How to Find Distressed Apartment Notes for Apartment Syndication with Scott Carson: Multifamily Investor Nation

Foreign welcome to this week's Multifamily Investor Nation webinar. Again, my name is Whitney Elkins Hutton. I'm the director of investor education here@ passiveinvesting.com and today we are going to be talking about how to use distress notes, how to find distress notes in apartment deals. Sorry. How to find distressed apartment notes. I, you know guys, it is early for me when I record these webinars, so pardon my. Yep, thank you, Scott. All right.

It's not kicked in yet for you there. It's okay.

I have not finished my cup of tea this morning. Well, anyways, I am so excited to be joined by Scar Scott Carson with we close notes. All right, Scott, just kick us off today. Tell us a little bit about yourself and how you got into the note space.

Yeah, it's a, it's definitely a different story. I mean I've been a real estate Investor for over 20 years and started a mortgage company back in 2004 with a buddy of mine and we were traveling the country doing mortgages, cash out refis for investors all across the country. And one of my, our sponsoring broker was teaching about creative financing, buying on terms, owner financing, that kind of stuff and had been through the 80s, you know, Resolution Trust corporations and the savings loan scandals and stuff like that and bought a lot of debt back then. Well, and he was teaching about note investing, how to find notes, how to structure notes. And then when everything hit The Fan in 2008, this is the great recession was kicking in, our mortgage business basically dried. Up. And he was saying, listen Scott, this is the best time for you. With all these mortgages being underwater and people falling behind, it's not only in the residential, it's also the commercial side. Now's an amazing time for you to be focused just solely on the note business. And so that's what I did. I stopped originating notes and I started calling banks and lenders to see what kind of distressed debt that they had in their books that they were looking to sell at a discount. Now what I mean by a distressed debt, I mean it's a mortgage whether it's on a single family home, apartment, complex of storage. If there's a mortgage on it and somebody has stopped paying on their mortgage, it's considered distressed, obviously and some of it's more distressed than others. But really when start somebody becomes more than 90 days behind their mortgage, the bank looks to start to initiate the foreclosure process or the liquidation or some sort of thing after trying to work out with the borrower and the value of that debt, as far as, you know, what it seems, it's a million dollar note. It starts going down the value because the bank's not collecting that. We all know that banks like to collect. They're not in the business of owning real estate. They want to own, you know, cash and mortgages that they get payments in that they can leverage out, you know, 40, 50 times a year. But I started calling bank, started getting lists sent to me of anywhere from a one off note to like capital One sent me their list of every small balance commercial note in the country. It was 33 pages long PDF with like, I'm serious, six point font. And it was just something I was like, okay, I'm onto something here. And started buying these notes, you know, individually, one at a time, either brokering and flipping them for quick profit, or we would buy them, take them down, go in and work with the borrowers to either get the property back on track or the mortgage back on track or looking to liquidate or foreclose and take the property back and then sell it or hold it. So, you know, bought over a billion dollars in debt since I started doing this. And it's been an amazing and interesting ride with the markets being where they're at right now. So that's a little bit about my background and kind of how I got started.

Awesome. Thank you so much for sharing, Scott. All right, so I am super intrigued because, you know, just over the past like 24 months, the pendulum is swung here. I feel like, you know, everybody was ready to get in, hopping in on equity deals, you know, value, looking for more of those value. Add distressed apartment deals to where they could like, you know, scoop it up, you know, below value, complete, you know, modest rehab on it, push the market, rents. But as you have mentioned, you know, kind of harking back to, you know, history has taught US like in 2008, we're in that part of the cycle where there could be opportunity here to not just scoop up the apartment itself, but maybe just the paper. Okay, that banknote around the apartment. And thank you so much for kind of defining what a distressed apartment note is. Why do you think it's super important for the active multifamily investor, and that's who's usually listening to this webinar right now, to consider either investing in distress notes or, you know, adding it to their portfolio or pivoting to add distress notes to what they do.

Well, we, I think we all know that multifamily properties have been the hottest asset Class the last, I'd say five to 10 years. Right. Everybody's looking to get into that, trying to find a deal. Well I often looking at a lot of these stuff see that a lot of these are overpriced or overvalued assets because of competition people over. And you're starting to see the news is littered with, you know, deals that have been over financed or they overpaid, they couldn't get it back on track and now they're facing foreclosure. And so I get phone calls every week from investors. Hey, I'm looking for apartment deals. I'm like, well I'm not buying an apartment, I'm buying the actual debt and becoming the bank. And the reason that I like actually owning the paper better than the asset is the bank always gets paid.

