Did this Couple Do Everything Wrong or Everything Right?

Two Wise Acres wrote about an older couple who succeeded in the real estate investment rental business by doing "everything wrong" by violating these "rules":

• 1. "Leverage Your Investments to Maximize Growth" (instead, they paid off a property before they bought another).
• 2. "Always Make Sure You Have Well-Drafted Leases with Tenants" (instead, they rented month to month with no lease).
• 3. "Maximize Rental Income" (instead, they charged 30% under conventionally-accepted "market rates").
• 4. "In Your Lease, Make Sure that You Contain Appropriate Restrictions on Tenant Alterations to the Property" (instead, they allowed renters to paint even the exterior of the building).

However, the couple followed these rules instead:

• 1.Minimize costs (debt)--and pass the savings to the customer without lowering your profit (low producer costs=low consumer prices).
• 2.Serve the customer, find a niche, and build loyalty--the biggest cost/effort/risk is spending for the initial setup and then (tick-tock-tick-tock) eating your costs while waiting for a 1st-time customer to "walk in the door" (this why companies spend so much to advertise and to track and profile customers) so the holy grail for renting is "finding your market" (flexible leases) and no vacancies (less turnover, less frictional losses, maximum utilization of your infrastructure, on the edge of your economic "production possibilities curve"), provided by tenants' loyalty and tenant-provided free word-of-mouth advertising/recruiting.
• 3.Undersell the competition--#1 leads to #2. Low price also increases the landlord's applicant pool so he/she can select and keep the cream of the renter crop.
• 4.Build/allow customer identity/community with your product--customers will lower your costs by doing free maintenance (paint the rental house) or will create new content or products for you (free R&D). A recent book argued that most innovation comes from the bottom up, from users who invent something new for their own use first (necessity is the mother of invention, and the customer/user knows his/her own needs better than existing companies know his/her needs) and then the big companies mass-produce what the customers invented for them.

Real-life example: Another landlord (not Two Wise Acres' couple) offered low rent with no lease, let a renter nail/drill holes, and even added a major amenity without being asked or raising the rent. The renter returned the favors, paid to fix the apartment's (landlord's) refrigerator without bothering the landlord, and paid professional cleaners to clean the apartment when he moved out.

(I will write more about renter modifications in a future installment of my "Housing Myths" series.)

Did these Landlords Do Everything Wrong or Everything Right?

FNBO Blunder: Due Diligence 2nd Request Email

FNBO achieved the seemingly impossible: It created a run on an FDIC-insured bank.

"Security" Measure Creates Mass Insecurity

FNBO Direct followed its previous threat to keep customers’ money with this new threat:

As part of your initial application, we did not receive information regarding your current employer, occupation or position. In many cases, this is because you have a status of retired, unemployed or self-employed. We are updating our records as part of our on-going due diligence to be compliant with our standards to support the USA Patriot Act.

Due to the importance of the USA Patriot Act, we have placed a hold on your account(s) until we can document this information for our records. No deposits or withdrawals can be made through your account(s) until we receive this information. We will release the hold upon receipt of this information.

Please provide us with your previous employer, occupation and position by sending an email with this information to fulfillment@fnbodirect.com. If this information is not received within 30 days, the account(s) may be closed. Your immediate attention to this matter is appreciated.

If you wish to discuss this further, please send an email to fulfillment@fnbodirect.com or call 877-370-3707. Please reference your FNBO Direct account number displayed at the top of this page when you contact us.

Thank you for choosing FNBO Direct for your Online Savings Account.

