How Investing In Real Estate Backed Notes Work With Scott Carson From The Fortes Company With John Fortes

A lot of investors I partner with have one major challenge. They are busy professionals that love to create memories with their families but are too busy to actively look and find value. Add real estate that cash flows hey guys, I'm John Fortes and I want to partner with you. I provide investment opportunities through apartment syndications that allow my partners to invest passively so they don't have to worry about trading more time for money. If you are interested in creating passive streams of income, wealth creation and all the tax benefits that come along with investing through real estate, I encourage you to fill out the form at www.investwithfortez.com. invest today so that tomorrow you can trade money for time once again. That's www.investwithfortez.com and I can't wait to partner.

Are you a busy professional looking to diversify your portfolio? Ever wanted to passively invest in real estate but don't know where to start? John Fortes with provide you with a guide to passively invest in real estate. This is the Passive Investor show. And now the Passive Investor Show. Here's your host, John Fortes.

Hello PI listeners. Thank you for lending me your time today. Welcome to the Passive Investor Show. I'm John Fortes. Our goal is to provide you, the busy professional with passive investing tips and tricks for your real estate investments to leverage more. Time for you to focus on your true passions. Let's get to work. Welcome back PI listeners. This is John Fortes and today I got a wonderful guest with Scott Carson. Once again if you're a first time listener, this podcast is focused on quick nuggets, easy to digest, it's information and we just want to give you the content, you do with it what you want. So today we have Scott Carson. Scott is a podcast host of no Closes show and a nationally syndicated radio show. He's also a sought after speaker, featured on media outlets and active real estate investor and he's an active real estate investor and entrepreneur. Scott, most bios are too long didn't read. First of all thank you for coming on. Give me a little bit about yourself.

No problem John. Thanks for having me on honored here. I've been an active real estate investor for over almost 20 years now. I guess you could say for the last 12 years has been focused on the niche of investing in debt, investing in mortgages, especially with the Great Recession. Twelve years ago we had a lot of non performing notes. That's what I really started buying back then was non performing notes and then working to get the borrowers to get either a re performing or to either give the house back if they could, if we couldn't come to a kind of a win win scenario, or worst case, if they don't, didn't want to pay, didn't want to work with us, then we'd go the legal right and go to foreclosure. But for your audience, I think the best thing that everybody needs to realize is we're all in the debt game. We're all in the note game. Just most of us have payments going the wrong direction. We have it going out versus coming in. And so one of the great things that's been happening the last six, seven years is a lot of the non performing stuff has become performing. So performing notes are a great investment strategy for those that are looking for passivity, looking for a decent return on their investment. It's not going to be, as I like to say, adjusted by Wall street where you can lose 30% of your portfolio in a matter of a couple weeks. Like what's going on right now. Now don't be wrong. We have some, we're going to see some issues with people, job loss and things like that, but most people will pay their mortgage instead of the car payment, the credit card payments and stuff like that too. So that's kind of what we focus on, is teaching investors across the country how to dive into that, the game of notes, or as we like to say, paper profits. Whether it's buying non performing assets at huge discounts or buying a performing note that's going to yield 8 to 12, 15% return on investment to them.

That's awesome. So walk me through that process for you. How do you find the note, how do you buy it, what are you buying it for and all that. Walk me through that.

