Buying Distressed Notes To Make Millions with Scott Carson - Collecting Keys Podcast

You're the bank. And so when we buy that debt, we buy, buy it. The borrower still owes the full amount, but we're buying that debt at a very substantial discount, usually 50, 60 cents on the dollar, maybe less, 40, 30 cents, depends on what's going on. And so that's one big advantage is that we're seeing bigger discounts than most people are seeing buying retail. Welcome to the Collecting Keys Real Estate Investing podcast with your host Mike DeHaan and Dan Austin.

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Full time real estate investment and wholesaling business. All right, guys, on this episode of the Clayton Keys Real Estate Investing podcast, you have just me today. Dan was not able to make this interview and I chatted with Scott Carson, who is a professional note investor. And he is the first person that we have had that first focuses specifically on real estate debt. And the things that he does in his business and the kind of spreads that he makes on his money are absolutely ridiculous. If you're not familiar with distressed notes, very basically what he does, he buys distressed properties, like, kind of like the same sort of concept, except he buys literally the debt for it. So let's say that there is a piece of debt, you know, that is in foreclosure with the bank that is worth 200,000. He will work with the bank and go and buy that debt for 70,000 and essentially assume the rest of the value of that note. So an ideal situation, what he does is he tries to get the person to pay back the full $200,000 and essentially two and a half times his money, or worst case, he goes and he forecloses on the deal and ends up getting a house at an extremely huge discount. He goes all into strategies about how he finds these sort of deals, how he analyzes them, how he puts them together and the different nuances of doing so. And it is a really, really unique take on something that is kind of like the long lost, I guess, part of real estate that so many people don't even consider as an option. And he really has some incredible takeaways from this that you can go and potentially explore yourself. So you should definitely reach out to him. Super, super friendly guy. I really enjoyed chatting with Scott. Funny thing is this is one of the first episodes we've done where I actually had to cut away some of the times because we went over on time so much. We were having such a good conversation. So, you know, that says a lot because usually it's we stick to about 45 to 50 minutes on average with these shows. This one we were pushing well over an hour and I had to trim it out just because he was such a great guy to talk to. So you should hit him up and definitely take him up on all the different things that he offers there at the end. Anyways, guys, please enjoy this show. Share it with all of your friends. It is the easiest way for us to continue growing the show is if you share it and if you do not enjoy this show with Scott or you don't learn anything, I don't know what to tell you. You must be a pro. Cause there is so much knowledge in this episode. All right, Scott Carson out of Austin, Texas, the first note investor that we've had on the show. So super excited to get into the world of finance with you. I know it's a big part of real estate that doesn't get talked about nearly as much as like rental properties, everything else. But this is your full time gig. So excited to learn more about it.

Yeah, man. Been buying debt for over 15 years. That's really. We rehab properties, we do a little wholesaling as we stuff. But I got started really on my ass. Bought a couple rental properties, overpaid for them, market crash here in Austin. Back years ago, was a deadbeat bar myself trying to make three mortgage payments with no money coming in because I was laid off. So I got exposed to distressed debt pretty fast. On the wrong side of the books, but okay, you know, licked my wounds for a while, got into banking, did that for a while and then had a buddy, started a mortgage company here in Austin. We were doing mortgages in about 30 states. And one of our big investors and sponsors was a note guy who taught, you know, creative financing. And from 2004 to 2008, I really had kind of like a four year apprenticeship and learning about debt and financing. And then when everything hit the fan in 2000, late 2008, I just stopped on the origination side and then just started buying debt. Started calling the same banks and lenders that we originated for and started buying mortgages. And now fast forward 15 years later, we bought over a billion dollars in debt, thousands of properties on residential and commercial notes all across the United States. And I like to call it the sexy side of real estate where you don't deal with toilets, tins and trash outs or rehabs for the most part.

So yeah, just deal with the money. So you've done A lot really quick. And you kind of just glossed over a whole middle bit there. So most of the people that listen to this show are relatively sophisticated with real estate. But maybe you can like give a general breakdown about how node investing works and like what exactly that process looks like. I think what a lot of people don't realize is you're buying it, the debt as an asset, typically buying it at a discount. And that's something that doesn't even come across the radar for most people.

Yeah, I'm really glad you bring that up there, Mike. And that's the big thing. When we buy the debt, we're buying a note. That's the mortgage on a residential commercial property. And we're only buying first liens 99.9% of the time. That's the senior lien. And we're buying from a variety of hedge funds, banks, institutions, other debt investors as well. And what we end up buying 75% of the time is distressed debt. And this is stuff where people haven't paid their mortgage in six months to 10 years in some cases. It's hard to believe that a bank won't foreclose in 10 years, but we see stuff like this. And so we get these lists sent to us from banks, lending institutions and servicing companies. And there may be one note on there, maybe a thousand that we can cherry pick from. And when we buy that debt, we don't actually own the property. And that's one of the big things, big caveats I'd like to make aware, because a lot of people, oh, I'm buying the note, I own the property. No, no, no, you're the bank. And so when we buy that debt, we buy the borrower still owes the full amount, but we're buying that debt at a very substantial discount, usually 50, 60 cents on the dollar, maybe less, 40, 30 cents. It just depends on what's going on.

Oh, wow.

