How To Invest in Non Performing Real Estate Notes - Scott Carson from the Real Estate Mogul Podcast

Hey everybody. Welcome here to another show of the real estate mogul MD I am so excited. For those of you listening in on this, you can't see the excitement in my face. We have the note guy himself. This man has done hundreds of podcast episodes, spoken with hundreds and hundreds of other investors, has also taught so many investors about this really cool thing about investing in notes and actually non performing notes as well too. He is the CEO of We Close Notes and you can find that@weclosenotes.com Mr. Scott Carson, welcome to the show, sir.

What is up man? I'm doing well. Happy Friday. Good day, good life. It's, it's a good day to be a real estate investor, especially a distressed debt investor.

Oh yeah, yeah, I heard something about. I mean we're going to dive into this, but three legs on the stool that I've heard this called and one of those legs come out and one of them is foreclosure. So we're going to get into this just a little bit. But just starting off the gate, man, you got. I can tell that you've been doing a lot of shows because just your voice, the tone of your voice is smooth. The delivery just make me happy to, happy to be around you, man. So thanks again for coming to the show.

Hey, no problem, Mac. My, my days of being a college radio DJ came in handy. You know, my goal of being the next ESPN Dan Patrick, which didn't pan out. It's, it's being able to scratch that itch as a podcaster. But yeah, no, lucky enough, you have been on a few hundred podcast teaching about note investing or entrepreneurship. And then we've also. I've recorded over a thousand episodes for.

Wow, congratulations, man.

Thanks, man. Yeah, been doing it for about six years, so we, we crank them up almost daily ourselves.

Yeah. Well, congratulations to you and congratulations to all the people. I'm sure you've changed some lives along the, the way too. And, and being an instructor yourself, teaching about notes and real estate investing. Just off the top, let's start off with a story. I mean, what's the, one of the biggest changes that you've been able to help make in another investor's life?

Oh my gosh. You, you. We were talking beforehand. Freedom. You know what I mean? That is the biggest thing. The, the first thing you see is belief. When somebody's able to make an offer on what no matter what it is, any type of investment, they make an offer and it gets accepted. That light bulb that goes off in their head and that little bit of confidence that just. It just radiates. It's like a sun exploding out of their chest. That's a beautiful thing. And then them being able to make money, whether it's $500 a month or 5,000 bucks or, you know, 50 grand a year or 100 grand a year. I've seen people that, when I first met them, they were very Debbie Downers. You know, everything was crappy to them, and they just had a bad attitude. And then, you know, six months, four months later, when they've left this job that they hate and they will do something they enjoy and live, it's no longer work for them. It's called living life. Right. And they just become this positive individual. They're just, you know, that's. That's the beautiful thing is if you can help somebody overcome an obstacle or overcome a limiting belief that we've been drilled into our head, you're not good enough, you're not smart enough. Nobody's gonna invest with you. Oh, you don't have any money. Nobody's gonna do that. That's so false out there. There are so many different opportunities. And when you. When you help people overcome that obstacle and help them build that confidence, that's. That's so rewarding. I mean, I could go on with stories that we've helped borrowers stay in their houses, but our students and investors, helping them achieve things that they never were able to achieve alone is. Is probably the most rewarding thing. I get more excited about them closing deals than when we close deals.

Yeah. Freedom. And I think that, that, that piece alone is just awesome. My, my. I have two small children, 8 and 9 years old, and they've recently joined a gym for Brazil. Brazilian Jiu Jitsu. I love it. The. The. Just a character building aspect of it, and it's more love than anything. Right. But the pieces. And I was telling the instructor, great guy, great guy. And I told him, you know, I didn't grow up playing video games or anything like that. He said he didn't either. But this is his video game. So similar to you teaching other investors him in the. In the gym in the Brazilian Jiu jitsu, he's literally teaching people and showing them what move to make. And if you could think of it as the analogy, they're. They're. You could be literally playing video games, but helping people the same way, you know?

Exactly. Instead of playing Mike Tyson punch out, you're hitting that right button for the right hook. How to do. That's awesome, man. Congrats.

That. That May give us our age too. They always say when people can't see us. The old Mike Tyson knockout game, huh?

