Buying Pools Of Assets From Banks And Hedge Fund With Scott Carson From The WWRE Podcast With Barri Griffiths

Hello and welcome to Wrestling with Real Estate, where we look to Choke slam all your real estate problems. I'm your host, former WWE wrestler and now Circus elite performer, and of course multi family real estate investor, Barry Gruffers. Now we're joined by Scott Carson today. Hey, Scott, how you doing, man?

I'm doing great. Barry, hear the crowd going wild for you.

I need to have some sound effects, man. You even brought your own sound effects. You got it. That's gotta make you the best guest ever just by that bringing sound effects alone, man. So that's awesome. How are you doing today? How's everything going with you?

I can't complain. Honored to be here, man. Austin, Texas, is home. Although I love the Caribbean. You and I were talking about vacationing beforehand and you know, it is a new year, you know, and I absolutely love it. People could be down. They could be all crazy about what's going on in the government or things like that. Look, I'm a big believer that we control our own story, all right? We control our own destiny. And if you had a crappy 2020, guess what, you got your bad year out of the way. It's time to, you know, quit crying in your beer and dust off the dirt, get out of that body slam and start, you know, throwing some punches back at 2021 for a. I love it.

But yeah, no, it's true though, right? We do control our own story. We control our own life. We. We control our own narrative as well, right? You decide how you see things. And you know what I've noticed, like, I was talking to someone the other day and I realized you get those people, right? And they ask, how's your day going? Oh, it's one of those days. What do you mean? I just started. I got out of bed and I slipped and I bumped my head. And then I went into the car like my bird had pooped all over my car. And then like, oh, it's just one of those days. It's like, no, it's not one of those days. You're focused. You've made it into one of those days. Because every bad thing that happens, you've said it's one of those days. So that made me think, like, people that complain about 2020. And there's plenty of reasons to complain, but it's the same thing, right? Like, you look for the negatives. Once you start looking for the negatives, they're everywhere. You can find them easy, easy. Every one of us can find those negatives. But, hey, go find those positives, because they're there too.

And that's the thing, is there's always a yin to a yang. You know what I mean? You can't have a positive without a negative. It's the whole thing of energy, and I'm a big believer in that, that we attract. If you do start off on a bad day, things do happen to you because you attract that negative energy. It's the whole thing of quantum physics. You attract what you put out or what you ask for. If you're smiling, you attract people that smile at you. It's a little things going to the store, smiling at somebody, they're having a bad day or a marginal day, and you brighten their day. They may just help you with something. And it's just that same thing. You put positive out, positive comes back. You put negative out, negative comes back. And it's so much the same in real estate, whether you're marketing, your vendors, your message, the deals. We all know not one deal goes exactly the way we hope it. There's always going to be some oh, shit thing, you know what I mean? Oh, it's going to make you get scared. And a lot of people, little babies will run crying to their mama. But that's where us as investors, we have the biggest opportunity. Because oftentimes you can take lemons because life gives a lot of lemons. And how you approach it, what your energy says and your mental, you got to have a strong mental mind. Besides just a thick skin, you can really turn a lot of lemons into really great tasting lemonade if you know what to do and really come out doing a lot better. And you'll have things happen to you, deals will come to you, you'll meet amazing people, lenders, investors. If you just have a positive mindset, get me wrong, shit happens to all of us. But it's all about how you approach it and how you deal with it with the difficulties that can make or break you as an investor.

Man, that's so true. I love that. I love that so much. Because also if you have that positive energy, positive vibes, positive outlook, you're a person, people want to be around, right? If you're that person. Oh, it's one of those days again. Oh, it's one of those years around. I don't want to be around that, like, oh, everything's going wrong. Everything is like. And I get it, right? I'm not here saying like, life isn't perfect and things do go wrong and it's hard, right? But it's just like you said, it's all how you look at it, right? Just how you look at it, right? And just if you just make everything into a positive and it's not that easy as like I'm saying words now, right? It's not that easy. But if you really work it and concentrate and be aware of it as well, I think that's a huge part. If you're aware, hey, I'm talking a lot of negative stuff. Let me just at least cut that out. It makes the world a difference. So, yeah, awesome. A good way to start this podcast. Man, talk about starting off with a bang.

I love that.

I love that. So before we jump into any more kind of craziness and awesome conversation, do you want to give people an idea about who you are, what you've done, what you're currently doing?

So for the last 12 plus years, I've been in the real estate industry as the note guy. I buy and sell distressed debt. And what that means is I buy mortgages directly from banks on property where the borrowers have not been paying for a period of time, six months, usually to six years. And we buy that debt that controls the real estate, we become the bank. And how we make our money is by working with the borrowers to keep them in their property. We buy this debt at a big discount, usually about 50 cents on the dollar of value. And that gives us a lot of flexibility to work out, reach out to the homeowner and say, hey, what happened? What's your country western song? Did grandma get run over by a reindeer? Did Billy Joe run off with a waitress? What happened? Okay, well, let's. Do you wanna stay or do you wanna go? If you wanna stay, you gotta pay. So you no pay, you no stay. But we're willing to work with them, keep them in their house as we can, and turn a non performing note back into a reperforming asset that we hold for cash flow. Or if the borrower decides they just don't want to deal with us, stick their head in the sand, then we do go the legal route to foreclose and take the property back. But I'm buying notes for cash flow. We don't buy the debt to buy the real estate. A lot of times in some cases we do, depends on the situation. But most of the time I'm buying debt, buying mortgage, determined cash flow, and become the bank of these borrowers that haven't been paying for a while.

Yeah, how do you get into that? Because this is not like, this is not like wholesaling. It's not like flipping that everyone has heard of, Right. There's very few people actually doing it compared to the other niches in real estate. Right?