And so that's one big advantage is that we're seeing bigger discounts than most people are seeing buying retail. Now, obviously we've got to do some things to be able to collect on that non performing debt. Our, our favorite strategy is just to reach out to the homeowner, the borrower, and say, hey, you want to start paying again? Let's work out some sort of payment plan modification, whatever it might be, to get them back on track. And we left cash flow off of that. I don't want to foreclose unless I have to. But we still end up having to foreclose about, about 20, 30% of the time. But the fact that we bought at a discount gives us a lot of flexibility to be flexible with the borrowers that the original lender that originated didn't really have. The bank was happy to sell it at 50 cents a dollar to us because now they have 50% in, they can go lend that money out and arbitrage it and you know, rinse and repeat that 10, 12 times a year. But we at a discount that gives us all the flexibility we need with a borrower and then we're getting the bar to start making payments on to us on a monthly basis for cash flow. Maybe a little bit of extra above their normal payment to for extra skin the game or we'll ask for some extra payments in the front end to modify it. And then our whole goal with this stuff Mike is to hold it for cash flow. You know we hold it for cash flow for 12, 24, 36 months or longer. I've got something I've held on for like six years the borrowers and paying on time. But we have the opportunity that when it's a borrower who started to pay on time for 12 months it's now reclassified. So the non performing as reperforming and what a lot of funds do, they'll buy non performing stuff, try to work it out with the homeowners, get them back on track and then in 12 months time of on time payments they'll turn around and sell that debt back to Wall street, back to other investors at 8590 cents of the dollar. Oh wow. Without ever owning the real estate. So you get lump sum on the front end, scan the game from the borrowers. Usually it's four to five months monthly cash flow that may be at or above what they were supposed to be paying and then a lump sum on the back end now that that loan is reperforming. And you know what's great about this stuff is you know we're direct so we're often seeing really clean assets from banks and lenders. We yeah, it's a different animal when it comes to marketing than most investors are used to. A lot of investors are used to direct mail or postcards or bandit signs or whatever like that. We don't spend any money on that stuff. All of our stuff is like direct marketing like LinkedIn to asset managers or harvesting an email list of banks. Yes secondary marketing professionals and and drip marking them on a monthly basis. And every bank has notes available for sale. Some of them just don't want to sell stuff especially your smaller 1:1 branch institutions, they're too conservative, they can't really take a discount. But you start getting to regional size banks or servicing companies or funds, they're, they usually will have more stuff they're looking to sell. You know, of course bank of America, Chase City, they've got notes to sell but they're not going to sell them anything less than like a $50 million pool. And they're not going to sell them at a big discount for the most part anyway because they're so leveraged and they've got money so cheap. So. But there's still tons and tons and tons of deals out there for investors like you. To me, you can pick up one note, two notes, a dozen notes. I mean on Monday alone I got a list in from a servicing company of 291 non performing notes that I can cherry pick. My bids will be roughly around 52% of value. All right, I got another one with 179 notes that were non performing. They're a little bit further defaulted. So my bids are a little bit lower at roughly 49% of value. And I also got a list of 65 notes that we're re performing that are offer, if they accept it is going to be about a 15 yield on the cash flow basis. For things on the non performing side, well, you know, ones we make offers on we'll probably get reperforming 60% of the time. The other 40% will be a mixture of foreclosure or incentivizing the borrower to sign the property over by giving cash for keys or offering a deedling forgiveness of debt. So I know I unpacked a lot of stuff there, but that's kind of note investing in a basis is not really going after real estate in like one zip code or one city. I'm investing in 25 to 30 states.

Yeah.

And so it's, it's really kind of unpacking knowing the foreclosure laws in the state. Each state's a little bit different knowing values. But you know, we don't do a very big deep dive on the front end. We get a spreadsheet, run some quick numbers, run some formulas, make some offers and then the fund will either initially accept our offers, then once they accept our offers we do a deep dive. And if we find stuff that's wrong with the asset, we can reduce our bid. We find a ton of taxes are owed or the value's not there. What based it, you know, at the value of the day based on we can reduce our bid or just kill it off if it doesn't make sense for what we're doing long term.

That's crazy because like at the core kind of what you're doing is similar to wholesaling real estate, right? But you're working with the loan holder. But you know, you go through, you have the distressed debt, you're working with a distressed seller or borrower I guess. And then you make, you know, you kind of have like the rental property aspect of a cash flow where you make it as you get it re established and reperforming but then you make a larger sum of money when you exit after you know, 12 to 24 months. So that's, that's fascinating. So like what are your, when you're going through that and you're doing the underwriting, how many of these sort of deals do you have to look at for everyone that you buy? Like, are you like.

Good question.

Underwriting 20 or 30 of these?

I love it. So what we always say you probably have about a 10 when you're brand new, you're probably going to have a 10% closing ratio offer. So you get, you want to get one accepted. You mean making like 10 offers?

That's not bad though. It's not like even compared to like off market real estate, we'll look at 17 to 20 to 30 sometimes depending on the time of year.

Now it'll vary too on where you're buying. Like if you want to buy in like Austin, Texas. If I was, I don't buy much in Austin, Texas at all. I haven't bought anything in Austin, Texas in 10 years. So if I was just trying to buy notes in Austin, Texas, I would have gone broke a long time ago because I just don't see a lot of distressed assets here. And Texas has a fast foreclosure market. So the banks that do sell stuff here, they know that it's going to sell fast. So they just don't don't take that big a discount. So I buy a lot like Ohio, Michigan, Indiana. I like the Hoosier state, I like the Carolinas. I've bought tons of stuff down in God's waiting room, Florida, you know what I mean? Back in the day I was buying condos at 5, 5 cents on the dollar. Wow. I'm still buying stuff at 50, 60 cents on the dollar because it's a year to foreclose. So when it's a longer foreclosure time frame like that, I asked for a bigger discount because I'm going to have or holding costs. It's going to cost me more to foreclose too. So like you're in Washington state up in the neck of the woods of Spokane. Don't buy that much stuff up there. You know there are some states that require specific licenses individually to have to operate. Like Washington state wants you to be a licensed mortgage broker to buy debt in Washington state, whereas about 75% of the states in the country you don't have to be a licensed mortgage broker. You just have to hire a loan servicing company who's a debt collector in that state to collect on your behalf or to do the borrower outreach.

So gotcha.

It's really a vendor driven business in a lot of cases. You know we have a, I've got a small staff that helps with marketing a little bit due diligence and stuff like that. But we really rely heavily on servicing companies to do a lot of the borrower outreach and then collecting the payments and sending out statements. And then of course attorneys should we have to foreclose and yes, you've got to have a different attorney in every different state and that's okay there. That's why you buy the discount. You just figure in you know, three to six grand and foreclosure cost per asset across the board.

Yeah, well and the thing that's interesting too about it because it's in the finance business, there's a ton of industries and professionals that are involved in that. So it's not like off market real estate where you're kind of having to piece together teams and figure out like individual players that are willing to play along.

We do have some of that fast. I'm not sure.

A little bit.