Well, I'm. I'm 40. What am I, 45? I guess I am. I don't act it. I've never had a video gaming service. I, yeah. Was always cheaper for my parents. Hey, here's a football, here's a basketball. Go go outside and play. You know, Absolutely, absolutely appreciate that. And friends have done that. But you know, it's a. I like today's youth has a hard time because everything is so electronic. If you're not on your phone, people can't communicate. You know what I mean? Yep. If. And that's Glad to hear that because that's social skills, that's being able to relate to people and y. There's a lot of strength in any type of sports, you know, whatever. No matter what it is, it breeds a confidence. And I think we. You also have to understand you're going to fail. You're going to get your knocked out on your ass a little bit. And we need more of that versus the participation trophy or as I call it, the pussification of America that we've seen in the last decade or two. So.

Yep, yep. So a piece of that reach into freedom though and you know, not only knowing how to assess failure or how we should interpret it, but some of the things that keeps people from taking action is the knowledge piece. And you know, we'll start this off, we're going to get in some notes because I'm excited to talk about it. You know, I've read a lot of Jim Rohn stuff. I don't know if you know who Jim Rohn is. So he said, don't let your reading learn lead to knowledge. Don't let your reading lead to knowledge. And I say this so many times, you got to let your not reading lead to action. And that action, that different piece, is where you don't get participatory rewards. Right. You got to go out and you got to get burned, you got to get hurt. You got to learn you don't always have to lose. But failure is a. Is an important piece of making improvements in important piece to improving yourself. That path to success will have failure and it's only failure if you stop. So let's stop talking about failure. Let's talk about some good stuff. How about these notes? Tell me a little bit, just briefly. I know. So you got a lot of content out there. It's awesome. The website, the podcasts are awesome as well. And on your, on your weclosenotes.com there's a really cool video that I watched. It's just a brief introduction of how you got started in notes. So what I'd really love for you to do is just let our listeners know a little bit your brief background of how you started out as an active real estate investor and then you got into the note game and then just tell us what, what does the note game mean? What does investing in bad notes even mean?

Yeah, so I, I focus on the niche of basically non performing notes. Like think of me as the big short, you know the Bale character in the big shorts but on a smaller breadcrumb level in a lot of cases. I got started as an Investor back in 2001 out of college, married, graduated business degree and we bought our first house. And this is a great time be buying real estate. If you had could fog a mirror you could get approved for finance. I would get credit a realtor, you know what I mean? Realtor gives man you got great creation beat Think about investors like yeah, I always thought about doing that. We like watching those fictional TV shows on hd, you know what I mean?

Yeah, yeah.

So we bought two, two rental properties and I thought it'd be the next landlord and I got laid off for my six figure job as a financial advisor. My tenants got laid off from their job working at Dell Computers because I live in Austin, Texas, we were living around Rock at the time. So I went from being a performing to being a non performing bar really fast. Behind on six mortgages, three first liens and three second liens because we were trying to survive on a private school teacher salary at the time. Well, well lucky for me we got rid of the two investment properties. We were able to keep our primary. I licked my wounds for a couple years while I was trying to figure out what the heck I was going to do jumping from job to job and then settled. I've got back into finance that I like so much and became a banker for JP Morgan Chase and started having success there. And a buddy of mine that I worked with previously, he started a mortgage company that was working with investors traveling the kind of, I guess the speaker circuit, the Ron Legrand circuit, going across the country and I need some help. So I left my job, my secure safe job at Chase and became a mortgage banker, our mortgage broker and we were doing you know, tons of mortgages to investors. But I learned how to real estate become an investor right the second time around instead of just going buying traditionally I spent basically Four years not only doing originating mortgages, but for your apprenticeship with a couple investors that taught me creative financing. Subject to buying on terms distressed debt, you know, wholesaling, you know, all options, stuff like that. So I was started investing in real estate like that, you know, flipping a few properties here, taking some under subject to's and stuff like that. And then when everything hit the fan in the mortgage industry in 2008, I just stopped being a mortgage broker and became a full time investor and focused just on buying debt. And I started, you know, I had a couple investors that had made their riches in the 80s during the savings and loan crisis by buying debt. They're like Scott, this is a once in 20, 30 year opportunity. With everything that's going on in the mortgage markets you need to really capitalize on. I said okay, you guys are smarter than me. I'm coachable. And that's really what I did. Instead of calling banks and lenders to originate loans, I started calling their internal back office department. Said hey, what do you have on your books that is naughty, you know what borrowers on there you want to get rid of. And started dialing for dollars, 50 to 100 phone calls a day. Started getting lists in of this distressed debt, these non performing mortgages on residential commercial properties and started breaking them down, started working through them and started flipping a few of these. But then take, you know, raising private capital and taking them down from my own portfolio. Now fast forward 15 years later. It's hard to believe it's been over 15 years, but bought over a billion dollars in distressed debt, bought thousands of single family homes. We've bought anything with any a mortgage on it. We've bought at some point from a hotel to apartment complexes to mixed use to industrial stuff like that. That's what we did. So we, that's all I've really focused on since 2008 is just buying distressed debt. I reach out to banks and lend institutions. I'm not, you know, different than a lot of other real estate investors. We don't do any direct mail campaigns or bandit signs. We literally use 21st century technology, LinkedIn and email to make right party contact with these banks. And these banks send me lists on a monthly quarterly basis that may range from just one asset that I can buy or a portfolio of a thousand that I can share a pick from. And so that's, that's, that's what I do, man.