Right? All right, but the fact is theoretically in line to get paid.

Yes, theoretically in line gets paid. But if they don't get paid, guess what, they foreclose and take the asset back. I mean it's good to be the only thing that really trumps being in a, in a, in a mortgage position. Firstly mortgage would be if you bought the taxes for the most part. But I like the fact is that we're seeing, and I've been seeing this for about two years now, increase amount of distressed properties where the, the underlying borrowers were hoping they, like you said they would buy it, increase the rents, increase the values and then turn around and either sell the asset off or they would refinance the loan for long term, pull out their equity out. Well, with interest rates going through the roof like they have, that refinance exit strategy has gone the way of the dodo bird. And that's why you see a lot of folks struggling. Commercial real estate's been hit pretty hard in a lot of cases. Even there's increased distress in the, in the multifamily space as we say. You'll see numbers come across there. So I like owning it because it gives you an opportunity to buy this debt, especially if it's distressed at a discount. Now we know that, you know, most commercial properties are financed at what, 60, 70, 80 cents on the dollar of value when it was originally done. Well, a bank definitely doesn't want to have non performing notes on their books because they can't leverage the cash flow. But they are much more flexible in working with a note buyer on an acquisition of a non performing note because they would rather keep that note some sort of fashion on their books. And we've even been able to negotiate with banks and lenders like, listen, we would like to buy that note at a discount below what value? Below what's owed. Which, that gives us the, a, the flexibility to go back to the borrower and say, okay, what's going on? Can we refinance you? Can we modify your loan? Can we get, give you some workout plans, get back on track? If that doesn't work, then we just basically acquired an asset that we now could either a foreclose, do cash or keys dean loom and then take the asset back at a price well below what the purchase price was in today's market without ever having to do a lot of the work. And so that's kind of what I like about the distressed note space is that banks will literally give you lists of their problem borrowers. All right? And I always make the joke that, you know, I, I'm not in the habit of rehabbing properties. I don't like to take property back, but I like to rehab borrowers to get the cash flow and get good yields without having to show up and deal with contractors, show up and deal with a rehab. Basically, if I buy the paper at a discount, I can often get a nice double digit or higher return by modifying the terms of the loan and working with the borrower in a variety of fashions without ever having to own the actual asset. So that's, that's a couple of advantages that right there. Plus you're seeing, we get deals and this is the, the second big thing, Whitney, is these deals aren't just out publicized. There's not everybody's searching for that distressed, you know, distressed asset of their property, whether it's through their, you know, pocket listings to realtors, things like that. Well, when we're dealing directly the banks, it's a much smaller group of individuals that understand where to find these deals. And I've got a couple different websites to help you find potential distressed apartment note deals for you to tap into if you're interested. But it's a, it's a beautiful business of becoming the bank and controlling the asset by either a working out for cash flow that makes sense for your roi, that makes sense, or working to take the property back and then taking, taking the asset over and operating if you want to. Does that make sense?

Yeah, absolutely. And you know, it makes perfect sense to me. I've been investing in notes for quite some time. You know, both apartment debt as well as even distressed business debt. Now here's the thing. I would say on the distressed business debt side, things have not always Gone as planned with those type of investment, but it's a similar type of concept. So, you know, can you go through just really quick before we get into the how to find the distressed apartment notes, what are the downsides here? What are the risks? What should somebody be on the lookout for or think about, like the risk whenever they add something like this to their portfolio?

