Are We Entering The Big Short With Scott Carson From Real Estate Milestones Podcast With Ben Malech

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Welcome to Real Estate Milestones, where we explore fascinating topics in commercial real estate with knowledgeable industry experts. I'm your host, Ben Malik, and I'm a young real estate professional who is passionate about adding value to people's lives through the incredible power of real estate. My goal is to help you discover what the heck is going on in the industry and how you can get involved. This is Real Estate Milestones, where your future in real estate lies just around the corner. Hello, everybody. Welcome back to Real Estate Milestones. Today we have Scott Carson, who's known on the Internet as the note guy. So we're going to be talking about distressed notes. It's, I guess, a niche real estate investment strategy that not everyone knows about. But we got Scott on here as a true expert. He has his own podcast, the Note Closer show, which has over 700 episodes. He's been on about 300, 400 other episodes as guests. So we definitely got an experienced expert here to tell some good stuff. So, Scott, welcome on the show.

Well, Ben, hey, I'm honored to be here, bud, and thanks for having me, and just honored to spend the day here, spend an hour or so with you or whatever, how long we talk about notes or real estate, and really giving back to your audience. Thank you for having me.

Awesome. Well, I appreciate you coming on. And as always, we like to start with asking you, what's your first milestone in real estate?

Wow. My first milestone in real estate, I guess, would be saying, you know, buy my first investment property. You go to that. But that flopped. You know, I was, you know, we bought our first house in 2001 and then bought first investment property a few months later, you know, 100% finance and thought I'd be a landlord. And then I got. I got laid off and lost my job. My tenant got laid off, lost his job. We had a second investment property, but lost. So I think my first milestone may have been buying investment property, but I think the bigger learning curve was getting rid of those two, getting out of a bad situation, licking my shops, and then a little later, not letting past mistakes stop me from taking action. So, you know, if that makes sense. I learned A lot from my mistakes and learned, okay, this is what I want to do. And I remember buying that true first investment property the right way and going from there. And it's been an interesting thing. I've been, I guess you'd say, an active investor for 20 years, but I haven't had a W2 job since 2004. So over 18 years of making money as a mortgage broker and a real estate investor full time since then. So that's a little background there, I guess would be a long, long answer to your short question.

Well, yeah, I guess that's very interesting. I guess most of the first milestones in real estate we've had were not flops, which is funny because you think it's a pretty big learning curve. But when was that your first couple investments and like, in terms of what year was that? And then has that influenced you in terms of focusing a lot on the debt side rather than the equity side?

So my first, we bought our first house 2001, bought our first investment property later that year. And that's what we had to get rid of. We went traditionally 100% financing because we had great credit score stuff like that. But they go back to 2000. If I fast forward a couple years, 2004, the first investment property was a subject to deal that was around the block from where I lived. I was able to, you know, I saw this vacant house and the yard needed to be mowed, you know, driving for dollars. A lot of folks do you know what I mean? And was able to contact the bar. We moved out of town. Was a divorce situation where he had access to home, but his wife made the decision on selling it, which is weird. So I had to work with two divorce, two divorce parties. Neither one of them wanted the house, but we were able to walk out, have them sign the property over to us subject to the existing financing. And he gave me $100 to mow the lawn too. So I always make the joke. The first true house that I walked into, that I walked away with, I actually walked away with the keys and 100 bucks. But that was exciting. But really what directed me into the note business, what I had a couple mentors, one of my money partners, and then a guy that I learned real estate investing from. And he was a co sponsor of our mortgage company from 2004 to 2008, really taught me the note business. And what we learned, like many people about notes, is we learned how to do creative financing origination subject, you know, owner financing or wraparound mortgages. But when Everything hit the fan in 2008. There was the opportunity with the recession, all this distressed debt is, you know, I left the origination side of the business and started calling banks and lenders out there who had non performing stuff on their books and started buying that stuff there. So I guess you could say I've always been in the mortgage industry of some sort creatively, you know, we've done fix and flips and had rentals and other things like that and wholesale too. But for the most part, I really do enjoy buying notes and I'm literally buying the debt, becoming the bank. And the great thing about what we do is I don't want to end up with a real estate. I just want to hold the cash like a bank. Because when we buy the notes, we're not really owning the property, but we do control it. And we've done a lot of good by working with homeowners who are six months behind or more on their mortgage or you know, commercial property owners are behind. And we'll buy that debt direct from the bank at a big discount, become the bank. And that gives us all the flexibility we need since we bought it at a discount, to work with the borrowers, work with the homeowners to either keep them in the property by setting up a payment plan or modification, helping them walk away from the property if they don't want to keep it through deedling cash or keys or selling the asset, or c, if they don't play ball with us, then we, you know, we're forced to foreclose and take the property back that way or sell it at auction. So, you know, it's been an interesting 15 years as a note investor since I bought my first note in 2007 and we've closed over a billion dollars in debt in that timeframe. But there's a lot of opportunity going on right now. There's always distressed debt. But I'll tell you right now, Ben, in the next 12, 24 and 36 months, it's going to be the big short part two, if that makes any sense for you.

