How To Buy Distressed Debt With Scott Carson From Behind The Facade With Gavin J Gallagher

What's up, guys? Welcome back to another episode of behind the Facade. This week is a super interesting episode for you. I am delighted to bring a guest back. Yes, the guest interviews are coming back this week and this particular guest is going to give you a couple of ideas how to make money in an economic downturn. So I think it's going to be really useful. Now, before I introduce our guest today, I just want to quickly remind you that, that I am back doing the weekly livestream Q&A's over on my main YouTube channel. That's Gavin J. Gallagher on real estate. And over there I'm covering the, the latest real estate and economic news, breaking it down, talking about the opportunities and the risks to your portfolio. And then I'm going to throw in a bit of the usual kind of mindset coaching and stuff like that that I usually go through. So if you, if you were looking to build an investment career or a portfolio in real estate, then I thoroughly recommend that you do not miss the live stream. A live stream obviously means that you can actually ask questions live rather than watching it on the replay. And, you know, you'll have other people's questions being answered, but it's useful to have your own. So that's one o' clock Irish time on my main YouTube channel. That's on Wednesday of this week. Every Wednesday for that matter. One o' clock, every single Wednesday. Now, if you're listening in from the US or whatever that is 8am Eastern Standard Time. So my guest this week is Mr. Scott Carson from Austin, Texas. And Scott's specialty is not buying real estate or property assets. He is actually focused on the buying of distressed mortgages and at very, very significant discounts from the large institutions that are selling them off. Now I understand how that might sound. Initially, when I first heard, like buying mortgages, I was thinking, ooh, that could be kind of an unpleasant side of the business and perhaps not something that people want to listen to. But actually, you'd be very, very wrong because as Scott tells a great story today, one of his borrowers actually went on to name one of their children after him because they were so happy with what he was able to do for them. So that just gives you an idea of the kind of opportunities that are out there. But what really interests me is sticking it to the big man in the big financial institutions. Because some of the deals that Scott has managed to do, he has been able to buy loans and mortgages and stuff from these big institutions at $0.05 on the dollar. And so given the difficult economic downturn that it looks like we are heading into. And certainly I'm convinced that that's the direction that the market is going. I think this episode is going to be super useful because it is going to allow you to kind of have a look at opportunities to make money both in the downturn and in the. Well, you know, we all can make money in an upswing, but can you make it in the downturn? That's the big question. And it's going to be useful for two types of listener, an investor. And you're looking for sort of a different opportunity, like creative alternative investment, or you are actually a borrower who has found yourself in a difficult situation. And Scott's going to be able to kind of peel back some of the secrets behind the scenes in what people that are buying mortgages and stuff, the kind of deals that you might be able to cut if you're in that situation. So without further ado, let us get into this week's episode with Scott Carson.

You're listening to behind the Facade, and.

I'm your host, Gavin J. Gallagher. On this podcast, I explore the mental and emotional game, often playing out subconsciously, both in your mind and the mind of everyone else in the real estate or property investment market. The key to success in this game is to master your mindset and your behavior, to take control of your thoughts, your emotions, and most importantly, your ego.

Welcome to the show. Scott Carson. Welcome to the podcast, Gavin.

I'm honored to be here, man. It's a great day and enjoying our conversations that we've had already.

Great stuff. Well, Scott, let's begin with where in the world are you right now?

I'm in Austin, Texas, the capital of the Lone Star State, as we like to call here in the United States. Everything's bigger in Texas with our bravado here in Austin. But I actually, my background is from Texas, basically, but by all across the United States here as far as real estate investing, too. So I sold everything I owned back in 2010 and actually spent about what I thought would be 30 weeks travel in the country. Turned it over like four years of nonstop travel all across the country, United States. So. But Austin is Austin's home.

I can relate. Back in 2008, when everything went kind of belly up, I spent six years abroad and I ended up spending time in Africa, in the Middle east, all sorts of places. And it was a combination of work, but it was also just kind of running away from the problems back home. I mean, it was, you know, you know.

Yeah. Sometimes you have to do that for peace of mind. Sometimes it's good. Just get the heck out of dodge, as we like to say to fresh perspective and fresh kind of mind. Shift a little bit to say, okay, I need a fresh day. I need something different to add it to otherwise, because we all can really bury our head in the muds and kind of get very depressed if we're not out doing something.

So true. Well, we'll get into some of that today, Scott. But let's begin with just for the audience listening in, they might not know you've got a podcast called the Note Closer show and that is going to be a complete blank to a couple of people who don't understand what a note is. So why don't you start by just explaining what it is you do.

Yeah. So for the last 15 years I've focused primarily on a niche of real estate investing here in the United States, basically buying debt, buying mortgages. In the United States, the banks will issue a, on a residential piece of property, a 30 year mortgage, which is an IOU. Borrower has to qualify for it or the homeowner qualifies for it, they get, they bring, you know, 3%, 5%, 10% down payment and the bank carries financing on it and that's a note or mortgage. And so what I do is when somebody hits financial difficulties, divorce, health, wellness, they haven't paid their mortgage in a period of time, that's considered a distressed debt. And I, here in the United States, we can actually buy that debt direct from banks and lending institutions. And I buy that debt at a significant, I don't own the property, but I buy the mortgage, technically become the lender and then we make our profit by, you know, working with the homeowner or the commercial property owner by modifying the loan, working to keep them in the property if we can, through a variety of different strategies. And they won't, that they won't play ball with us. Well, since we're the lender, we have the legal right to then foreclose and go after the asset. We need to. So that's what we call the nut closers is we buy notes and then we, like I said, we try to, to work to keep people in their houses as best possible. And the fact that we buy that debt at a discount gives us a lot of flexibility to work with home. And they, just because we buy it at a discount doesn't mean that they don't own the still, they still own what they owe. But it gives us a fresh approach to be able to Approach and say, listen, Mr. Mr. Barr, what happened? You know, what's, what's your, as we say, country western song? Did your grandma die, dog die? You know, what happened? Let's work to keep you in there if we can. If not, do you want to walk away? You know, we can work with you in a, in a variety of fashion. So that's kind of what we talk about. Closing notes.