Well, the first big thing and the number one mistake that I see regular real estate investors, people are used to owning the property. They get in the note space is you don't automatically own the property. That's the biggest thing. People will, oh, I'm a buy the debt. I'm going to own the property. No, no, no, you're not going to own the property. That borrower has the right to come back to the table, reinstate the loan and get back on track. You not going to own the property. If your goal is to own the property, you got to be very careful and perform your due diligence on it. It's the second thing is making sure you understand the due diligence, not only just on itself and the cash flow, stuff like that, but doing due diligence on the actual borrower. The servicing of the notes, the, as I like to say here, the collateral file, this is really what you're buying, is the collateral file that controls the note. And then of course, looking at all the, the documents, making sure that everything is, is created properly filed properly, if the note's been sold a couple times, making sure the assignments and the, you know, chain of title is all in place. So it's not just, like I said, not just doing due diligence, one thing, but really three things. The property, the borrower, and the collateral file. And then of course, you've got to understand the, the specific foreclosure laws are different in each state. All right, so I'll give you a funny example. There's been some news recently where Grant Cardone talked about using stop doing due diligence in all assets in New York State. Right. So they just came out. I'll stop all the under. I'm like, okay, if you were really buying multi, multi family in New York state, which is one of the most difficult states to foreclose in and also evict. You're not very bright, no offense, because I've been getting, this goes back to the beginning of COVID I was getting lists and lists of apartment loans that were in distress in New York State, New York City, in the neck of the woods that were selling it like 40, 50 cents the dollar. But there's no, you know, people are living in these places dragging out rents and not making their mortgage payment stuff for years. So you got to understand what goes into each state as far as foreclosure and eviction laws. That's, that's the biggest thing is that people think, oh, I'm just going to buy it because it's a deal. It may not be a deal when you run into something like, of course, Covid can always put a cramp with something like that where they stop foreclosures for a while. Stopped evictions. We never expected that. And it kind of put a little bit of a, a kink in her chain when it came to having to foreclose on folks that weren't paying. So those are some of the inherent risk. Obviously, you know, there's all sorts of different classes, A, B, C and B class, stuff like that. I always make the, the comment that don't buy a note on something that you don't want to end up taking back. If you would be. Not enjoy taking it back, it's probably an asset you should not be bidding on. Whether it's ugly, you know, it's in Chirac or Crook county in Chicago, stuff like that, which can be difficult, or it's in a rural area that, you know, you know, like somebody was talking the other day, they're trying to buy a multifamily in an area that had like 400 people. I'm like, that doesn't make any sense. You know, that's too small a market. Stick to your major markets or tertiary markets across the country and understand that. But that's, that's the beauty of it is there's a lot of opportunity. And when banks will send you their lists of distressed debt all across the country, it gives you the opportunity to be able to cherry pick versus what happens. A lot of times people get so motivated to try to do they get delights. I gotta do a good deal. I gotta do a deal. I gotta do it. And they do a deal. It's a skinny deal that gets them in trouble if something goes wrong. Don't do skinny deals. You know, make sure the opportunity is there if you know where to look. It's a different mindset and different strategy session. But there's definitely plenty of opportunities out there if you know how to approach it. So hopefully that makes sense and answers your question.

Oh, yeah, definitely. Let's dive in. So, okay, how do we, how does somebody do this? How does a listener, you know, take action on what you're saying today, like, find that distressed apartment note, like, right, like the first step would be get a list. How does it.