Especially if we're doing in due diligence on an asset, we've always got to find realtors. You know, we can pay a national company to pull a BPO or that's great. But we always like to put eyes on every asset. I mean I'm not flying out and looking at 300 assets. We, you know we'll look at online to see what kind of pictures and the dates of those Google maps as a good indicator kind of maybe what the initial valuation or condition of properties. But then we're still going to put a realtor locally to drive by current comps and look at the market because the market's changed in the last six months. You know, days on market have escalated and that's also a big thing. We have to look at our exit strategies. You know, can we sell this asset in 90 days if we need to. If it's going to be 180 days, well, then we've really got to reduce our bid and reduce our value of that asset based on a quick sale price is different than a traditional value of the property. You know what I mean?

Yeah. So when you're, when you're underwriting these as well, you mentioned like the foreclosure laws, the general market. Do you ever look at like the seller demographics and seller temperaments in these markets? So with our main business, we're mainly a wholesale brand. Right. We do it all over the country. We work in. We're currently active in 12 different markets. And what we always have to sort of cater the conversations to is around the seller cultures because they're all different. And one of the big things that we look at is such a buying something with tenants or buying something with squatters is how we approach them. And like states that I would say have lower income, Cash for Keys is much more effective. Right. States that are a little bit more landlord friendly, you can bring the law down on them a little bit more. Do you get into that at all? Are you more just like on the, I guess, like the bigger picture market side?

No, that dictates the states that we market in and buy in. Like, I won't buy in Chicago. Okay. I won't buy in Cook County. It's so corrupt. It's difficult to evict anybody there. So been there, lost money, got the scars, just. Nope. Anything in Cook county, it's getting deleted off. Okay.

Yeah.

New York State, New Jersey, we delete those because they take two years in New Jersey, three years in New York to foreclose. And that's not even evicting somebody yet. You know what I mean? Covid was a bit of an ass kicker because we couldn't foreclose or evict anybody for 12 to 18 months. Fortunately, most of our portfolio stayed performing and did quite well. But that drug out foreclosures in a lot of markets that like Florida. Florida can take you a year to foreclose easy. And the cash for keys is something that you've got to reach out and try to negotiate. So that's the thing, is our biggest goal isn't to own the real estate, though. It's literally just trying to get the bar on track and say, listen, I mean, I've bought notes that borrowers have been trying to modify their loan for four or five years and their loan's been sold and sold and sold. But when I, you know, we are doing Due diligence. And we are looking at these, you know, servicing notes or these collateral files, you know, we'll see short sale files or borrowers have sent in stuff. And I see these hardship players, like this borrower wants to stay. This is stupid. Let's call them up and negotiate this right now. And you know, a lot of times we find that especially when you're dealing with lower socioeconomic individuals, you know, we buy a loss of a 250 grand or less but you know, like parts of like Ohio or Michigan that's like might be LeBron James house at that neck of the woods versus you know, a shanty in other places. But yeah, just having somebody that people can talk to, I mean everybody is going through financial difficulties at some point in their life. Whether it's job loss or sickness or you know, death in the family or divorce, sometimes people just need a reset. And I think me going through a rough time when I first became investor really helped me empathize with borrowers that are in tough situations. It was one mistake I made early on as a Note Investor in 2008, 9 is I let, oh we have all these foreclosures, all these borrowers aren't worthy of staying. And I, I didn't modify a lot of stuff in my first two years. And looking back I should have modified everything because I would have had cash flow immediately versus servicing and legal costs coming out of the books and then having to rehab those properties. I could have just kept people in it and my ROI would have been even higher without all the headaches. You know what I mean?

Yeah.

That's one thing that we really love doing. If we can keep this money in the house and it's going to be a double digit return for us or greater, it's a win win. You know, I don't have to try to squeeze the bars for every dollar they got because then I found that investors that try to do that, that borrower ends up defaulting later on. And it's really a downhill spiral. You know, there's times that we'll, we've forgiven debt right off the bat, you know, or like I bought a note in Cleveland, Ohio and it wasn't worth much at all. It was a $16,000 worth house. So it was not, it was like a shack really. And I, I think my cost base was a thousand bucks. I'm like, I don't want to foreclose on this house. I don't want to take the asset back. Let me just in the bar living it single mom with four kids. I'm like, listen, tell you what, Christmas came in July. I'm just gonna forgive you of the money that you owe. I think she owed, like, 60 grand on this property. I'm like, I'm just gonna forgive you. Do whatever you want with it. Merry Christmas to you. I don't want to foreclose on it. And, you know, sometimes when you do that, it's amazing. Now I'm writing off a thousand bucks. Whoopi. Whoopi. Freaking dude. It's not that big a deal. I'm losing it. But those are the kind of things that we can help people stay in their houses. In a lot of cases, you know, it's like, do some good. And that's the beautiful thing. We get paid really well to keep people in their houses, if we can.

Yeah, I love that. And that's something that gets so lost on people when they're trying to get into business. And something that we preach a lot is a people business. Right. And even wholesale business. You know, the wholesale business. People say, like, we're equity stealers doing all this sort of things. The vast majority of the people that we work with, they don't have any other options, you know, and we've. We've done all sorts of wacky stuff to help people out. And, you know, the note buying side, it sounds like it's quite the same. So as you're going through these, I imagine, you know, with the amount of volume you're doing, you've done a billion dollars over the last 15 years. I mean, I'm just assuming you're not sitting on a billion dollars cash. You must have some kind of arbitrage that you do on this. So, like, hey, what does that look like and what are the legalities of it? Because I know when you're raising money, if you're raising money to tie to other debt, there's different rules versus if you're raising money to tie it to a hard asset. So how does all that structured.