Great. Okay. Well, it's interesting and I do think that given what's going on in the economy right now, it's something that we're probably going to see more of. And so we'll, but I'll save some of that for now for a little bit later. I just wanted to kind of ask you in terms of the real estate business, have you been in real estate as an investor before or is it, is it just notes?

No, I've been an active real estate investor for over 20 years. You know, I bought my first house back in 2001, and we, when the credit was great, we had, it was amazing market. If you fogged a mirror here in the United States, you could get another house. So we bought a couple other investment properties where landlords had tenants in those places. And then I got laid off from my job, lost my job, and then my two tenants lost their job as well. So I went to the distress side, investing pretty relatively quickly, trying to figure things out. But I've, you know, I've fixed and flips homes, I've had rental properties, we've done some small development. You know, we buy, we bought a lot of stuff here. But you know, when you buy the debt, you as the bank, you end up seeing a lot of different, you know, opportunities out there. So I, I've been an active, like I said, an active investor for 20 years, but basically investing in real estate for the last 15, that's all I do. Basically, Notes is primarily where our deal flow comes in direct, but it leads to a lot of different opportunities. We either take the assets back or reposition it or, or sell it off if we, if we can.

That sounds really interesting. All right. Because from my perspective, I mean, if you're coming at it from a real estate investor standpoint, it means that you're used to looking at piece at an asset and thinking to yourself, well, if I own that, I would add this to it and I would do that to it, and this would enhance the value. And if now you're in a situation where somebody has bought a property for, let's say 100,000 and they owe 80,000 to the bank. But you're able to buy that note for presumably 40 or 50 or something like that. And you go to them and say, right, look, you owe 80, but you know, we could probably cut you a deal at 60 or something like that. So you're going to make your profit there. But worst case scenario, you get handed back the property that you. And you get a hundred thousand property for 40 or 50, and then you're able to apply the stuff that, you know, works from your experience in the past. That's interesting. Yeah. And is there a minimum lot size when it comes to doing this kind of deal with the banks? I would have thought you can't go in and like buy up individual assets. You got to take like a little book or something, is it.

Well, that's what most people, those are great questions there. And most people think you got to have, you know, 5 million, $10 million in liquid capital to do this. But you know, if you're going to, you're not, I'm not going to go buy from like the top five or ten banks like bank of America, Chase Bank, Citibank, these big international banks here. They're not going to sell you an individual residential loan. Okay. They would sell you a $50 million portfolio and that's correct for a bigger bank. But there's still plenty of other mortgage companies, residential lenders out here. I'll give you a great example. We just closed on the property. Oh, well, didn't close. We bought the note two months ago, borrowed 210. The house is worth somewhere around 200 to 230. Need a little bit of work. But the bank that we bought it from was a California hedge fund. They had like a thousand of them. And they were willing to sell this off to us at a big discount because they bought it in a big bulk. So they got it at a bigger discount than we paid for. So we paid 109 for this mortgage. Now, the borrower didn't want to work with us. They hadn't paid in like three years. They were default. They were not making a payment prior to Covid shutdowns here in the United States. For those that don't know, the government basically allowed people not to make their mortgage payments for almost a year and a half to two years. So we stepped in, we actually offered the borrowers say, listen, we're going to foreclose. Unless you want to modify this loan, you want to start making payments again, we'll work with you because we're at 109 is what we Our investment on the note was if they play ball with us and they started making payments on time, the calculations on what we offer would be about a 12 to 13% cash and cash return to us based on the annual income. And then what we do a lot of times, Gavin, is if we could get that bar back on track and they pay on time for 12 months, the market recognizes that mortgage now is re performing. And so if we bought it at 50, we could turn around and sell it back to Wall street and, you know, private investors or things like that at 85, 90 cents on the dollar. So that's kind of our business model is to buy cheap, get it reperforming, keep the bar in it so we don't have to foreclose, fix it up, pay attorney fees, and then sell it off after, you know, in a nice chunk without ever having to lift a finger or swing a hammer. You know what I mean? Yeah, but if they. And this bar, they didn't want to do that. So in Texas. It's in Texas. And each state in the United States has a different kind of call foreclosure time frame. Some can take three years to take the property back. In Texas, it's fast, 21 days.

Wow, 21 days.

It's the fastest in the country. Exactly. So we foreclose, we took it back, and we'll sell it. It needs a little bit of work, but we'll sell it. Right now I've got an offer sitting on my in my inbox I just saw during our break for 185. And so we ended for it at 109. We've got about five grand in legal fees, servicing, stuff like that. So, you know, 115, 114 around there. That's a pretty good chunk of change to sell it at that. Now the market shifted a little bit here in the United States. Values have dropped a little bit because of interest rates rise, stuff like that. But yeah, that's the beauty of why we can pick something up at 50 cents the dollar. We can still move the assets relatively quickly if we've got to dump it in a variety of fashions.

Yeah, well, that's one of the things that's nice about that, is that you could also package it up and sell it off with a group of other loans. And so I can remember here in the Irish market during the crash, there was the big, huge. There was Kennedy Wilson, which is this huge, big hedge fund or private equity, and they bought UP loans of 1.4 billion and 790 million and these kind of numbers and they were buying thousands of mortgages and thousands of non performing loans and stuff. But what was in there was there was often some real jewels in there mixed in with a lot of crap. And so you kind of sifted through it and you know, oh wow, look what we got, you know. So is that the kind of. Do you go and look at individual assets or do you look at the bigger sort of.