Hey Scott, when you say buy the assets, are you buying the actual tangible asset? Are you buying the note that's secured by the asset.

We're buying the debt, we're buying the mortgage that secures the asset and we're only buying first lien so we really control the out outcome of that asset. And with us buying it non performing, that's usually what I buy. 90% of the time is we, you know, being in the first lien position, the only thing that can wipe us out really is taxes. We don't pay properly. We then when we buy this debt at a discount, we then reach back out to the borrower, say, hey, what's going on here? You know, you were dealing with Wells Fargo, you're dealing with ABC bank or bank of the west, you had your, you know, what's going on? We're giving you an opportunity. Do you want to stay? If you want to stay, you got to pay. Let's figure out a plan that makes sense. If you don't want to play ball and don't want to stay, then do you want to sign the property over and walk away and we'll forgive your debt. Or if you're not going to play ball, communicate, we're going to go the route to foreclose and take the asset back that way. I don't like to do that, but we still end up doing a chunk of the time just because people won't communicate or they'll try to, you know, they've gotten an inch in the past, they try to take a mile. Yeah, and I don't, I don't run a charity, I donate to charities. You know, we're capitalist.

Yeah, yeah.

But we like it. We, you know, we, we help a lot of folks. We are able to modify or do trial payment plans for, you know, 65, 70 of the residential stuff that we buy and keep people in their houses and make a, make a really great return off that stuff. We hold it for cash flow for a period of time without the, the annoying, of annoyance of dealing with toilets, hands and trash outs. For the most part.

Yep, yep.

It's all about cash flow for the most part. And then there's some that we foreclose on and you know, we take back and either sell at the auction or you know, do some fix up and either keep it in a portfolio or, or sell it off on the mls.

So you've probably raised a substantial amount of capital to make. And this is all in inverse investments, right?

Is that. Yeah, we've got a variety, we've got a variety of different LLC. That's just one we've used over eight years, but we've got a variety of different LLCs and entities we use. We don't usually keep more than a million dollars in assets in one. If it's a commercial property's got its own and any individual asset over a quarter millions in its own LLC and stuff like that. So. But yeah, we've raised, we've raised a couple figures on the left, on the left side of the comma there. A couple million bucks for stuff like this. You know, we work with a lot of private investors, self directed IRA investors, you know, tired landlords, people that used to be in the REO market that can't find foreclosures anymore, but they don't want to do all the, you know, dealing with the general contract stuff like that. They like the passive returns that we give them.

So I could go into that whole direction, but before we headed in that way, tell me a little bit what makes a note non performing.

Right. It's the same thing that makes a marriage non performing. Nobody's participating.

No communication, right?

No communication, no action being taken on. Yeah. A non performing note is, is a mortgage where the borrower has not made a payment in at least 90 days or longer or at least 90 days behind. We get involved usually the stuff that we look at is usually going to be longer than that, like six months or greater. Like I just got a portfolio in two weeks ago. We made a big chunk on. I had 422 assets and 200 of the assets hadn't been paid in at least five years or longer.

Holy smokes. Why would that bank be holding debt like that, man?

Well, because it wasn't a bank. This was a hedge fund that bought a portfolio. They'd worked out a chunk of it and they were more interested in the real estate and they just kind of let this stuff sit there. And so people were able to live scot free for a couple years. We bought this at this, we've bought some stuff like this at substantial discounts and said okay, hey, your time, your, your free rent is going away now. Now. Yeah. Hey. Or no or we're gonna play. So.

Right, right. Interesting.