Yeah, it definitely is a smaller niche and I'm very, very blessed. I was a mortgage broker, actually I left banking, was a mortgage banker, left JPMorgan Chase back years ago with a buddy of mine, started a mortgage company for four years prior to 2008, I was traveling the country on different real estate expos and seminars and doing mortgages for real estate investors. You know, back 2004, 2008, great time to get refinancing. Heck, you could fog a mirror, you could get a mortgage all right. And then when the music stopped playing, when we had the great recession kick in, we had all this bad debt, you know, 15 million homeowners underwater and default rates through the roof. I stopped on the origination side and started calling the same banks that I'd been originating from. I was very fortunate. Over that four year period, a guy that I worked with was really like a mentor and apprentice to me. He'd been a note buyer, debt buyer, created owner, financing, creative financing, sold debt off. And so I really had like a four year apprenticeship when I was doing mortgages and learning creative financing and creative real estate. So that's how I got into it. Then when everything hit the fan in 2008, I just started dialing for dollars, kind of like something out of Pursuit of Happiness or Boiler Room if you like those movies, and just started reaching out to banks, started getting lists, spreadsheets and other non performing notes that I could cherry pick from. Whether it was residential notes or commercial notes or like multifamily deals. I would get all sorts of stuff that I could cherry pick at a big discount. And I just started working through them, checking values, talking to the attorneys on it, talking to the bank, trying to figure it out. And now fast forward now, over a dozen years later, I've bought over a billion dollars in debt. I was the educator of the year in my niche a few years back. And I'm really proud of the fact that we've helped thousands of investors out there and thousands of borrowers stay in their house. And then also a lot of investors out there really learn what note investing is and how to turn them into cash flow kings. I like to say lien lords, not landlords in a lot of cases.

Well, something interesting that you said is that before you did that you were a mortgage lender for primarily working with investors, right?

Yeah.

So maybe out of interest for people, I think investors they think you just go to the bank, you get a loan, okay, and that's how it works.

Right?

But there's more to it, right? For investors who understand how they can be better borrowers, how can they be better, look better in the eyes of lenders, what can they do and what do they need to know and understand?

So this is, I'm so glad you brought this up because traditional financing is just a small sliver. There's a lot of creative financing out there and trillions of dollars sitting on the sideline looking for a good vehicle. There's a lot of, I mean there's millions and millions of dollars sitting out there in the sidelines making 0% investors wanting to invest. So as a real estate investor, most of the time you want to know, you're make sure you're getting a deal and the more you know about your property, the value, the rent rates, the debt coverage, the appreciation, the days on market, whether you're flipping, what's the, you know, what's the rent rates, what are the existing rent rolls? If you're buying multifamily, is it undervalued, is it overvalued, what type of repairs is a property? So the more you can know about that property or that deal and the timing of what's going on in the market, the better prepared you're going to be and the more likelihood you are to get funded. Whether it is traditionally because a bank is going to ask all these questions and look at you personally, a lot of cases, or your entity, or if you're dealing with like a private money investor who's looking to lend money out of his self directed IRA or savings accounts or things like that. They're going to look at, are you buying this deal at a discount? Does it make sense? And I'm a big believer you want to make sure that you're buying traditional real estate and you're going to get traditionally financed. You can probably get to 65 to 70% now and still have to put, you know, put 25 to 30% down. If it's like a class A, class B property of some sort, whether it's a multifamily or a nice flip. If you're going to go the investor mindset, you might pay a little bit more for your money, you know, 6 to 8 to 12%. But it's a short term kind of financing if it's a fix and flip. So that 12% isn't going to really eat into a lot of your profit unless you hold it for a While. But that's why there's a lot of lenders out there, whether it's private money lenders or hard money lenders that'll lend it 65, 70% of an ARV, we call that after repair value. If your property's in good condition, great. They'll end at 70% of what your acquisition costs. Sometimes they're all in the rehab costs. But knowing that you're buying a deal and knowing the numbers is the most important thing. What's the due diligence? And you want to have the answers to the elephant in the room. If there's something negative about the property, know what the answer is. Because they ask that question. You don't know it. That's going to knock you down that peg. And you want to. As a mentor of mine, years ago, when I was a mortgage broker told me getting a property or a loan approved on a property is like walking down a hallway with all these doors. And when the underwriter or the investor is going, looking at the file, when they come to the door, that's the value of the property. You want to make sure you have that sticky note that says, okay, here. Yes, we have the bpo. We have the right number. Okay, move on the next one. Are taxes paid? Yes, taxes are paid. What's the after repair value? So you want to have that sticky notes on all those doors because you don't want them to open the door, go in and start inspecting things around. And if you don't have an answer, then you haven't done enough due diligence. And it's always important, I think, as a, whether you're a new investor, an experienced investor, run your deal by somebody that you respect, a title company rep or a traditional, another banker or even another hard money lender. And a lot of times they'll look at and review and tell you where the red flags are that you need to overcome.

Wow. Yeah, I like that piece of advice a lot. Right. Well, for one, like you said, have all your ducks in a row, right? Understand what you're doing, understand what the lender's going to ask you, but also have someone else look it over for you. That's such a great idea. Even if you have to pay them to like, hey, here's 100 bucks, look over this for five minutes and tell me what are the red flags? And then you can fill those holes.

And you know, one of the great things I've always found, Barry, is those that are the most successful are the most giving of their time, and they're the ones that are most willing to help people avoid landmines or potholes. So I think being a part of a good real estate investment club is important somewhere, whether it's virtually or in your local town. If you're able to meet in person and reaching out to somebody who's doing the type of deals that you're looking to do and ask them to review it because they'll sometimes not only will go over it with you and tell you where the red flags are, they might just want to buy it or fund your deal too.