We look at both. I've actually had the conversation with the head of asset sales from the Royal bank of Scotland in the past and some this idea of being able to buy an individual note, to be an individual that buy. I mean I've got companies that I own that we buy under the entity name. But yeah, a lot of these foreign institutions, they're not going to sell a smaller portfolio than $100 million or $50 million. So that's in different areas, but you've had different markets like Spain and Greece and others start to get into that, as they call it a secondary market, sell stuff up. But yeah, we get, we call it a pool, not something that you swim in, but it's a, a tape or Excel spreadsheet of assets that may have 50 assets or may have 500 or a thousand. And it all depends on, you know, what the seller is looking for. A larger institution, they want you to buy it all. And so those lower valued assets, basically you value them basically at zero or nothing. I mean the largest portfolio I've ever bought was 285 single family homes and 285 assets. And we're all in 35 different states with values anywhere from 15, 15 grand all the way up to a million dollar value. Now we didn't buy it at that, we bought it a huge 20 cents of the dollar of full value is what we bought it at. But the fact that these were in a myriad of different conditions. It took us roughly 60 days up front of initial due diligence and we had an additional six months after we went to contract to evaluate that assets. Evaluate. And that's the thing that's a little bit different in the note business or in the mortgage buying business. It's just not the property we're evaluating. We also have to evaluate the borrower and their likelihood to be able to perform or get back on track. And then we also have to look at the collateral files, the loan documents, make sure that everything is in there, that if we buy that note that we still have the right to foreclose. All the documents are signed, we still have Everything in there is clean. So we've got to go through the legal process. We can document, we know we have everything, we have the right to foreclose every, you know, the mortgage has been sold three times. We've got all those transfer docs showing that we are now the right person, the right company to be able to foreclose.

That's really interesting because, you know, given my roller coaster ride that I went through and I can remember when banks were, you know, foreclosing on a property that I owned and they, you know, they were, they didn't, they didn't have the paperwork organized and they would come and they would say, we need you to sign this. And I'd be like, why would I sign that? And he said, well if you don't sign this, we're going to make your life really difficult on these other ones over here. And so I was like, okay, okay, I'll sign it. You know what, they had been really, really. And I've heard this come up multiple times that there is still at the moment, I read in the paper today or recently that there's something like there's at least 10,000 properties in Ireland that, that are still, people are more than 10 years in arrears on their mortgage payments and yet they're still in the property. And I think it's down to the fact that the, the note was not properly closed out, that they, they forgot to sign something or they didn't get the title deed properly so secured or whatever it is. And I've heard that coming up. So one, that's obviously a weakness that you're going to make sure that you're not buying yourself. Yeah. And so tell me, I mean in terms of the legal process, how much time does it take for you to go and review that kind of thing?

So that's, that's a really good question. And part of our process is once we've agreed on a price is that they send us a copy of all the loan documents. What they have is a scanned PDF, we call it a soft copy and then we review it. It takes us, it doesn't take very long to review it. Once you've looked at quite a few. We've got a part time person in the title business. That's when we're buying a portfolio, we just send them to her and she has a checklist to check them up. This matches up or this assignment. This has been sold three times so we need to transfer docs for all three times making sure that the borrower is signed on the mortgage. And it doesn't take long. I'd say about 15 minutes once you know what you're looking at to 30 minutes of flowing through. Now I bought loan doc loans before that were anywhere from. It was just a file folder empty. That's not a good thing. You know, you value that loan very, very little to all the way where I got a banker's box and I thought it was like 20 files and it was one file.

Wow. Yeah.

And so like the bar on that one, the bar had been trying to modify their loan for four years and send in documents to the previous lenders the four different times or tax returns or bank statements their hardship letters are trying to modify. That one had been just sold and I was the fifth. My company was the fifth company that bought it. But it was great because I opened it up and I saw this letter from the borrower. Like, you know, we've lived here for 18 years, we've raised our daughter. My husband had a heart attack and I bought that loan so cheap. I'll just give you the numbers. The, the borrowed $60,000. The house had decreased in value about 40 at the best. They hadn't made a payment in over four and a half years. And you know, she was trying to modify the loan. I bought it for 12. I paid 12 grand for this, you know, note at basically 20 cents on the dollar. At 25 cents of RPF, that was truly, yeah, 120 cents of basically they. What they owed. And we were able to get the bar on the phone and said, listen, I see what's going on. Do you want to stay? And of course I knew the answer that was yes. And you know, seeing her document that she didn't now have the ability to pay, her husband was back up and working again. He had a heart attack. I said it was a pretty easy no brainer. She started paying me 465amonth. She brought $2,500 to the table to kind of reinstate it as a little skin the game. And then she paid an additional $200 a month on top of that for 12 months. So at the end of, you know, year one, I gotten, you know, $10,000 brought to me my $12,000 investment. It's a pretty good return. She paid, you know, after, after 12 months. One of the things that we do, Gavin is if they can get back on track, then we'll modify the loan to make it very, very favorable. So like with her, we reduced her interest rate to zero because and said okay, list every penny you Pay, keep your existing payment to 465. So every payment you make, every payment goes towards principal. So instead of it taking you 33 years to pay off this mortgage, it'll take you six years. And you know, she was like, oh my God, yeah, but you've got to pay 12 months on time first and do your part and then we'll do that. And, you know, I didn't want to own this house. It was in a little rural area of Illinois. You know, it would take, it would. If I had to foreclose at that time, it probably taken about 12 to 18 months to foreclose in Illinois because each state's a little bit different. Some are better, like New York, New Jersey can take you two to three years to foreclose. Well, I don't buy in those states because of course foreclose. So. But this bar, she paid on time and she just paid off her mortgage about six months ago. And I get, you know, six months into the deal, I get a Christmas card from her picture of her and her family, her three daughters and this new grandchild that one of their daughters had. And she goes, thank you so much for helping us get out of a nightmare. We named our new grandchild here, Carson, after you.