Great question. And what we do is we work with a lot of IRA investors out there, and depending on what somebody's going to invest with us, we'll structure it a little bit differently. So if, like, somebody's bringing 50 grand to 100 grand, we'll put them in our fund and pay them a flat, you know, annual return, 6, 8%, something like that. They're just getting a flat. Just like a. Yeah, like a prep. They're not getting anything in the back end. It's just a flat. Especially if they're not. That's the one thing is when we talk to investors we're always asking what have you done? What are you investing in? If they haven't done anything in the last two, three years, I'm not going to give them 12% because they're not going to go do it for themselves. But 6 and 8% is damn good right now. Yeah. For passive returns. If somebody brings, you know, a quarter million or greater, then what we might do is create a separate special purpose LLC just for that one investor. Buy five or six and then we will go splitsies on that deal. And if it's cash flows, great. They're getting a split of cash flow. Our normal turnaround time on that isn't going to be like 90 days. It's going to be like 24 to 36 months because it takes time to work those assets out and go that route. But they'll be co owner of the LLC and go from there. You can't have somebody fund a note and then give them a preferential prep rate and then split the back. That would be technically selling a security and that's illegal. So we don't do that unless we're actually in an LLC together. They're funding the LLC and then we're going that route for that. And we've got a fund that we're working on. It's, it's a reggae right now, you know, then we can do, we'll be able to do a pref and a split of the back end. You know how that goes. Jumping through hoops. Takes a little bit of time to get that done.

Oh my God, it's such a headache. Even on some of the stuff that we've worked to bring in partners on acquisitions. If it's a 503C, a 503B or like how you're going to structure it to JV. And they're all kind of different ups and downs for each one. So. Yeah, so that makes sense. On that same note, how about like taxes? So like for example, this is maybe Disney's being completely ignorant right now. Can someone like 1031 from like real estate sale into debt or can they 1031 from like one kind of debt into another kind of debt?

That's a great question. No, you can't actually use a 1031 exchange because it's got to go from hard asset to another hard asset.

Okay, okay. What about debt? Like could you sell some debt that you have like let's say a massive gain on in 1031 into another kind of debt?

No, because your debt, it's still got to be the asset. So if you're buying an apartment complex and you're selling the apartment complex, you've still got to go into a physical asset. Okay. Notes are not the physical assets. So interesting. You can't do that. But here's how we've helped people that have. That is, if you're taking cash and you're putting it into an asset and you're, you're buying that asset cash, you're not doing any financing, then go get a line of credit against that asset and use that line of credit to fund note purchases. Okay?

Yeah.

Another thing is that you get with real estate is you get a lot of deductions and dollar cost. Oh my gosh. Not dollar cost averaging, but, you know, depreciation, you can write off. You know what I mean? Cost segregation. Well, you don't get a write off depreciation on being a note investor, but we do get to write off a lot of the debt that we forgive. So, like if I buy a note, borrower's in at 120 grand and a house is only worth a hundred. When we modify that loan to a hundred in 12 months, we just forgave them 20 grand. So we write that 20 grand off by 10, 99 of them, and that reduces a lot of our profits, I guess you could say paper profits on paper, it looks like. When we haven't realized it yet.

That's interesting. I mean, is that like a strategy that you do on an annual basis, then you basically go through and you look at everything and try to get your line to zero?

Yeah, we try to. I mean, if I'm paying Uncle Sam, I'm paying Uncle Sam, and sometimes that's a good thing. But here, you know, what we end up doing is when we do take an asset back, like, I've got an asset right now in Florida that we foreclosed on. We're finishing the eviction this week. Thank God. It's been 14 months in the making. We got Covid kind of delayed things a little bit. We'll take that asset back and then fix it up, and then we'll be able to write some of that depreciation off. So you're, you're having it. We're not investor. You really need a good bookkeeper that understands both the note side of the business and also the real estate side of what you can and can't do in a lot of cases. So, yeah, we write a lot of stuff off. Right? A lot of debt off. Sometimes when we're buying in bulk too, we know we're going to take some assets that have no value that we're just. We'll take it just to write it off, knowing that it'll give us a bigger discount off the pristine assets that we want to own, you know, and a lot of funds will do that though, when they're buying a big bulk stuff. Their top 25% of that asset portfolio is really there to make back what they paid for the assets. The middle 50% is where they're going to make most of their profit margins. And it's not going to be huge rehabs. It may be, I call bread and butter assets where you get a borrow paying 500amonth or 6,000, you know, 600 bucks a month on cash flow basis and you hold it for a while. The bottom 25% is really the tail that you got to get creative on if you're going to buy it. And that may be Dean Luke cash or keys, forgiving the debt, selling it to somebody locally at just a rock bottom price. Let somebody else take on that deal. I've got a contract with one hedge fund where it shows seven bucks for like 30 assets. And they're like, how the, how did you get these for seven bucks? I said, well, this was costing that asset manager 95 bucks a month in servicing. They're crappy. I can donate those all to local cities for parks, or I can call the next door neighbor and get a deed in L or work to just sell it to the next door neighbor for 100 bucks each and make it. Make something happen at it. So a lot of what we do is making lemonade out of lemon sometimes, you know what I mean? But it gets creative and it's. The beauty is you can do this business from anywhere. I'm in Austin, Texas, but I've closed deals when I was in Spain or on a cruise ship. Because you've got such a great strong team with vendors of servicing and attorneys to help handle a lot of the heavy lifting Once you end up buying something that makes sense.

Yeah, that's awesome. So one of the big things I think a lot of people will ask about this is with the security aspect. So obviously you can claim the property back if you go through a foreclosure. What's your typical exit strategy at that point? I guess, I mean, you're already relatively secure because you probably bought that at like a 40, 50% discount, which puts you in an okay position. So at that point, are you looking to like sell the debt again or are you like just listing the property on the MLS as is? Are you trying to a wholesale it to a cash buyer? I guess probably all kind of depends.

It all depends on the asset. So once you. And here's the thing, if you go through a foreclosure, that's a strategy to kind of take the property back to legal. The aspect of it that should wipe out everything except tax liens. You still got to pay taxes. Okay. And then it's an REO at that point. If you get a deed in lieu from the bar, the way that the courts and everything, the legal system, once the borrower signs the deed in the loo, literally signs that you are responsible for that property, even if you didn't file that, you were still technically responsible for that property because they've deeded the property back to you. It all depends on the condition of property. If the properties needs to be cleaned and we can list on the MLS at basically full price, we'll do that. If it needs a little bit of rehab, paint and carpet, maybe appliances, we'll do that and then sell it. List on the mls. If it needs a heavy. If it needs a heavy rehab, no, we'll just move it to somebody else, a wholesaler. You know, we'll advertise it in an area club or meet up as a handyman fixer or stuff like that. You know, one of the great things I've been doing this for a while is we got a pretty good network across the country that we can distribute things to. And you know, we use a lot of text messaging. When we have something like that, we can pull a list of people that are in Memphis. Hey, we got this rehab property. We just take it back. Take a look at the properties available for three hours on Tuesday. Bids are due by Friday if you want to proceed. Stuff like that. So we move stuff a lot that way as well.

