How to Make Millions Buying Mortgage Notes featuring Scott Carson with Aaron Trevino

Hey, what is going on, everybody? We have an awesome guest today. His name is Scott Carson from here in Austin, Texas. What's going on, Scott?

Hey, Aaron. I'm honored to be here. It is another hot ass day in Austin, Texas, man. But I'm honored to be here and just to serve your audience. I mean, it's an interesting time for a lot of real estate investors out there. So I've been looking forward to this for a couple days now.

Absolutely, absolutely. You know, I was, I know we were just talking before the chat, but I do like that background there.

Yeah, I love the water. I grew up in Corpus Christi, Texas, so, you know, small town Ingleside, Texas. So I missed the water. Being in Austin for the most part. Lake Travis is nice, but it's not the same as the Pacific or the Bahamas is where I love to go. The Caribbean, definitely. If I think that's where I'm looking to retire here in the next couple years is somewhere where it's flip flops, khaki shorts and a dirty T shirt and a hat is my lifestyle for the most part. But yeah, you know, that's the thing. We were very blessed living here in Austin, Texas. A great real estate market. And it's also nice too. I invest a lot outside of Texas. You know, you can jump on an airport and be basically to 90% of the country in roughly two, two and a half hours on Southwest. So it's a great place to call home.

Absolutely. Kind of similar background to you. I grew up in Corpus Christi as well, so I know that flip flop and you know, baseball hat culture. I totally get that.

There you go. Corpus Christi hooks, baby. That's right.

I was there at the, I was there at the inaugural game in 2005.

Yeah, man. Same here. Wow. See, we're destined to be on the show here.

Small world. Small world. But yeah, I know a little bit about Ingleside from the area, but. But yeah, Scott, so for anyone who hasn't met you, you know, could you kind of introduce yourself and just kind of explain what, what you do?

Yeah. So I've been an active real estate investor since 2002. I bought my first house in Round Rock and bought, you know, a couple other properties around the area. But for the last Dolly I've bought For the last 10 years, I've focused on the distressed debt side of buying those because Austin is obviously very competitive market. I mean, I bought, sold and flipped or wholesaled over like 150 properties I had in Austin. At some point I went through that whole 2004 to 2008 aspect of things made a lot of money fixing, flipping and doing some amazing stuff as Austin was really growing. And then when everything hit the fan, I left my mortgage company and I started with a buddy of mine, learned to know business from a couple of investors that were traveling and doing stuff. And so I started buying debt literally just dialing for dollars, calling banks, calling hedge funds, calling hard money lenders like streamlined to see what they had in their books that was not performing. It was either underwater, the values had dropped or the borrowers had walked away or stopped paying. And that's really what I have focused on the last 10 years exclusively just buying debt from banks, like I said, institution and buying that debt at a discount because it's non performing, becoming the bank, becoming the lender and then working with the property owners, the borrowers to try to keep them in the property, some sort of modification, retention plan. If that doesn't work, they don't want to play ball with us. Then we look to go to the legal route, liquidation or cash for keys and then take the property back of some sort and then turn around and sell the property as an REO if we can, or offer up financing or a variety of things. Sometimes we'll do some rehabs for the most part. I'm a pretty much a cookie cutter kind of guy. When you're buying in 30 different states across the country like I am. I limit my rehabs to basically Texas and Florida for the most part. But that's what I do. I buy debt. I'm known across the country as the note guy and proud of the fact that I bought over a half a billion dollars in distressed debt for my own portfolio. Another billion billion plus for a lot of other investors and students of ours, teaching them how to, as I like to say, make America great again. One default to borrower at a time.

Well said, well said, Scott. But kind of for maybe someone who doesn't know, not really too familiar with the lingo, you know. How would you define the word distressed and non performing?