Oh, God.

And I was like, blown away. You know, I'm like, tear crying, like, what the heck? But that's, I mean, there's, I mean, people, people become distressed for a variety of reasons. You know what I mean? Lose, job loss, sickness, health. There's a variety of different things. So I always, you know, I talked back, you know, earlier, how when I first bought my first house, I was in distress. And so I really empathize with people that are struggling. And we really try to say, okay, if you want to stay in your house, that's, that's fine. But we've got, it's got to be a win, win here. You know, I don't run a charity. You've got to show up. And sometimes, you know, it's, it's having that kind of, as I like to say, come to Jesus meeting with the bar. Like, listen, you can't really afford to live in this home anymore. Let's make it as painless as possible for you to walk away if you need to. You know, sometimes we'll give them cash to walk away. Sometimes it'll be just, they will forgive them the debt and not, you know, send them a tax statement that they had to pay tax on them, reduce debt. So I joke that we, you know, we have a whole variety of different ways that we're looking at stuff. But it's, it's really a three prong approach. Not only just the property, but the borrower and also the collateral. And then working through those numbers and.

I mean, I mean that's a nice story where you're actually, you know, there's a positive win, win for both. Like you've made a return on your investment and this lady has called her dog or child or whatever after you. I mean, but it can't always be that easy. Presumably you've had some really difficult situations where there's people like screaming at you and things like that.

Well, you know, when that, in that case, I mean, they're not screaming at me in here. In the United States we have a third party servicing company that they actually are the ones handling most of the borrower outreach. The ones collecting payments are the one taking the phone calls. But I'll give you another great example. We got a deal right now that we bought in Florida. Borrowers been dragging it out. They didn't want to modify it, they didn't want, they didn't pay. They hadn't paid three years prior to us buying the note. And numbers are different on this one. The house is worth about 1.2, it's in Miami. It's a great looking property. When we bought the note, we knew we'd have to foreclose. So they owed, like I said, they owed about 900, 950,000 on the mortgage. We bought that loan for 441,000 knowing that we'd have to foreclose. Now we offered, we reached out to them, said listen, you know, if you want to refinance, you can refinance or we'll give you a reduced settlement, we'll forgive 100 grand of back payments and more to get. Well, they didn't want to do this. They dragged us out. Drag this out, drag this out. We took it to foreclosure, finally foreclosed on it last, last month and now we're just going through the eviction process. But the bar that, oh, I want to, I want to, I want to get a new loans. Like I'm sorry, we've given you a year to take action on this, but you didn't want to do it. Well, now it's not in our hands anymore. It's in the hands of the attorneys to do that. But here's the thing is about if it's not. If we're buying these in bulk in pools, we like to go after occupied assets and if it's occupied or somebody's living it. About 65% of time we can get that bar back on track. It's the other 25, 35% of time that we end up going the legal route. Have to foreclose or.

Yeah.

Play hardball with stuff. I mean, I've been called angels. I've also been called the devil, you know, because of, you know, what we try to do to help people. You know, some people just don't want to be helped. You know, it's, you know, the beautiful thing is I can do this business from wherever I'm at because we do it with our third party servicing company here in the United States. And then attorneys are in every. I don't have to go out and see that, seen touch that property. We really do it remind. I mean, I've even closed on deals in the middle of the Mediterranean before on cruises before a buying and then also working things out as well too, because it's such a, it's the beautiful thing about the Internet these days, right, Gavin? By anywhere.

Absolutely. And tell me this, Scott, I mean, I actually think this could be a helpful conversation for, even for the guys living back home. Because one of my friends that he's been a guest on this podcast, he and I, we both went through kind of difficult times where the banks are kind of knocking on your door and stuff. And most of the time, if you're prepared to work with the, with the, you know, the lender, you can actually work something out. Now it's not always possible because the numbers, you know, stack up so badly against you. But from your perspective as the lender, like what are some of the tips that you would give to a borrower who is in this difficult situation? And they're kind of like trying to figure out what to do and then suddenly they get a call from somebody like yourself who, you know, you gotta go and deal with this problem. Have you got any tips for the borrowing side?