Great, great question. You're not going to go down to your local bank of America or Chase and say, hey, I want to buy your notes. They're going to call security and have you escorted from the building. Okay. But there are still hundreds and hundreds and hundreds, if not thousands of banks and lending institutions that either have debt. You know, banks make money by creating mortgages. They take your. For every dollar that comes in, they lend it out 10 to 12 times so that they're making points, they're making fees, things like that's why banks are the biggest companies out there in the biggest building. So we buy notes. Like we deal with a lot of regional banks, some of the major banks. It just depends on the price point. But for those who are looking to it, you're not going to Talk to the vice president of the branch. You're going to deal with a couple internal departments that go by a couple specific names like special asset managers, secondary marketing manager, the whole loan trading desk. These are the guys and gals that are looking at the bank's portfolio, what they have and see how everything's looking. Filing quarter reports with the FDIC and they have to stay at a specific balance amount of having mostly performing. If they start seeing an increase in defaults, they're going to be looking to sell stuff off their books because for every $100,000 loan, it's cost them roughly about a million dollars in fees in ability to reprint money by arbitraging their funds and things like that. So you're going to deal with internal apartments. Not every bank is going to have something on a regular basis. Some will have it quarterly, some will have it monthly, just depends. Some will only sell their notes once a year. So we deal with a lot of these internal bank departments by reaching out to them. Hey, what do you have in your books this month or what do you have this quarter? You know, the end of the year and the first quarter are often really great times to reach out to these bank managers. And they'll have performing and non performing assets. It just varies what they'll have in the books. Most of them will have stuff all across the country depending on where they're lending. If they bought a bank or portfolio from another bank, it'll depend where it's at. And oftentimes we'll get lists in from these banks that we can cherry pick or do a carve out, you know, five, 10, sometimes they want a minimum amount bought, but a lot of times especially smaller in your regional banks and also a lot of your lending institutions that have sprung up over the last couple years, they're looking to sell stuff off their books that you can cherry pick. And then it's a matter of doing some due diligence. You know, looking at the loan parameters, what's the value of the property, are they paying, are they not paying, what's the foreclosure time frame in that state, you know, the average days on market for, for sales, looking at the notes from actually the borrower, you know, have they called in and communicated if they've been in trouble, you know, have they tried to make payments, have they tried to do a loan mod? Are they in a loan mod? Did they get modified from a few years back? Are they working? You know, is there especially right now with what's going on? The market is There is there. Are they in a job that's still providing them money, are they still working? Or are they in a, you know, an industry that's been hit hard with this new recession they've had? So there's a lot of due diligence that goes into looking at this stuff. It's a different mindset than just looking, hey, look at the value of the property, what I'm buying the property for. You're not. With note investing, you're not necessarily buying the property. You're buying the paper, which is secured by the property as your collateral for the most part, or the investment amount. So it's a different mindset than just fix and flipping or being a turnkey renter. You have to look at the, you know, realize that, hey, if you're buying the paper, it's the cash flow, it's not rental, it's the cash flow that's coming out of the mortgage. And as I always like to say, the banks always get paid first. It's a good secure position to be in.

That's awesome. Scott keeps referencing the market and if you're listening to this in the future, it's COVID 19 what we're going through right now. So how do you buy the notes for cash flow? Like what are you buying it at? Are you buying it at a discount?

Yeah, so I like my money to making sure it's making double digits. You know, most people, if they're doing it passively, if they're lending money out, they're gonna get somewhere between who knows what's going on in the market right now. But usually if you're lending it 6 to 8%, 6 to 12% in private loans and stuff like that, that's not bad at all. We can see stuff like that. It all depends on what you're wanting to make. So when we buy performing notes, we're usually buying something that was non performing maybe a year, two years ago that has been re performing where the borrower's been paying on time for 12 to 18 months now, in time, and we'll buy that at a discount, that will yield somewhere around a 12 to 15% cash and cash return to us. So let me give you an example. If the borrower owes 100 grand on a property that's worth 100 grand and the mortgage is at 5%, well, I'm not gonna pay 90 cents on the dollar for that loan. I want my money to make at least 10%. So I would offer a 50% discount to buy that note so that a I'm getting a 10% return based on the interest rate and the payment streams. Now if the borrower's been paying on time non stop, you're not gonna get. Most banks won't sell their performance stuff at $0.50 on the dollar. They're gonna sell it at 80, 85, $0.90 on the dollar because they don't want to take that too big a haircut. But the non performing stuff is where you get the biggest discounts. 40, 50, 60% off of what's owed or the value of the property. And that's our whole goal is buying the non performing stuff to get it reworked so that it is re performing now. Because if I can buy it at 40 cents of value, it's a 5% interest rate. Let's say I get them to start performing well, I'm going to see about a 12% cash and cash return based on making those normal payments on time. Again. I hold on the asset for 12 to 18 months. I've got that nice cash flow. The value of that mortgage now is considered a reperforming loan that I could sell in the secondary market or other investors at 80, 85 or maybe to another investor who's wanting to make 6% in their IRA. That's not making anything selling at 85. I just now made another 35, 40% of profit on the back end and now I've got a good return on investment. I can turn around and go, I like to say double down by two assets that are cash flowing or vice versa.

