How to Buy Debt to Be the Lender Through Note Investing with Scott Carson - Money Vision U Podcast

So a note is an IOU and everybody's in the note game already. If you own a mortgage, a car payment, student loan debt, credit card debt, you owe your cousin Bubba down the street 500 bucks, you're in the note game. You're just making payments on the wrong stream. You're paying outgoing versus incoming.

Welcome to Money Vision U. In this podcast, we are passionate about teaching the financial class you should have had in high school so you can learn how to fast track your freedom. If you want to learn how to make, manage and multiply your money and see opportunities the way the wealthy do, then you came to the right place. I'm your host, Stuart Berryhill. Money Vision U. Class in session.

Foreign welcome to another episode of Money Vision. You. Today we have Mr. Scott Carson on the podcast with us, who is a note investor, which is something we have not talked about on the podcast and frankly, something I have never done. So I'm looking forward to being a student this episode as well. But with that being said, Scott, welcome to the podcast, man.

Stuart I am excited to be here as part of mvu, man. Just here to give and help, educate and share the, as I say, the sexy side of real estate investing. Being a note investor.

There we go. Yeah, we got to hear all about the sexy side of real estate with the note investing. But just, just to start, give us a further financial bio on yourself. What sparked your financial literacy and financial freedom journey and how did you really, I guess you can tell us how you got into note investing from that journey.

Yeah, so like many folks, you know, I graduated college, I have a business degree and started, you know, reading books and obviously rich dad, poor dad was a big inspiration. Me listening to Mark Victor Hansen, Chicken Soup for the Soul and stuff like that, and Jack Canfield and Sharon Lecter and a bunch of those, you know, started really reading my mind as I was getting into the workforce out of college. And then I, you know, we bought our first house and the realtor is like, hey, you know, you guys got great credit score. You should be an investor. You should buy some more to be invested. It's a great time to buy an awesome. This is going back to like 2001 22, so it's already 20 years ago. Like, yeah, I grew up, my dad owned the local hardware store when I was growing up in a small town. So there's not really much on a house I'm not, I haven't done or could technically fix, you know, better than Tim the Toolman Taylor in a lot of cases. So I was like, yeah, let's buy a couple investment properties. What we did, I was making good money, six figures as a financial advisor almost right out of school and you know, 2001, then Dell moved a lot of their headquarters over to Memphis and some other things. And then suddenly we had, we had three properties and two when I were vacant. And then I get laid off from my job and you know, you go through savings pretty fast. And we were making six mortgage payments, three first three seconds on, on a private school teacher salary of $33,000 a year. That doesn't, doesn't last long. So I went from being an investor to being a distressed borrower really, really fast. So fortunately for me, we got rid of two investment properties, kept we're able to keep our primary through a modification. Licked my wounds for about a year, did a lot of odd jobs, but got back in on the finance side and was doing really well as a banker for JPMorgan Chase and going that route. And then a buddy of mine started a mortgage company and he was working with a couple investors that were traveling, you know, the speaking circuit with, with Ron LeGrand, a few others, teaching people about creative financing and investing. I was like, man, this is really what I want to do. And so I left my job as the number one banker for Chase in Texas and started on July 4, 2004. I was, you know, speaking in LA at the LAX Marriott about mortgages, you know, how to all the different, you know, products for investors at the time. Because at that time you could fog a mirror and get, get a mortgage in a lot of cases. So lucky for me, from 2004 to 2008 I really had a great apprenticeship besides originating mortgages and doing mortgages in about 30 different states and just making a kill. And then I also had this time to learn from a couple really great investors. Bob Leonadi, Jimmy Kayla, Ronald grand and a few others. I really had an MBA in real estate education and I'll sit in the back of the room of all these classes, not only being a vendor, but also taking copious amounts of notes and then going home and applying what I learned, wholesaling, subject to deals, doing some light rehabs, learning how to raise capital, but then also learning about owner financing and then also learning about non performing notes that were big in the 80s with the resolution Trust and the savings and loan scandal. Back then you had a lot of distressed debt. Well, lo and behold, what happened in 2008 is, you know, we were doing this mortgage stuff in 2008, the music stopped and my mentors and I had a couple of money partners at the time that I made like, hey Scott, this is an opportunity for you. If you're really going to focus on one thing, don't focus on rehabbing because market values are dropping. Focus on buying debt. And so that's what I did. I stopped rehabbing, I stopped doing subject to deals. And so I started, I, you know, sold my half of the mortgage company for a buck because it's all it was worth and then just started calling banks and dialing for dollars to find non performing notes and you know, made a name for myself. He started sharing what I was doing on YouTube and Facebook and you know, if that, you know, fast forward now, it's been 15, 16 years. No, actually, yes, 15 years now. We bought over a billion dollars in distressed debt. Bought, wow. Thousands of non performing mortgages. And we'll talk more about what that is. But that's really all I focus on and that's why I'm known as the note guy now.