Yes, very, very good tips because I end up, I talk about this quite a bit because a lot of times the banks are not gonna give you the full picture of what's going on. And here's the thing. If you find out that your mortgage has been sold to like a third party like me, that is an opportunity, huge opportunity for you as the bar. Because now you've got a fresh start. Now you've got an opportunity to set up some things, maybe change the terms of loan that are more favorable. I'll give you a great example. We bought a commercial property, self storage Facility here a while back and we're able to immediately modify the loan for the borrower. We forgave some debt. We actually brought in some appreciation clauses where we on the ups because the market it was depressed, was really depressed. Self storage facility and we were able to negotiate with the bars. Listen, we'll give you this opportunity to get back on track but if we're going to help you, we want a little bit of the, the upside, you know. And so we were able to put in a, you know, appreciation clause where we got a percentage of the profits as they rebounded and reset the terms of the loan so that they knew now had five years. Now they were cash flowing versus being in a, you know, negative cashless bot in a lot of cases there for you. So if you're, if you're struggling, pick up the phone and call. It's always better to communicate with the bank first and foremost. Tell them what's going on, be honest about the situation. If you, if, if they start, if the bank starts to threaten, not initiate, but threaten a lawsuit threat things. Get, get an attorney. Finding an attorney, not just your local attorney who does everything, find your real estate attorney because that can help you hold the bank to doing exactly what they need to do to be able to foreclose. Sometimes you can drag this out sometimes. I'll give you a great example. I had a phone call from a borrower the other day. He's like, I've got this mortgage. We've been paying on time, but the bank wants us to sign paperwork to change this. They want me bringing all this money to the table because the value of the property has dropped. I'm like, no, you don't have to do that because the mortgage outlines the agreement. Do not budge. They can't force you to pay. And if they're accepting your payments, no judge in the country is going to side with them when they've been accepting your payment and cashing your checks. So that's the thing to keep in mind. If you could just get the bank to do an agreement or a trial payment plan or forbearance, it's really. Here's the thing. Commercial assets often have a lot more flexibility to make some things happen. The banks don't want to end up taking real estate back. Whether you believe it or not, they actually do not want the property. And so in some cases it might make sense. We've even had borrowers create a new LLC and contact the bank and bought that debt in that new LLC that the bank didn't Know that the bar was actually part of that other LLC and bought it at a discount and restructured things. So communicate but get, get advice, get counselor, somebody, an attorney or somebody has been in the same situation. They can walk you through that. So important. There's opportunities and different things. Sometimes the banks don't want to share strategies because it's not favorable to them or it can be favorable to you.

And in terms of the spread of. I mean you've bought lots of different properties. Now like typically would 20%, 20 cents on the dollar, would that be the low end or would that be the average or.

Great question. So back in 2008, nine and ten, I was buying stuff at like five cents on the dollar. I mean five cents, wow. Like Miami beach condos were going for five to ten grand a pop. I could buy the debt. That's ridiculous. It take me 18 months to foreclose and. But the nice thing is in the little fork in that area, the depreciation, the market value went back. I mean condos were just, they were giving away for the most part these days with it. It's varied. Pricing has changed. I'll be the first one to say that. But we usually we see we don't want to pay above 70 cents on the dollar. That's about the highest that we will go explain. Now $0.70 on the dollar means of what we're paying at 70% of the value, they may owe a lot more if they owe a lot less than we might to just pay up to 80 cents of what's owed. If there's a lot of equity above what's owed.

Right.

But we tried to stick it at 1665. You know, sunny Mark is the highest and it's got to be in a, a state that's got a fast foreclosure time from like Texas or the bank has already initiated the foreclosure and it's coming up like the last 90 days of the time frame. But you know, when you buy in bulk, you get bigger discounts. I mean we, we bought a portfolio of 30 assets a few months ago. And we got it like 30 cents of the dollar because we were buying it. You're buying it all at once from a bank. And it was kind of funny is the bank had this loan program, it was a local bank had this loan program that they initiated. Well, it was working pretty good. But the bank didn't want to be the bad guys foreclosing because they had all relationships and deposit relationships with the borrowers. So they rather sell this off to somebody, let me be the bad guy. So they saved face. It was still a great return. We had performing notes that we bought at a 17% yield straight out the, you know, borrowers never miss a payment. We bought it at such a big discount because the bank was motivated to get off their books. Now, as we come into the fourth quarter here in the United States, banks are often very incentivized to get things off their books before they have to file their quarterly reports with the, you know, the government and the Federal Deposit Insurance Corporation here in the United States that we got to make our banks, our books look good so that we don't, you know, we can land. Keep landing like we've been.

Yeah, the old trick. Yeah. And, Scott, like, in terms of. I'm just thinking about, how did you find this as an opportunity, this industry? I mean, was it because you were on the, you know, the difficult borrower side, or did you figure it out a different way?

So I'm very blessed. I started, I was. I used to, you know, I was distressed borrowed there for a while, but I got back, I liked finance. I actually worked for Smith Barney back in the day before they close the offices here in Austin. And so a buddy of mine started a mortgage company in 2004. In 2002, I started working for Chase bank and was just a banker, you know, bank president. We opened branches here, deposits. And I had people that come in like, oh, we want to buy Chase notes. Like, oh, Chase doesn't sell their loans. I didn't even know about this niche. And the sponsoring broker for my buddy that started a mortgage company, he'd been a mortgage banker, and he'd had a portfolio in the 80s during the resolution Savings and Trust scandal that had gone south. And he worked out the note sales, and he kind of taught this niche of investing a little bit, but he taught more creative finance, like how to get people to own their finance or to buy. In terms, from 2004 to 2008, I really had this apprenticeship with this investor, and we were traveling the country to go on all these big real estate seminars and conferences, and we were doing mortgages for investors on the origination side. But I got to learn this very small niche, creative side of things. So when everything started to hit the fan in 2007 and 2008 here in the United States, I sold my side of the mortgage company for a buck. And instead of calling banks to originate loans, because then nobody was originating for a while, I was calling, say, hey, what do you have on your books? That's in default that you want to sell and just started dialing for dollars. And, you know, I got one note under contract and flipped it for $35,000 profit in 24 hours. Another one I made six grand on. I mean, wow. It was. It was nice. I mean, we flipped another one for $250,000, you know, in like, two weeks. So it was good. You know, I was getting stuff in, and I was like, I didn't know where to begin. You know, I mean, there's so many of them. I had to figure things out. I mean, the first one I bought, first note I bought was on a property in Detroit. I paid 500 bucks for it, paid with a debit card over the phone, and then I flipped it for scrap metal for $1,500, like a week later, because it was just demolished. I was like, I just want to do this, to do this, to see what I can make, you know? And I got excited about that, and I said, okay, here's this huge opportunity. And I had a couple other private money lenders that I borrowed money for my fix and flips here in Austin and some other stuff that I was doing. They're like, this is an opportunity, Scott. This is how we made a ton of money back 20 years ago. You need to focus on. If you've got this opportunity, this is what you need to focus on. And that's what I did. So I started, you know, sharing little videos. You know, here, hey, here's a deal that I'm looking at. Here's an apartment complex, and I'm buying. It's worth 750. I'm picking it for 349. It's eight units. You know, who wants to buy it for me for 35 grand? You know, for 4, 425 or 450. And I just started sharing stuff like that online, and it led to kind of a grassroots effort for people paying. How are you? This is interesting. We hadn't heard about this. What is this Note investing? And I said, well, this is an opportunity. So I kind of sold everything I owned, and I started going around the country and meeting with banks and asset managers. Not the biggest banks, but regional banks, local banks, and really just kind of made a name for myself going around and buying individual stuff or helping them facilitate workouts and help them set up some programs that borrow outreach, because a lot of the banks were overwhelmed that didn't have the resources as the bigger banks. It was simply like. Like one bank. I'm sitting at the I remember bank of Shamrock in Naples, Florida.

