EPMEPM: Technology & SocialOpinion

Spotlight on Rent Bidding: Sarah Bell

EPM Editor Sarah Bell takes a look at the pro's and con's of the explosion in rent bidding apps

Rental bidding apps have been on our radar for a little while now: think Rentberry, Liveoffer and Rentwolf. In theory, I love what this tech is attempting: A free and open system, rewarding those who compete and are bold. Many welcome the move to a freer economy between landlords and tenants, and while I’m just as big of a fan of the free market as the next gal…there is something in my stomach about rent bidding that just feels a bit yucky. What is that?

It is difficult to speculate about whether rent bidding is good or bad because it is both new and thinly sampled. We don’t understand the consequences. So while trying to pacify that yucky feeling about the process, rather than irresponsibly laud or loathe rent bidding (which is a little unhelpful anyway), what I want to do is explore some thinking points for policy and implementation that might temper the desire for unbridled capitalism with a more equitable approach.

Thinking point #1: It’s the context, not the process

Firstly, it’s not the process that is at issue. If I were selling my own home tomorrow, I would want an auction campaign, price feedback through early offers and public negotiations during a lively and exciting auction spectacle. It is the only way I could be sure that I was getting the highest possible market price. Open negotiations, such as via public bidding, are also a transparent and time-efficient way to offer, counter-offer, compete and close.

The process is fine, but the context is different when we put competitive bidding into the rental arena. The ‘market price’ for rentals won’t necessarily be dependent on the features of the accommodation as much as it will turn on the availability of the accommodation. A roof over our heads is a basic human need, and there is a stress and urgency involved in the search for temporary accommodation that isn’t necessarily there with the search for a permanent home.

A rental property can mean the escape from domestic violence. It can mean the rehoming of a family closer to a hospital during the care of a sick child. It can mean independence for a young person testing the waters as an adult for the first time. It can mean a fresh start after the sale of a much-loved family home. It can mean a lifestyle decision that involves a diet inclusive of avocado. The emotion and vulnerability in each of these scenarios searching for accommodation in a variety of circumstances are easily exploited when there is a lack of availability.

A possible remedy could be the availability of recently leased comparable properties so that tenants can make an informed decision about market value, as opposed to market value being whatever a tenant is prepared to pay. In some states, fixed prices are compulsory and market rent reviews by tribunal are available to ensure the system is ‘fair’, so we might save a lot of time and build trust if that information was available at the beginning.

Thinking point #2: There is uneven bargaining power between tenant and landlord

You see, when buyers and sellers negotiate in competitive bidding, we can assume that they have a mostly equal footing in negotiations. We are transferring an asset from one party to another, and in doing so are dealing and moving in a similar asset-value class. There are some scenarios in the rental world where tenant and landlord might be in the same asset class, but that is overwhelmingly going to be the exception rather than the rule and not the basis for sound policy.

There is a danger that as the economy cycles and rental accommodation becomes more scarce, the non-property owning class – some of whom are the most vulnerable people in our society – will feel the impact most sharply.

A class war is bad for the economy. I’m not suggesting that rent-bidding apps are going to get us to full-blown class war, but what I do know for sure is that once the pendulum swings too far in one direction there must be a correction. These apps must find a way to address the imbalance of power between landlord and tenant. Otherwise, the 21st-century tenant consumer is not going to stand for it – and, as end users, tenants are critical to the adoption of rent bidding.

Thinking point #3: Buyers have time to recover from the passion

The auction, or competitive bidding, places upward pressure on price. We know that – that is why we recommend it as the method to extract the highest possible market price in a sales transaction.

We know that at a sales auction the highest market price is an emotional price beyond the valuation of a property, and that this heart-price is a premium paid for a lifestyle, usually hedged against long-term capital growth.

Should the bidding get a little carried away, the buyer can recover in the long term as the asset they bought at the highest market price now appreciates over time.

Again, fine for those who can afford to make a luxury lifestyle decision, but for those bidding emotionally – perhaps in a scenario where the threat of homelessness is a factor – then we are no longer in the realms of the determining the ‘market’ price any more. We are dealing with exploiting a vulnerability.