That is really cool, your story there. And yeah, you got into the banking system, helping with mortgages, kind of, I guess at the right time, which is kind of neat. Can you actually, this is a little bit off topic, but can you actually give us a glimpse like into that 2008 crisis, what actually happened there? Because I know I haven't talked about it on the podcast, but I think it's a key learning point for listeners to understand of why a lot of people started defaulting on loans. Just what led to that financial crisis, that real estate, you know, crisis, I guess, if you will.

So let's, let's, there's a two phases to it. Let's first talk about the mortgage side and when you talk about Wall street side in a lot of cases. So what happened leading up to this? You had a lot of, you had Wall street getting very greedy because there was this mortgage rush. Now rates weren't really low. I mean they're about what they are right now. We consider rates high compared to right, right now. Because we've been so spoiled for. But you had people, you had a lot of no, no income, no job verification. You know, they call them liar loans. You had a lot of subprime mortgages, you had a lot of a paper mortgage. People were just taking out a lot of debt and banks and lenders wanted to get a piece of that pie. They want to, you know, get their place in the trough. So instead of like okay, normal, you got to have like a 680 fico score. And you get a loan, a bank would give you a loan with like 95% down, right? You know, a 5% down in a mortgage for 95 to 97 cents. Well now when, when they heard all this greedy and all this growth was going on, well, each more and more lenders are getting more competitive. Well, we'll drop it to a 660 FICO score and then only require like 4% down. Or we'll, you know, we'll go to a 580 FICO score and give you 100 financing, but we'll charge you 12%, you know what I mean? So you had this just huge rush of lenders wanting to get into and all these people that like to qualify without having to verify if they had a decent credit score, they would have to verify income. If you, if you could say you were a real estate investor and had an LLC around for two years, your CPA could write you a letter and say you're a real estate investor and you make this much money and there's no, you know, you're not checking into it now, verifying a lot of cases. So, you know, all these people get mortgages and then you had market values kind of stopped. Because what happened is that Wall street started selling all these defaulted, you know, bad mortgages and wrapping them all into these big tranches and then call and selling insurance off of these things. And then S P and Wall street started saying these non prime mortgages were A plus paper investments. Well, they aren't A plus paper investments. And most of the different Wall Streets and the banks, when they look at their portfolio, they had only kind of modeled their default rates to show like, oh, if we get to, you know, we only ever expect an 8% default rate and we'll still be fine. Well, what happened is that default rates skyrocketed past 8% to 1015, sometimes 25% depending on the type of loan that was in. Well, that meant that that paper, which hence made that, you know, the money behind that mortgage not worth what it was written on. You know what I mean? It's basically like a million dollar. We'll just say a million dollar loan really was only worth like 750, that's a 25% loss. Well, what happened with his insurance, these credit default swaps is that insurance basically became worthless or it would bankrupt. To pay the insurance on these bonds, AIG defaulted because they couldn't afford to do this. So it's just one big, as I like to say, it was a big sandwich and everybody had to Take a bite out of it, you know what I mean? And it led to, it led to, you know, big companies laying off. It led to literally almost the world economy kind of coming to a screeching halt. In a lot of cases, if, you know, like Congress stepped in and bailed a lot of people out, a lot of these banks and these big banks that went out of business, that they got sold for like 20 cents on the dollar, like Countrywide. The reason Countrywide went out of business because they had bought all these negative amortization loans from, from California, which basically you're not. These borrowers weren't even paying a full interest payment. They're only paying like a partial interest payment. If their mortgage is written at 6%, they were making a 1%. That 5% interest went to the face amount of loan. So the loan was getting more expensive every month. Wow, they were paying it down. It works okay if your value keeps going up, but when your value stops or you owe 125% of the value alone, the bank then says, well, no, you can no longer make a partial payment. You've got to make a full, you know, PITI, or at least a 30 year interest only payment. And people just didn't have that. And that caused people lose their jobs, lose these big huge foreclosure wave. And it led to a big opportunity for me because I started getting lists in from banks where they were like, give us 5 cents on the dollar, give us 10 cents on the dollar. And the underlying asset may have not been worth like 100% of the value of the loan. It still had value. And that's where we, as note investors make our money, is that we're buying this debt that's non performing. Maybe they owe 120,000, the house is maybe only worth a hundred now. They haven't paid in six months. We can buy that debt from the bank, say like 50, 60 cents of value. So we buy $120,000 mortgage for 50 grand. And the way that we make money, Stuart, is to go in there, reach out to the homeowner and say, hey, we know you're upside down, we know you made a payment. What do you want to do? Do you want to stay or do you want to go? If you want to go, that's fine. Just sign the property over to us, we'll forgive you the 120 grand and then we'll take that property and list it and sell it on the MLS for 90 to 95 with a $50,000 investment. So it's a Nice chunk of money. Our number one strategy though is to like to keep people in their houses and say, listen, hey, I know you've been paid in six months, you owe more than the property's worth. If you want to stay, not pull your kids out of school, have to pay all this money to move and try to get qualified. But your credit's shot now because you've been paid on time for six months. Just start paying on time. Let's, you know, let's do a trial payment plan for a year. At the end of the year, we'll modify your loan. We'll forgive some, you know, whatever balance you're above, you know, whatever you owe, it's over and above the value of the property. And let's, you know, make, let's create a win win and that works for cash flow for us, you know, and then after 12 months of on time payments, you know, we could then sell that loan back to Wall street for 85, 90 cents of the dollar as well, without having to fix the property, without having to foreclose. No property management, just start collecting payments. And that's kind of the two major strategies we have as a note investor.