FNBO Direct Customer Service

Problems:

• The email does not state that any law requires these actions. FNBO only states that you must comply with "our" (FNBO's) standards (if a law does require them, that topic is for another article).
• Having money is not prima facie suspicious, unless you want to be subject to interrogation every time you pull a bill from your wallet: Do you have a receipt for that dollar? Millions of people have something called “savings” from past jobs. Maybe some bankers have nothing better to do than interrogate retired Grandma and the self-employed teenage babysitter.
• The email starts by stating that FNBO does not have your “current employer” but then asks for your “previous employer.” FNBO apparently does not even know what it wants.
• FNBO’s action is not due diligence. It is closer to no diligence at all. If FNBO is so worried about Grandma’s “suspicious” money, it should verify or deny before accepting her money, not after, so she can take her pension elsewhere. FNBO’s sequence of actions shows that it has few qualms about receiving Grandma’s “suspicious” money; it just dislikes giving Grandma her money back.
• Some posts on the web claimed that providing more information had solved nothing so the only ray of hope for the customer is that FNBO "may" close your account if you do nothing and do not provide the information, so at least you might get your money back--a month later--maybe (hope you did not need it to pay bills anytime soon).
• The email reads like a classic phishing scam when a con artist impersonates an institution to steal your identity, this time invoking FNBO and the PA instead of the Bank of Nigeria. Many businesses state that they would never send such an email asking for such personal information by email.

How To Make Things Worse: What FNBO Direct Did with Its Policy

• FNBO actually managed to damage itself further by taking its bad policy and then mistakenly applying it to customers who already had provided employment information, when on August 10 it sent the above email (with its confusing, out-of-the-blue "2nd Request" title) to an untold number by accident.
• FNBO then took almost 3 hours to issue an apology email, amidst a flurry of complaints from irate customers.
• FNBO still did not learn its lesson because its "apology" only told customers to disregard the last email but in the next breath warned that it still could freeze your account and send you a similar email at any time: "If Due Diligence information is required, you will receive a follow-up email."

Meanwhile, FNBO Direct customers peppered internet forums and blogs with announcements that they were withdrawing their money and closing their accounts as soon as possible.

FNBO achieved the seemingly impossible: It created a run on an FDIC-insured bank.

Why Do You Have ING Direct (or Not)?

The Sun's Financial Diary mentioned that ING Direct has lackluster rates but a 52% market share and asks why.

Here are some possible reasons for ING Direct's strong market share:

• Advertising visibility.
• Brand-name recognition as a "real" bank without having to check FDIC lists.
• Ease of setup (How many people bailout in the middle of other banks' applications?).
• Minimal strings attached (do not have to open a checking account with $10/mo fee, etc.).
• Customer service and ongoing, consistent ease of use, either online or by phone.
• The quick gratification of the sign-up bonus.
• People with low balances rationally value the lack of minimum balances and no fees when compared to the small dollar amount of even an extra 1% on a small balance (it will take a long time before the marginal difference of a higher rate on a small balance will exceed the sign-up bonus).
• People keep token amounts to keep an open account for the referral bonus, which provides social/viral marketing (see advertising visibility).

What is your explanation?

FNBO Might Decide To Keep Your Money

I mentioned FNBO's assertions that it can keep your money indefinitely and Bank Deals posted that he will attempt to test withdrawals (thank you), although he did not mention the amount.

• Small amounts will test nothing. People want to know if they will miss their house closing when they need to withdraw 5 figures or close the account.
• FNBO claims that it can refuse to transfer to accounts that it previously approved and used.
• FNBO claims that it can refuse to mail a check to your physical address or even hand your money to you in person (the FNBO email warning did not limit itself to bank accounts).

Did FNBO Steal Your Money?

Has anyone been unable to get their money back from FNBO?

Here is what FNBO lets you know in an email after you have deposited money:

Because security of your account is important to us, we want you to be
aware of one of the steps we take to maintain security: We may temporarily
restrict all deposits to and transfers from your FNBO Direct account if we
determine a security risk exists and we may refuse to complete any transfer
based on the existence of a security risk. Please see the "Note about Linked
Accounts" and the "Important Note about Security for Deposits and Transfers" in
the updated Disclosures for your account here. Corresponding changes are
contained in Sections 7 and 12 of the Online Services Agreement and Section 6 of
the Deposit Agreement, all found in the Terms and Conditions here.