Interesting. Yeah, that's a good point. Right? Yeah. You never know who's going to be funding your deal. But back to the note investing, because that is really interesting. I wanted to ask that question because I was having that conversation with someone recently and they had trouble getting lending. I was like, well do you figure out what the lender needs and then reverse? They were like no, I didn't think of that. I was like oh, maybe try that. But anyway, sorry. Onto the note investing. Right? So you started, right? So you're always getting these notes from banks, right? How is not as simple as going to a bank and saying hey, I want to buy your notes. Right? How, how do you go about that?

So if you and I walked in and did that, they would call security, security, security. Because even as when I was a banker for Chase, I didn't know that Chase sells their notes. I mean they don't. They do, but they're going to sell me like $50 million tranches. So there are specific departments inside of each bank that handle the non performing note sales. It's not customer service, it's not loss mitigation. On the bigger banks they go by a special assets department or secondary marketing manager. And these are the people looking at the bank's portfolio, the performing notes and the non performing notes. And they're working with loss mitigation, trying to get loss mitigation do their job to get the people that aren't paying back on track. That's why if you're ever seven days late in a mortgage payment, your phone's ringing off the hook, the mailman's coming by dropping certified letters because they want to get you back on track before 30 days goes by and it really becomes a non performing note. Cause then the value starts dropping 5 to 10% for every month that you're behind. So you reach out to the special assets department, the secondary marketing department. The whole loan trading desk is another title. We use LinkedIn a lot. We'll jump on LinkedIn and we'll do searches for people, these titles and their names and we'll reach out to them. Hey, what do you have on your books that you're looking to get rid of this quarter? You got anything ugly or anything with any hair on it that you're looking to move off? The fourth quarter is always really busy. The first quarter is really busy too. And we expect the next six quarters in a row to be really busy as the government starts to let these foreclosure and eviction delays coming. And you know, you've got to start paying Peter out there to, you know, a lot of people have not been paying their mortgage for the last year in forbearance agreements. And so we're going to see, are we. We already are starting to see a lot of lists coming from banks asking us what we would pay for these and offer for these on both residential and commercial properties. So it's reaching out to the people at the banks, getting lists in from them, and we call them spreadsheets or tapes, and then starting to cherry pick, doing our due diligence on the properties, on the borrowers. And it really kind of come with an idea and a bid and making an offering and see if the bank will accept it and if they won't, then countering back and forth with it till we find a number that makes sense and then close them on it. And then I become the bank and then it's all about then reaching out to the borrower to see what they want to do, to stay or go.

Interesting. Remind me, let's go back, let's circle back on where we are in the economy and everything else like that eventually. Don't let me forget that. But I don't want to skip around. So. So with multifamily, right, you have different niches, right? You have value add, you have stabilized, you have A class, you have B class, you have C class, right? I'm guessing with note investing you have the same. Cause obviously there's all kinds of different. Do you guys have a strategy that you guys stick to or will you take any kind of note that makes sense?

Well, the magical answer you hear in every real estate question is it depends, right? A classes usually will have very little default rates because they're often owned. Anything over 5 million is usually owned by a big hedge fund that's got a lot of reserves. They've got cheap money on that stuff. So you don't see a lot of class A apartments coming across. If you do, they're usually gobbled up pretty big by the big guys. What we see a lot of is the B, C and D stuff, the smaller balance stuff, sub 5 million 200 doors or less. We do see a lot of the smaller first time kind of asset class, 20, 30, 50 unit apartments that a lot of times a homeowner or investors bought it, you know, mom, pa, trying to manage it all and they can't afford too many people to go dark on them or not paying their mortgage. I mean, luckily for the most part, most of the collections in the country have been really good. On your traditional multifamily stuff, what we see a lot of opportunity these days is on the student housing stuff. And you see A, B and C units on that stuff and that's a much bigger hit. As colleges are not back, people aren't paying. That's about a 60% collection rate, 40% vacancy factor right now, which is really hitting a lot of that student housing investors pretty hard in the pocketbook. So, you know, we see a variety of things and all comes down to pricing what makes sense. We're usually looking for a double digit cap rate of some sort for us to take it down. You know, in commercial you want to buy in a high cap rate and sell on a low cap rate. And it's just a matter of if we can get the financials. And a lot of times we can get it because the bank will have that on a regular basis. If the borrower has not been paying and using the property as its own atm, we'll have to kind of recreate the financials and make a bid off what we can kind of determine, as I say, being our own Sherlock Holmes in some cases and go from there. So the thing you gotta realize, I like notes because the fact if I do buy it on a commercial property, I have the right to go ahead and force collecting the rents once they go and in default. And that's a nice thing on the commercial side of paper, that we don't have that on the residential side. You know, if you go buy a second home, you know, the bank's not going to start collecting rents for it. But on an apartment complex, the minute I step into it, take it over, the borrower's not paying, then I can enforce collection of the rent. So they stopped using as an ATM or their own pocketbook. And that will often lead to the borrowers working with us quickly to resolve the situation because they don't want to lose that cash flow.

So do you, do you have a focus on single family or multifamily or commercial or do you?