Exactly. It is all about getting a list. Now, the beautiful thing about multifamily or note business is that banks, lending institutions, mortgage company hedge funds, they all have internal departments. And the way I used to have to do it would be pick up the phone and make 50 to 100 phone calls to different banks and ask to speak to either a, their special assets department, their secondary marketing department, their whole loan trading desk for hedge funds, or if it was a smaller bank like their chief credit risk officer. Now, you all can go to LinkedIn right now, type in those four job titles, and it will pull up a list of people that have those job titles at banks. And you just probably want to add commercial, special asset manager, chief credit risk officer, commercial, you know, senior vice president, special assets or capital markets. Those are job titles to look for on LinkedIn and start reaching out to people. That's one of the most effective ways. Now, another thing that's very effective leveraging LinkedIn is typing in job titles of people or companies looking for people to hire people in the special assets or secondary marketing. And this is one thing that we track every quarter and we see the number of job openings for these specific job titles increasing, which means there's an increased amount of debt distressed out there for them to hire people to help to work these deals out. So that's a kind of an easy cheat shape. You see a job posting for special asset manager, secondary marketing manager, you know that you might want to be contacting that bank, say, hey, what do you have on your books that you're looking to get rid of? Another thing is there are a couple different resources to find the internal departments or to find banks that actually will kind of publicize their distressed debt. As we all know, for banks to be accredited for the fdic, they've got to file quarterly reports with the Federal Deposit Insurance Corporation. And these quarterly reports are literally like them opening up the kimono and flashing you where they're at. Okay, Now, I'm not saying go to the FDIC and start reading every bank's quarterly reports. That's not smart. That will take forever. There's a service that we use called Bauer Financial, and it's a website that actually, if you go to bowerfinancial.com I had it pulled up. I guess I can't share borrowfinancial.com give them a phone call and say, hey, I want to buy the quarterly report. Of banks that have five branches or greater. Not credit unions, but banks. And the great thing is that they'll send out a spreadsheet about 300 bucks. I don't make anything off it. I'm just, you know, I'm just telling you this is what we do. We buy this quarter report and it will literally list all these like 1500 different banks that have five, five more branches. And let me see here now. Oh, I can share now. This is great. Okay, so let's go. Here we go to Buyer Financial. This is the website. Okay. And when they send you this report, it will give you how the bank is classified whether it's a zero star, one star, five star. It will tell you their distress ratios, you know like they call it the Texas ratio, how much of their portfolio is underwater, what kind of dollar amount is that number gone up or go down. It will even give you a category as far as distressed commercial loans and even multifamily loans. There's even a category for that. So what do you do when you see that a bank has distressed multifamily apartment loans? Guess what? You pick up the phone and call or contact their special assets department and see what. And they tell you what they have as far as is distressed stuff that's over 90 days default. And they even give you a column, column that shows you what's coming down the pipeline, what's now 30 to 89 days in distress. So that's an easy kind of cheat sheet to do that. I also like there's a service called Credit Iq that tracks all of the commercial servicers. You can actually do a search on their website. I don't know what they charge per month. I don't make anything off it. Just telling you this is thing to do. But they will. You can actually pull up distressed apartment loans that are with master servicing companies. And what a master servicing company is. This is a servicing company that takes over the loan servicing of the note from a bank hedge fund lending institution and tries to start working it out some sort of plan with the actual underlying borrower or the, you know, the, oh the, you know, the bar on the property, borrow the mortgage. And this is really great because you can search by number of doors, locations, how far to fall and they was actually publicized. You can actually track all the information for who like the sponsoring partner is the LLC information. And often they'll have notes from actual master servicing companies of what's going on with that asset. Now there is a another thing that I really like. You've probably heard of the Mortgage Banking Association. Right. And every year the MBA publicizes commercial multifamily mortgage servicer rankings. This literally is like a cheat sheet. You can click to download the report, it's free to do. And what it'll do is you click on that report, it should. Can you see my screen now where it says msr? Okay. This is a report that literally ranks and shows who all the multifamily servicing companies out there. And all you got to do is scroll through these and it gives you like how many loans they have, number of loans like this one, like Wells Fargo, we know that, you know they've got 39000 plus loans and the average loan size. So I don't like to target these top five or six, but I like to go down to like the bottom ones and start contacting these. And same thing, you jump online, do a search for their main corporate office, ask to speak to somebody in special servicing or the commercial special assets manager and say, hey, what do you have on your books that's in distress that I can take a look at? And then that will then lead to them often making you sign a non disclosure agreement and then they'll send you, we call it a tape or it's a spreadsheet or it may be a file that literally is everything about what's going on with that asset. You know, what's the bar we're doing, what's the payment history, what the value was, what the cash flows was. And usually if it's relatively new in distress, you'll have you know, the most recent quarterly financials. But if it's drug on and the borrower's not being cooperative with the lender, you might need to go out and try to, I call it Sherlock Holmes, try to create and get a bit of an idea what the financials are yourselves in, doing some due diligence on the actual asset. But those are the sources that we will leverage and use to actually find deals and get stuff sent to you. And what I like about this is once you get in with the right department, I'll give you an example, like Zion's bank is out of Utah, right. Big bank out there, they have one special asset manager that handles all of their residential stuff across the country. But they have 12 to 15 commercial special asset managers that handle stuff across the country that sends me a quarterly report of what they have on their books that they're looking to get rid of or that's in distress that they would be interested in selling. And that's that's that's the one thing I've always loved about notes, is once I make a relationship with a bank or hedge fund, it's not just one deal and then I got to go on and keep hunting or fishing. Once I make that relationship, it's usually gonna, they're usually gonna send me stuff every quarter, sometimes once a month. And when you start closing stuff with them, you'll even get stuff that falls out from other places that they just pick up the phone, say, hey, we had another. Somebody couldn't close on this note, trade or deal, are you interested? And go from there. And that's, that's, that's the beauty of it is it's a lot less work to find deals because now you've got an influx of distress stuff coming your way that you can be, you know, cherry pick and be conservative in what you're buying.

Awesome. Okay, so then what's the next step? I would imagine you have this list and now you've got to, you know, perform due diligence. Like how, you know, you know, what are some broad strokes here that.