Well, let me, let me go back and I want to break down some of the terms that you used that people might not be as familiar with because sometimes we'll have a younger audience here. And so hearing things like the prime mortgage or prime rate or what you were saying there, that would be one question. And then how, where I want to start though is basically the overall problem really started with banks not verifying or qualifying people that are buying homes correctly. So for example, they didn't a bank nowadays, if you're trying to buy a home, they're going to make sure that they're getting all the resources to verify that you have income, verify how much income you have, how consistent that income is, and just qualify you as not necessarily a home buyer, but someone who is taking that debt. And so what happened back then is just banks were giving out money and just thinking that all right, they're going to find a way to pay it one way or another. We don't have to overly verify this. That's kind of the overall premise.

Or, or they would qualify people knowing that they were going to sell that mortgage off in 30 days to Wall street or somebody else. So they didn't do a lot of verification. They if you got the FICO score, we don't care a lot of times if you can bring the 5% down based on our program, hey, we'll we'll, we'll, we'll rubber stamp you in a lot of cases.

Okay.

You know, or if you don't mind paying a higher interest rate, well, rubber stamp you to get the mortgage in and then sell that to Wall street and we're, we walk away. And when what had happening is that a lot of these lenders, if a bar goes in, default in the first six months or the first 12 months, oftentimes that mortgage company has to buy that mortgage back from who they sold it to. So there was a big, big subprime lender called New Century Mortgage. It was doing these negative am, you know, negative amortization loans, or they call them pick a payment that weren't the greatest product. So they, they had such a high default rate at one point that it was. Countrywide called a billion dollars in debt for them to buy back a billion dollars in debt because these bars are. Started to default. Well, New Century didn't have a billion dollars. So they just went out of business overnight. Well, then Countrywide got stuck with this stuff on their books and they went out of business. Bank of America saw an opportunity. So bank of America bought countrywide mortgage for 20 cents on the dollar.

Yeah.

You know, they bought all this debt for $0.20 on the dollar, basically was owed, and then they modified it a year later and had a record year in earnings.

Okay. You know, now tell me, yeah, tell me how Wall Street. So because you're saying Wall street is coming in and buying these. So, you know, I think when people think Wall street, they think stock market. They think, you know, things like that. And you know, for people who are buying homes, you got your mortgage company, it's Penny Mac. It's not necessarily somebody you're thinking about that's not necessarily Wall Street. I guess as you're thinking of it in terms of maybe, you know, go on, go to New York and actually look on Wall street and think like people trading stocks and doing things like that. So can you kind of define what that is with Wall Street? Like who is from Wall street that is buying these notes or these mortgages when, like they're going to be defaulted and they're still propping things up. Can you go into a little detail there?