Great, great questions, Aaron. Distressed or non. Let's start with the first thing. Non performing. Non performing would be somebody who's not paying. They're not paying the time you get a mortgage. One thing that most people don't realize is that we're all in a mortgage business of some sort. Paper. It's just that all of us are. Most of us are paying money out monthly to the banks. You're paying out with a mortgage, car payments, credit cards, student loan, Debt. If you own Bubba down the street 500 bucks, you pay them a hundred bucks, you're in the debt game, just paying out the wrong way. I want to work to build cash flow. That's why the banks and lenders are always the bigger institutions that they understand the aspect of cash flow and incoming. So non performing is basically where somebody has stopped paying or can't pay through a variety of things, whether either job loss, divorce, death, sickness, Covid, you know, pandemic, and a variety of things out there. You know, their businesses shut down, so they're not paying in some sort of fashion. Now, defaulted is a little bit more extreme in that usually you have a lot of people. Even before what was going on with the pandemic, you had about 10% of Americans that were roughly 30, 30 days behind. They were kind of hit and miss, a little distressed. But a bank and the Atlanta institutions look as defaulted when somebody gets to at least three months, 90 days or greater behind on payments. And that's really the defaulted side, that's the distressed side, where they just can't make a payment for a variety of reasons. One, like I said, they're either not working or B, the bank wants them to bring the full amount to the table, the full three, four, five months to the table to pay in full. And they can't afford that because they're just getting back on their feet. So you look at what's going on right now, compare it to kind of what happened 10 years ago in 2008, which obviously was the start. If you ever watched a big short. You know, we had a lot of people fall into troubled times. At the peak in 2015, we had. I'm sorry, 2010, we had 15 million Americans that were way underwater on their, on their mortgages. It took us from 2008, and 18 months later, we saw, we saw 1.6 million borrowers in default, at least 90 days behind. Well, you look at what's going on now. We're not even six months into what's going on, the pandemic, and we're already at 4.1, 4.2 million homeowners that are in default. At least 90 days are good or behind on their mortgage and another 4 million that are somewhere in that. In between, between 30 and 90 days distressed. So I don't know if we'll get to the 15 million in defaulted residential loans like we saw at the peak in 2010, but I think we're gonna get close to 8 to 10 million borrowers in distressed sometime in the next 12 to 24 months. I don't think we're gonna see a big wave of foreclosures anytime soon. I mean, Texas obviously is the friendliest state to foreclose in the country. We do everything fast in 21 days, you know, fast foreclosures, fast highways and fast execution. But the thing that you keep in mind here is that with what the government has done with delaying things, specifically the government backed loans, the government insured, like the Fannie, the Fannie, Freddie, the Jennies, the FHA's, them allowing borrowers to stay in their house or forbearance agreements for at least six months and with maybe probably a secondary six month forbearance agreement that's giving borrowers time to get back on their feet, find a new job, try to do something to avoid foreclosures. Now, you and I are both in the private lending side of things a lot. We're not seeing that in the commercial side. You have a lot of commercial distress, commercial defaults, a lot of hard money lenders. I'm getting a phone call actually quite a bit. And emails from other hard money lenders or mezzanine financing ask me what I'm looking to buy because you know, they finance projects started six months ago, before everything happened. And now as those terms are ending, they're finding that the bars are starting to get distressed or the projects aren't completed, or they don't expect the market values to remain where they're at on the project. So we're starting to see more phone calls, more emails from lenders that are asking us what are we looking to buy and what we would pay for their debt.

Sure, absolutely. You know, it's great to get your perspective kind of on what happened, you know, back in 2008, 2010. Because for me, I mean, frankly, I was in high school at the time, so I was, you know, I had other things on my hands, much less important things than that.

Where were you going? Where'd you go to high school in Corpus at?

I went to King.

Oh, I was supposed to go there. I live really neck of the woods. I graduated from Ingleside, but King great. King Mustangs, if I remember correctly. Right?

That's right.

There we go. Good stuff. Yeah, I mean it's a. It was a different time. I mean, Corpus is being hit hard now. Besides, I mean, we live in Austin, which has really been at the least stress of the major cities. Corpus, I think it leads. Corpus leads in unemployment in the state at 10.1%, something like that, which is still better than the national average of 11. I think it came out today was actually 10.8. It was the new numbers for July. Houston's at 9.9, Dallas at 9.8. Austin's at like 7.6, 7.8, something like that. As a distress side, as a state wise, it's. We're roughly about 8.6% default rate. So one out of every 12 borrowers in Texas is at least, you know, is already 30 days or 90 days behind now. It doesn't give me any numbers with what we look as far as like mezzanine financing, hard money lenders. I would be interested to see how you guys, your projects have done if they're still performing as planned or you've had anybody ask for agreement or extensions.