Do you ever sell stuff like subject to. So like for example, if you're. If your debt's cheaper than like an end buyer's hard money cost and you know the property isn't terrible and you find a good buyer, so you sell it to them with like the previous owners, I guess, like you're going to be a seller wrap or something, wouldn't it? Or like a seller finance.

So you realize if we take the property back, that's distinguished alone. Okay.

Yeah.

So now we own the real estate. There's no existing financing in place.

Yeah, right. So it'd be a seller finance, though, I guess.

Yeah, we would sell our finance. And I actually seller financing is a horrible exit strategy.

Yeah.

And that's kind of controversial because there's people out there making money on seller finance your property, you'll make more in income over the time, which is actually false because here's the thing. Let me just give you a strategy. Got a house that's worth 100, I buy it at 50 grand, 5 grand to foreclose, demo, whatever it is, I'm in at 55. That's my cost basis. Okay, well, if I own or finance it to somebody at 100, I just tied up that 45,000 equity that I can't touch. I can't do anything. I can't go get a loan against it because I need seasoning of that asset to be really 90 days for a traditional lender to give me a loan on it. And most of them aren't going to give me that number off 100. They're only going to give it off what the foreclosure price was. And if I owner finance them, I got to hold on to that Note now for 12 months to make sure that he's got seasoning. I gotta make sure the bar's got a 620 FICO score or greater, make sure there's FICO score, and then I can maybe sell that note off to get a big chunk of it where it makes more sense for me just to list the house on the MLS and sell it traditionally, or listed at 85, 90 cents and get multiple people in and sell it traditionally. I don't want to create new notes because it's just a pain in the ass to cash out. It always makes more sense when you look at numbers. And then I can cash out of that deal, make, you know, my 55 grand back plus my 45 in profit. Now go buy two and do the same thing. Two turns into four, four turns into eight, eight turns into 16. And I'm not that long delay. I get people all the time, they call me, hey, I own or finance a property. Will you buy my note? I'm like, well, when did you originate? Oh, a month ago. I'm like, well, I'll give you maybe 60 cents on the dollar. I'm like, what? Like no seasoning. The borrowers got below a 620FICO. They brought 5%, not 10% down. You over finance the property, the house is only worth 100, but you finance 125 because you're the bank. Well, when you do that, you better expect to hold on to stuff and that people just don't know how to underwrite, create that stuff. And then of course they've got to go through Dodd Frank compliance. You got to hire an mlo. And then I'm like, oh, I just did this once. I don't need that. Like, well then your paper is the napkin with my bourbon and rum on is more valuable than the paper you finance that house with.

Yeah, right. And that's something that I think that's very valid point that you said there with the dodge rank. A lot of people don't realize that when it comes to debt, you know, the different legalities around that. Can you give like a brief, like five second, you know, one minute overview about what exactly that is?

Yeah, Dodd Frank was a law that was enabled by Bernie Frank and I don't know the other, other senators names after 2008. It was basically to set some standards up that people that were going to owner finance a property had to make sure that the borrower or even traditional lenders too. It's not just owner financing that all lenders who were, they're going to either do traditional lending or an owner finance had to comply to make sure that the borrower could actually, you know, afford the property. I mean, that's a noble concept. I'm going to finance it to you make sure you're able to afford it. So there's specific laws, there's specific percentages, there's specific things you've got to do and checking and verifying income. And the thing that always cracks me up is when you gotta predict that the bar can afford that property three years from now. I mean, who has a crystal ball? But that's Congress for you. Yeah, so what the great thing is with less buying existing debt is we're only usually buying 99 of the time we're buying from banks and hedge funds. So all the loans that we're buying are already Dodd Frank compliant. So I don't have to jump through the hoops if I modify, I don't have to Dodd Frank compliant because they're already approved that way. Now, if I were to initiate a new loan, yes, I would have to jump through Dodd Frank compliance, totally fine. But being the lender, if somebody comes to me and they're struggling to make their payments, one of the things we ask them, hey, do you have somebody who wants to take over the payments subject to the terms? And so we'll let people do something to deals all day long, as long as that new payee can pay the mortgage and go from that Route Another thing that for those that are subject to investors like I get these listing from banks all the time with non performing loans. If we make offers on a chunk of them and they don't get accepted, well we send a subject to letter out to the homeowners as well. Trying to take over the property. Subject to.

There you go. That's smart.

So and we have, that's a side business of what we do as a note investor and we may take over, I don't know, one to four properties, 72 each month and just doing that follow up drip campaign and we know that the buyer of that note it would probably want a loan mod. So that's what we do is we'll take it or study to then negotiate a loan mod unfavorable terms for us.

Yeah.

Huh.

I mean it's your HDO sort of like different entry strategies into the deal just depending on who you're talking to. That's smart.

They're not going to show up in link prop stream. They may show up in a default aspect if the bank has already filed the legal side, you know like filed the list penance or the notice of default. You may see it in those. But a lot of times we're seeing these deals 6 to 12 months ahead of most normal investors seeing these assets on the MLS or the foreclosure markets. We see them way ahead of time and it gives us that a lot of stuff that I buy will never show up on the open market because we modified it or you know, worked to get to keep the bar in the house or come to some sort of agreement with them before we ever got to that legal final lines on the foreclosure side.

Yeah. I mean and that that alone is, is worth its weight in gold. Right. Being able to do that. I mean like anything you can do to get access to opportunity before like the general crowd. I mean that's the greatest way to make a lot of money, honestly.

Well and that's the thing is when we make contact with a bank, a bank's not just sending us one note and never talking to us again.

Yeah.