So broad strokes definitely going to be like diving into the property. You know, one of the great things about when you're looking at the note side is there's not any, usually any earnest money put up on when buying a note. It's usually like making an offer based on what the bank has provided the lenders provide you. As far as your diligence, they may give you a rough value, you know, and you're bidding off of that. Now if they accept your bid, then you do a deeper dive into doing more due diligence. And then if something pops up, like the value they list is one thing, but it actually comes back worse, well, then you can, what we call fade or reduce your bid to something that makes sense based on your due diligence aspect. And then, you know, there's, there's countering back and forth, but making an offer off the initial due diligence that they provide. And then if they accept it, then you're doing a deeper dive. Then you're signing usually a loan sale agreement or a letter of intent on these. And then the bank is then starting to provide copies of the collateral files, copy of financials, whatever they have for you, do a deeper dive. And then, then you're, then you're, you know, rolling up your sleeves and getting to work, looking sure to verify everything is good. And then it may make sense then obviously then to do a site visit or somebody go by and take a look at the. One of the most frustrating things is you're not going to usually get into your access to the properties. Now you can go out, walk proper like you would anyway. Like you're going to be, you know, walk a proper like everybody should on a multifamily, but you're not going to be able to get inside like individual units and stuff like that. Would that you would be if you were buying an apartment complex. But you can often tell a lot about the interior by what's going on. The exterior, the classification, you know, the tenants is going on there. One thing that I have always liked to do is a bit of social sleuthing is, you know, jumping on white pages or something like that and typing in the address of apartment complex and it starts giving you lists of people that live there and picking the phone say, hey, can I speak to the property manager? I'm looking, I'm sorry, I'm trying to find the property manager. Oh, and they'll give me the information. I'm like, well, you know, hey, how do you like living there? And you'll get, tenants will give you all this information like oh, it's great, you know, I love it. You know, if, if, if somebody were to buy it, what would you like to see done? Oh, we need to have this fixed, you know. Oh, there was, you know, we need to have on site police because there's two tenants, Bobby and Tommy are down there selling drugs every weekend. You know, you get a lot of crazy internal information that necessarily doesn't show up at the bank. We're doing a lot of stuff. So it's just like then performing your due diligence and, and going from there and then having a conversation with the servicer too during your due diligence. What's going on? What is the borrower said is the issue? What have you found? If you're, if you're going with the foreclosure process, then you're speaking to the attorney and say, okay, you know, where, how long is this going to take to foreclose? Estimated what issues? I mean the borrower could always file bankruptcy to delay things, but that's okay. I like when they file bankruptcy because now you've got an attorney to talk to and it's often a, it turns into a loan model of some sort or a recurring note for a period of time. That works out pretty well in your favor in a lot of cases. And you're buying at a discount too. So numbers work in your favor.

So it sounds like one of the biggest risks Though, you know, if you're, you know, of course you're going to do as much due diligence as possible is that you don't exactly know what the interior of these units look like. So if you went through the foreclosure process, you got to account for that in your underwriting financials. Now of course you're not going to be holding on to the asset. It doesn't sound like that's what your strategy is. So what do you have like a base number that you slide into your financials or a certain percentage that you already discount the note in your hand. That way if you had to resell it that you could recoup those costs.

It's all, all can be relative on what we find in the due diligence aspect of things. And a lot of times there will be notes in the, the servicing of when the last upgrades were done, when the part, you know, when this property was, you know, upgraded, maintained, whether it was new carpet, new paint. I mean that's the great thing is something's been bought usually in the last three to five years, which you see there's been some maintenance done to, there's been some upkeep done to it and oftentimes, thank God to social media. You'll even see photos a lot of times of different stuff or of if they've got decent on site management. There'll be old videos or other photos of units that are available, you know, that they're trying to rent. So you'll often kind of get that interior view without knowing it. And then of course sending out if there is a lot of vacancy, sending out your realtor to act like they're trying to rent a place to get an idea of what it looks like by walking the complex and looking at a few units. But yeah, we always, we always expect that we're probably going to put paint and carpet in every unit. We're going to have to upgrade some stuff and we have our checklist of looking at that and you know, every operator, you know, some folks like pools and don't like pools on that specific age of assets when they were built, others don't. So it just all comes down to kind of what your buy box is for the most part part.

Awesome. Okay, so we, we've covered like how to find the list, get that list, start performing due diligence, just kind of broad strokes. Right. Because that's so personal, depending on each operator strategy.

Right.