Sure, absolutely. I mean, there definitely are people who will ask for those extensions, whether it be for three or six months. That can happen. I guess we have seen a few of those, but we're kind of. I don't know, it kind of. I mean, people are obviously still doing deals. People are definitely building on one hand, but on the other hand, some people are still trying to kind of wait it out.

Yeah, I think you have to look at the asset class or where it's located. It's really a geographic area for the most part too. Property value levels. Honestly, I think here in Austin, we're pretty blessed. Anything has really been hit hard is the first time home buyers, the 200 grand or below, for the most part, those are the people that are working, the jobs have been laid off, the service industry, the hotel. We see that across the country as well, where a lot of those. That's the price point where a lot of people are struggling to get into. But a lot of lenders or a lot of investors though, hey, there's still some great deals out there. If you're finding stuff and can get in and get out and stuff. Like, there's still a big demand for housing, especially here in Austin, something that's affordable or even, you know, the second tier of home for most people that they're upgraded. God knows we get enough Californians moving into here trying to buy an annual basis, right, Aaron?

Yep, absolutely. You know, there's definitely plenty of people want to come down here, especially, you know, from a lot of other colder states. They want some sunshine where it's nice and warm and plenty humid too. But. But yeah, I mean, could you. Could you kind of talk a bit? You know, you kind of threw around the word note a little bit.

What.

How would you explain what A note is. And then what, what do.

Yeah, note. That's a good question people ask me when they hear you in the notebooks. Oh, you're a realtor? Like. No, I'm not a realtor. Oh, you're a broker? No, I'm not a real estate broker. What I mean by the note, that's the mortgage or the iou. Like I said, a note where you have predominantly first liens, that's like a first mortgage. And then you'll have junior liens which are like second liens or mezzanine financing liens. Often go buy that for you. What I focus on is the first lien is notes in a first lien or senior position so that, you know, like a hard money lender will land at roughly 65, 70% of after repair value or as is value. And then some people will come in with a second lien and finance like the repairs or the upgrades and stuff like that. Well, I'm only gonna buy that first lien because I want to be in a senior lien position, so. And there's also a lot of that stuff out there. Whereas junior liens or secondary notes aren't that prevalent because they're just not that much originated for the most part. But especially on traditional housing, on the hard money side or the investment side, you'll see smaller mezzanines as investors are, you know, builders or rehabbers are tapping in investors to come in and finance the last part of the project and stuff like that. So a note is just the iou, like I said, a car note, mortgage note. When I buy that debt, I'm not buying the property, although the property is the collateral for it. So I buy that note, I become the bank at that point, I become the new lender. And I have the same rights as the lender does or the bank does to work with the homeowners, to work with the lenders to try to keep them in the property or to keep them paying of some sort. That's where we make the most buying my money. My goal when I buy debt, buy notes is into foreclose. I mean, we still end up doing it quite a bit depending on the location of the property. But I actually prefer buying occupied assets where the borrower would like to stay in their property and we can work some sort of situation out. Now I don't usually buy performing notes because those are being sold basically at value at face amount or as they call it, at the full unpaid balance. When a bank or lender has a portfolio of distressed notes where the borrower hasn't paid, they're often willing to sell that debt at a substantial discount, provided that a, the borrower usually owes more than what the property's worth or the mortgage amount is more or at what the property's worth. So you know, depending on where the property's located, the foreclosure timeframe, the condition, you know, we'll often buy that debt at a substantial discount. It varies. On residential, commercial side, we don't usually pay up to, we don't usually go beyond 65, 70% of as is or unpaid balance, whatever's less. On the residential side that's about as high as we go because we still got foreclosure costs and things like that. But if we can buy a note at say 50, 60 cents of what was owed and the loan, let's say what's your traditional interest rate on your guys loans right now? 9, 10, 12%, Aaron? Yeah, we'll say 12%, let's just say 12%. So if I were to buy a note from you guys at 50 cents on the dollar because it's distressed and I can get the borrower to come to the table and start paying on time again, I would basically not get a 12% return, I would get a 24% return. So if you put it in a traditional loan, like someone say got a 6% interest rate on their mortgage of 100 grand, houses may be worth say 90 and we picked that up say for 50 grand. All right, well if I get them to come back to the table, say listen, I know you're six months behind on your mortgage or 12 months behind in your mortgage, I know you don't have all that. So let's have you start paying on time. In a normal mortgage it's 100 grand mortgage, 6%. At 6 grand a year, just say $500 a month. Well if I get em start paying $500 a month, 500 times 12 is 6 grand. Well if I paid 50, that's a pretty good ROI for me right off the bat right now. If I can bring them, have them bring say an extra hundred bucks to the table or $200 a month to the table or bring a little bit, give them some leniency. Now I'm doing really well, I'm in at 50. The borrower still owes a hundred to a year goes by, they've made six grand in payments and let's say they paid four extra months of payments. Well now I'm at eight grand on a $50,000 investment. That's about a 15, 16% cash on cash return. I'm in at 50 houses, say worth 90, 95. At 12 months of on time payments, I can turn around and sell that note to Wall street to other investors, say sell it at 85, 90 cents on the dollar because it's at a decent interest rate of 6%. So I sell it at 90 grand. I paid 50 for it. I just needed another 40 grand. Plus technically 14 months of payments, 12 months in that extra skin in the game. So I'm really doing really well at this point. Now let's say they don't pay. Okay, they don't pay. We then foreclose and then say I'm spending another two to three. You know, two to five, depends on where it's at to foreclose. And then I list the property for sale and try to sell it as is. I don't usually buy unfinished projects. I usually like to buy occupied assets too, because the fact the borrower's in it and they've been paying the electric bill to keep the AC on with the vacant property. Often the air conditioner will take a walk and go on vacation or the copper goblins will show up and strip the property too. So a little bit of an insight and kind of what we're looking at when we're in buying notes.

