Could rent bidding startups send rents skyrocketing?

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Colin LalleyContent Director, Home & Auto InsuranceColin Lalley is the content director for home and auto insurance at Policygenius, where he's been writing about insurance since 2015. His insights have been featured in Inc. Magazine, Betterment, Chime, Credit Seasame, Zola, and the Council for Disability Awareness.

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"The rent is too damn high" might be a bit dated, but it’s never too late to pull a good internet meme out of storage, especially when it’s still applicable. But a new group of rent bidding apps, led by Rentberry, is looking to change that by putting the ability to set rent in the hands of the renters.

It’s too bad that it probably won’t work.

Rents soared following the Great Recession as homeownership declined. The average U.S. rent increased almost 15% between 2005 and 2015 as record numbers of people turned from owning to renting. The percentage of renting households increased to 37%, the highest rate since the 1960s.Despite this, renting still works the same way: a landlord lists an apartment with a set price, prospective tenants apply, and the landlord chooses from the pool of applicants. It’s a black box for renters once they apply.

Rent bidding apps like Rentberry, which has just expanded its number of available cities, claim to offer a new level of openness by having landlords list apartments without firm prices and inviting tenants to set the price by bidding – like eBay for apartments. Rentberry says the system will lower rents. But instead they just turn the act of finding an apartment into the Hunger Games, with fewer bow and arrows (hopefully) but higher prices.

Rent bidding apps are upping the stakes

Rent bidding apps ostensibly bring transparency to this process, and that ostensibly benefits you and the other members on the Lord of the Flies island.

But there’s still little room for actual negotiation, and all it does is widen the pool of competitors. Rentberry theoretically allows potential applicants to have a voice in setting rents. Even if that’s true, it’s unlikely that they’ll be lower than market rates because, thanks to supply and demand, tenants aren’t in a position to be demanding lower rates.

In places like the Bay Area, the vacancy rate is under 5%. If a tenant lowballs a landlord, the landlord can turn them down and won’t be waiting long for another prospect to come along. When competition is that high, it’s more probable that renters will end up paying more than they would have otherwise to secure the apartment of their dreams.

This is where transparency is a detriment. Ignorance can be bliss; when we only know one side of the equation, we set our own limits as to how much we’re willing to compete for a particular apartment. At some point, we give up and look elsewhere. But when we know exactly how much you need to offer to get the upper hand – however temporary – it can spiral out of control.

Like with eBay, if someone offers a set price we’re probably willing to take it – but when we bid on items, we often overbid.

So rent bidding apps can end up driving up rents. Like with a lot of new apps that claim to solve a problem, it doesn’t seem like Rentberry was thought out very well.Or maybe it was – and landlords, rather than renters, have been the real customers all along.Renters pay a $25 fee when they sign for a new apartment – much lower than the several hundred dollars for an application fee. But that’s not where the real money is. Rentberry has said that it plans to introduce a fee structure by which, if a landlord secures a tenant willing to pay more than the initial asking price, Rentberry charges a monthly fee of 25% of the difference.

If a renter agrees to pay $100 over the asking price, Rentberry gets $25 for as long as that tenant remains in the apartment. Three hundred dollars over the course of a year is more important to the company than a $25 application fee.

That means it’s in Rentberry’s best interest that tenants pay more than the original offered rent. The landlord also comes out on top, even with the added fee. The one getting taken advantage of is the renter.

For what it’s worth, Rentberry seems to admit that if and when rents do rise, renters probably won’t appreciate it.

The appeal to landlords that appeared on their website last year, "We strive to maximize your rental price by allowing tenants to submit custom offers and compete in the bidding process," has since been removed. And after telling landlords that they could expect to see a 5% increase in rents using Rentberry, CEO Alex Lubinsky now touts that renters end up paying an average 5% below asking price when using the app.

Only one problem: it’s impossible to know what those numbers mean. Is the drop in rents because landlords are overpricing listings initially, hoping tenants will compete with each other, and "below asking price" still means "above normal market rates"? Is the drop even true, or is the company trying to win over skeptical customers?

Transparency apparently has its limitsAs terrible as the rat race for renters usually is, middleman tech companies encouraging higher rents by taking a cut of the action make it worse.

So this is what it’s come to. Ridesharing apps are playing mind games, art investment apps are trying to convince you that paintings are good investments, and renting is now a mundane Battle Royale.

May the odds be ever in your favor.

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