For the rental market, the highest possible market price has the potential to punish a tenant through the term of a lease, and there is no balloon at the end to justify the passion of competitive bidding. The expense and labour involved where a tenant cannot afford and ceases to pay rent can dwarf a theoretical windfall from an inflated rent bid.

A tribunal also has the power to grant terminations and compensation based on an extensive discretion and overarching fairness principle. In an already clogged system, we do not want to be relying on tribunals to decide, with some level of arbitrariness, which was a fair and valid bid and which was not.

To protect those who could be vulnerable to over-bidding, setting limits on bidding based on affordability and median rents could be a way of maintaining some integrity in the process.

Thinking point #4: Price becomes the only differentiator

Rent bidding could implicitly make price the only determination of a suitable tenant. With rent bidding the price becomes the most critical term, where seasoned investors know that there are other important differentiators when it comes to quality of tenant.

I have made the mistake of installing the highest-paying tenant over a more stable one seeking a lower rent for the security of a longer term. While it doesn’t happen in every scenario, on this particular occasion it was a gamble that didn’t pay off – a nightmare for me, a nightmare for the owner (around $19,000 of compensation won in a nightmare tribunal proceeding) and a nightmare for insurance recovery.

Certainty, stability, rental history, length of term and countless other variables go into the mix to decide what is a ‘good’ tenant. Where price becomes the only differentiator, we run the risk of training landlords (the majority of whom will only own one rental property)  to look only to price in approving tenants. Price is rarely the only relevant term of any contract; in fact, a premium is often extracted in any exchange where the deal carries a greater risk than usual.

A possible cure could be the provision of a tenant rating system across other categories, such as the ability to service and positive rental history scores, so that owners might have the opportunity to compare tenants and make appropriate judgments about risk and return.

Thinking point #5: Tenants are people too

Tenants deal with a bit of a legacy issue where they are treated and communicated with as second-class citizens. For agents, the lines are very clear that we act for the vendor, and far too often that puts is in an adversarial position with tenants rather than a collaborative one. It is bad for brand and bad for business.

Forward-thinking companies are embracing tenants as an opportunity to have a great experience with their future buyers, future sellers and future landlords. Social trends like rentvesting, the tightening of lending and a focus on lifetime customer value have made the stereotype of tenants as second-class citizens a bit redundant and backward. Nevertheless, it is a persisting stereotype.

If tenants feel as though there is a (further) structural impediment to accessing accommodation fairly, then there is potential for resistance. More than at any time before, tenants have a voice and a platform for that resistance. Individual tenants can cause brand damage through negative reviews. Collectively, tenants could vote with their feet and simply refuse to rent properties in a rent-bid scenario – essentially driving their corrective action on a perceived power imbalance.

Ux features of rent bidding will be important in order not to marginalise tenants. What value could be offered to tenants after successful and unsuccessful bidding so that the process remains respectful of their position and sets the tone for a cooperative tenancy? If the technology is to be adopted for its efficacy, then how will human capacity be better engaged in service delivery?

In essence, I don’t believe the concept of rent bidding is fatally flawed or fundamentally unfair. Like most technology, it is morally neutral and needs the supporting policies and implementation rules to shape its impact.

So the question isn’t so much about the tech but what we are going to do with it. What I do believe is that the context of residential renting is different from the transactional market and different from free negotiations between those in, or about to join, the ranks of the property owning. We can’t make policy or implement platforms for the segment of tenants who belong to affluent and aspirational groups; that isn’t how policy works.

Policy must protect vulnerable people from exploitation and the threat of homelessness, partly because there is some social responsibility in that and partly because exploitation is unsustainable and usually ends in a disastrous affect on the economy – read bad news for everyone.

(Note: The recent proposal by the  Vic Government for legislative changes to the RTA in Victoria, if passed, will outlaw rent bidding apps.)

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Sarah Bell

With a background in research and investigations, Sarah Bell married into the real estate industry in 2009 and has found a passion for both the business and its people. Sarah is the Editor of Elite Property Manager magazine and also a regular contributor to both Elite Agent and EPM Magazines. Contact Sarah sarah@eliteagent.com.au.
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