They're literally sending us tapes and spreadsheets every month, every quarter. And that becomes a great way for us to consistently just drip market. Hey, what do you have on your books this quarter or this month that you're looking to get rid of? Nothing will fall up next month. And just getting stuff that we're not spending a huge amount of overhead on like postcards or SEO or anything like that. It's all Email blasts and then reaching out to new asset managers on like LinkedIn and connecting with them that way.

Yeah, that's awesome. So for people who are kind of interested in this, what is like a general return expectation that people can get?

Great question. It's kind of, there's kind of a couple of phases to it. So if you're want something that's very passive, you're not doing any work, you can, you can actually buy performing or re performing notes. Okay. If you're going to buy a performing note, you can probably buy a performing note right now at a pretty decent 6%, 7% return to you. Okay. That's be direct from a bank, direct from a lender. There's stuff that would sell newly originated stuff off. If you're looking for something a little higher, you can buy reperforming notes. Or maybe the bar was non performing for a while and somebody like me got the bar back on track and we'll sell it to an investor at a 10 to 15% cash and cash return. Okay. So we were the servicer. They're collecting payments. You're going to buy it at a bit of a discount. So if you ever do at the foreclose, you're going to make your money back. If you're on a higher return then you're going to go more the non performing side and that's going to be more active aspect of that. So when I look at non performing stuff, I want to see where I'm going to make either around a 24 to 25% yield. So if I've got to pay my cost, I'm still going to see a 12 to 18% return for us. If it's going to be an asset that I'm going to foreclose on, I want to make sure that we're seeing at least $20,000 in profit to make it worth our time to foreclose on. That may be more. If we rehab the property, it might be a little bit less. But that's kind of our ballpoint that stuff is looking for.

Okay, so that 25% yield, that's like, like a reoccurring.

Yeah, exactly.

Or is that including the exit?

That's an annual basically. If we can take their monthly P and I payment times 12 and divide that into what we're paying for the note, that's what we're kind of looking for. 20 to 25% yield on that. Okay, no shit.

And does that include the exit when you sell the note at the end?

It doesn't include the exit doesn't include the exit. Because here's the thing, we're going to figure in like four extra months of payments. There will be some skin the game from the borrower on that to keep them in the house because they don't. We don't get any skin the game, they're going to default again.

Yeah.

All right, so we're looking for that 20% yield at least, usually to maintain it. Because if we're paying 6% or 8%, we want to see 12% after our money costs for the most part. And then who knows what we can sell it for? We don't ever plan on that in the backside. But yeah, if we can buy that 50. Let's. Let's just run some numbers here. So we buy $100,000 note, and the bars got a 6% interest rate, right? So they're paying 6 grand a year that they're supposed to pay, which comes down to 500amonth. Right? Well, if we buy that at say, 50 cents of the dollar, we paid 50 grand for it. Okay, well, if they pay, they're paying six grand a year right there off the top. If you take 6 grand divided by 50, that's a 12% return right there to it just off of that alone. Now if we get them to bring six months to the table now that returns an 18%. Okay, we hold that for a period of 12 months and then we sell it at 85% or 85,000. We just realized another $35,000 in profit. So there are deals that we're into that we're making high 20s, 30% over a 12 to 18 month period because we bought it at discount, we put the work into it, and then we cashed out with a nice lump sum later on.

Okay, I'm fucking. I think I'm done with houses, man. This sounds way better.

Like, I bought a note one time from a bar that was going to foreclosure the next month. I mean, why the bank sold to me, I'll never know. Yeah, but they did. We bought it at 40. We sold it at the auction two weeks later at 88 and made $48,000. We knew we were going to foreclose another one. They sold me a note, very similar numbers, but we thought we'd have to foreclose. And the idiots at the bank didn't see that the bar had already signed the property over to them. There was a deed in Lou sitting on top of the collateral file. When we got it, like, great. We just. Let's just Sell this thing. We sold it in a hot market, made it, and we got another deal like right now, this a Florida deal. It's worth 1.2 million bar. When we first bought it, it was worth 950. The asset was borrower. Originally financed it for 695, did a hard money loan and they never paid. Okay. And he's drugged this out, played all these tricks, filed bankruptcy. Well, now his debt is 1.2 million. Okay. We bought this roughly about 14 months ago, knowing we were going to have to go through a long foreclosure process. But we paid, get this, 441,000 for a $950,000 asset.

Oh my God.

Okay. Crazy, you know, right? It's going to be a nice, like 300, $400,000 payday even after paying our investor a nice chunk of money on that to finance the deal.

And even if you burn the fricking thing down, like you can rebuild it and still have some room on it.

Well, that's, that's why insurances are a case of an active diet or an angry borrower. So if he do trash it, great, we file an insurance claim and we dance all the way to the bank. And then we. Then we sue the borrower for. For vandalism and arson.

Yeah, right.

But that's, that's the thing. I mean, sometimes we'll get notes and we're a. You know, a bar may own a portfolio of real estate and they got a loan on one they haven't been paying. They've been robbing from Peter to pay Paul. And those are always interesting conversations like, listen, we know you've got these other 10 assets that are in your name or same LLC, just either do something with this note with us or deed it over to us because otherwise if we foreclose, we're going to slap a judgment against all your other assets.

Yeah.

Or if we forgive the debt and you're underwater, just, you know, we'll send you a 1099. Just file was an IRS form. 928 or something like that that they can show to be insolvent and they're not gonna pay any taxes on that.

Yeah.

So, I mean, we work with a lot of people. We tried to do something, always tried to do. Something's a win win. Sometimes you got assholes out there that wanted to play games and, you know, the bank always wins. You know, you're not dealing with me. You're dealing with my attorneys. And my attorneys are undefeated right now.

Yeah, exactly. And when you're A debt holder too. You have so many more rights on a property versus even being like a landlord where you're, you know, you're securing the debt. At the end of the day everything is going towards helping the bank out that you have your mortgage with, not necessarily with you.