Yes, we should definitely get into that because I haven't heard too many bearish perspectives on the market on the podcast or on any of the podcasts I've listen to. So I definitely want to get into that. But before we talk about the Big Short part too, I kind of want you to you paint an image for us of 2008 being a mortgage, I guess, a note investor. What kind of deals were you getting? What was the whole picture of the Industry from that side of the business. And how did you see it as an opportunity, ending your originations business and going into this business.

So I'll give you an example I got to take. I got a spreadsheet in the note business. We get lists of notes, you know, first mortgage, the second mortgages from banks and hedge funds. And on these lists, or we call them tapes is lingo for the industry. It may be one property or one note, or it may be a thousand plus. And the first tape I got was from a company called Wells Fargo Financial, like Wells Fargo neighborhood subprime lender back in the day. And they sent me over 75 non performing firsts that they wanted anywhere get this from anywhere from like 500 to like 5000 bucks for these assets. So the first note I bought was on a Michigan, Detroit, Michigan property. Bar was gone. It was, it was ugly, an ugly neighbor. But I only paid 500 bucks for it. Okay. And I sold it for scrap metal the next day basically to a scrap metal dealer for 1500 bucks. Okay. Now the house is probably worth about 20 as it sat, but it was vacant. And I'm in Austin, Texas, not Detroit, Michigan. Okay. So I was buying stuff for pennies on the dollar. I bought a, bought a note on a Property in Jacksonville, Florida, paid six grand for it. I wholesale it for ten. It was worth thirty, borrowed 65, 70,000 on it. I got a note on an eight plex in San Diego that was worth seven hundred. The borrowed like four hundred and fifty. I picked it up for three hundred and seventy five and wholesaled it, maybe had somebody else fund the transaction and put 35 grand in my pocket in 30 days. And so back then we had a lot of distressed real estate where market was in a, you know, real estate was in the tank. We were buying a lot. I was buying like condos in Miami beach for like five grand, you know, and it take me a year to 18 months to foreclose because the foreclosure timelines were longer. But it would, you know, I saw it for 100 grand at the foreclosure market or 50 grand the foreclosure market, you know, so it was, real estate was on sale. The biggest, biggest regret I have is I didn't buy 10 times more back then, you know what I mean? And hold on to it more. But a lot of opportunities. I know we've always had distressed debt, we've always had foreclosures. If you have foreclosures, you always are going to have distressed mortgages. And what I like about the note business is that when I was getting these lists and it was, I was seeing these deals 6 to 12 to 18 months ahead of like your traditional fix and flippers, your traditional real estate investors would never see that and never see the deals I see because I'm closer up by buying the debt. Now when I buy that debt, I become the bank. And now I have the decision to work with a borrower to keep them on track or like, or work to liquidate the asset or sell it if I want to. But we only take about what only take about 25% of the deals we buy to foreclosure. 75% of the time is either worked out with a homeowner in some sort of friendly repayment plan modification or short sale or, you know, they sign the property over to us and walk away. So when I started getting these lists in without having to spend money on like direct mail or postcards or yellow letters or I didn't have to walk out and knock on doors and get shot at like I have before. I love it. You know, I don't have to do the, I don't have to do rehabs on these properties. We keep people in their houses, they're living in it, they don't, you know, I gotta fix it. So I love that fact that I can control real estate without having to worry about, you know, my contractor showing up to lay tile or paint in a timely fashion. I can literally buy the asset. And usually in 30 to 60 days we'll have the bar back on track of some sort or know which way we're going to go with that exit strategy. And it's usually a bigger return on investment to us because we're buying these deals still today at 40, 50, 60 cents of value. So we're getting a sizable discount than what most real estate investors are seeing out there. So that's, that's why I fell in love with notes at that point because I didn't have to spend all this money on marketing they banks. Once we made the right contact, we, they were sending me lists to cherry pick from. And that's still the case today.

Great. So before we get into some more of the details, like our couple sentences, super high level, like how, what's what's the most? Or how would you describe, you know, a note? Or like, yeah, you know, great question.

And I always say we're. Everybody's in the note business. Okay? Everybody's already in the note business. If you've got a credit card that you owe money on, you got a car note, student loan debt, you have a mortgage, you own your, oh, your brother or cousin Bubba down the street, 200 bucks on an IOU, you're in the note space, but you're on the wrong side of the payment streams you're paying out. Okay, you want to be receiving money on the income. So when, when I talk about note investing, what we buy is actually the mortgage, the loans. So if you, if you ever bought, anybody out there has ever bought a house, they got a bank loan. Usually probably 30 days after you close, you got a letter in the mail saying that your mortgage had been sold to some other bank or institution. Okay, you close with ABC mortgage company here in your town and then 30 days later you're owing Wells Fargo's your new mortgage company. Or something like that happens all the time. Well, that's what we do, we do on a much smaller scale though than like bank of America or Chase or Citibank, is that we are literally buying those mortgages from different lending institutions. Who are, who are selling these, I guess you could say these problem children off at a discount because they don't want to have to foreclose. Or for every dollar that they have tied up in a mortgage that's non paying, it costs that bank 10 to 15 times that in how they lend money out. So they would rather get 50 cents on the dollar. Now let me or my team step in and deal with a borrower for six to 12 or 18 months. But they can get that 50% in now and lend it out and arbitrage it out 10 to 15 times and make their money back. So, you know, we make our money by really solving, I guess you say the bank's nightmares in a lot of cases, but they incentivize us because we can buy that debt at discount. So if somebody owes 200 grand on a house that's only worth 150, when we buy that note at say 75, they still owe 200. That hasn't changed what the borrower owes. The interest rates term has not changed. But since we didn't make the loan at 200 or whatever, we are just into it for 75. So that gives us so much flexibility in adjusting payments and modifying and working to, you know, take the two years of payments the borrower hasn't made and put it on face map alone or you know, give them 10 grand to walk if they're not going to pay and let them move on to their, or foreclose if they won't play ball with us.