That's pretty cool. I like that. I like the fact that yeah, yeah, yeah. You're putting in a bunch of exit strategies in there and different things where you could do. And also they can pay it off too. Right.

That's the beauty of this. There are basically, if you're buying notes especially non performing, you got about 10 different exit strategies. You can either flip the note to somebody else wholesale if you want to, you can keep it. You try to get a re performing. If they don't get re performing then you do a loan mod of some sort. If that doesn't work, you can try to have the borrower maybe have somebody come in and assume the loan take over payments. If that doesn't work, you do a deed in lieu cash for keys to take the property back and sell it. You can offer to do a short sale if they owe more on the property than what it's worth. If they've got some money sending 401k retirement accounts, get a cash payoff which is Always really nice. If they won't work with you and they tell you a pound sand, then you go the legal route and foreclose. If then you can take the property back and do whatever you want to with it at point. Sell it as an reo, keep it as a cash flow rental or owner, finance the property if you need to. And then also like I just said, if you keep reperforming, then keep it for a while and sell it as a reperforming note to somebody else if you need to.

I like that, I like that. You got a lot of different ways to go about it. So go ahead.

I'll just say that yeah, there's about nine, ten different ways to technically skin a cat for the most part when it comes to the no game.

Alright, so I'm just learning about note invested and I don't know too much, but I'm a busy professional. What do I do? I want to know enough to be able to feel confident to invest in a deal.

That's a really great question. I'm glad you asked that because it is a different mindset if you've been, if you like watching Flip this House or HGTV or something like that, those fictional TV shows, that's not how the note business works. This is a different mindset. There's different features, there's different things you look at. We actually don't look at the property for the most part. We look at spreadsheets and determine our initial course of action when we're bidding based on the numbers that we see, the values. We don't fall in love with a property. Oh, I'm gonna put up white picket fence and pick out paint, carpet, paint and carpet to the thing. That's the least of our worries. I have to do a rehab on a property. That's my least favorite thing to do. I wanted to, I want cash flow. I want to be able to do this from the beaches or from Spain. Well, maybe not Spain because Europe's closed right now, but you get what I'm saying. So the thing that you learn the most is there are a lot of videos. We do different trainings to help investors out there as well. We've got the podcast the Note Closer show which is come up about 600 episodes of educational training and talking to vendors. There's a lot of great information. Get yourself educated. You know the Debt, the Debt Game by Jim Napier is a great book that's out there. You can catch on that. Just educate yourself. More so than anything else, we have a lot of our students are doing this in their spare time, 5, 10, 15 hours a week because they're still working full time and they get in, they die, they buy an asset here and there, use their self directed IRA to fund the deal and use vendors to really do most of the heavy lifting. I mean, that's the thing. It's not like you're going out and, you know, mowing the yard and hammer nails. As a net investor, you have to, since you're dealing in the debt game, you have to have servicing companies, a third party that's reaching out to the borrowers and trying to collect. Yeah. If you have to foreclose, you're not going to go do it. You hire attorneys to go do that stuff for you. And then there's also other door knockers and other sources help with it. The idea is, hey, you buy it, performing, it performs. You never have to worry about foreclosing or going that route, which is what we all want. Unfortunately, that's not the case. You know, we've seen ups and downs and at some point you're going to have borrowers that go into fault just because life happens, you know, divorce, death, corona, you know, we're not talking the beer on the beach with Tony Romo answering the phone for you.

Yeah, that's what's going on right now. That's what's crazy right now. So.

Exactly. So, you know, just get yourself educated. There's different conferences and different, you know, webinars and like I said, just go to YouTube and type in note investing. You'll find a lot of people that are teaching people on there. Or our website, weclosenotes.com, we got a lot of free education on there as well too.

Now with all that's going on with the world right now, it kind of feels like the best opportunity for you guys to dive in. Right. To take over some notes or capitalize on some notes that might become available that are the banks just want to get off. So how is that working for you right now?