Shamrock?

Yeah. I walk into the. The bank. Bank doesn't. Banker doesn't think anything. He looks at this kid who's got this short haircut, looks younger than he is. What do you know? Well, like, I know you've got 50 million in distressed debt on your books because these banks have to publicize this all with their core reports. I said, I'd like to help you. I either buy it or help you. And he's. He's like, hang on. So he comes back a half an hour later. I'm sitting in the lobby. He walks me into the conference room, and there's this long 15 foot conference table. And stacked to the ceiling are all these file folders of individual loans. And he's like, buy. Here you go. Here's my assistant. Buy anything. Buy something, please. And so I was at that bank for like a week. I said, listen, why don't we do this? Do you have a name of all these? He's like, yeah, I could possibly just reach out to him and let's modify these loans, let's put them on trial payment plans. Let's just do this. And he's like, well, how do you do that? I was like, oh, my God, you're. You should not be in work. So, you know, we taught that old dog some new tricks, but he got a big chunk on it. We moved a portion off his book, so his bank was actually able to stay open for a while longer. But his commercial notes kind of drove him to ground. But that's, you know, most people don't know, but it's a niche. It's. I kind of call it. If you're a fan of movies, in the movie. We had a movie come out a few years called the Big Short with Christian Bale. Yeah, I'm kind of like Christian Bale's character in there on a much smaller version, I guess you could say.

Right, Interesting. And I mean, do you. Do you use your own cash or do you work with investors and you pool together?

So when I got started, I didn't have any capital because the market tanked. I had two big investment properties, fixed flips. I had to write checks. The closing table, you should not write checks. The closing table, you should be giving checks. Right. So I basically started at nothing. And so I had a little bit of money that I could get something under contract, then I'd flip it. You know, I'd wholesale the contract. But about 90, 95 of what we have bought over the last 15 years is using other people's money. You know, there's a lot of investors that have money in the retirement accounts here in the United States not making anything. They like the idea of investing, but they don't want to do the work themselves. They'd rather, you know, cut you a check and get a, an interest rate or return on their money. And that's what we've done.

So you borrow money from the, from the pensioners or whatever and at a rate and then.

Yeah, yeah. Like if an investor's got money sitting in there, it's not making anything 0% or negative 8. With inflation these days, I'll say, hey, we'll give you a 6 or 10% return on your money, depending on the deal. And it'll be. It will borrow the money from you for 12 to 24 months and pay them a quarterly payment on the money that they use, because that gives us time to work it out with the borrowers and either get it reperforming or sell it off or go the foreclosure round. So.

Yeah, right, right. Yeah. Fascinating. And I mean, just changing, shifting gears a little bit, Scott, in terms of the, you know, the current economic climate and where we're at. I mean, what is it. What is your view on what the next 12 months or beyond is going to look like?

Well, I think we share some similarities. I think it's going to get very tough for a lot of your traditional investors out there. I mean, we've been, and I'm speaking here in the United States, you know, in a lot of cases, there's a lot of distressed markets out there besides just here in America. But speaking here, you know, there's a lot of people that have made great money in real estate or as property values have continued to climb and climb. And it's been crazy here in the United States. But that shift is the market's cooled off and does remind me a lot of similarities in different ways. Back to 2008. Yeah, interest rates have gone up. I mean, I can remember in here in the United States, they were talking about interest rates was like at 6%. I can remember back in 2000, like, oh, 6% was a great rate. Back in 2007, you know, when we were originating stuff, my parents, they bought a house back in golly was 1987, 88. And their interest rate was like 12 and a half or 18%, I think it was at one point with their mortgage. So while it's not quite 2%, like how we refinanced our house two years ago, you have to look at the market. You've got to change and adapt to the situation. If, if you think you're going to keep seeing that appreciation. A lot of people bought at the peak of the market thinking it was going to go up another 10 or 20 or 30%. That's wrong. That's really like playing Russian roulette. You can't have, you can't be in real estate and just rely on appreciation.

Gambling.