Yeah. So Wall street likes performing assets because if they can buy, if they're, they've got the cheapest money out there. So like, their money costs are like at 1%. Okay. So if they can finance mortgages and get a 2% return, like the lowest interest rate, they're still making 100 profit on their money. Okay. So they're paying back the Fed or all at 1% but they're making 2% or 3% or 5%. So they're making the difference in the arbitrage. That's how banks work. Banks will take your deposit. You know, if you put money in a savings account or you keep a balance of checking account, they're glad to pay that 0.01% on your savings account because they're lending that money out at 5% mortgages making the difference. Yeah, they're arbitraging the fund. So that's, that's literally how Wall street works. They are like arbitrage. But Wall Street's likes performing assets because then they can predict the income of it. They can figure in some of their quants. Okay. If we have a default rate of 8%, we're still going to come out doing well necessarily. Wall street doesn't like to buy non performing notes. They want to get off their books because based on how lending regulations are, if a bank has a non performing loan, it costs them about 10 times that in fees of what they have to hold back in reserves and also lost revenue from lending that money out, you know, 5, 10, 15 times a year. So what makes an opportunity for you know, myself, other investors there are hedge funds that will go in and buy this debt at big discounts because they know that if they do a little bit of work, they usually get the borrowers back on track because their cost basis is less than the actual asset was is created. I mean that's the thing we, we end up controlling real estate at $0.50 of the value because we end up buying the distressed debt. We make our money by working it out and turning lemon, lemons into lemonade a lot of times and knowing that. Okay, so we buy, you know, give you, give you some numbers generic we talked about before. So if we're, you're buying a Note, say borrows 120, they're upside down by them, paid in six months, it's worth 100. Values are dropped a little bit. If it's got a 6% mortgage on it and we buy that mortgage for 50 cents on the dollar, but we get the bar back on track and start making payments on time. That's like a 12% cash and cash return there just based off the cash flow. Okay, okay. Now if we turn around and sell it to Wall street, not only do we get the cash flow along the way, we usually last the bar to bring some skin the game a little bit extra to get caught back up on. So in a year we can now sell that performing note at 8590 cents in the dollar. And Wall Street's happy because they're buying a hundred thousand dollar asset at a little bit of a discount and they're seeing a six and a half, 7% return on their money, you know, or six times their money costs them 1% and they're going to get a 6 to 7% return. That's a 600 profit in their money. They're happy with that, but they just got to be performing. I'm happy because now my fifty thousand dollar investment just made me twelve months of cash flow plus another 35 to 40% in twelve months in this, in the spread between what I bought it for, sold it for. So it's, that's the, the borrower is happy because now they got kind of a get back in. They're paying on time, they're not going to lose their house. They're also, their credit's getting repaired along the way every time they make a payment on time. It's also helping the market because the neighborhood's not going to see a foreclosure which will depreciate each block or each neighborhood as well. So it's, it's really how we kind of create a lot of win win wins out there with what we do. But if a great example to look at, if you like movies is go watch the Big Short with Christian Bale and Steve Carell.

Yeah.

And what I do is I'm a smaller version of the Christian Bale character in that I said buying billions of dollars of mortgages. I still look at a lot of spreadsheets and we're buying. That's like right now. I had a bank and a lender send me one, sent me A list of 291 notes that I can cherry pick from. Another one sent me 175, I got 60 from.

And these are people basically not paying their notes is why they're trying to sell it to you.

Exactly. Their mortgage. Yeah, yeah, exactly. They're not paying their mortgage. Although I did get A list of 60 performing notes that the bank is looking to move off their books as well because they're trying to raise capital to offset some of these losses on the non performing side.

Okay, okay. So just wrapping up the 2008 crisis, that's people were not getting verified for their income. And then Wall street was getting way over leveraged because these people were not verified and could not pay these loans. And so now they got no one to sell these things to then, then getting into the note side of things, that's where you come in because you see an opportunity and what you can do probably as a more private investor is really, you know, work and strategize how to make something work. Compared to big banks, they don't have time, I guess for that. They, they don't have time to go in and look at every single detail, call the people who are living there, hey, how can we work this thing out? They just can't do that. It's too much. They have too many things on their books and you can come in and do that.