How do you get to closing?

How do you get to closing? Well, it's, it's a little bit different process than probably what you guys are used to. So once you've gone through your due diligence and you're happy with what your bid is at and the, the bank or the seller is happy with where everything is at, I mean multifamily stuff is usually it's a 60 to 90 day or longer closing just because it takes a little bit longer for due diligence, stuff like that than with a single family home. Obviously once you're, you're happy with everything, then it's all about wiring the funds directly to the bank or wiring it to an attorney's office and you know, having the funds sent in and then having the assignment docs. Because remember, you're not technically buying the property, you're buying the note. So what's transferred isn't a deed. It's what's called an assignment of mortgage and then a long assign which transfers the receivable. It's a very easy process, very simple process of things. Now because remember, because you're not buying the property, so the existing title is still in place, obviously you're checking title reports, make sure nothing else has popped up behind it. But that's the, it's a pretty easy process wiring into an attorney's office or wind direct to the bank. A couple days later the assignment of mortgage is transferred, you know, sent to you and then you go file that the county and now you're, now you're the lender. And then it's a process of if you want to retain servicing, keeping the existing servicing company or the, keeping the attorney, the existing attorney on there who's already handling and dealing with the borrower, dealing with the entity, it's handling the property, the maintenance, stuff like that, to either retain them and keep going down the process or bringing on your own maintenance or your own servicing team to take over that process to either maybe be a little bit more aggressive or get to try to start reaching out to the borrower to maybe come up with a strategy or a liquidation strategy or a modification strategy maybe has not been approached by the previous note holder. And that's, that's the thing. Some of these things, we've seen it where banks, you know, they were, the borrower came to them with like a payment plan modification agreement of some sort, trying to stay. And they were like, no, they're very fixated and that they want, you know, to foreclose and then they were delayed because of legal issues, stuff like that. And sometimes just having somebody, you know, like if I'm buying something 50 cents a dollar. I've got some flexibility versus somebody who originated that note, you know what I mean? So I can come in and say, listen, let's, let's start making payments, or let's adjust your interest rate or, hey, we'll delay the balloon and stretch it out another three to five years to keep you in the property while having to foreclose and go from there. And we all know foreclosures don't do anybody any good in any form or fashion. And we really tried not to foreclose if we have to, but sometimes you just have to, and that's the way. But there's been times we've bought stuff and negotiated where there was a second on the mortgage. We were able to buy that second at a discount or negotiate with them to go away because if they we did foreclose, it would wipe them out. And so sometimes it just all comes down to what you find, what Easter eggs you find hidden in the loan files, or Untitled the Borrower. Some borrowers have been great and easy to deal with. Others like, hey, this is, we're in over our heads. Can we just deed the property to you and walk away? And yeah, you know, there's a variety of different things that we've done to get things handled. I mean, there's been times we've taken over the property where it was in. In bankruptcy, we took over receivership. We collected cash flow for eight to 10 months on the units. We work to get new renters in the unit. And then when the foreclosure auction came, we were able to get a better price for it when we sold at the auction because it was higher valued and we owed the borrower, owed us so much that we were able to make a nice return without ever really having to technically own the property. That makes sense.

Well, guys, we're coming to the end of our webinar. If you have questions for Scott or for myself, be sure to go to the Q and A box and drop those in. But before I start asking, there's a couple that are already in there. Scott, I do have a question here. Right. Because, you know, we went through the list. We went through, like, you know, how to, you know, kind of negotiate the deal, how to perform due diligence. What does closing look like? I'm curious. Once you get things closed, you did mention you can either retain servicing or you can contract that out. You know, this is like, new for everybody. Probably listening here. What does servicing look like? Like, what is, you know, for Somebody's just new getting into the space. Where do you suggest they go with this?

Personally? Do not service it yourself.

Okay, okay.