We do. I've done every asset asset class. I mean I've bought hotel notes, I've bought single family. It depends on what's coming across the board. Usually we like to stick at the. In a single family, the 50, 50 to 200, $250,000 valued asset class because that gives us the most flexibility on the commercial side. I've bought anywhere from a 5 Plex up to 300 units in Indianapolis before, you know, we've bought the hotel before we've bought self storage. You know, we've bought medical office in the past. It just varies on what comes across our books. And then the thing is that I'm not managing the property. If we buy something, we either are a. If we are going to take it back, then I put it in touch with our different management companies that work and managing the office or the complex or whatever like that. We keep that in place or hire new stuff. So I'm not having to handle the day to day in operations on that. I'm more focused on buying the assets, raising capital and then we put it in the right joint venture partners on our team to help manage that stuff for the most part. But we. I'm not, I like A class, but A class is too expensive. So I'm a more of a B C guy because I think there's more opportunity for adding value add to it and increasing your cash flows in a variety of ways. So usually distress means there's usually some problems that you've got to deal with. Either getting rid of some tenants, boosting the rents or getting new management in to help, you know, improve the vacancy factors or reducing the vacancy factors and adding value add to it. You know, management, whether it's notes or property can eat you alive if you don't have good servicing in place.

Yeah. So you guys tend to go for stuff that has more distress, I'm guessing.

Yeah, I don't mind rolling up my sleeves and getting dirty. You know what I mean? Doesn't mean we haven't bought performing notes or we've bought stuff that we've worked for a little while and flipped it to somebody else to take care of it. But yeah, for us on the discounted side, if we want a bigger deal, we've got to usually take on more problems. I don't mind killing Freddy Krueger a few times. That's our. We've got the flexibility because we're buying it at discount. And so once we. Since we're not the one that originated the Loan. I'm taking the big loss in the write down. We've got a lot of flexibility and can often have a normal conversation with a borrower. Say, listen, I'm not your usual bank here. What do you want to do? Let's try to come to an agreement. If you want us to keep the property, then let's figure out a number that makes sense. I don't run a charity, but if you're not going to play with me, then you're going to be talking to my attorney. So it's in your best, best counsel for you to deal with me now or otherwise, you know, you're gonna deal with my attorney. And he's not a very friendly person.

So. I love that. I love that. But the, so the interesting thing is here now you're buying different kind of assets, but you know, diff, you know, different areas. I'm guessing right, you know, sticking to your nationwide. I'm guessing right. So when you buy. Oh, no, sorry, go ahead.

No, I didn't mean to interrupt. Yeah, we do buy in about 30 different states. You know, I don't buy a lot out in California just because it's overpriced out there, but we buy in most of the major markets or the secondary markets, secondary sized cities out there. We have a tendency to stay away from very small communities. It's usually harder to get people in anything below 50,000. We usually kind of remove it. We've got our kind of formulas that we have put in place depending on the asset class for the most part. But 30 states, we buy a lot in Ohio, Michigan, Indiana, Illinois, the Carolinas, Missouri. I love God's waiting room. South Florida. We bought a lot there over the years. You know, sunny there. It's not always sunny in Philadelphia, but it's always sunny in Florida. You know what I mean?

I love that. God's waiting room. That's funny. So the reason I was asking that about different states, so you're in 30 different states, you're all these different asset classes. How much do you need to know about where you're buying and what, what you're buying? Because essentially you could end up owning that property, right? That's not your business model, but if you have to, you will. So how much do you need to understand? Are you buying it at enough of a discount that it, it's, you know, you're not so worried.

It's always important to know what you're buying. Never buy your ass, an asset, anything without seeing it. Now I'm not saying you have to see it. And I've only looked at maybe 5, actually visit about 5, 10% of the assets I've ever bought. Usually I'm relying on vendors or realtors or third party experts to go and take pictures of the property. I mean we're buying a portfolio of 50 and it's in 12 states. I can't jump on a plane and look at all 50. Doesn't make sense. It'd take forever to do that. Whereas I can delegate through social media. Or there are companies out there that we can say, hey, I need a BPO on these 12, or hey, we need a realtor to go look at these 15 properties. Make sure we got videos or external photos and it's done in a week for us. So you always want to know and put eyes on an asset. Last thing you want to do is end up buying an empty lot cause you trusted a Zillow view where there was a property standing two years ago. Okay, always, always, always have somebody put eyes on the asset. The next important thing is I always tell people, don't start off in 20 states. I'm buying in 30 states because I've been around for 12 years. Start off with two, three states. Understand what's going on in those bigger cities, know the foreclosure timeframes. Cause to foreclose in Texas is really fast. I mean we do things fast here in 30 days. New York takes three years in some cases. So you need to know what's going on with the legal ramifications. Can you foreclose quickly or is it a drawn out process? You need to know what it's cost. So you need to be putting your teams together in every city. Good realtor, good property manager, good. If you do end up having to rehab the property, you need to have some crews ready to rock and roll for the most part. And start off one, two states, three states maybe. And as you grow, as the markets change, like when I first started, I didn't buy a lot of stuff in Michigan. Five years into the business, I started buying a lot in Michigan because it became a lot cheaper for us in a lot of different ways. And so states. I live in Austin, Texas. I love Texas. I love tacos, I love barbecue, I love margaritas and cold beer. Doesn't mean I buy a lot of assets here in Texas because I think it's overpriced. So I buy a lot, like I said in other states that I can get a bigger bang for my buck. I mean 100 grand I can buy, you know, five, six properties in Ohio when I might buy a dog house in California, you know what I mean?

So I think you mentioned also there earlier that you guys raise money now. So like what, what is your typical transaction kind of look at? There's no typical transaction, but just a high level just to give people an.