The bigger it's distress. The bigger discount we get oftentimes too. Which is nice.

Yeah. So and, and then are you nationwide when you acquire, does it matter what market those assets are in for you?

It does.

Based on your resources.

It's based laws. That's the first thing. It's foreclosure laws. So we don't buy, we don't buy in really unfriendly states. Like we don't Buy in New York or New Jersey because it takes you two years to three years to foreclose there.

Typically blue states. Right.

You know, I'll buy in Illinois. I just won't buy in Chicago because.

Okay.

Is horrible. Yeah, I don't buy in like Washington state or Oregon State. They're not very friendly. They're also, you know, the west coast is really, really overpriced. So. But we, we buy a lot. If you're a, a college sports fan, we buy a lot in like the Big Ten.

Big Ten, yeah. I grew up in Michigan, so.

Okay. I love, I love Michigan. You know, Michigan and Ohio, we see a lot of stuff there. I also love God's waiting room, which is Florida. You know, we buy a lot in Florida even though it takes about a year to foreclose there. Yeah, Texas is great, but Texas is often overpriced and that's my home state here because it is the fastest state to foreclose. But we still see stuff here. You know, the faster, the faster we get foreclosed, the higher, you know, the more velocity on our capital in that state. It just makes sense in some cases. So. But yeah, we buy in about roughly 25 to 30 states. We usually stick to most of the major cities. We'll look at some stuff that's outside of those major cities. We prefer occupied assets because that actually gives us more exit strategies.

Right.

It also means that the property is probably being taken care of in better condition if it's vacant. In Michigan you got, you know, this time of year you got an indoor water feature in a lot of cases, or you know, or the air conditioner has gone on vacation because somebody's picked it up and walked away with it.

Absolutely, absolutely. Very interesting. So, so you have a distressed note, a non performing note. Basically the, the borrower wants a divorce, really at that point, whether they say it or not. And you acquire these notes. I'm sure that you speak a lot about this in, in your classes. If you're spe speaking directly to someone who doesn't do a lot of, or doesn't know about distressed notes. I mean, how do you figure your discount? I mean, is there a general range that you're looking at in order for that to work?

Well, yeah, it's always based on yield. So I'll give you an example. So if it's a non performing note and it's occupied and we think that the borrower may want to stay in the house and we'll evaluate the property remotely, I don't go out and look at every asset. But like, like if they've. One of the great things we get to do during due diligence is we get the servicing notes so we can talk with the servicing company that's handling like that week in, week out, you know, communication at borrower outreach. We see the servicing notes and if the bar has been friendly, you know, we look at the collateral files. Have they sent in a hardship letter? Have they requested to do a mod in the past? You know, where are they working out? We get to kind of see kind of what's beneath the, the kimono in a lot of cases and see, okay, this is this person. If we buy it at a big enough discount, can we get a double digit, a 12% or greater return if we get them just to start paying their monthly payment on time? Yeah. So we take 12 months of the P and I payment and divide that what our purchase price is, and that's kind of the first figure in. Okay, what do we need to get to get a 12 to 15% yield? If we get them to pay a little bit extra per month, you know, 100 bucks, 200. And there's things that we do to incentivize them. Oh, hey, you're three years behind. If you make an extra 100 bucks a month payment, we'll forgive a hundred bucks extra. You know what I mean? So we run those numbers. If it's vacant and it's an estate or area we don't mind foreclosing, then we want to see probably at least a 25% to 30% discount off what's owed or off the value of the property. So that gives us enough room when we foreclose that we're still going to be able to make a sizable chunk, you know, at least 15 grand, if not up to a 20, 20% ROI on the, you know, annualized return based on how fast we can sell the asset or what the average days of market to sell an asset in that area. Obviously, days of market have increased across the country in the last few months. So that's just us to reduce our bids by 5, 10% depending on the market. But those are the two biggest things. It's really three. Can we get re performing if we can't get reperforming, can we get a deed loom? Can we, you know, that's where the borrower assigns the property over to us and walks away. We may give them some cash for keys. The cash for key amount is usually the amount that costs for us to foreclose. Three to Five grand to start off.

Right.