Right. And the reason I wanted to ask the question in that way was so we could get into how cool and how powerful business is. Because really what we're talking about is a win win situation where the bank by, even though they're selling it at a crazy discount, maybe half the value of the note they're taking. The way that the private banking industry works is that the opportunity cost of not having the cash flows now is much higher because they could lend it out and then just create more money and create more liquidity, just do their business plan and make spreads on their financing and lending. But for you, now you're getting an asset for. You're paying half the value of an asset, getting something worth 100,000 for $50,000. And then this one gets, this is where I think gets into the cool part where you can create some value. Because I want to paint the picture that, you know, there's act. There's actually many ways that people in your situation can do a lot of good and add a lot of value for people who might not be in the best situation. So could you kind of talk about that, how you work with a borrower? What a typical, it gives a kind of a case study of how a typical deal goes.

Yeah, let's, let's do that. Let's get some simple numbers, simple math out there. So I liked what you said about, you know, $100,000 asset that we're controlling for 50 grand. So let's just say a borrower has a 6% mortgage rate. Okay. On 100,000. So they're paying, they should be paying 6 grand a year in interest. Right? That's their payments is basically $500 a month. Well, if we buy that note at 50 grand, they still owe that 100 grand. So we bought it at 50, they owe 100. If we can get the borrower back on Track, paying well, six grand of income coming over a $50,000 investment, that's a 12% cash and cash return right there. Okay. Now if we get the bar to bring some extra to the table, you know, an extra couple months, we usually like four months of extra if they're behind by a year or more now that return goes up dramatically to mid teens or even 20%. Now we'll hold that note for at least 12 months. So the bar gets back on track, they're paying on time again. It's going through a third party servicing company that's handling all the paperwork to make sure we're compliant after 12 months. It's now considered reperforming so now I can sell that note as a reperforming asset back to Wall street, back to banks, to other investors out there. Let's just say 85 cents on the dollar. Okay, so now I got a year cash flow plus some extra on the front end from the borrower. And now that $50,000 asset I'm selling for 85, 90 cents on the dollar, I'm making another 35,000 in profit in 12 months. So if I got six grand a cash flow for their base payments, if I had him bring another 2,500 to the table to modify it, reinstate it, great, that's 8,500 plus $35,000 in profit of the note sale. That's $43,500 in profit on a $50,000 investment. That's an 87% cash and cash return in a 12 month process. That's pretty stinking good. You know what I mean? It's pretty good. Even if I just held onto it for cash flow. You know, if I'm borrowing money at 6% from a private lender and I'm making 18% on the, on the payment stream, my investor's happy because their money's now not making negative interest with inflation. It's actually doing something. And I'm making not a 12% return on investment. I'm making an infinite return on investment because the fact I'm not using my own funds now, if the bar didn't play ball, didn't restate, then we would go the foreclosure route. And that could be anywhere from like a 30 day process here in Texas to three years up in where you're located at New Year neck of the woods. But I don't buy in New York or New Jersey. But Right. Still though, if I'm in at 50, it's gonna cost me five grand to probably foreclose and servicing for the time frame or less. I'm in at 55. I sell at the auction for 90, 90, I net 85. I still make $30,000 on a 55, 000 investment. That's still a good, good yield, good ROI. Even if it takes six months or even a year to make that kind of stuff happen. So those are kind of things. Now the great thing is, is helping people stay in their house. You know what I mean? That's always a great, great thing. I mean, a lot of people went through Covid, couldn't pay because they, you know, they were laid off, their job wasn't working. You had a lot of people in financial hiccups. Good people. You know, we had a deal that we bought a note on a while back where the borrower, she and her husband had lived in this house for 18 years. You know, they. They'd raised their three girls in there. Eldest one was 19 or 20 at the time. The two girls were still in high school, but their husband had had a heart attack and was out of work for over a year. Recovery. And they hadn't made a mortgage payment in four, four or five years because they were trying to modify and that their. Their mortgage had been sold four times as well. So they would send all this paperwork in trying to do a loan modification. They send their tax returns and bank statements and hardship letters. They don't owe a lot. I mean, their house, they owed about 65,000. As it set back a few years back was only where, like, 40. Okay. You know, and when we bought. When we got this note across our table, we bought it in a pool of others, about 60 other notes. Okay. So I only ended up paying like 12 grand for this note. You know, they owed 36. And then the. So they're. The value was about 35. Like I said, they owed 60 on it. And the house was somewhere around 35, 40. So we paid less than 33 cents on the dollar for this asset. Right. And basically 20 cents of what was owed. Her monthly payment was like 400amonth, if I remember correctly. Well, when I got. When we got the collateral file the loan on it, we was like, well, this lady wants to stay. They've been wanting to stay for four years. Let's work with them. You know, the previous blender, the previous note holder had been trying to get the bar to bring a year of payments to the table. They just didn't have that. So I call up the bar. It's one of the few times I actually made a phone call bar. Usually we let our servicing company do it. And I get Sheila on the phone. Is her name, okay, Sheila and Charles. And I get Sheila, phone, and I tell them who I am. Hey, I