It is gambling. California. A lot of investors in California have been guilty of that buying and appreciation with very minimal negative cash flows because they think, oh, I'll hold on to it for a year or two and sell it for twice it's worth. You've got to really understand the, the economics and the financials of that asset. If it's a single family, what can it rent for? You know, what's your buying pool? What, you know, if you're going to, if you're going to carry financing, what's that look like? What, what's it going to cost you to hold on that asset? Those have had cash sitting on the sidelines for, for the last couple of years. Now's the time to get in and you can start going to start seeing increased numbers of distressed assets, whether it's residential or commercial. We, we see this and you know, one of the things that we've done well over the last 15 years, Gavin, is we actually do a lot of not borrower outreach, but bank outreach. You know, we've got a Rolodex list of bankers that we call on a regular basis. Hey, what are you selling? You know, drop them an email once a month. What do you have in your books you're looking for sell? Well, it's always interesting when my email box starts to get flooded with requests of what, asking us what we're buying or bankers call me back on their cell phone after hours, hey, I want to talk to you. Tell me what you're buying or where you're looking to. And you know, back with COVID when the more the market shut down, I was like, this is, this can't stay shut down forever. You know, at some point the piper's got to be paid. And we're starting to see that, we're starting to see that here, especially the last six months, things the banks are no longer extending, things like they have, they've got to get borrows back on track. If not, then you see an increase in foreclosure filings. It's also led to an increase in bankruptcy filings and people fighting to stay in their houses, if they can hold on to it as well. But like I said before, a lot of opportunities if you know where to look, you just gotta tweak your business model. I have some investor friends, they've been in a very heavy fix and flip, buying a house, fixing up and flipping it and stuff like that. Well, that, that model doesn't work when you see days on market increase and you know, prices, prices starting to drop. I've got a friend that works from a home builder and she's looking for other ways to make money because she's just been an agent for this brand new home builder and you know, contracts were getting canceled left and right. Just people are like, oh no, we're going to put a pause on this for a while. So she's, you know, she's looking for other work basically. So you just got, you just got to pay attention and yeah, don't, don't put a blind eye there.

I've been watching it for a while. I, I've had a kind of a sneaking suspicion that this is the market that we're heading into. And I, I have been giving these kind of warning signals on my podcast. But you know, you get people kind of thinking doomsday. Sarah, if you say it too often, people kind of badge you as a, as a, as a doomsday kind of sayer. But it is something I can remember you were just talking about, you know, the home loan at 18% or whatever years ago. I can remember I told you earlier my father died when I was in my early 20s. And I can remember he was sick in hospital for quite a few months. And in that period of time we didn't open any post. It was addressed to dad. And so we just left the post piling up. And then after he died, there's this awful moment when you have to kind of like say, well, I guess this post is for me now. You know, he started opening all the envelopes and taking out the letters and finding out what. And one of them was the mortgage on the home. And I can remember it was November 1993 when he died and the mortgage rate was 16.75%. And, and people kind of think today like 2%, 3%, 4% is pretty high. And it's kind of like, well, hold on a second. If you go back to the 80s, it hit 18, 19%. And we're now in an inflationary kind of environment that is similar to what it was back then. And the problem is that central banks, they don't have a lot of they don't have a lot to do. All they have to do is get the inflation down and they've only got so many tools to do that. And interest rates happen to be one of them. And even if it brings on a massive recession, that is what's necessary because the alternative is to allow the currency to collapse and to end up in hyperinflation, which we've seen in different parts of the world. But everyone kind of thinks, oh, it'll never happen here. But you know, it's one of those things. I think people have got to be really careful now because I think we could be looking at rates getting to uncomfortable levels that will push a couple of people over and they won't have been prepared for it at all. And I can remember just. There's one thing I can Remember back in 2007 or something like that. I can remember I had a property here in Dublin and it had a big loan on it, but I had a big tenant paying a lot of rent. And I can remember when I initially did the deal, it was throwing off about 150,000 a year in surplus income above the borrowing rate. So I was like saying, happy days, I've got 150 grand to play with here. And it was during the next couple of months, every time there was a meeting of the ECB or the Fed or whatever, they would incrementally increase the rate and it was going up a little bit more and a little bit more. And. And I can remember that 150 went down to 75 and then it went down to 50 and then it went down to 25. And I remember kind of thinking, whoa, it won't be long now before it's the reverse. And it's like, oh, that 25 you now need to put in, you know. And I can remember suddenly going, okay, I better go and look at fixing rates at that stage. And of course it's way too late when, when it gets to that point, at that point for me to fix the rate, I would have automatically starting to have to pay 75 or something like that.

That.

So people are always way too late in sort of deciding that you got to take the pain sometime. And so anyway, now we had that.

Happen here in the United States. As a mortgage originator, there's a loan product called the Pick a Pay okay. And this is very, it was a very popular mortgage product that was done in California so folks could be able to afford the payments out there. So it. That the picket pays. Had you had a 30 year mortgage you know, fixed rate, a 15 year fixed rate. You had an interest only mortgage payment, but then you had a partial interest payment. So if your interest rate was 6%, you don't have to pay 1 1/2 percent. The other 4 1/2% interest rate went on the face amount of your loan.

Wow.

So it was a negative amortization loan. And people are like, oh, that's great. You know, I can get a 1 1/2% interest rate. My equity, my equity will always keep increasing because the value keeps increasing. Well, people didn't realize that if you hit a point where you had owed 125%, you know, of the actual value of the property is that partial interest payment went away and you start paying a full 6% interest rate. It basically recast itself.

Right.