This is why banks will offload a lot of that borrower outreach to servicing companies. I mean we've got servicing companies that still outreach. But the thing is, banks aren't in the real estate business. They're in the mortgage and lending business. They don't want to own real estate, they don't want to own rentals, they don't want to deal with toilet stands and trash outs. That's not their cup of tea. They would, most in most banks would rather refine it or modify the loan and get you back on a payment plan of some sort versus taking the property back. They just don't want to do that. But yeah, that leads to opportunities for us because a couple years ago there used to be a lot of HUD foreclosures. Well, HUD realized that they could make more money and solve issues for them faster by selling the debt off to investors like me and others. And they literally came out in a news article, a press release saying, listen, where we're going to be selling more of the debt off than the actual properties because the investors that are buying the notes, they have more flexibility to do exactly what you said, the individual outreach, the individual creative on an asset. I don't mind if I have to take a property back depending on where it's at. I don't mind having to put some fix and flips to it because I'm buying at such a big discount and I have the flexibility and speed to make decisions faster versus having to go up a chain and get approval from a loan committee or anything like that. We move as I say, we're more agile, hostile and mobile than most of the banks are because we're smaller. But when we make make quick decisions and then we also know what's really going on with that individual asset because we know the location better than somebody in New York just looking at a spreadsheet and trying to figure out what's going on? Zillow and Julia.

Yeah. Okay. Okay, now I do. I want to make sure that I don't pass this by. Can you just define what a note is? Because that term might confuse people, too. Is it the same as a bond or is that more. A bond is between entities, and a note is with private investors. Can you define what a note is?

So a note is an iou, and everybody's in the note game already. If you own a mortgage, a car payment, student loan debt, credit card debt, you owe your cousin Bubba down the street 500 bucks, you're in the note game. You're just making payments on the wrong stream. You're paying outgoing versus incoming. So what I do is a note is a debt. We buy notes or mortgages just on residential commercial properties. I mean, you can buy credit card debt. You can buy debt on just about anything, but we just buy it on residential and commercial properties because it's secured. There's an asset behind it. Anything that's unsecured debt, like credit card or medical stuff, you would buy. You know, you can buy that stuff at, like, you know, 10 cents of the dollar. But you have to be very aggressive in your outreach, trying to collect from people. There's no type of tangible assets securing the loan. So that's why we like real estate loans, because there's a property, and when we buy the note, we have. We become the lender, and we have all the same rights that the bank does in foreclosure, in working to modify the bar. If the bar won't play ball, you know, as we say, you know, pay, you know, stay. You know, we. We can foreclose and go that legal route. We don't want to. We give them. There's, you know, like, 11 different ways that we can work with a borrower. But if they won't play ball and they just tell us to go pound sand, then we'll just kick it to our attorneys and then foreclose. And each state's a little bit different, Stuart. Every state has a different foreclosure time frame. So that goes into kind of our evaluating. You know, we stay away from, like, New York and New Jersey because it takes two to three years to foreclose in those two states. We like faster states like Texas and Georgia because they're like, 30 days or less. The thing about buying in those states, though, is that the banks know it's faster to foreclosure, so they want a bit more of a premium. So we buy. I'm buying about 20, 25 different states like Ohio, Michigan, Indiana, there's a lot of stuff up there that we can buy a big discount. Florida, God's waiting room, you know, we buy, they're relatively cheap because it does take about a year to foreclose. But you know, you only buy a lot. We don't buy a lot in California because it's just crazy to have to foreclose there. And then the banks want through the nose or something that's non performing, they want a premium for it. We're just, we buy one asset like in San Diego, we buy like a whole block in St. Louis.

Gotcha, gotcha. So with note investing, you're basically buying debt, but you are the lender, you are not the borrower, you are the lender. So that's the difference in buying real estate versus buying notes. If you're, if I go buy a real estate deal, I'm likely going to be the borrower. I own the asset and I get cash flow. Well, I guess I don't technically, Technically I guess the bank owns the asset, but I get to reap all the benefits of the cash flow, run it like a business, but I'm still paying those mortgage payments. But with note investing you can invest in anything where there's debt with your cousin Bubba or with a commercial property, multifamily property, something like that. And so you like being the lender rather than the borrower and just finding situations where. Yeah, someone's not. I will say, how do you, how do, how can you tell if, I mean, is it all about location? Location? Obviously there's certain states to stay away from, but is how much do you vet because you want to work with the resident or whoever is the borrower on the note. How do you vet something like that? Because that, I mean that seems like a big part of it to know if it's a good deal or not.