Idea of what it's so giving people an idea. Well, and some of the trades we're buying in bulk and that doesn't mean like million dollars, two million dollars. I mean we've had trades like that. But when I look back at things we're buying average half a million dollar trade, 350 to 500,000 because we may make offer on 30 and after due diligence and bidding we may be down to 10 or 5 in some cases. So that's about 250 to 500,000. But normal purchasing transaction on a mini bulk deal, 5 to 10 assets, we're usually securing the money for 2 to 3 years because it takes a while to work the assets out. It takes a while in some states to foreclose. It takes us about 60 days once we buy a note to really start working with the borrower to get them on track to see where they're really gonna go. Are we gonna have to go to the foreclosure route or are we gonna be able to keep this borrower in their house and get them back on the track to homeownership and take away that nightmare and get them back on being happy that they have a mortgage versus being afraid of the phone ringing every hour and stuff like that. So it's, we look at stuff, we remove stuff. If we see bad values or if we see a lot of vacant homes, we don't buy a lot of vacant homes. We actually provide for occupied because then somebody's taking care of the property. If it's a vacant asset, it's been vacant for more than six months. The copper may have been stripped out of it, the air conditioner may have gone on vacation. If it's in Michigan, it may have an indoor water feature, indoor skating rink, you know what I mean? Something's been trashed out in a lot of cases. So if I can buy something that's occupied, I can tell a lot about that bar by looking at the exterior of the property. Is the lawn mowed, Is the car decent? Do they have plants out or a flag or kids toys, you know, how long they lived in it? We get a lot of information on the borrower, so we do some social stalking, you know, look at what they're Doing on Facebook. We get the call logs to see if they've been nice, when they've called in to make a payment or if the bank has called them, whether they were very friendly or they told them to F off. That will help us determine. I mean, I had one borrower who posted on Facebook, we were checking her out and she's like, hey, yeah, should I pay my mortgage this month or should I go to Disney World? I'm going to Disney World. I'm like, and we're gonna foreclose. You know what I mean? Or another one. Look at the brand new car I bought. Oh, you're paying that with your monthly mortgage payment. You're not paying us. So let's have a come to Jesus meeting really fast. So it's always an interesting day in the note business. You get a lot. You do a lot of the same things. A lot. Kind of like hurry up and wait stuff. But there's never a dull deal. There's always something like, I had a lady today who runs a daycare out of a house, and she fraudulently signed my name to the county daycare association. And I'm like, yeah, that's not my name on there. I did not give permission for her to have a daycare in that house. And so it'll be an interesting conversation tomorrow when she calls me back, hopefully.

That's really interesting. Yeah. So then from that social stalking and from that, you call it, from that understanding of what kind of what's going on.

Yeah. Pictures tell a thousand words. And while it's great to look at Zillow photos, stuff like that, we do a little bit deeper dive. We, you know, we'll. In our due diligence of the property, we'll call the local zoning department. Hey, has this property ever had any issues? Is there. We're checking title to see if there's any other liens, weed liens, or other things on the property. Checking the borrower, do they have any outstanding judgments or things against them? You know, looking at the taxes, the taxes paid, you know, that's a big thing that you always have to do due diligence on. Are the taxes being paid? If not, is there a pending tax sale? Did it get wiped out in a tax sale? You know, some people won't do the basic due diligence. And there's a lot of moving parts, notes. Just like anything else. You just. It's a little bit different mindset than it is for your traditional fix and flippers, because fix and flippers are gonna look at that. Like the after repair value. I don't look at the after repair value. I look as the as is value. Cause my goal is hopefully never have to end up with that property, but end up with just a cash flow for six, seven or heck, 30 years in some cases.

So where do you make the money? You make the money because you bought the mortgage so cheap or where does the cash flow come in for you?

Good question. There's bas basically three ways to make money in the note business. When we buy the notes, we're buying at a discount. So if we can get the borrower to start paying something, that's cash flow, okay, monthly cash flow. Usually we want to borrow if he's been behind, he or she's been behind for a while. We want them to bring some skin in the game to the table, some extra. So that's the second way. Bringing three, four, five months, ten grand to the table to reinstate their loan or get us back on track. Third thing is if they won't play ball with us, then we can go the legal route and foreclose, take the property back and sell it as an reo or sell it at the foreclosure auction if we want to. If they do pay and are paying on time after 12 months of on time payments, Barry, we can often sell that note back to the market as a re performing note. So if we bought it say at 50 cents on the dollar, get them back on track, we made cash flow along the way, and then we may sell it at 85, 90 cents on the dollar, back 12 months later to another fund, another bank or another investor without having to do any fix and flip or rehab or anything like that too. So that's what I like about it. It's really kind of turning out mailbox money. But wire money as people come in and either comes in in cash flow that we don't have to worry about toilets and tents and trash outs because nobody ever called their banker at midnight to come unclog or we end up with a payoff. I got a borrower right now who's paying off. We bought the note at 33 cents on the dollar. They've been paying on time for a little while, got their credit back up to working. Now they're paying me off. Be a nice sizable chunk out there. And I got another borrower last month who'd been paying on her mortgage for six years that we bought at a big discount. She paid her mortgage off in six years versus 30 years. And so that's a really a great Story. She's lived in the house for 30 years, you know what I mean? And so lots of great ways to make money. Usually it's cash flow and either payoffs, cash flow or we take the property back, either keep it as a rental or owner finance or sell it as an REO if we need to.

And then if you have to foreclose it, I guess it depends on the state, right? How much, how much work. And I guess it's different. Right. But just maybe again on a high level, roughly, like what does the foreclosure process look like?