And so the third strategy is if we have to foreclose, you know, what's it going to be to foreclose? If it takes a full time to foreclose and then to sell it and figure out that yield. And so it's a couple different formulas on that stuff. You know, obviously if it's a vacant asset, we know we're not going to get them reperforming. So we don't buy, we don't like to buy a lot of vacant assets. If it's somebody who hasn't paid in the last three years, that's kind of our threshold. If they go back to like 2019 and 2019 and they haven't paid since then, we know we're probably going to have to foreclose because there's plenty, been plenty of opportunities for people to get back on track through Covid and stuff like that, you know what I mean? So, but if they've made payments but they're, you know, maybe they're only a year behind or six months, we know we got a really good chance to get that borrower back on track. Yeah. And our yield, you know, is going to be in the mid teens, if not 20%. When we start figuring, okay, can they start paying extra? You know, have them pay on time for 12 months, then we'll modify the loan. Maybe we'll forgive some of this rear balance. We're also really good about working with the borrowers for local resources. There's church groups and organizations that often are there to help people stay in their houses as well too.

Yep. Every now and then I'll see a billboard on the highway for foreclosure. For foreclosure help. How big is your team, Scott?

It's small, man. The beautiful thing is it's, we're, we're a lean, mean note buying machine. All right, you're gonna have attorneys in every state. So we've got an attorney in every state they're buying. We have a servicing company. We actually work with three different servicing companies that manage our portfolio depending on the states that they're licensed to, you know, to service in. So we rely heavily on them. I've got a full time staff member who works remotely. She handles a lot of the portfolio, the initial borrower outreach and connects with our borrowers. And then we've got a couple vas that do a lot of data pulling for us. And so we get a tape in, we kind of look at it initially. I can literally have offers in in 30 minutes. On a bulk chunk of my tape, we send that in to the seller, they'll get back to us, and then depending on the amount of assets, we'll have two weeks to, you know, two months to do due diligence to raise capital and then close on it. And then it's a matter of that first 30 days after we buy that portfolio is a really a heavy borrower. Outreach letter campaigns, the ball order to get them back on track. And if they won't play ball after 30 days, then we kick that to our foreclosure with the attorneys and let them do the heavy lifting.

Yep. Yep. Makes sense. So that's cool. So do you ever wholesale the notes when you buy them?

Yeah, great question. You can wholesale anything, you know, and that's where a lot of folks, they get into the note business. They say, hey, I'm going to wholesale some notes to begin with, and that's great. But you leave. If you're a wholesaler, you're not really an investor. You're just a transaction engineer. You're not really making a lot of money. And so I'm telling one of the things that we like to teach is like, look, if you're gonna wholesale, that's great, that's fine. But the people you're wholesaling to, if you just tweak your message or tweak what you're doing, you'll have more confident buying for your own portfolio first and talking with your buyers. Hey, why don't you just fund this deal? We'll go splitsies or, hey, we're gonna make 15 or 20%. Why don't we just go, you know, 50, 50 on this deal? Or if you're doing all this work, how's that working out for you? Oh, you're making 8%. Well, I can give you 8% passive, you know, for 12 to 24 months. So that's the thing. Yeah, you can. I mean, we'll wholesale some notes off when we're buying a big portfolio to our students or a few other stuff like that. But I always tell folks you're going to have a much better experience, and they never say you're wholesale enough, you're dealing with the seller. Banks don't want to hear that. If you're buying for your own portfolio, even if end up wholesale, that's great. Still act like you're going to buy. You're going to be more confident as a wholesaler because you've done due diligence. You understand what the, the deal holds the profit options and stuff. Like that. And you'll have better deal flow in a lot of cases too.

Yeah, makes sense. So if so a lot of our listeners are going to be physicians who want either thinking about getting into real estate or talking about getting into real estate. A lot of our listeners will already be in real estate, different kinds of real estate. Obviously some of them may even be in the note arena too. My first connection with physicians, so I'm, I'm an active. I, I was active, I was fix and flip. I was the TV show hgtv hands down. Right. And that's where I was introduced to physicians along the way because I would work with them, they would be the debt lender. Right. Which is a great scenario. But they just never could get equity in the deal, those kind of things. Because I was the one, my companies were out there doing the active deal finding and stuff like that. What would you to our listeners, the physicians who looking to get into this and would consider non performing notes, is that something for a start or would they have to go to a class first or what are your suggestions?