mean, now you're a new lender, your notes been sold. I gotta hear like the wind escape out of her. Like a wind out of a sale. She's like, oh, it's been sold again. I was like, wait a second. I see your letter. I see all the stuff that you communicated with the last couple lenders. Were they not willing to modify or work with like, no, they want to spring a full year. We have a full year. I was like, okay, let me ask you A question. Can you start making Your payment of $450 a month? Is your husband back to work? She goes, yes, he's back to work. Yes, we can start paying for 50amonth. I'm like, great. Can you bring anything to the table? Can you bring five grand? She's like, no. I said, could you bring 2,500? She's like, yes. I was like, okay, you bring 2,500 to the table. Can you pay anything extra on top of that? 450amonth? She's like, we could probably do 200 bucks extra per month. I'm like, let's do that then. So the first year, you pay 650amonth plus the 2,500 in the first month payment. You do that for a year. Sheila, what I'm going to do, this is what I'm going to do for you after a year, will evaluate the value of your property. I know that you owe more than the house is worth right now. So if 12 months, when we reevaluate, if it's worth 40 at the time, we'll forgive anything over $40,000. We'll reduce your debt by 20, 25 grand, whatever the value. Now the house goes up to 60, it's going to be stay 60. She's like, that's fair. I was like, I know, but I'm gonna do one other thing for you. You make 12 months of on time payments at 2,500, plus the extra on the 13th payment. What we're going to do is reduce your interest rate to zero so that every nickel, every penny you pay goes towards the principal amount of the loan. So you're paying down your loan faster. So it won't take you 33 years to pay down your mortgage. It'll take you less than six and a half. And she's like, shut up. I think she said something else, but I was like, no, no, no, I'm serious. If you'll go meet with my attorney. This was in Illinois, so go meet with my attorney the next week. He'll have all the docs for you to sign off of or we can send it out to you. So I found out that she and her husband showed up and they both cried at the table because they were so worried they were going to lose their house they lived in for 18 years. Six months goes by, it's come Christmas time, I get a Christmas card in the mail. Now tell you, every time this lady thought she'd be at least one day, like, she was like calling me. I was like, no, no, you don't have to call me. Call the service and come with her. Sir, you're okay. You got a seven day, seven day window. It's good. But she was so nervous. So in this Christmas card, it was like thank you. Showed a family portrait and it included their three daughters. And one of the daughters had a baby. And in the car they said, well, we just want to say thank you so much. We were so moved by that you're willing to help our family and you've never met us, that we named my daughter, named her child, her firstborn Carson after you. You know what I mean? And so they done, they just finished paying off their mortgage like two months ago. And it's when you. And now the house is worth over 150,000. You know, they've got all this equity, but sometimes, and that's the thing, some people just need a hand up. It's not always people are dead beats that aren't paying their mortgage. You know, shit happens to all of us. And these, this couple from looking, they just need to help. They need somebody to work with them. And that's one of the great things that we do. I mean there's times that you know, we will give people ten grand to walk away from their house. You know, they can't make a traditional mortgage payment, they can't afford it. So I'm like, listen, instead of you fighting to try to keep this dream that's now a nightmare, what you can't afford does not make sense for us. I don't run a charity, I donate to them. But here's what I'm willing to do. I'll give you 10 grand to walk away, you know, or your first month, last month, rent an apartment. In 24 months when you get all your stuff back on track, you can go qualify for a new mortgage, you can go get a new house or give you some time. But let's get you out of this bad situation. We'll take the property back, give you a little bit of money to get going your way. And it's really a win win at that point too for.

Right. And I think that, I mean it's obviously moving story and it's an amazing opportunity you can provide for someone. But the thing that is the most amazing is that this is completely economically rational on your behalf because you know, you still make a return on investment because you got such a big discount on the, on the note to start out.

So let's go back to those numbers though. Let's talk about so 2,500 plus 650 times 12 months. What's that come to? That's not 7,200. It's something like that. So if we figure that out, so 650 times 12, that's 7,800 plus 2,500. So in cash flow, I got 10,300 come back to me on a $12,000 investment, and then I got 450amonth for six years afterwards. Basically, I made a very good ROI on the deal. It was when, you know, there's. Sometimes we buy in bulk and there's crap, I guess you could say crap. But another man's junk is another man's treasure. You know, there's a single mom in Cleveland. Her house was only worth like 20, but she had four kids. Her husband had left her. She was trying to go back to school to get a degree of some sort of. I'm like, we ended up paying like a grand for it because it was just. That's what it came down. But we had to take it with 175 other assets. I just called her up, I said, listen, Christmas, Merry Christmas, we're forgiving you your debt. You don't owe us anything. I'm going to send you the stuff. Merry Christmas. I hope your ear is better. And she's like, what, you know, cussing up a storm and oh my God, Jesus. Praise Jesus. You know, like that. I'm like, no, I'm serious about this. You don't always say anything. Because it doesn't make sense for me to foreclose on an asset that's gonna cost me four grand to foreclose. And then I got put re pair into it for asset that's only worth maybe 20 grand at the top. So I'll just eat that thousand dollars loss as a write off and make, make some lemonade out of lemons. You know what I mean?