That's a great question. That's a good question. So foreclosure will depend on how on the state it's in. Like Texas is like 30, 21 days. If you're 90 days late and we publicize at least 21 days prior to the first Tuesday, then you would foreclose like 1000 bucks. Not very cheap because we're a non judicial foreclosure state. Now you look at like New York, which is a judicial foreclosure can take over two to three years to foreclose and cost you ten to fifteen grand. Okay. Most states are somewhere between six and nine months to foreclose. So that's the thing that you kind of figure in, that's why we get the discount a little bit bigger, is because we are taking on that issue of having to foreclose and we know we'll have to drag it out. But my goal is not to foreclose. If it's going to cost me five grand to foreclose, the first thing that I'll do is go to the bar and say, I'll offer them if they can't pay a grand or two to walk away, give them cash for keys and lock to speed up our velocity of capital to take that property back and move it. So, you know, you still end up foreclosing about 30, 40% of the time. No matter what you try to do, people will just hide their head in the sand. People always ask me too, it's like, oh, do you have people that will vandalize the house on their way out occasionally. Well, that's why you have insurance that covers your butt in case that happens. I had somebody that was burning down a property that we victim from, they came back with a can of gas and burned down the garage. And I just had to chuckle. I'm like, thank you. You just made me 20 grand because the insurance kicked in and now you're going to jail, you know. So yeah, foreclosure Is not difficult. You just. I don't handle it. Once we start the legal process, I'll let my attorneys handle that and my servicing company and they take care of all that. And then they just alert me as things pop up, what do I need to do? Here's what they're trying to do. Here's what we need from you and go on for. This is the beautiful thing about the note business is our vendors that handle most of the heavy lifting, servicing companies, they handle the collections of the money. They handle the mailing out. So I have a conversation. My servicer, once every two weeks, we go through my spreadsheet of what we have on file with them, what's going on, and then my team reacts from there. And you know, that's the beautiful thing. That's why I can do this business from where I'm in Austin or LA, or middle of the. In Barcelona or wherever I'm at on vacation. I can do this business from anywhere. Yeah.

So like for example, in Dallas, like you said, right. 21 days to foreclose. So after those 21 days, that property is yours.

Basically, the first Tuesday of every month in Texas, we have the Super Tuesday. So they foreclose, the county steps, we get what it calls a sheriff's deed. And then basically, if they haven't evicted already or haven't left the property, then we file the eviction papers and a couple days later they're evicted from the property. I don't usually like to go that route. Usually if we do foreclose, then we come to them and say, listen, here's a grand. I need you to get out of the property. Let's get you out and do something good for. Keep the property in place. Give me the keys. You know, where's everything at? Let's, you know, I don't like to foreclose, but we still end up doing it a chunk of the time anyway. I try to limit that in the front end and try to work with borrowers. If I see a borrower has been very communicative with the servicer calling the bank or trying to make a payment here and there, you know, I'm willing to work with them in some sort of fashion versus having to be the bad guy that kicks them out. But it is what it is. I run a business. I don't run a charity. And if you. This is why you have servicers and attorneys. If you can't handle evicting somebody, then you need to put it in somebody else's and let them handle it.

But so what's the difference between some. Some just get foreclosed and some go to the foreclosure auction.

Well, I say a foreclosure there. I mean a foreclosure auction across. Because basically. So in a non judicial state like Texas, you file and then the crier comes out and try. If the borrower's got, you know, their seven days or 21 days to try to make it up. If they don't do anything or file bankruptcy, delay things, then the crier cries it at the auction on the courthouse steps. There's an auction and then basically I get my check if it auctions off. If it doesn't auction off, then we go and evict the person and take the property back and sell it. Now, in a judicial state like Florida, you've got to go through a court proceeding. It may take you nine to 18 months of going through court proceedings pre Covid. All right. As things get delayed. And then once it does, then the judge will then set an auction date, official date, and then they'll go on a courthouse step and get auction at that point. So in non judicial, you don't need to go through a judicial process. In judicial states, you've got a little bit longer process and timeframe.

So any foreclosure that you see on Zillow or that your Realtor sends you, that's already usually been to a foreclosure auction. We bought it and then they put it on.

They've done all the legal stuff to take the property back. Exactly.

Interesting. This is fascinating. So if anyone wants it to get started, you have some tips, like, because it sounds great, right? But it's. And you make it sound easy, but you obviously it's not.

Here's the thing, it is a different mindset. And if you're coming from. I've had people that come into the fix and flip mindset and they like start buying bidding on a note. I'm like, whoa, whoa, you're overbidding. You don't need to bid that much. You're bidding more than what's owed. You don't need to do that. So it's a different mindset being a banker versus a fix and flipper or a landlord. So you gotta learn it. There's a lot of videos on YouTube. You know, we've got an ebook. I'm glad to give them away. If they want to go to noteblueprint.com freebook, they can get my 73 page ebook for free. It's an easy read because you have to have a banker's mindset. Banker are going to think. Bankers aren't in the fix and flip or the property management. They want that cash flow. They make their money by the velocity capital, getting, taking money in at cheap rates, lending it out, making loans and getting that cash flow to come in that they can leverage. So you know our YouTube channel, we close Notes TV, we've got over a thousand videos on there in our podcast as well. We're excited to have Barry on our podcast here in a few weeks, but we spent a big chunk of time going through little nuggets of training and it's just a process like anything else. It's something new, it's a new tool to use for a lot of people's. It would be a lot of debt out there. As we were talking. Second, you know, the market's in an interesting place right now and we expect to see a lot more distressed debt hitting the secondary market that we can bid on here in the next six to 12 months.

Well, good, good job looping that back around, man. I appreciate it. So yeah, no, that was interesting, right? Because nobody knows what's going to happen, right? There's like so many variables and like everyone's making predictions and whatnot. But I'm sure like if you're dealing with direct with a bank, you've got a feel for it much better than anyone else, right? So what are you kind of seeing and what kind of are you feeling?