Your time is not worth the servicing aspect of it. You're not an attorney and to foreclose you've got to have an attorney that's licensed in each state to foreclose on, on that asset. So look at the, you know, one of the most important things is like if you're buying a property is looking at the property management, you know what's going on with that asset, have they been working properly? If you're buying a non performing note, it's the same thing. The servicing is the management of the collections of that mortgage note. It's also the legal filings to get the process rolling on foreclosure. So have they been aggressive, have they follow through on that? It's the same thing as when you take over note. Then it's all hey, how much communication, you know, is being done in reaching out to the borrowers of these properties, the management, what's going on? You know, has it been very adversarial or very friendly environment? So you know, sometimes having that fresher breath there come and say listen, I don't, I know that maybe these, the previous lender wasn't so good. We've, we're taking a new approach with this. We, you know, let's, what can you do that, what can you come to the table with and let's try to meet you halfway. And that's one of the great things is that we create a lot of win win scenarios versus just be winning on one side. If you're, if you're the only winner situation, it's not going to be the greatest, greatest monetarily thing. It will take longer to foreclose. Whereas if you can come to the table and get a bar back on track and start making payments in 30 days, that's a beautiful thing. That's a cash flowing asset. And then if they start making payments on time for 12 months now that note is reclassified as re performing. You could turn around and resell that asset back to Wall street as a performing note at a higher value. So buy at 50, get it back on track. They make payments on hard tools. I could technically turn around and sell it at 75, 80, 90 cents on the dollar back to Wall street as a reperforming note.

So you get paid for the work that you put into it.

Amen to that.

Well, so Scott, we got some questions coming in and just for efforts of time, I'm Kind of gonna kind of do a rapid fire here. If you're actually looking to acquire communities, would it make sense to build relationships with note buyers like yourself to see if we could come in and rescue the borrower if they are in a distress situation?

It does but you're, you're going to be better off because most note buyers are real estate investors. So you would be better off probably trying to make relationships with the actual asset managers, banks to get stuff sent to you on a regular basis and then identifying and picking three to five states to start buying distress notes and understanding what's going on in those states. And then of course the relationships with brokers or servicers and they're lending those states.

Awesome. Are you using the noi of the property to negotiate with the bank, you know as well as property condition, new loan terms, stuff like that?

Yeah, those are all important things to know about what's coming in and what's not coming in. So yes, those are things and like I said, sometimes you'll get that information from the most recent financials, other times you'll need to try to go out and create it yourself if the borrower hasn't been providing it. So yeah, those are very important terms to understand and know.

In your due diligence, what is the range of discount typically seen on the note purchase?

That's the million dollar question, Terry. Thank you for asking that. And it varies. It depends on.

All right, it totally depends exactly.

We're not talking about adult diapers here. But it varies on where it's at, the cash flow, the lack of cash flow, the foreclosure process, what state it's in. I mean there's a lot of things that go into that you're just going to need to understand and dive into the due diligence and figure those numbers out for yourself. And here's the thing, making an offer now you're not going to make a ridiculously lowball offer. If there is equity, you're going to have to probably be a little bit higher. If they're and normal might be 70, 80 cents on the dollar, the full legal payoff. If there is equity, the property's valued above legal balance. Now if they're underwater, we've gotten stuff anywhere from 40 to 60 cents on the dollar of values when they the borrower owed more that property's worth. But it just varies. It also depends on the motivation of the seller. Some banks that maybe not don't have a lot of stuff, they'll be more aggressive it others that had a lot we're glad to move some stuff off. We've had some funds that we bought. They need to close the fund out because it was computer time. So they sold it to us at a bigger discount because they were motivated to wrap up the fund. So just there's a lot of things that go into that. The short answer to your short question.

What amount of capital is needed to dive into note buying as a business?

Great question mark. You got to have capital, you gotta have cash. You can't go to the bank to get a loan to buy a note. And it's the same thing. You're going to need to have capital. So raising capital, syndications, you know, limited partnerships, you're going to be raising capital to go buy notes then. And that all will vary on what type of property values you're buying, property conditions you're buying to. There is one thing that's like I mentioned earlier on. We have in multiple situations been able depending on how motivated the bank was, they were actually able willing to finance the note sale to us where we didn't have to show up with a dollar. They literally knew that the borrower was ready to walk away. We're going to take a rubber. So they literally moved it from the non performing side of the books. The performing side the day we took over. And we've had that happen any, anywhere from all as a 6 Plex all the way up to a 150 unit depending on the condition of the property too. Like we a few years back we were here in Austin on a 24 unit that was in disarray while the bank was willing to finance the note purchased to us and carry give us the financing to rehab the properties to get them back up to code. Then we turn around and sold all the units off individually in a kind of conversion. So it just depends on the motivation to sell in a lot of cases too for you.

And it also seems, it seems like it would depend on your skills as an operator if you're able to take that on.