Yeah, well, that's pretty amazing also. So let's get into. I'm curious about. So, yeah, we started touching on the 2008, but you kind of alluded to a current situation that you know, might not be optimal. So I want to hear your perspective on that and how it plays into your business as well.

So we, we're really excited about the next. What's going on in the market right now as a debt. Now I've been saying we're going to see a correction in the market. Other people, oh, we're not going to see any foreclosures. Well, you're not going to see a huge wave of foreclosures. Out there because the distressed debt is going to get bought up. Like guys like me months before every ends are going to foreclosure. But you will see and we are already seeing numbers echo disturbing trends. So like they just came out with the foreclosure numbers for the first half of 2022. Those numbers are almost identical. Just a thousand less foreclosures filed prior to Covid and that number's going up. With a default rate sitting somewhere around 3 to 4% on 80 million mortgages across the country. That's still 3.2, somewhere between 2 to 4 million homes that are in distress dramatically. That's not just people that are missing a month, that's three months or four months of missed payments. So that's a lot of opportunity out there. And then you've also talked about the commercial. There's a lot of commercial debt that's distressed on mixed use and restaurant space and retail and big box and a variety of different asset classes out there. So there's a lot of opportunity out there. You just. People keep waiting for the real estate. Well, builders right now are we in a lot of the bigger cities there's a huge need for new homes. Well, with interest rates going up like they did doubled, people are no longer able to afford, you know, if they qualified for a $500,000 house 60 days ago, they can now only qualify for a $250,000 house. So there's this huge way they've numbers we see. We expect to see somewhere around a million new build homes hit the market basically all at once with distressed pricing. Where their builders are building these homes now, their buyers aren't there so they've got to dramatically reduce the price to make them attractive. 30, 50, $100,000 in some different markets trying to get people to come in and buy author. But that, that, that's a big, big issue across the country out there. So I think we're seeing, and I know it based on what I see, it's not a guess. I think I know that we're seeing distressed debt because there's another thing too, Ben. I mean in this business for 15 years, we've got a pretty good database or Rolodex of contacts, right? When we send an email out to our asset managers at banks some, a lot of times we'll hear crickets, you know, they won't respond. I don't have anything this quarter because that's like, hey, what do you have on your books this month? When my phone starts to ring or my inbox starts to get full of emails from asset managers that I didn't send them an email first. That tells you they're looking for outlets to sell their debt off. This tells you they're looking to move stuff. And then another thing, look at their hiring practices. You had all these loan officers, originators, hundreds and hundreds of thousands of loan officers get laid off in the last 90 days as banks are cutting their staff from the origination side. But they're bulking up on the loss mitigation and the secondary markets where notes are sold, they're hiring like crazy on that side of the bank. So that tells you they don't see, think they'll be originating quite a bit. There'll be more on the liquidation side over the next time. So you don't have to be a rocket scientist to understand that. You can sit here and say, oh, we need this, we need this. Because I, I have other investors like, oh, we're not going to see that. Yeah, there'll be cities that, across the country that aren't hit hard. I don't think Austin's gonna be hit that hard. I don't think San Francisco, I don't think D.C. you know, new York, where you're at, it's always going to be that it takes three years to foreclose in New York City. So stuff that was happening in 2020 hasn't even hit the doorstep there yet in the Big Apple. So I, I, we're seeing opportunity already. I see stuff, like I said, I see things way ahead of most of your retail buyers out there. And we've been bulking up to buy and buy and buy and buy, and we're still seeing stuff at 50 cents. I mean, we just closed on a deal in Indiana worth $98,000. We picked it up for 47. We bought another deal in Miami beach worth 225. We paid 100 for it. You know, we, you know, we've, we're buying all across the country in a variety of markets. You know, Houston, Texas, worth 230. We picked it up for 109. You know, we're going to have to foreclose or modify these. But deals are out there. You just gotta, gotta market like anything else, you know, when, and we market uniquely because we're not targeting borrowers or realtors, we're targeting actually the banks and the internal departments of the banks that handle this distressed debt. And so a lot less competition. Nope. This is why note investing is such a niche. It's a, it's a smaller niche in the market. But it's also very, very popular and very, very, very rewarding and great returns on investment return on time as well.

Yeah, definitely sounds. Again, I want to just touch on one thing that you kind of commented on was that we're going to have a bunch of properties come into the market that aren't going to be able to be sold at the initial price that the builder thought so. But the funny thing is everyone on podcast obviously hearing us talk about being undersupplied with housing, affordable housing, market rate, housing rental opportunities. But I wanted to comment, I guess if you had a perspective on that, I want you to share, but also wanted to comment that as maybe a supply increases and demand is still above supply, which is what a lot of people are saying, that there could be momentary drops in demand when interest rates go up that cross below and actually leave us with more supply then overall in the long run, the demand still could be higher than supply. So even if there's a short run over supply, it doesn't necessarily mean there's a long run over supply. But I kind of want to know if you had a deep perspective on that.