Great, very great question. So what we get when a lender sends us a tape or a spreadsheet, that's what is an Excel spreadsheet. It'll have the address of the property, the borrower's name, sometimes they'll have their Social Security number. It'll tell us, you know, when their last payment was made, when they're next due. Sometimes the value of the property, sometimes we'll get the last 12 to 24 months of payment stream so we can see how they've been on time or not. We'll often do due diligence and get the actual servicing notes sent to us where the we can Find out if the borrower's been reaching out to the lender or the lender has had to reach out and had no luck. So we'll know the value of the property, we'll know what's owed, we'll know the total legal balance will also oftentimes know the occupancy. So we, we prefer occupied assets because that gives us somebody to talk to. You know what I mean? If it's vacant, we know dependent, we don't know how long it's been vacant. But often vacant assets will run into more issues. Like, you know, the copper will be stripped out of a property if it's been vacant for a while. Or right now, if it's in Michigan, it may have an indoor water feature, you know, an ice skating rink in the basement because it's frozen up there. You know what I mean? So you got to know this. So if it's occupied, we like that because it gives us more exit strategies to perform with the borrow backup track. If it's vacant, okay, that means we're really taking the asset back and have to foreclose. Less strategy, but it could also be a really good, good deal. So depending on what we buy. So there's, we like to, we have to research the property, we have to research the borrower, and we also do some due diligence on the collateral, file the loan, loan documents and all the stuff that goes along with that. But when we get these lists in, you know, there's no way that we're going to know everything about an asset. So like on this list of 291 assets I got, I'll probably make an offer on a hundred assets based off of just some formulas and what's going on. Information is provided to me. Okay? And if they come back and accept my initial offering, then I'll have a period of three weeks to, you know, a month and a half, depending how many I'm buying, to do a deeper dive. If I find like, you know, they list the value at 100 on a spreadsheet. I don't know if that was an appraisal or just opposillo. Well, if I find that the value is like say 60 grand, well, I'm going to reduce my bid and I have all the right to reduce my bid because the value is really not there. And either they can accept my reduced bid or I'll just kick that one asset off the list. And now I'm working on 90 instead of 91. You know what I mean? You know, we'll check Taxes. We'll call the utilities departments too, as we're in deeper duty. Is it occupied? Is the power on? You know, the thing is, what's really great is since we're the bank, we have a vested interest in the property. So we will often get more information from the, the utility departments and like the county, because we're the bank, we're ultimately trying to get apartments paid. So they'll give us a lot more information. I mean, I've had them tell me, oh, yeah, power's been off for six months. Or hey, borrowers are on a payment plan or they came in there, gotten a fight, you know what I mean?

Gotcha.

All sorts of stuff. And we'll see a lot of information. Like I've, I've bought notes from banks in bulk and I've gotten these, you know, we get these collateral files sent to us and it'll be like hardship letters from a borrower. And a borrower is like, you know, trying to do a loan mod for four years. And we'll see all that information and like, oh, hey, this borrower wants to stay, they want to do a loan line. We'll buy that note immediately. Why the, the previous note seller didn't agree to it, I don't know. They just chose, they didn't want to go that route. And it turns out to be a good day for us because we can get that borrower back on track. And, and it's a good yield to us. So there's, there's multiple facets. You know, we don't do everything on the front end. We've got time to look at stuff. We're buying one off note. We might have seven to 10 days for due diligence and then time to fund. We use cash to fund. You can't go to a bank to get a loan to buy a note. So we leverage a lot of, you know, retirement accounts, individual investors. We're working on a fund as well, too, to make things to buy bigger and bulk, especially with the new opportunities that are presented to us with the market being like it is right now.