Yeah, yeah, that's a, that's a really great question. Now over the last 10 years, we've seen the market rebound and the market tighten up as values increased and defaults have dropped from, you know, 8, 9, 10% down to the low 2% of all mortgages originated. Well, we don't live in that world anymore. The world is different place now. So right now a lot of people are in that kind of, let's wait and see what's going to happen. You know, that we there's notices going out like bank of America announced last night or yesterday that they're going to give a 90 day window or forgiveness to people that are affected by this. I think Chase announced the same thing. You're going to see that across board. Even if banks and private lending decisions don't delay things, the attorney generals are going to step in or that the attorney or the governors are going to step in and delay foreclosures, delay evictions. You're seeing that especially in California and other places that are hit hard right now. There's going to be a delay. Now what happens after the delay? Will the government bail out the banks? Probably so. Will the government bail out people that have been laid off? Yes, we will see that, but I think we're going to see an unemployment rate skyrocket to somewhere between 15 to 20% based on the number of filings, the number of people that are affected. The tourist industry, you know, your service industry, then you have all the suppliers and vendors that service those two industries for the most part. So you're gonna see a lot of that. We're not, I don't foresee seeing any immediate impact in the next 90 days. It's gonna be after that 90 days. When we get through this hiccup, you know, in a couple years, we'll look back, oh, you survived the coronavirus, you know, scary. In six to 12 months is where we're gonna see more opportunities. I mean, I'm getting notices, I've gotten four emails in the last hour from lending institutions who are suspending originations. They're suspending unless your loan is set to close this next week. They have suspended all originations or refinances because they're expecting a decrease in property values. They're expecting an increase in defaults. They don't want to write a new loan and put money up that's just going to go in default in the next 90 days. So the real opportunity I think is going to come in 90 days plus 90 days plus to six months once we kind of everything shakes through. And then that's the opportunity to come across and start buying a lot of stuff. Buying and looking to work it out with the homeowners. If you can get money cheap, like 0% financing right now, oh my gosh, Wall street is just licking his chops. Because if they can get a billion dollar loan at 0% and they buy loans at 3%, that's not a 3% return, that's a 4%, 300 or really an infinite return on investment to them to think about that. So with all this money being printed, there is opportunity, but it's kind of just wait and see what happens, what steps the banks, the government takes and then go from there. I mean, we're gonna see defaults, there's gonna be opportunity. Just gotta see where it's gonna come from.

That's awesome. Just gotta be patient with. Sounds like that 90 day window with the experienced buyers they might get, for instance, they might reach out to you sooner because they already know what's coming down the pipe. And you might have the advantage of being able to be in position to buy them before anybody else. Right.

And that's the thing. That's why we've worked so hard to make relationships over the last decade is just touching base with people. Hey, you know, and it's the same with anything. Stay connected, talk to your people. If you've got property for sale and it hasn't sold, you might want to look at reducing it. A lot of people, I was just on the phone with some friends who have quite a few Airbnbs. They're not. They had a couple that were going to be put on the market. They're not putting on the market right now. They're waiting to see what happens. Others are reducing their dollar amounts. This, you know, the cost and the nightly fees to rent to try to keep up with a decrease. I mean, try to help themselves with a decreased demand for stuff like that. Or they're reaching out to local hospitals or they're near military bases and things like that. With the National Guard trying to reach out to those where they're going to see an increase in people coming in to try to help fill their spots. Yeah, people just aren't traveling. You know, we're gonna probably see a travel ban here before too long. So just make sure that if you've. If you're one of those investors with some stuff, hey, expect to reduce your cost to try to keep up with reduced demand for if you can.

Thank you. Thank you for that. So, Scott, we already touched on the importance of educating yourself and getting familiar with whatever investment strategy you're going to take in real estate, in this case, it's notes. So what's the one nugget you can give us that'll help us as a passive investor to really be able to capitalize on the next opportunity we see after we get comfortable with the sponsors. What can you give?