Well, you had all these people that happened to, had a lot of investors that use these to pull cash out of their properties and cash in the equity. And they didn't use the equity on anything good. They used it on toys. They used to buy bigger house, you know, bigger cars, trucks, Holiday home. Yeah, holiday home. That didn't cash flow, you know what I mean? And I, you know, it's like it became, I called it a garage sale or estate sale economy. Had all these people bought these toys join for a little while, but then they had to turn around and sell their toys at a big discount to try to pay to stay in their houses. And what's funny, it's not really funny, but it's humorous. You do see history repeating yourself. I reached out just to just check and say, have you seen an increase? I reached out to the local newspaper and said, hey, have you seen an increased number in garage sales, estate sales? Because I'm starting to see more signs popping up on the side of the road and they're like, yeah, we have. I was like, okay. It's just a matter of, unfortunately it comes down to, it comes down to that people just don't aren't using their money well, but you've got to, it may, something may look really good and fuzzy on a mortgage and there are people that did do the right thing. There are people, but you also got to realize, hey, you know what, does it make sense now These days we're seeing 40 year mortgages and 50 year mortgages for people to be able to afford property. I think that's going to be more of the rates to try to fit that affordability in a person's budget for the most part. Sad.

Yeah, I don't know, it's this is the thing, it's kind of like people just don't want to pay the piper, you know, it's kind of, they want to push the day of reckoning as far away as possible and just hope that, you know, something will bounce back. Yeah, interesting. Scott. I'm conscious of time in terms of one of the questions I like to ask my guests is knowing now what you know, you've had a career in this and stuff like that. When you started out, you were obviously had a different mindset. What advice would you give your 18 year old self today if you had an opportunity?

First thing I would say is find you a mentor. Find somebody who is 20 years ahead of you or 30 years ahead of you, who's been through a couple cycles and listen to them pick their brain. You know, everybody has advice. Grandma has advice because she comes from her limited belief, but doesn't mean it's good counsel. So seek counsel, not advice. Don't. Another big thing is, I think, especially me, I was kind of, I was just thinking back to 18 to 21 as a college football player. I was very cocky, confident myself. I'm still very confident cocky, but I listen more to other things without listening to the news and I think that's the most important thing. Listen to your mentors, listen to, turn off the news. Thank God social media was around 20 years ago. But I think really social media can be a tool, but it can also be a very bad thing. I think, I think for most investors or people out there, especially, especially as we younger and growing up, we want to be accepted and be loved by everybody and you have to realize that not everybody's going to love you. That's, I think that was probably the hardest lesson. And when I think of the counsel I've gotten from my mentors is when they tell me like, listen, you're not going to have everybody that like you. You're going to end up screwing up at some point and that's going to happen. Don't be afraid to make mistakes, but be willing to take accountability and move on. Don't let that mistake drag you down into making a bad second, a third, fourth, fifth in a row decision. Does that make sense?

Great, great, good, good. Very good points. And I mean the big one that I think of is comparison. Do not compare yourself with others. It's so easy to kind of see somebody else and you see the, especially with social media, you see the outward appearance of success and you're like, how is that guy able to do that when he's Only that age or whatever it might be. And then it takes a recession or something like that for you to realize other guy was on debt. And the guy, you know, suddenly he'll disappear off social media and like the account will be closed and you won't hear anything more from the guy.

I've had a friend that has done well the last couple years buying a lot of real estate and he's changed. Going from the humble guy that was driving the Honda Accord that was a few years old to now buy driving a green Lamborghini to the office. And I was like, I was like, you can't be happy. And he shows one thing online and I get him on the phone, we're talking back and forth and he's gone through divorce. His two boys don't want to talk to him anymore. Yeah, he's really struggling that side. It's like, well, you've changed. You're, you know, you're hanging out with all your buddies, drinking, you know, in a circle, telling you how awesome each of you are. You need to be home and be a little more humble on some of the things, you know, because I've been there, I've been through divorce. I think you have to as well too in going through different things. You have to realize that, you know, it's, you've got to pay the, the piper gets paid more than just real estate. That's.

Yeah.

Happiness and health is one of the most important things. Being able to sleep at night is such an important thing these days too.

Absolutely. Scott, if people want to reach out and find you, what's the best place to, to, to seek you out?

Yeah, really easy. If you go to my main website, we close notes.com. you'll find our podcast classes. We have on there all the information. I've got a YouTube channel. We close Notes TV out there. It's the. I'm very fortunate to have the number one YouTube and podcast in my niche of real estate investing. For being the note investor out there, I, I do want to say, guys, if you're listening to this podcast, Gavin has done an amazing job with it. So make sure you hit that subscribe button and leave a five star review anytime you show up consistently like he does. Well, you. 126, 127 weeks straight now, Gavin. Yeah, yeah, leave a comment. We as podcasters love to see that from our audience. Hit the subscribe and make sure you leave that five star review for Gavin. He didn't tell me to do it. He should have, but I mean it's such a great podcast. I love what you're doing with this show, Gab. Great stuff, Scott.

I really appreciate that. That's the first time a guest has done that and so full kudos to you for that. And anyway, Scott, it's been a real pleasure and I wish you every success and hope to check in with you again at some stage.

Definitely. I plan on coming over across the pond here hopefully in the next six to 12 months. When I do, we're gonna get a pint together somewhere.

Let's do that.

Thank you so much for tuning in to another episode of behind the Facade. If you enjoyed that episode or if you found it useful in any way, please take a moment to leave a review over on itunes. If you're listening in on the podcast, if you're listening or you're watching in on the YouTube channel, then maybe you can leave us a like. And if you can't do any of those things, maybe just share the episode out with somebody you think would find it useful. If you have any questions or topics you'd like me to cover, send me a message through the Facebook community is probably the best one to go for that is called behind the Facade Community.

Alternatively, you'll find me on social media.

Social media. My handle is Gavin J. Gallaher, and.

As you would expect, I have a.

Website that has the same name, gavinj gallaher.com if you go in there, you.

Can join the email list, you can.

Add yourself in there and you can find out what's going on on the various projects that I am working on. All right guys, hope you enjoyed this one. Speak to you again next week.

SA.