Yeah, I was going to ask that how to buy a note, because let's say there's a hundred thousand dollars that is left on a mortgage payment and, or that's the debt the borrower owes and you're coming in and buying that at a cheaper value. So you may say, hey, I'll give you $50,000 for your $100,000 note. They're wanting to get rid of it because they're not getting Paid and just losing money at this point. So that's where they just take their losses, cut their losses, sell it to you. One, you vet that. Really a key part of that seems to be occupancy and really trying to figure out who maybe the resident is. And doing your due diligence on the bank's due diligence and then your own separate due diligence outside of that as well. But then you buy the note. But if so, there's a business deal, whatever is in a contract, hey, this bank, XYZ is going to sell it to Scott Carson Investing Company. It's a hundred thousand dollar note for $50,000. You have to come out, you have to find all the cash for that. You can't take a, a loan on a note because that's a, that's debt on debt. Which, wow, that, that's like what's that movie called, where it's a dream within inception. Dream within a dream within a dream. So that's essentially how it works. And then if you get them starting to pay again, the borrower, you're getting cash flow, probably good cash flow at that because you have a lower payment. But then. Well, is that all accurate, what I'm saying first, before I get to the part two of that question, you're very.

You'Re right in track. So yeah, let's, so let's just make, make it something simple here. So they, a hundred thousand a mortgage, they 6% mortgage, they got to pay 6 grand a year in interest, right? And if we bought it at 50 and they start paying on time and they're working on paying that $100,000 mortgage now, it's like a 12% return to me. But if I'm borrowing 50 grand from an investor, you know, and we'll have him code named or have an LLC with them, if I'm borrowing that, say at 8% mortgage, so $50,000 times 0.08%, that's 4,000 years. If I divide that by 12 months, I'm paying $333 a month to an investor who's making 8%. But I'm getting a 12% return. I'm basically getting 6 grand a year on that. And so that's the arbitrage I pay My investor, the 333, I'm getting 500amonth. I'm making $177 a month cash flow. And then in 12 months I sell it at 85,000 or 90,000 to Wall Street. And I just got a big huge windfall of 35 to $40,000 more in profit off my $50,000 investment.

Okay, perfect. And then I get part two of my question and key note here, no pun intended. But you, you cannot act, you're not actually selling the property. The borrower, whoever the person is that got them has the mortgage. They choose when they want to sell the property. All you can do is sell the debt. So you can't unless, unless it forecloses and then you just own it outright. Then there's no more foreclosure for listeners. Means the, the resident or the borrower has defaulted, they can't make any more payments. That's the nice thing about owning real estate, I guess on your end is you have that as collateral because if you're not getting your payments, you at least get the real estate back and you can figure out a way to minimize your losses. But you find, how do you find a bank to take that note from? I mean, is, is it just from relationships that you've built up over time? I mean, how does someone get in contact with someone like Wall street to be able to sell a, what was a non performing note early on, now.

A performing note is now a reperforming loan. I have to have 12 months of on time payments.

Okay.

And that's got to usually be with a third party servicer, you know, so the borrower is back on track, paying on time. We usually ask them to bring some skin the gang. So they've, instead of paying just their normal monthly payment, they may be making a hundred or $200 extra a month. So we work really well to get them back on time. Plus 12 months of on time payments will boost their FICO score up some. And so Wall street realized, hey, I'll buy that debt, it's worth a hundred, I'll buy it at 85, because that gives me still a 15% discount. And like I said, they've got cheap, cheap money. So now they're still, I'll make an 8% return on my own. That's, that's a pretty good yield for them. And it's just a matter of there's, there's debt buying firms out there. I mean, if you've ever gotten a mortgage on a house you closed a month later, you probably got a letter in the mail saying your mortgage was sold to somebody else.

Right, right.

It happens all the time. And that's just kind of, there's just firms out there that specialize in buying debt. There's banks that like to buy this stuff. There's individual Investors like I'll buy performing debt from other investors as long as I can see like a double digit return. So there's a lot of firms, it's a smaller niche within a niche, you know, so you're not going to have as many note buyers as you as fix and flippers or landlords. There's probably total of 50,000, you know, maybe, maybe 50 to 100,000 note investors like me. You know most people think of note investing, they think of like somebody owner, owner financing a property and that's a small niche within our bigger niche here. But that's, you know there's places out there that will sell debt all day long for that will buy if they can get a decent 8% or a higher return.

Okay, yeah, that's all super interesting and I guess you've just built relationships with banks over time just to be able to have them send you notes or potential non performing assets. But how would someone even start if they were wanting to be into note investing on and go ahead and tell us, you know, if, if. Because obviously people can invest with you. What do traditional returns for them look like? I know you gave kind of an example there but for the specific investor.