Sure. So it's almost like, you know, you want to work with someone in the house because they're kind of helping you get along. Whereas if it's, if you're just. If you just picked up a shell of a house, you know, the AC is not on. Obviously the house can deteriorate if no one's there.

Yeah, that's the truth. If it's a house is vacant, it's about 50% more likely to need a replacement of something. Either the electric, the plumbing, the air conditioning, H vac, or a roof in some sort of fashion. Plus if it's vacant, especially a lot of kids these days that aren't out at school or doing other things to stay busy, you'll have a lot of vandalism takes place. So I mean, we like. That's why we like to try to buy occupied assets. That's not saying I won't buy it. Vacant assets. The one thing about buying notes is you don't often get to see the interior of the property because somebody's living in it. If it's vacant, you just can't go break the door in or change the locks. You can see what's going on. You have to kind of peek and See what the house looks like and judge what's going on by the exterior. And you can tell from what's going on the interior too. So the nice thing too is if we're buying the notes, we do, we'll get the full loan collateral file, you know, the loan application, see what the borrower did to qualify for it. We'll ask for servicing notes because there's a servicing company that we use to do borrower outreach. I'm not the guy calling borrowers. There's professionals that do that. And so we'll ask for the servicing notes to see, hey, how friendly has the borrower been? Have they been confrontational? Did they try to do a loan mod? You know, do they want to do a short sale? What's kind of the situation, what's the soap opera going on with the borrower? So we can kind of figure out what's the best course of action for us.

Yeah, no, absolutely. Kind of towards the end there, you talked a little about, a little bit about, you know, if they try to do a loan mod. How would you explain what a loan mod is? Or a short sale?