So no matter what you do, no matter what niche of real estate you're going to be in, you need to understand that asset class note investing is completely different than being a landlord or a wholesaler or something like that. If you're buying debt, there's things you can do which are great. There are things you can't do. You know, there's things that you get access. Because the biggest mistake most people get when they come in the note business is that first question you asked me. Oh, I'm buying the notes, I'm controlling, I have the property. No, no, you've got to foreclose or have the borrower to sign on. So you don't have the equity that's above what you wrote. You're only entitled to what you're owed. So a lot of, for those that are have full time and very intense, you know, careers like a doctor, maybe non performing isn't the way to go. Maybe it's. You need to be buying performing notes, which is something that we also look at. We buy a lot of performing stuff or stuff that was once non performing that we've worked out or somebody has worked out. We, we buy that reperforming debt at a double digit yield, which is a great way to do that. That's a great thing to be started. You know there's. If you're buying non performing stuff, yeah, you can own it. And like I said, you don't have to have a huge Team you can have servicing companies and attorney do a lot of that heavy lifting. Unlike a fix and flipper where you've got to be there for your crews and stuff like that. So, so I would help folks get started. You know, you're gonna learn more by doing your first deal and, and walking through that phase and then figuring out, okay, do I want to do this very actively or would I rather be a passive investor either performing or lending money. So we've got classes that we teach. You know, we've been teaching this for years and we've got a three day workshop that we teach called no Buying for Dummies. It's really the nuts and bolts we teach.

Yeah.

The first day how to find these deals, how to fund them and then how to flip them basically.

Yep. Yeah. And so we, we have a company that's nationwide acquisition so buying the actual asset and you. I can't count how many times we've ran into these opportunities and I learned about it just stumbling onto them. Right where somebody's going to sell me the house, it's on land contract or I got a somebody that sold the house on land contract and they want to get out of it or you know, somebody that lent somebody some money and they're done with it. So I've only stumbled across these, you know, throughout my experience. But one of the things that does spark my interest a little bit, Scott, is I don't hear you having a lot of value on the asset itself. Once you take care of the paper, if it's not performing, then you're, you're moving along the asset. Do you have buyers that you work with directly that would then acquire the assets from you?

Yes and no. But if we're. Let me give you a scenario here. Let me ask you what you would do. Say you're buying a note on a property. Say the Property is worth 100 and they owe 110. Okay. On something like that, they haven't paid in a while. You're probably picking it up at 50 grand. Takes you five grand to foreclose. Now you have the option to sell at the auction, which is the easiest thing. If you can sell it at auction, sell at auction. But if you've already done the heavy lifting and had been in this asset for six months or 12 months, it makes better sense for you just to list it and sell it at. Even if you don't sell at the auction, it makes more sense for you just list on the MLS and sell it at 80, 90 cents on the dollar. Right. We, I mean, we get people, hey, I want to buy your discount deals. I'm like, if I'm doing all the heavy lifting of foreclose, I'm not going to sell it at a big discount unless it needs a lot of work and that, you know, and then those are the things we do. But if it's a pretty property, most of the time we'll sell at the auction at 80, 90 cents on the dollar, or we'll take it back and do a little bit of cleanup to it and then sell it on the traditional MLS for the most part. And there's, there's plenty of buyers out there, so.

Right.

You know, if you're looking for discounted deals, you may want to, you know, there may be some opportunity for folks to buy that debt. You should understand you're buying the debt in faster foreclosure states like Texas or Georgia, Virginia or North Carolina. But you have to think in the note business, you got to think like a bank instead of a fix and flipper. It's a little bit different mindset when it comes to strategies. Does that make sense?

Absolutely. Yeah, absolutely.

For sure.

Well, I think we've walked through the, through the whole bit business here of the note without getting too much into, I mean, it's so, it's so intriguing. And you've, I mean, coming from the financial advising platform into the mortgage platform, I mean, you've got the perfect journey which puts these experiences together to make you the note guy, man. You are, it's funny, man.