Totally. This is one of the best things it's look, I'm not an operator. I want to bring on operators. And that's the beauty of it is same thing. The bank's going to look at your team. The last thing they want to do is if they're going to finance something is fine is it from one trouble bar to another trouble bar. So if you've got a team or relationships are very important. You know this community is phenomenal for that. You know in, in getting people together on your Team. Just because you're buying the note doesn't mean you're an operator. So making sure that, hey, this is why you want to sell us the note or financing up because we've got an amazing team of people that are going to help operate this. So that's, that's just as important. It's not a one man show on the multifamily side, as we all know that.

Well, we got one more question here guys, if you have any more questions. Two more questions. Thank you. Drop them in now. We're about to wrap up. I assume you prefer landlord states, is that true? Or friendly states. I left a word out there.

Yeah, I mean landlord friendly states are very important. No offense to me on the west coast, but we know how difficult it is to foreclose and evict in places like Oregon, Washington Stadium and California, stuff like that. So yeah, but I do, I will look at stuff in, in non judicial and judicial states. I avoid the longer foreclosure states like New York and New Jersey. But there's, you know, made plenty of money by buying in other judicial states like Ohio and South Carolina, stuff like that. It's about a year or so.

All right, last question here. If you're gonna, it seems like if you're gonna leap into this business, what roles do you need on your team besides a foreclosure attorney?

You got to have a servicing team, servicing company. You also, I really believe that you need relationships with commercial brokers in the cities and states that you're buying assets and so they know the market, they know can help you create those cash flow, those in aligned reports, things like that too. So you have a bit of an idea if you don't have that, you know, you know, talk to your local bankers, talk to your local, you know, Mortgage banking association is sometimes good to go to and hang out and rub shoulders with the bankers and just let them know that hey, you're buying distressed debt. Because many times, you know, here's the funniest thing I always laugh about this is usually it's us reaching out Whitney to banks and asset managers. But when I started getting phone calls and emails and LinkedIn requests from special asset managers asking what I was buying and to give them a bid on paper, that's when I know there's an issue. Definitely may not be immediate, but it's coming down the pipeline. So you know, making it's all about networking and putting it together like you would on that. Because buying the notes one thing, but then the management is just like you would with a normal when you take the property back like you would with a normal apartment complex.

Another question came in. Is it beneficial to live near where the property notes are? And I'm going to crack at this. First of all, for me, my mantra is like live where you want, buy where it makes sense. I don't know, Scott, what's your opinion on that?

100%. You know what I mean? I mean there's a small tool called Google to help with some stuff, but there's, you know, that's why it's important what's going on in an area. One of the biggest mistakes I ever made, I'll tell you this, was buying a 10 unit apartment complex in Chicago. I got it a great deal, but I didn't live there and I didn't talk to people on that side of town. And it was one of the biggest mistakes I ever made because it looked good on the outside but I didn't read the notes. I didn't have any notes. If I dug a little deeper on the servicing side and I probably would have realized, yeah, these tenants are probably not the right type of tenants I want to have. And it became an albatross and just a pain in the ass. So that's the thing is you buy where you want but you know, makes sense. You don't have to live in your back. I live in Austin. Texas is a great place. It's beautiful here most of the time, but most of stuff I buy is outside of Texas.

Awesome. Well, Scott, thank you so much for educating us here today. If people want to connect with you, how can they do so really easy.

Just go to our main website, weclosenotes.com we're here to, to help out there or you can always email me at Scott we close. Notes.com is my direct email address or if you want to book a call you can go to talkwithscottcarson.com take my calendar and always glad to chat and give some insight into what you're trying to do and point in the right direction.

Awesome. Well guys, as always, we love bringing amazing experts like Scott Carson onto the show to share their knowledge with you. But as always, make sure whenever you are forming any relationship that you perform your own due diligence. Guys, as we move into next week, I want to show you. This is always the clunky part of the transition for me. Sorry guys, I want to show you our what our topic is for next week and we're staying on the note front in there you guys. So next week if you haven't done so already, make sure to go to the registration page. We'll drop that into the chat box. How to use a debt fund to how to use debt to fund private land. So we're staying on the note side of things, guys. This is an amazing, you know, area of business to be in real estate in this phase of the market. If you haven't done so already, make sure to find that link for registration in the chat box. Scott, again, thank you so much for sharing your time, knowledge and expertise with us here today. I think everybody's going to find this show very educational, especially if they want to get into this note side of the business.

Well, thank you. It's been an honor to be on here as always. Thank you. And congratulations, your book as well.

Thank you. Yes, yes. Super excited about that.