So let's, I'll start with the first question. If you, with anything, any niche, you've got to learn about that niche no matter what it is. Apartments, self storage, note investing. We started teaching other investors how to invest in this niche because it helped us raise capital. People didn't understand it. Well, you mean I'm not buying the property? You know like. No, no, you're buying the debt which controls the property.

Right.

So we teach, we teach workshops, you know, once a quarter of a three day workshop and I'd love to. We have a one day workshop that we teach every third Saturday of the month. We call it note weekend and it's usually 99 bucks. It's a kind of the Cliff Notes version of note investing as we like to say. We show you how we find these deals, we show you how to fund these deals and we show you how the flip or the extra strategies behind it. Like I said, it's only 99 bucks if you go to noteweekend.com and register for it and type in this discount code mvu. Mvu. It'll give you, I'll give you the class for free. And you ain't got to show up live. You can, we'll send you the replays the previous class or the replace the, the class so you can start learning. But like I said noteweekend.com special discount code MBU. It's still going to ask for you to put your information and credit, credit card, make sure you're a real person but we'll not charge you card anything. But you're. That's my special gift to your audience out there. And that's the first thing I always tell people. Hey, got educated. Because that way you know what you're investing in. Somebody wants to invest with me. Hey, you know, you can always schedule a call with me by going to talk with Scott Carson. We'll talk about where you're at, what kind of goals you're looking for. For some people it's a great passive investment where they can make 6 to 8% on their money and not do anything. Other people are looking for more active returns and then you can very easily make a double digit return in multiple facets depending what you're looking for. So I always say let's, let's jump on a call and talk and make sure that we, you know, for some people note investing is not the right.

Sure.

You know, and I don't want to, I'm not wanting to blow smoke and say it's for everybody because it's not.

Yeah. But it important to know too that these are like 12 month deals that you're doing. It doesn't really go too much past 12 months traditionally.

Or no, it's the opposite way. It's, it's the opposite way we always talk to people. It's a short term investment of like usually 24 to 36 months.

Okay.

Because most people when they think of a mortgage now they think 30 years. Right? I'm going to be for 30 years. No, no, no, no. We don't do deals usually less than 12 months because if we're buying a note, it's going to take us a little while, 90 days for servicing to transfer and then the borrower outreach and then depending on what state it's in, it may take us longer to foreclose. It could take us a year in Florida. So we also, people plan on 24 to 36 months to be in and out of the deal. If it's going to be a performing note after 36 months, we'll say, hey, do you want to stay and keep making a return or do we want to, you want to cash out and we can refinance you out with other people's money. But the great thing to realize is, is what I love is that we don't do a lot of direct mail. It's a lot of it's drip marketing via email blast asset managers or LinkedIn. So we have a lot less overhead as far as marketing. No postcards, door knocking or bandit signs. And banks when once we get the whole right department, they're sending us lists on a regular basis. Most real estate investors are used to dealing with one distressed bar and they get one asset and they have to do the same thing every month to find stuff. We don't. We get stuff sent to us on a regular basis. And then the ultimate thing is that we get stuff at bigger discounts which leads to bigger returns without having to do all the hard heavy lifting fix and flip.

Really cool. Yeah, you're flipping the note, flipping the debt instead of the property. Super cool concept. A lot of people just don't even think about it or think that they're too small for it, but private investors can be involved in things like this. Such a cool episode. Scott, thank you so much for coming on. How can listeners reach out? I know you mentioned a couple ways, but just any other ways listeners can reach out and follow you?

Yeah, real easy. You can go to weclose notes.com that's our main website, weclosenotes.com We've got all our different podcast classes and things we've going on there. You can always schedule a call with me if you want to find out more by going to TalkWithScottCarson.com that's TalkWithScottCarson.comthat's my calendar link to talk with you. And if you're listening to this, Stuart is doing a badass job and we as podcasters we want to hear from you. So do Stuart a favor. If you're listening to this, click the hit the subscribe button and then make sure you leave a five star review. So make sure you share some love with Stuart today too.

Hey, I always appreciate a good shout out. I appreciate like that I'm going to listen to your podcast too. I didn't know you had a podcast as well and I'm just curious about this. Is it something I might be finding myself investing in? Because I can see the passive side just as you can passively invest in real estate, passively invest in notes like these. But I see the great potential for those. So anyways, thanks again for the shout out and thanks for coming on the podcast. Look forward to connecting more in the future.

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