That's so true. And that's one thing about what happened here in Covid. You had all these small mom pod landlords who were left with the short end of the stick. You know, the tenants didn't have to pay. Uncle Joe's gonna save them. You know what I mean? I'm like no, it doesn't work that way. The bank in many at times the bank's like okay, we understand what's going on. We'll give you a six months, we'll give you another six months. Well that's what causing. So you have a lot of these borrowers out there who are the landlords. They're still not made whole, they're still struggling to get by. You're going to see a lot of that in small multifamily. Oh yeah, already seen it. And even bigger multifamily. You know, a lot of these investors go buy these multifamily value add. They're going to add the value up and then refinance out in three to five years once they the property's re gentrified. Well with interest rates going up, that has killed a lot of these deals down now. Now the property isn't worth as much as was because their debt service coverage ratio has gone down which reduces the value. Their operating income is gone down some because lack of payments and stuff. So you're going to getting a lot of mature loans where the, you know, the investors were paying on time but now the bank wants 10, 20, 30% capital to get them back to a 70% value or 70% value. And a lot of these operators don't have that 10, 20, 30%. They're not going to go back and their investors that they got the money from aren't going to have that to pony up. So we saw a lot of this back in 2010 and we're starting to see some defaults and stuff like that happen right now. And so that's, I'm pretty excited about what's going to take place the next 24 to 36 months on the note investing side. Yeah, you know, we're already seeing more inventory than we've seen in a while. It's always interesting thing Mike, when, when banks start calling and emailing me on what I'm Buying, you know, it's usually the other way around. But when they start reaching out to me, hey, what are you buying? Like, hey, this is a, this is a song by different tune. You know what I mean?

Yeah, right? Yeah. The lead flow starting to turn out.

Yeah.

That's crazy. So I mean I love everything you're saying, man. You got me, got my brain really turn in. So I guess one last question before we go into the end of show questions. Here is someone's listening to this. They have a couple hundred thousand dollars they want to go and invest in a note. Right. Where do they find that? Because obviously you have banking relationships but how can someone that's going to do like one or two, how can they get started with this?

The first thing you got to learn is you got to get educated. That's the first thing. Because it's a different mindset. I've seen a lot of fix and flippers, landlords, stuff like that. They decide they want to jump in the note business. They overpay for an asset or they buy something in a market that doesn't make any sense.

Okay.

So you got to understand there's different. You're owning the note, not the asset. Okay. Yeah. And one thing that we'd love to help people out with is we teach classes on this stuff. So if you want to learn, it's great. But every third Saturday I teach a one day class called note weekend. It's kind of the Cliff Notes version of note investing. A lot of new investors. I love it because it's we show you how to find fun and flip these things. But it's usually 99 bucks. But for the collecting keys audience, I'm giving to you for free.

I see.

So if you go to no Weekend.com, let's just say collecting is the keyword. It'll give it to you for free. And you don't have to be live. It's recorded as well too so you can catch the replays. But that's a great way to kind of get your feet wet without any investment. There are platforms out there for investors. Go take a look@auction.com has their commercial side 10x. There's a couple other websites. I always tell folks, hey, reach out to me. You never know what we've got available and what you're looking for. Schedule call with me. Then I can help guide you in the right, right path and set you straight. Like if you're in California, oh, I want to buy something in San Diego for a quarter million. I'm like, yeah, Good luck with that. It might be better for you to take that quarter million and go buy a dozen notes in Memphis because your, your money's going to be leveraged out and spread out. So if you've got a dozen assets and you have one borrower or one tenant doesn't pay, guess what, you still got 11 that are performing notes for you versus one asset that one borrower doesn't pay, then you're not getting anything in. So that's why we kind of love those more value added states in a lot of cases because our money goes a lot further.

Yeah, that's awesome, man. Yeah, that's good stuff. So, yeah, so noteweekend.com I'm definitely gonna check that out because I'm super interested in anything going on.

So there you go. I will send you, I'll send you the links and everything to it for you. This video, it's about eight hours of me teaching and then about eight hours of additional other videos and training for you about the business and things.

Awesome. I like it.

Cool.

Awesome. Scott. Well, so thanks so much for all the knowledge, man. There's tons of great stuff in here. We're going to dive into our end of show questions here as we start to wrap up.

Hang on one second though. If you're listening to this show right now, which you are, and Mike is kicking ass and taking a lot of names when it comes to being a great podcast host, make sure you smash that subscribe button and make sure you leave Mike a five star review. He's doing great stuff with his show. So make sure you leave that five star review and hit subscribe. All right, go ahead, let's continue. I just want to get that out before we got going there, Mike.

No, I appreciate that, thanks. You'll see, you'll see me saying it at the end. But no, yeah, I do appreciate that. Thank you. Certainly trying. All right, so the end of show questions here, first question, which is always the group favorite, we can modify a little bit for you as well, but we always ask you what is their craziest real estate investing story. And I know a lot of your stuff has been on the note end, but either way dealing with foreclosures, all sort of things, I'm sure you still have some pretty crazy ones, man, I.

Got, I got tons of stories on this stuff. Some of the crazy stuff, I bought a note where the borrower died and been dead in the house for like two years and our realtor found the.

Dead body for two years.

Oh, two years had been Sitting there vacant, and he'd been in a closet. And the realtor walked in taking photos because we were changing locks, and there he was. There's the was. Remainder of the body in the closet.

Oh, man.

So that's crazy, but there's one. I bought a note one time. It was on an 8 plex outside of Charlotte in Concord. It turns out it was a working brothel.

Okay.

So I was like, well, does that mean it's a commercial assets, cash flowing? You know, why can't you make your mortgage payment if you're. You know, you're. You're charging by the hour. Yeah, but there's a really good one here. We bought this note in southern South Beloit, Illinois, and it was a bar. Husband and wife had lived there for 18 years, raised her three daughters. They had taken out some money when the values went up, Got a loan for, like, 60 grand, which isn't nothing. But then the market values dropped, and the husband had a heart attack, was out of work. And so when we got this note sent to us, they owed 60, was maybe worth 35,000. And we bought the note for 12 grand. We bought it for 30 cents on the dollar of owed and roughly 20 cents of the UPB, as we call it, the unpaid balance. But the borrower had been trying to modify for four years. There was four years of tax returns and hardship letters. And so when I got it, I was like, this lady's in a slam dunk for a month. So I called her up, get her on the phone, tell her, hey, I'm now your bank. And she just like, oh, it's been sold again. I was like, yes, but this is your lucky day. Can you start making your existing payments? She's like, yeah, I could do that. I said, great. So that was like, 450amonth.