So we track banks, we track about 1600 different banks across the United States that have at least five branches or more. The reason we look at branch wise because when you start having more branches, you gotta be a little more flexible in your lending, okay. To cover your overhead and things like that. And we're seeing a big increase quarter over quarter as banks, these banks file their quarterly reports with the fdic, we're seeing a dramatic change in their defaults. You know, a $50 billion increase every quarter. For the most part. When you start, you know, driving it down and looking at the specific numbers, a lot of that's residential, but a big chunk of that is your small balance. Commercial stuff, you're sub 2 million and below. With the default rate in America still being around 8%. You know, that's, that's 1 in 12 borrowers or at least 90 days behind on their mortgage. Think about that. But here's the thing. It's scary the most before this all happened, Barry, before COVID kicked in, 1 in 10Americans was at least 30 days late on their mortgage already, okay? So it's gotten, it's not, it's going to get worse before it gets better. It's going to be interesting what happens here in February when they do finally lift the evictions and foreclosure moratoriums and let it be a free for fall. I think some states will continue to delay things. Some states will be like, hey, we've got to let it go. The investors are hurting just as bad as the borrowers out there that haven't been paying the tenants. So I think I saw a stat, the story in USA Today talking about how they expect about 40 million Americans to be facing evictions if things don't change. And so something's got to change. It means people aren't paying their rent. It means renters or landlords can't pay their mortgage. A lot of cases if they're not paying their mortgage. You know, there's a lot more defaults not just on the owner occupants, but also investor style loans across the board. When you and I were talking about that too, you look at hotel loans being in big default, you look at student housing being in big trouble, restaurants, small business owners in America are really taking it in the teeth. And so there's a lot of distressed debt that we're already seeing from banks. But these banks, we're seeing a steady increase in numbers. And the banks have been, before they sell a note off, they've got to take in reserves, taking money to reserve it to offset some of these losses. And we've seen a big increase in reserves over the last 90 days. So I'm expecting the numbers when we get the reports here in the next week, it's going to be even worse than it was back in December.

So when you say the bank is taking bigger reserves, what does that mean?

For them to sell a loan, they've got to bring in money and hold it in reserve. So when a bank starts holding reserves, which is a number they have to disclose, that's usually a sign they're looking to sell off some debt the next quarter to offset losses. So that's a number that we track besides default rates and 90 plus defaults and stuff like that. It's a, it's. And you'd be surprised. All this information is basically out there. If you go to the FDIC websites, you can actually pull up a bank's quarter reports and they'll tell you how good or bad it is. Just gotta know where to look.

Interesting, interesting. And so you guys are personally seeing more notes become available now as opposed to this time last year.

Yeah, yeah, definitely. It's. I mean, we've always, I mean we've always had defaulted debt. There's always been foreclosures and stuff like that. But. But yeah, the numbers have definitely started to increase. More spreadsheets and tapes are coming in. We've seen more banks reaching out that I didn't talk to in a year who wouldn't return a phone call or an email are starting to return phone calls. You know what I mean? So it's an interesting thing. Once a month, usually I spend a day calling banks for like four hours, four to five hours. And I will do it via Zoom so our students can watch and used to be I would be lucky if I made 50 phone calls. I would probably get 12 or 13 voicemails or talk to 12 or 13 people this time around. Out of 50, I'm talking like 30 to 40 people and people are. If I would leave a voicemail and never expect to be returned. But now the voicemails are being returned or emails are being returned quite rapidly. They may not be selling right now, but they're starting to take stock of what they have in their books. That's getting ugly and looking for people to offload it here in the next 90 days. And that's the thing. A lot of people, they're looking for that big foreclosure or REO tsunami for foreclosures. That's not gonna happen. You won't see that really start happening till the end of the year. If not moving into 2022 because of the foreclosure delays, the time for these things to hit the market and just kind of the trickle down effective for it becoming an rem.

Yeah, yeah. You never know what the government's going to do either, right. Extend the eviction moratorium. Extend for, you know, forbearance. Right. What's. What's to say that they don't extend forbearances for another.

Exactly. As I say, kick the cane down the road. They kicked the can down the road for a year now will they do it for another six months? Who knows?

Right? Exactly. Yeah, yeah. Really interesting. Well, thanks, thanks for the insight, man. Really interesting. But as this show is called Wrestling with Real Estate, you got to get warmed up.

I got a little loose here, baby.

As this show is called Wrestling with Real Estate, I like to ask some wrestling related real estate questions. So what would your wrestling name be if you picked one for yourself?

Oh, that's easy. The Calfman. All right. Carney. The Calf Man. Carney. The calf man. I got 19, 20 inch calves man, from walking on my toes for years. So that's been my nickname for my friends, whether it was the calf man. So that would be my nickname. The calf Man.

Awesome. Awesome. The calf Man. So every wrestler has a special move. What would your special move be in real estate?

You think, you know, oh, well, I'm the note guy. Definitely be in the note side of things. I would have to do the calf lock across somebody's head, you know, put them in. Instead of a headlock, it'd be a calf lock to squeeze them out there, choke them out that way. But one of the things I think I like doing is killing with kindness if you can, you know. And this is one of the things I tell my staff and as we're reaching out to borrowers, hey, let's just. You never know if somebody's having a bad day. And borrowers when they're stressed out and they haven't paid, they're worried about being evicted in the big bank coming up. And I always tell them like, look, just try to be nice, kill them with kindness a little bit. If they're yelling at you, just sit there and absorb it and tell them. Or trying to come up with a solution for you. If you can't, then we'll just kick it to the attorney. Let's do it. But yeah, my closing move would probably be the calf. The calf lock from the top rope for the most part.

The sweet calf lock. Right. Because you go exactly what's been the biggest body slam you've taken in your.