Well, you have to look at the price points. You can talk in generic speakings, but here's the thing we need. Yes, affordable housing is required. We need that. All right. Every major city out there, anything below 200, $250,000 is gone. I mean, it gets bought up. And then you look at rent rates too, increasing 20, 30, 40% in the last couple years. Yeah, we need that. What you're going to see a lot of distress in is that second tier, that $500,000 home below or, you know, whatever that second tier is in your market, if you're listening to it. Okay, you know, $500,000 in San Francisco, though, that's a doghouse in a lot of cases. You know what I mean? New York City, that's a broom closet. You know what I mean? So you have to take the numbers and get more granular or micro versus macro. Yeah. Oh yeah. We need all these houses. That's why they're not going to be. That's. I agree that in a certain case, when you break it down market by market, the states that are going to be the cities are going to be hit the hardest are the ones that have that biggest divide. And you can look at your, the difference between what the average house is and figure out what the average mortgage payment is compared to what the average income is in that city. You know what I mean? And so you look at that, you Also look at the, and that the bigger the divide that is when you start seeing where it takes somebody three times what they make to make live a house. That's kind of the market when you start seeing, well they need to make, you know, the houses are worth four or five, six times what they are making. That's where you're going to see the biggest amount of gaps and foreclosures. It's not going to be San Francisco's, the la's, the, the Austin's, the Boston's, the New Yorks may not, it may not be Miami, but you will see a lot in the 500 to million dollar mark. Already seeing that across the country. I mean if there was such a big need for housing, builders and sellers wouldn't be dropping their listings, their listing prices so much now with everything going on. And we're not going to just see a temporary spike in interest rates. Interest rates are going to be high. 6% was low 15 years ago. Okay. But we're going to see interest rates continue to stay where they're at. If not increase before the end of the year. It might be up to 7,8% natural. I mean we saw a 3 quarter spike today. You know, they're not, it's not going to happen overnight in that interest rates coming down. So you've just got to be prepared to deal with this for 12, I guess at 12, 24, 36 months. But that's, you know, every state's different too on the foreclosure timeframe. So when you have a big difference in that and people miss payments for a month, well that's in a non judicial foreclosure state like Texas, Georgia, Virginia, North Carolina, Missouri, that's a bigger default rate versus it being like in Florida which takes 18 months to foreclose or South Carolina which is a year to foreclose. Kansas which is a year to foreclose. So if Sony misses a month or two of payments, they're okay because now they can get back on track. They would probably be able to modify and get back on track in the next eight months or 10 months before the foreclosure auction arrives. But another faster foreclosure states, you're going to see a bigger increase in that. And then it all depends on what happens with the bar in those judicial states. We have longer foreclosure time and I could stop paying in New York right now and it wouldn't affect me for three years. Okay, that's not a good thing. You know, it's not a good Thing for the bank and the borrower. Okay, three years of being rent free. Great. Let's throw a party.

Right? So I guess last question before we hit the lightning round. This sounds like an attractive asset class. Very exciting. How do I start investing in notes?

So note investing is not like buying a property or wholesaling or buying a rental. There's a different, first of all, it's a whole different mentality. You have to approach it with a banker's mindset instead of a fix and flip mindset because you don't really own the property, you own the debt. So it's a receivable. Okay. So the biggest mistake I see, new invest new investors that get in the note space is they over bid. They don't understand that they don't own the real estate. Our average deal time frame is like 12 to 24 months from time we buy to execution, you know of either keeping it for a while for cash flow or selling it off for four clubs dependent states. So you got to get educated and I'd love to. You know, I've got a one day class that I teach, note invest. I mean I teach a three day class every quarter but every third Saturday of the month I have a one day class called note weekend that I teach. It's usually 99 bucks. It's a great way for people to get their feet wet, stick their toes in the deep end and see if it's something for them. But if they go to noteweekend.com and type in the code, let's just do this and say ben B E N, I'll give it to you for free. All right, so anybody out there? So noteweekend.com code BEN B E N ALL CAPS. You'll get that, that one day class for free and doesn't matter. It won't, that doesn't expire. That's good for a while. But you know, you got to get educated first. And then you gotta start tapping into reaching out to banks and asset managers and see what they do. Now you're not gonna walk into your local branch and say hey I want to buy notes. They're going to laugh at you, say oh, we don't sell their notes. You got to know that banks and institutions, they sell stuff but they sell it at a different, you know, different state. There's a whole internal department, handles their special assets department for the most part.

Awesome. Well, definitely worth looking into and yeah, hope people check out the noteweekend.com because it's cool. It's a cool discount code.

Sweet. But I mean it's recorded. If you don't can't make it live, you can always stitch the replays to it. You know, we focus on the three fundamentals when it comes to how to find deals. That's why we're the, we're the premier. We're the number one investor recommended note training class out there because we, we just really hone in on showing people how to find, how to fund these deals and then also the different ways to make money and flipping them or whatever that extra strategy might be. And like I said, I've been teaching notes for 12 years now. We've taught thousands of investors how to buy thousands of deals and we are still constantly buying. So it's always good. If you're going to learn something, make sure you're learning from somebody who's still in the weeds in the, in the business of doing the deals that they're teaching about. And we, like I said, we close notes, we just don't teach notes.