You know, you never know the path that you're going to take. We all have a plan and then God laughs and has his own plan for us. Right. And I look back and yeah, there's been things along the way that, you know, when we're going, when you're going through hell, you're getting laid off or you're dealing, struggling and stuff like that. The market takes a turn a lot of times like, oh, what am I going to do? You know what I mean? What am I going to do next? And then things, opportunities are placed in front of us. I mean, I was fortunate enough to, to be able to say, hey, yeah, I want to do this and leave a six page six figure paying job at Chase bank to do this. And, and then when the market started changing, I was smart enough to learn along the way that knew there was going to be a change. So when the music did stop, I, I just went, just changed my perspective and saw the opportunity where the opportunities went, you know, and that was, you know, Everybody has to do that. The market is changing dramatically right now over the last six and 12 months. And you know, those that we're buying, a lot of fix and flips are not seeing a lot of stuff where the profit margins have gone down or your price, you know, your days unmarket is increased because of interest rates increase. So you've got to gotta really understand what's going on in the market. So that's, that's a big thing. I keep my, you know, ear to the grindstone. You're to the ground a lot of times seeing what's going on in different markets and stuff like that. And you know, pivoting. You know, I used to buy, didn't buy much in Michigan and Ohio when I first started off, but now I love that neck of the woods because it's a big bang for the buck and just, you know, always looking for different opportunities out there. And, and that's, that's the big thing about being an investor. You gotta be able to pivot a little bit and adjust your focus because we just have one, one way when the music changes, you could be very well out of business of over.

That's, I mean, life in general, Scott, if you're looking at, you can be very focused and niched in. But there's that one degree pivot that keeps you alive. And it's always that little bit I'd love to get from you. On the outtake on the outside of this one, Scott, is two things going on right now. You mentioned on the current condition of the market, two things that have came and went is we're still dealing with the issues of is Covid and how that affected the market with foreclosures and forbearance and forgiveness and all of that stuff. So I'm sure there are some naughty ones sitting on the books, baby, from that. And then with the interest rates rising, trying to, trying to control inflation. So tell me a little bit about these two things and how, how you see the next, let's say six months in the next year laying out with foreclosures and interest rates.

So I gotta tell you, so going through the 2008 recession helped me prepare for what happened with COVID All right. And then I take it back, there were, we didn't have the national moratorium like the government did that was stopping all foreclosures for two years, basically.

Right.

But we did have states in, in 2008, you know, 9 and 10 that stopped foreclosures overnight or they wouldn't allow you to foreclose for years. So you had to understand that. So when we had cove and they're starting these shutdowns, I was like, hey, you gotta be preparing. You're, you know, you're gonna have borrowers that don't pay. Fortunately, about 85% of those folks that were paying continue to pay or they needed a short bump for 90 days, you know, and that's fine. Like, hey, I'll give you 90 days, no questions asked. If you need a bump, that's fine. We'll just put those three months back on the back amount of loan and that's okay. That's fine. You know, that worked out really well for a lot of folks. But it was also. You had assets, though, that you were in the foreclosure process. We had some that we bought that. Now the foreclosure got delayed another 12 months, another year. So it's. That was tough on some assets. I mean, I got one right now we're getting ready to evict that we bought right before COVID and now we're finally getting around to the foreclosure and the eviction side because it's taken forever and the state keeps delaying and kicking it down the road. That's the. It's. That's going to happen. You're going to have things that happen all the time. This is why it's also important to be. What I love about notes is that our portfolio is very diverse. And 1 asset or 2 assets or 10 of our assets get delayed isn't going to kill us because we have cash flow coming in and borrowers are. They're working to stay back on time. Most people are really great people out there. Most people that have gone through a financial hiccup, if you can help them out, you know, they're going to work to stay in their house, they want to pay their bills. And there's. And as I mentioned, we got really good at figuring out, hey, are there other community programs or other funds that are going in that the government's giving to people to pay their mortgage or pay the rent to stay in a house? So you got to find a way to do that. But yeah, that was the biggest thing there was. We know nobody expected two years. And that kind of slowed down a lot of note sales from institutions because banks weren't selling a lot of their bad paper because they didn't have to. They were basically had this freebie to hold onto it for a while. So we made sure and marketed and changed a lot of our marketing point to note Sellers and note investors like me that knew that they had stuff or they were getting hit hard from the forbearance and the foreclosure stopping that we could buy that debt from them at a discount and then work it out and make sense. So does that answer your question a little bit on that there?

Yeah, absolutely. Do you see in the next six to 12 months, do you see the foreclosures increasing or laying. Laying level.