I am not a fan of Chicago. I will tell you that. Chicago. We bought a million dollars of assets in Chicago. Some nice looking three brownstone, three story stuff. We bought them at like 49 cents on the dollar. And Chicago is such a corrupt place to have to foreclose now. Took over two years to be done with that portfolio. I lost about $300,000 my own funds in that. Paid our investors back. Glad to be, but takes forever to foreclose. And then we would evict the tenant and then they would break in, steal the copper, steal everything. We replace it, they break in again and steal it. We had one property get vandalized four times in a row. They even stole the doors, the big metal doors off of that we put in place one time to do it. So I'm not a fan of Chirac, okay. Or Crook county in Chicago. If you live there, great, fine, they will work with you. But if you're an out of state investor, they Have a tendency to side with the borrowers and delay and delay and delay. So I will not buy in Chicago just for that factory. So that was a big body slam about three years ago. We got through it and we're wise. We're wiser now for the better. And, you know, what doesn't kill you makes you stronger and you keep rocking and rolling. Right, Barry?

Yeah, absolutely, absolutely. So was there a moment that you were standing on the top rope, getting ready to jump, but you were too scared? How did you overcome it?

That's, you know, that's a good. I'll tell you a story that goes back to probably one of my first deals back in 2004. I'm from a town south of here in Austin called Corpus Christi. Texas is on the water. And I went to my local real estate club and I had a couple investors there that were pitching this 29 door deal. It was like an eight plex, a five plex, and a bunch of duplexes and triplexes. And I knew the area. I was like, oh, it's worth 1.1. They want half a million. I thought, that's a pretty good deal. And I went into my office and I told my mentor about it, and he's like, well, make an offer. I'm like, well, I don't have the half million. We'll make the offer. If the numbers make sense, go and do it. So I, okay, sheepishly made an offer, didn't think about it. That was a Friday, Monday, I get a phone call and it's these guys, like, hey, can you come up to 5:15? I'm like, sure, I got 500. Sure, I'll go to 515. Okay, then you're accepted. We accept your offer. I'm like, okay, great. Oh, great. Oh, shit, what'd I do now? Right? Went to the office, told my mentor. I said, how are we gonna fund it? He goes, I'm not gonna fund it. You're gonna fund it. I'm like, huh? So he said, you know all these people you've been talking to, these other investors, you know the deal, you're from there. If it's a good deal, get on the phones. So I started doing it. I dialed for dollars. In a matter of about four hours, I raised $3.6 million in people that were interested in funding the deal. And I was all excited about it. So a couple days later, I drive down to Corpus, go take a look at the property. Turned out to be a biggest pos. You know, it had a lean on it you know, the nine plex, the bottom of the doors was actually cut off so they could close the doors. You know, it was that kind of thing. So it was a deal I didn't end up doing. And I was really embarrassed driving back like, oh, man, my investors are going to think I'm an idiot. All that self doubt that we talk to ourselves a lot of times. And as I picked up the phone and started calling them back and told them, hey, this is not a deal, it's going to go through, and told them this stuff, you know what they all said? They all said, well, call us on the next one. And that was probably, to this day, I just had a little hair in the back of my next standup. That's probably the biggest thing that I think. Not every deal is a winner. If you do your due diligence and know your deal, you're doing your investors a favor by saying, no, I'm not going to do this deal. We're going to wait for the next one, then we'll appreciate you for you. And so I think that's the biggest thing. Every time I've gone against my gut, it's cost me, you know, Chicago, I was all excited about it, but it kind of went against my gut a little bit and I ended up hurting. So trust your gut. If it's the right time to jump off, jump. Okay, Ready, aim, fire. But do yourself a favor, too. Don't suffer from paralysis. Analysts or analyst paralysis, whatever. When you overanalyze deal, talk to mentors, get a team, call Barry. You know, that's what this podcast is so great about. So many people on here sharing nuggets. Pick up the phone and call and talk to somebody. Does this deal make sense? Because the most successful people are the ones that'd be the most giving of their time and they don't want you to make the same mistakes that they made. And if you want to do another thing, here's this big surprise. Barry didn't ask me to do this. But if you're listening to this, going over and hit the subscribe button, leave that five star review for Barry too. He's doing an amazing job, you know, for the top rope, baby.

All right, I love it, I love it. You're hitting that, hitting them with that elbow so you can get to get them to subscribe and like. Yeah, absolutely. Thank you. Yeah, if you, if you guys want to give a five star rating and write a review, that would be awesome. But yeah, that's. But that's so true. Right? You've just got to jump at some point and you've got to move forward, right? Otherwise you'll just be stuck there scared for a while.

And it's like there's no perfect deal. And the only way you get better at this business is by practice and taking that leap. And you're going to learn more by doing pulling the trigger on that first deal and messing up and failing forward. That's a good old thing. Just talk. If you have mentors, they can help you avoid the pitfalls, but you're not going to learn until you actually jump off the rope.

Yeah, absolutely. Absolutely. Well, Scott, man, this has been fun, man. This is like you're a great guest. No doubt about that. Full energy, full of great information and some good sound effects as well, right? I love that Scott has his own sound effects that he brought with him to this show. There we go.

That's best 10 bucks I've ever bought, man. Best 10 bucks I ever bought there for you there.

That's awesome. That's awesome. Well, hey, man, before we go, where can people find out more about you if they want to get in touch with. How can they do so?

Yeah, easiest way is go to our website, weclosenotes.com you can find me on all social medias at one Scott Carson, for the most part out there, but our website, the podcast, the Note Closer show, go to weclosenotes.com you'll find everything that we do, our classes, our podcasts and training and all that good stuff.

Cool, Cool. Well, have awesome rest of your day there at the beach for people that can see a video. He's got the beach behind him. So awesome, man. Thank you so much. It was a lot of fun. I appreciate. Have an awesome rest of your day.

Very honored to be here, buddy. Keep doing what you're doing, man. Keep rocking and kicking ass, man.

Thank you, thank you.