use it with any properties participating within 30 days. This also includes a credit report and background check, and renters can explain the reasons behind any negative items on rental and credit history.

Landlords can upload an existing lease form and send it to the tenant to sign electronically, creating a one-stop rental transaction. These tools are free for landlords and property managers who use Zillow Rental Manager.

Landlords and property managers can also collect security deposits, rent and utility payments through this.

What would get a landlord or property manager to switch from Zillow and it suite of technology tools to Rental Beast? What would be so compelling about Rental Beast’s offering that consumers would prefer it over Zillow’s, which has a “apply once, use many times” feature.

If that weren’t enough, one of the few companies connected to real estate that might actually be scarier than Zillow is CoStar (market cap, $27 billion), and CoStar has owned Apartments.com since 2014. And it’s not like Apartments.com has a shortage of tools for landlords and property managers. And seriously, CoStar makes Zillow look like the Sisters of Mercy in ruthlessness and business practices. Don’t ever underestimate Andy Florance and CoStar.

Should Rental Beast offer something either of these giants do not, well, Rental Beast raised $5 million in funding. That’s a rounding error for both Zillow and CoStar’s technology development budgets.

So it’s hard to see Rental Beast — and by extension, the MLSs that integrate Rental Beast — being all that compelling. But who knows?

But there are bigger issues to consider beyond just technology tools.

Consumer Traffic

It’s not close, is it?

Ultimately, landlords and property managers want to get their units rented. That means consumers putting eyes on them. Zillow and CoStar utterly and completely dominate that. Putting rentals into IDX is nice and all, but we already know where that is for for-sale properties… so I’m not sure why it would be different with rentals.

Drew Meyers appears to believe that having the distribution network of millions of agents is significant:

MLS partnerships are a great moat that will take years for a competitor to unseat–MLS’ won’t do multiple rental partnerships. The distribution available through agents becomes a growing strategic asset as those partnerships are formed.

I can’t imagine why. Drew is one of the thinkers in the industry who thinks that Broker Public Portal/Homesnap is barking up a doomed tree when it comes to for-sale listings, because the lead that the real portals have over those is insurmountable. It doesn’t much matter that BPP/Homesnap talk about having millions of email addresses and saved searches and all that; the traffic belong to Zillow, Realtor.com and Redfin. Period.

Why would for-rent traffic be different? Is there something about renters that makes them more likely to visit a broker/agent IDX website to check for rentals, instead of going to Zillow or Apartments.com?

And if there’s little consumer traffic, what is the incentive for landlords and property managers to make sure their listings are entered into the MLS/Rental Beast again?

Which brings us to….

The Role of the MLS?

In for-sale listings, the MLS is supreme. No one contests that. The MLS performs a few vital functions, which leads to it having the inventory and data about the inventory: cooperation and compensation, comps data, and most importantly, accuracy, speed and completeness of listing data.

But all three are based on real incentives for the real estate broker and agent wanting to make sure that (a) all listings are in the MLS, and (b) they comply with the MLS’s rules. A listing agent has to market the property for her seller, which means the MLS, which means complying with the MLS’s rules, which means data accuracy. No agent wants to get booted from the MLS, since that puts a major damper on her ability to make a living. No brokerage (other than REX) wants to be cut out of getting buy-side commissions, because they don’t know what’s actually for sale and whether the listing broker would actually pay them.

What is the corresponding incentive for landlords and property managers?

Say a property manager straight up lies about the listing and puts in inaccurate information. The MLS sends a strongly worded compliance notice. Property manager ignores it. The MLS fines him. He ignores that. Now what? The MLS boots the property manager from the MLS.

Big shrug? He was making a fine living before the MLS; what does he lose by not being allowed to be in the MLS?

A landlord or a property manager simply doesn’t care what other landlords and property managers are putting into the MLS; it’s not like he’s trying to rent their apartments for them and get a cut of the $500 commission.

So the MLS has no particular advantage in data accuracy, timeliness, and completeness. What’s the value then?

Rules Enforcement?

If there’s a commission dispute, what’s the MLS really gonna do about it? With two REALTORS, who have agreed to arbitration or something, the MLS has a role. If it’s a REALTOR on one side, and some landlord on the other side… now what?

I suppose if the rental listing came from a REALTOR member, and the tenant was repped by a REALTOR member, then there’s something there. But we’re talking about $500 or $1,000 here, not $15,000. Are people really going to go to arbitration and legal fights and all that over $500? Is the MLS really going to go all-out in enforcing cooperation and compensation over $500?

Maybe. I’m skeptical, but maybe.

Go On With Your Bad Self

None of this is to say that Rental Beast shouldn’t do what it’s doing, or that the MLS should not integrate rentals into its database. Of course both should, as a member benefit if nothing else.

So y’all go on with your bad selves.

But this seems a bit… optimistic:

Assuming MLS adoption (and why wouldn’t others follow MRED’s lead?), rentals will become table stakes in every search portal in the future–accessible to every IDX vendor. This is the type of rental partnership vendors so desperately need: Every IDX vendor and big broker should seize the moment and implement rentals as quickly as possible. And, if an MLS is not playing ball? Vendors should lobby their board and push them to partner sooner rather than later in order to better serve members.

Yeah… I guess… but how is Rental Beast getting paid? Because TANSTAAFL is a law of economics. Either the landlord/property manager is paying Rental Beast, or the MLS is paying Rental Beast on some kind of a basis, or the broker/agent is paying Rental Beast either directly or via higher subscription costs to IDX vendors.

I don’t know if that rises to the level of table stakes, especially given that the industry as of now still regards rentals as something for newbies and the desperate. Do they really want to spend money on the newbies and the desperate? I’ll believe it when I see it.

Those brokers and agents who are more strategic, who understand the value of long-term relationship building, and who are willing to invest in leasing as a strategy can do all of that using Zillow and Apartments.com and Zumper and whoever else is already here and already dominant. Putting rental listings on IDX is cute, but it’s ultimately not a great move: why put rental listings on your IDX site with its 500 visits a month when rental aggregators already exist? The strategic move for those brokers and agents is to open a property management division that gets you rental listings, because the point, as in commercial real estate, is to control the property and to control the relationship.

So yeah, by all means, implement Rental Beast in your MLS. It can’t hurt (unless you have to pay for it). But moderate your expectations.

Your thoughts, as always, are welcome.

-rsh