No, they're going to increase. And here's the thing we see when before we see foreclosures increase. And it's going to vary state by state because each state's different foreclosure time frame wise. Okay. So the stuff that's happening in Florida will take longer because it's a year to foreclose there versus Texas or Georgia, which are like 30 days. Okay. So you have to know what's going on in each state. When I, when I get worried about it is when I start getting phone calls and my email or LinkedIn or phone starts ringing from banks calling me to see what I'm buying. Usually it's the other way, me reaching out to them, hey, what do you have we can get rid of? But when they start calling, hey, can you give us a bid on this? Like, okay, that tells you something. They like they're looking to move their portfolio and there's a couple of lenders that did this right prior to Covid. They were calling me, ask me to bid on some stuff, performing stuff that they wanted to sell like 70 cents a dollar. I'm like, wait a second, that's like 10, 15 basis points below we normally buy this stuff. What aren't you telling me? What are you seeing that I'm not then I'm not seeing? So that was like the first red flag and then everything. So yeah, you're going to see more foreclosures. But the thing is, more debt is getting bought up than it ever has before. I mean there's still plenty of opportunity for everybody out there. We don't have near the competition like fix and flippers and. But a lot of that debt that's being sold is being bought up by investors and me. And then we're working out with the bars. So those folks that are waiting around for this big reo foreclosure tsunami, like what happened previously in 8, 9 and 10, you're not gonna see a lot of stuff because banks and lenders and stuff like me are gonna work it out with a homeowner or Deedaloon the turn around, sell it off at retail price for the most part.

Is there, are there any tax benefits? I mean, because when you own and control the actual asset, there are some massive tax benefits that we take advantage of. What happens then with the note life? I mean, is there anything that you can leverage tax benefit wise?

Well, we don't get depreciation because we don't. But when we take the property back, then we do, you know, so if we foreclose and take it back to get appreciate, the great thing is we can write off the debt forgiveness. So if somebody, we modify a loan, we forgive them 50 grand, we write that off, you know, so that reduces our profitability.

So when you, the forgiveness, say you bought a face value of 100, but you only paid 50 for it, you write off that 50 and you get to.

No, no, no, it's whatever we end up. So say the borrower owes 120. The house is only worth a hundred. Okay. We buy it for 50 cents of value. So if it's valued at 100, we buy it at 50. Borrower makes payments on time for a while. At the end of the year, we recast the loan for 100 because that's what the house is worth. They owed 120, so that 20 grand, okay, we write off. Okay. We're only taxed now while the IRS wants to tax us. If you do a, a loan mod immediately at the full loan balance, we don't do modifications in the first 12 months. We do trial payment plan. So then we're only taxed on the income.

I see, I see. Very interesting.

It's a different, it's, it's totally legal accounting. You just got to understand it's a little bit different when it, when it comes to that stuff. You know what I mean?

So, yeah, absolutely, man. Well, hey, Scott, I really appreciate your time, man. I'm, I'm just like a sponge when it comes to this stuff. I love real estate investing and I love sharing knowledge and I love being around people who also share that love of sharing knowledge. So thank you for your time. Thank you for your service. I'm sure you've helped hundreds of people along the way. Even though as a landlord, sometimes we're looked at as the bad guy, especially when, you know, somebody decides they want a divorce and they make us be the bad person. But I just want to remind everybody out there that each of us have shared our own experience in this journey. And I know that you have as well personally as well as myself, and it's just a piece of the process and understanding that everybody out there is not bad. Including you, including myself. And if we all do this in a way where it benefits both parties and still be able to to run a business, hey, let's get it, man.

Well, that's what I love. We really do a lot of good keeping people in their houses, helping them out of bad situations. Everybody goes through financial hiccups at some point, no matter what you're. And it's, you know, I think me going through that bad situation when I first started off helped me be more empathetic and being able to talk with borrowers more so than anything else. So it's helped. I think it gives us a bit of energy. But I want to if you're listening to this guys, make sure you hit that subscribe button. Make sure you leave Brett a five star review.

Oh, thanks.

And taking names and we as podcasters, we love to hear from you. So if you love this episode, great. If you didn't love this episode, guess what? You'll love other episodes.

But that's Right.

Right. A favor. And there's one final thing. I I have a one day class that I teach every third Saturday.

Absolutely, man.

I would let me give it. I want to give it to your listeners. If they're interested, they can go to noteweekend.com and they can sign up for it if they use a discount code Brett B R E T T all caps for low case, whatever. They get that class for free. It's basically about eight hours of me going through the Cliff Notes version of note investing. But it's a great way to kind of dip your toe in the deep insights. Noteweekend.com use the code Brett B-R E T T and you'll get the class for free, man.

That's. I really appreciate that, man. I'm sure the listeners will too. Thanks again, man. It's been an absolute blast and look forward to chatting with you again real soon.

Same here, Brad. Thanks very much.

Awesome.