Wow.

I said, if you start making your existing monthly payment, that's great. Can you bring anything to the table? Can you bring, like, five grand to the table? It's like, no, I don't have that, so. Well, do you have 2500? She's like, yes. Great. You bring 2500 to the table, you pay 450amonth. Can you pay anything extra on top of that? She's like, I could pay 200 bucks extra per month. There we go. 2500, 2400. That's my five grand, and I want extra. Okay. I said, if you do that for a year, what I'll do at the end of the year is we'll modify your loan, we'll drop the interest Rate from like it was like 9% to 0% for you. We'll adjust the balance, we'll appraise your property at that point and forgive anything above the value so that you're making 100% of your payment at that point of 450amonth goes to principal reduction and you'll have your house paid off in not 33 years, but in six years. And she's like, are you serious? I'm like, yeah, yeah, go do it. Well, if you figure the numbers, I was making 10 grand in cash flow that first year on a $12,000 investment, right?

100 return.

100, yeah. 88 return my first year. And it was person after, but she went and did this and they showed up my attorney's office. The husband had been sick, had a heart attack, couldn't work, but he's back to work. They cried at my attorney's office. They literally broke down crying. Has been trying to do this a long time. Six months later, around Christmas time, I get a Christmas card in the mail from them. And their eldest daughter, who raised in the house the entire time, had a baby. And they named the baby Carson after me.

No way.

Because seriously. Seriously. So we do a lot of good. Of course, we've got enough people that we've had to foreclose on or evicted, stuff like that. But we didn't have to evict the brothel queen. She ended up paying. Start paying on time.

She figured it out. Yeah. I mean, that's awesome though, man. That's what it's all about. And you're right, amongst all the dirt bags that you gotta kick out because they're being that way, there are a lot of people that you help in this business. I mean, even on the wholesale side, for all the squatters that we've had to kick out or the drug problems we've had to deal with, I mean, we've also had situations where we've helped people get into apartments. We've even supplied them furniture and things like that. They didn't have any of it.

Yeah.

And that can change people's lives. That's, that's cool. That's very, very cool story. And you know, financially, but also just the whole view of it, that's, that's rad. All right, so the second question is, what is the number one tip you would have for a new investor looking to get started or a small time investor looking to take their business to the next level?

Ooh, learn marketing. That is the biggest key. Yeah. A lot of new investors, they think they can only invest and make offers on what's in their account. That's the biggest limiting mindset that you have. You gotta realize that there's millions of investors out there that have millions of private capital sitting on the sidelines, not making anything. And it's actually easy, actually easier to find money than it is to find the deal. Oh yeah, you could, everybody could go to their county records right now, like the county appraisal district and like type in Equity Trust or Quest Trust as like property owners. It'll give you a whole list of people who've used their IRA to buy a property. Well, those people are the people you're targeting. They're investors. So you understand real estate. They've used their ira, which has got to be on a passive level. They can't be active investing and living in this property. It's got to be like rentals or stuff like that. And three, they've got money to invest. And we found that 67 of people that have an IRA have at least 150 grand or more in it.

Yeah.

So learn marketing, get out and talk, get networking, make more offers. The more offers you'll make, the better off you can get into it. And that's often the hardest thing. I don't want to say it's fire ready, aim, but kind of it is that way. Make offers, start networking. And the more you can learn about marketing, it'll help you in this business for a long run because it's like you're not going to be just a real estate for a year. So don't put off that, the marketing skills and developing that thing and raising capital because you're going to be doing this for a long time.

And I think that last bit right there too, the long time, that is something that so many people do not take into consideration. And I think the big thing with all this, as you're learning marketing, you're going through these processes, make sure you're doing it with a long term time horizon.

Amen. It's all about planting seeds, man. Best time to plant a tree was 30 years ago. The next best time is today.

Exactly. Yeah. And I think where a lot of people get caught in real estate, especially on the wholesale side, it gets sold as like a get rich quick scheme. I can't tell you how many people we talk to that are like, I sent a batch of direct mail and didn't get a deal. Wholesaling's dead. I'm like, well do it for another three or four months, work your leads. And I Promise you'll get something. Like it's gonna happen.

Well, that's the thing is they don't teach that. And this one thing we harp on consistently, 80% of sales are made after the fifth contact. Yep, fifth contact. That means you gotta follow up. And most people don't understand that. It's W O r K. But you're right, you have a lot of people, oh, this is get rich quickly. Somebody's telling you, run, run, run, tell and say, how many times do I have to contact somebody? How many times do I have to follow up? Show me your call list or show me whatever your list you're working. That's the thing. And you know what? Work is a four letter word. But work pays really good.

Yeah, exactly. Awesome. So last question. Where can people find you, follow you and reach out to you if you'd like to do so?

Yeah, really easy. You can go to our mothership of a website. We close notes dot com. You'll find out our classes there, our podcast, the Note Closer show is also there. 745 episodes and a couple million downloads, stuff like that. But yeah, weclosenotes.com and you connect me there. If you want to book a call with me, pick my brain, you can do so by going to talk with ScottCarson.com and they'll take you directly to my calendar and you can book a 30 minute call with me.

Perfect. Good stuff. Awesome. Scott, I really appreciate you coming on. I really appreciate you coming on my words there. And seriously guys, you should reach out to Scott because he's spitting some like straight just knowledge bombs here and something that is, you know, very unique part of the business that tends to get overlooked. So you should absolutely reach out to Scott, check out his show too. There is tons of opportunity here and I will say I have a feeling that it is a lot less saturated than a lot of the other niches that you see out there in the real estate space right now. So yeah, I'm sure it is. So awesome, Scott. Well, thanks so much for coming on the show, man. We really appreciate it. And if you guys enjoyed this show, please share it with everyone that you know that has any interest in real estate, finance, business or you know, just like listening to an interesting conversation that might open their eyes to the world of finance. So please share it with everybody and also leave me a five star review wherever you listen to your podcast. If you do that and you take a screenshot and you send it to me on Instagram at Mike Underscore Invest, I'll send you a free Collecting Keys T shirt. So please do that. And aside from that, guys, thanks so much for listening and we'll talk to y' all next week.

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