Awesome. Well, you ready for the lightning round?

Let's do it, baby. Bring it on.

Sweet. So if you have any superpower, what would you choose?

Oh my God. Superpower. I would have to be able to reap the, the ability to read people's minds. You know, like Dr. Xavier from the X Men. That would be really cool. Be able to read people's minds and what they're thinking because I wish that was the case that make me a much better note investor out there. But I can see what people are thinking and you know, be able to go there. I mean it's, that's, you know, I like doing. My favorite superhero is Iron man. You know what I mean? And it's great. But he's just more of a rich guy with toys, you know what I mean? But kind of like Iron man and Batman, they're just rich guys with toys for the most part. But Dr. Xavier, yeah, I would, I think the ability to read minds would be my superpower. Sweet.

So what's your favorite book or what's the one that's helped you the most in there?

That's a tough question. I mean we, I've got so many books, but one, you know, everybody's heard of Think and Grow Rich. You know, that's a must read if you're an entrepreneur. But Robert Kiyosaki, and I mean think he wrote by Napoleon. Yeah, Rich Dad, Poor dad by Robert Kiyosaki and Sharon Lecter is good, but there's another book, it's Outwitting the Devil. Think and grow rich outwitting the devil. And this is a book that was written back in 1938, but it wasn't published until about 10 years ago. It's basically Napoleon Hill sitting down with the devil and having a conversation, asking the devil how he's to be, how he's so successful. And the reason he says, he says in this conversation and I don't know if Napoleon Hill was just having an imaginary conversation or actually talking with the devil, who knows. But it said that he's able, the devil's successful in having people drift. He's successful in keeping people from accomplishing and being the most productive is that he throws distractions on a way, you know that you've heard the shiny object syndrome and the squirrel syndrome. The people that are most successful in the world, in life, in finances or whatever it is, it's because they're the most focused. They say no, they put blinders on to distractions. So they're just solely focused. And that's really, if you're going to do something, you can really as an entrepreneur only focus on one, maybe two things outside of your family. If you've got a full time job, your side hustle can only really, truly be one thing to be successful at it. So that's the thing is one of the most powerful books ever read is Think and Grow Rich Outwitting the Devil. And Sharon Lecter, who's a co author of Rich Dad, Poor dad, she was given the manuscript 10 years ago, went in there, left it pretty much the same as Napoleon, wrote it in 38. But she added at the end of each chapter what she thought Napoleon would think of in the world today. And God knows we're full of. We've got so many distractions out there. Netflix, Hulu, all the streaming services, all the social media distracting us. You know, I have found that I am more successful along with my friends and family members and colleagues are more successful because they say no a lot. No to the distractions until they get, until they get their sole purpose, their sole focus done. Then they'll add something else. You can't be a jack of all trades because if you are, you'll be a master of none of them. So focus on one thing and stick with it. And that's why that book is so powerful.

Awesome. So what motivate, motivates you to continue every day?

What motivates me is I, you know, I think it's one thing that's always with me is I don't, don't want to be a Failure. I think so many entrepreneurs have a. What do they call that? I think we all suffer from imposter syndrome. You know what I mean? We're like, I've been teaching for a while. We get a lot of people that listen to podcasts and they're taking a class like, oh, my God. I was like, look, I'm just a normal guy that wipes my ass with multiply toilet paper like you. I put my underwear on one leg at a time. You know what I mean? I'm just a normal guy that's just focused and developed my superpower of being a great note investor. And I'm just normal. I'm not any more talented. I just outwork people. And that's the thing that drives me most is this fear of failure. And my dad was my hero growing up. And he always says, scott, it doesn't matter if you fail at something. It's if you give up on something. You know what I mean? It's okay if you've got a dream to set that dream down for a while, if you've got to go provide for your family or friends or get a job, whatever it may be. But don't give up, all right? And you're going to have peaks and valleys. Entrepreneurship is not a straight and narrow road. It's a twisted curve of a road to get where you want to be. And real estate is just like that. You got to know ups and downs and tweaks, the market changes, and you gotta be able to pivot and rotate and sometimes stop something for a little while while you do something else to get back on track. And that's the thing I would probably tell you the most, is when I get up in the morning, it's like, okay, what am I doing today? How can I impact what's one person I can affect today? I think so many things in podcasting and content creators, they want something to go viral. You're never going to go viral if you try to go viral. The only way you really go viral is if you focus on having that message for one person or try to help one person at a time. And then that resonates with your crowd or tribe or people out there. You solve a problem that people are doing. So that's one of the biggest things, is I just wake up every day, okay, what am I going to market today? How can I help that one person? Because if I can help one person, it's a good day. And of course, there's days where you have just explosions of downloads or podcasts. That listens or whatever it might be. That's great. But it's all. How can I help and answer that one question that that one person is thinking about today?

Awesome. Well, since I put you on the spot, I want to give you a chance for revenge. So feel free to ask me anything you want to know about me.

What's your biggest fear when it comes to real estate investing?

That the market won't save me. That I go in, I buy a property, and just the act of God occurs or something, or just the precipitous drop in the market just like wipes out the value and that I could be theoretically doing everything right and still, you know, not have any. Still have very few options of.