So here, here's the biggest nugget. I tell people I wish we all had a crystal ball, but that doesn't happen. At some point, the first thing is you have to do is educate yourself. Learn something about what you're going to dive into. Never invest in something you're not knowledgeable with or comfortable. That's the best advice I've ever gotten. You know, never invest something you're not comfortable with. But then also do yourself a favor. If you're educating, reading and understanding things, then get in and pull the trigger. Get in the game. It doesn't do any good to sit on the bench and watch everybody else do some things. Take advantage of the opportunities, learn about that opportunity and be ready to strike when the opportunity arises. Too many people sit around and wait to the very end. I mean, everybody here in the last 12 to 24 months, like, oh, I'm getting in and get buying real estate. Well, it's at the peak of the market. You're not. You're also gonna be the biggest losers going down. You have ups and down markets. There's money being made. You just need to know where those opportunities lie. So educate yourself. Talk to the people have been through this before. Talk to your real estate investors that went through the downturn 12 years ago, that lived through the 8, 9 and 10 recession. Ask them what they did, what they're planning, and then learn as much as you can and be prepared to strike.

Yeah, I like to throw something on top of that is if you believe in the asset class that you're investing in, at some point you gotta bite the bullet and make the move. So yeah, if you have strong conviction about it, you gotta go ahead and do it. So thanks for sharing that, Scott. One last thing. Where can we find you?

Really easy? You can find everything at basic our mothership website, weclosenotes.com you can go there for the podcast that we have. You know, we've got three different podcasts that we put out on a regular basis. One is the Note Closure show. One's a webinar that we do every Monday night called Note Night in America. And then other ones, just an educational class that we did called Note Camp, which is a great spot to go to to kind of get your feet wet on the note investing space. But go to weclosenotes.com, you'll find everything we have there. And I'd like to give away. We've got a free 73 page book that we wrote a year ago. It's a really easy read. It's free. If you go to noteblueprint.com freebook you can download that book. We're not here to sell your information. I just want to educate people on the world note investing. So noteblueprint.com freebook you can download it and go from there.

Three page book that sounds like that's 73 page.

73.

Page 73.

Yeah, yeah. It's still. It's a one page or three page like buy notes now would be what my book is. But no, that's not the case.

No worries. No worries. I thought you said three page book. I said.

Out there to write a book. Three page book.

I like it. You start a new trend. There it is digesting everything quickly. Scott, thank you for coming on. I appreciate you. One last part on words if you have any. Go ahead, feel free. The mic is yours.

Oh man. Here, here's the thing. Just do something. Don't panic. That's the most important thing I can tell you. People that panic are the ones that take the biggest losses. Talk about the guy originally from Apple who sold his stock for $800 years ago when he was first getting going. He's the biggest, he's the biggest regrets of not hanging around. Alright, so do yourself a safer wash your hands, don't panic, educate yourself and then take action. Sometimes, you know, people say ready, aim, fire. Sometimes it's better to ready, fire and then aim to go from there. But you know, learn about it. Take action. That's the biggest thing. Learn what's opportunities out there. If you've been hit by a bad thing, don't stop. Go out and do other deals. Go out and find other things that can happen and offset those losses or those momentary declines in the market. But I want to, I want to say one more thing. If you're listening this podcast, go on over and hit subscribe and leave John a five star review. He is doing awesome stuff. He did not pay me for that. But you know what, the checks in the mail, I can tell you that right now for that. But leave them a review. We all love that as podcasters. To hear what you like. If you found value in this episode. Hey, thanks for listening to John and thanks for listening to this episode. But give John a big five and he's doing awesome stuff.

Man. I can't believe you did that. That was unexpected. I'm blushing now. I appreciate you doing great stuff man coming on. Go listen to his show, the no closing show. Go to his website, find out more if you're. If you're ready to go down this path, go ahead and do it. I love what would love what I'm hearing and I love what you're doing, Scott. Thank you for coming on and sharing.

An honor as always. John. We'll see you later.

I appreciate you PI listeners. Thank you for listening. Till next time. Happy investing PI listeners. I'm grateful for your time and I appreciate you for listening. For more information, go to passiveinvestorshow.com if any of this resonates with you, please subscribe and leave a review. The more you know, the more we grow. Thank you for tuning in. Till next time.