Well, that's why. Well, that's why it's real estate. That's why you buy in an llc, you know, you buy an entity on your own name, so if something goes route, you can walk away and not be personally affected. Second thing on that, you always buy right. If you buy right, they know the asset class. You shouldn't be buying at top of value. If an act of God happens, that's what they made insurance for. So you better be putting insurance on your property. But that's the biggest thing. There's no perfect deal out there. Markets go up, markets go down. This is why you talk to people that are doing the deals that you're wanting to do and see what they're doing and really pick their brain and answer it. Have them answer, ask the questions. Don't listen to your grandma or your uncle or somebody who's not doing. They've got an opinion like assholes. Everybody has one. Go seek counsel from somebody who's actually doing it and live through it and you'll be. Feel a lot more comfortable.

Yeah, no, definitely, definitely makes sense. Part of the reason I have a awesome podcast where I could talk to a lot of people.

So I got a second question for you. What, what's your five year goal?

Five year goal? I guess I want it to be. This is the tangibility aspect of it. Um, it could come into. It can come in multiple different forms. I have like some ideal forms, but fundamentally I think $10,000 of passive cash flow a month would be an ideal level to be at where like in five years I'll be what, 26. And it would be setting you up to like have the flexibility to maybe have, start a family or start, you know, be, you know, the comfort to be serious with a potential future spouse to, you know, feel like I can support myself and People around me and kind of have the freedom to not, you know, just feel. Feel free of. Of, I guess, not necessarily needing a job to stay fed, you know, just kind of. And, you know, I think that it's good Foundation. Be 27, have that, and it'll be cool to go from there.

So, yeah, 10 grand a month coming in, cash flow is 120 grand a year. It's not bad at all there for you. So you got five years to get to that. So that means between now and then, you need to basically be every year adding $2,000 in cash flow to your bottom line. Right, Ben?

Yeah.

So if you like notes, that's like four or five deals a year, performing notes that you could buy one every. Every other month. Basically every three months. Once a quarter, you could buy a performing note, bringing in roughly $400 to $500 a month. And you could do that with none of your own capital. God knows there's trillions of dollars of private capital sitting out there, and you could be giving people good yield. So that's what I would tell you. If you were to get one deal, though, you got to make, like, 10 offers. So if you needed to close on, you know, five deals this year to get to that 'Thousand, you know, $2,000 a month for your goal this year, that means you would need to be making 50 offers. That's basically one a week.

Yeah. Wow, that's good. Good math. I like that.

That's the thing. A goal is great, but you need to break down and take a look at the activities of what you want to accomplish. You know, six figures a year, that's a very common goal. Ten grand a month, that's. It's a feasible goal if you put the work in and you got to start making those offers. So that takes me. My next question, my third question, with your fourth question, we're at how many offers have you. Not your company that you work with, how many offers on any type of real estate have you made in the last 12 months?

I've made a couple. Not personally, so no.

No, no, no. So that. That doesn't answer the question. Personally, it's great to have a job. It's great to be where you're at working. I'm not. We all got to learn that, right? We got to learn the business. But don't let your age or inexperience stop you from making offers. Get out there, make offers. You're in New York. Are you originally from New York or where's D.C. it's okay. From Washington D.C. that's right. So Virginia, Maryland, plenty of opportunity outside Washington D.C. is a little expensive as we know that. But Maryland, you got plenty of opportunities there with Baltimore and other areas. You know Virginia is a fast foreclosure state. Other great areas there too for you. So those areas, the east coast is full of opportunities there for you. So that's the thing. It's yes, I get that you've got to be working for your company and making offers for your bosses. I get it. But that should not stop you from going out investing for yourself. So don't wait to do that. Start doing that now. Get out networking for everybody out there that's worried about not having a capital. Just go to your local real estate club, start networking online or in person and start making some offers on focus on the deal flow that you want and go from there.

Yeah, I guess see a lot of deals too. To see, to know, I guess what the right deal is.

There's no perfect deal. If you like multifamily, then you got to spend time with multifamily. Although multifamily is the most overpriced asset class right now. Maybe you need to buy some assets rentals that you can turn into short term or long term rentals or distressed debt where you can turn it into cash flowing notes without having to do any of the fixed or toilet tenants and trash yet. So there's a lot of opportunity. You just got to pick one or two asset classes and focus on it.

Sounds good. Well that's, that's the plan and appreciate this advice and one of the great things about having a podcast and I hope it would applies to anyone listening as well. So great. Well Scott, it's been a pleasure to have you on the show. I've learned a lot and I'm sure everyone listening has learned a lot. I hope everyone checks out. What's the, what's the website again?

We close notes.com is how you connect with me. If you want to pick my brain for 30 minutes you can do so by going to talkwithscottcarson.com check out the Note Closure show podcast. There are over 700 episodes and guys and gals, listeners of all ages out there, Ben is kicking his ass and taking names and we as podcasters we love to hear from our audience. So make sure if you're listening to this, make sure you hit that subscribe button and then make sure you head over there, hit the review and leave. Leave Ben a five star review. Tell me what you like the most about the episode or his what he's doing. So he's like I said, we'd love to hear it. We'd love to share. And the more we hear from you, the more it drives us on a day in, day out basis to show up and record other episodes. Right, Ben?

Very true.

Very true.

Well, I appreciate that. And everybody keep making milestones.

Sa.