Oh, two different things to list. We'll start first with a loan model. A lot of people have heard of loan mods because that's what we do when we buy the note, we're buying the exact same parameter. So if it's a hundred thousand dollar loan at 6% on 30 year term, you know, fixed rate, it stays the same like that when we buy that. Now a loan model means we would modify that loan in some sort of either a, in some cases, maybe we were buying a loan that was originated back 10 years ago. So it's at a 9 or 10% interest rate like a subprime loan. We could modify that loan by okay with agreement. What we usually do, we'll have the borrowers sign a trial payment plan first to get them, see if they're going to perform for six to 12 months. And then if they've performed in payments or fallen through some payment plans, we'll go back and modify the loan, reduce the interest rate down, reduce the term, forgive, say the house is only worth 50, but they owe 100 because the market crashed. Maybe we can forgive some of that balance or we can forgive back payments so we can modify it, do a stair step interest rate. You saw that happen a lot of times, you know, where banks reduced their interest rates like 2% for two, three years and they went up by a percentage point each year. We can get really creative. You know, one of the most creative things. I bought a note from a borrower who lived in Illinois. She'd lived in this house for 18 years. 3 bedroom, 1 bath, 3 bedroom, 2 bath house on about an acre in southern illinois. She owed 60 grand. Okay, 60 grand for a three bedroom, two bath, 2,000 square foot house. Just blows my mind living in Austin now, right? So she pulled a little equity out is the property went up in value, lived in the house for 18 years and then the market crashed in where she's located. Her husband had a heart attack, didn't die, but was still sick, couldn't work as much, was laid off for a while. So this lady had been trying to make do a loan modification of some sort for four years when we got it come across. So she owed 60, house was worth about 35. I picked up the note for 33 cents of the value. I paid like 12 grand for the note. Her existing mortgage payment was like 465amonth. So I see this portfolio, it's a stack of paperwork when we get it because she'd been trying to do a loan mod and sending in documents and other things like that. I knew that she wanted to stay there, so I got on the phone with her and said, okay, tell me your situation. You know you want to stay in the house. She's like, yes, it's like, I know you're like four years behind. Could you start making your existing payment of 400amonth for 16 months? She's like, yeah, I can do that now. I'm like, okay, can you do that for 12 months? Yes. I said, could you bring some money to the table? Could you bring five grand to the table for us to instill to put this in place? And she's like, no, I couldn't bring five grand to the table. I said, well, could you do 2,500? Yeah, I could do 2,500. I said, well, could you do it? Pay an extra $200 a month to make up that other 2,500? Yeah, I could do that. I'm like, okay, golden, let's do this. So basically, if you figure that 460 times what she's pay, at least five, you know, basically. Well, actually, 650. 650 times 12 is 7200 bucks roughly, right? And then she paid another $2,500 down, I basically in the first year I would get 10 grand on a $12,000 investment. Okay, so she did that, made her payments for 12 months. At 12 months, we appraised the property, houses where it had grown to like 45,000, still well below the 60 that she owed. So we dropped the balance from the more of the mortgage from 60 grand down to 45. So she wasn't over cumbered. And I did one other thing too. I dropped her interest rate from a 9% interest rate to 0% so that every penny she made going forward after the first 12 months, the 450, it all went to principal reduction for so that now she would have the mortgage paid off in 72 months versus 33 years. And so she just couldn't believe that we were willing to do that. You look at, I was making back most of my investment and she paid on time every month. I made five times back when my investment was in the first four or five years because she paid on time and it was all golden. And then she did this. And so 12 months after we did the original loan modification from this plan, I get a letter from her and she'd raised her three daughters in the house and her youngest daughter was 19 or 20 and had a baby. And they named the baby Carson after me because we were willing to help them out with that. Oh wow. So great stories like that. Her and her husband cried at the closing table. Meeting with my attorney there to do this all, set it all up. And you know, it's a, it's really good when you help people out because you know a lot of bad things are happening to a lot of good people these days. We all know that. And on the other side, like a short sale, we can get to short sale in a second. But we've had people that want to do a loan mod that never showed up to the closing table or never said anything. So then we have to go the legal route to foreclose. It happens. But a short sale is you got somebody living in the property, they owe more on their house than what it's worth and they're willing to walk away from it. So what a short sale is basically they list the property for sale on the MLS. We get a realtor to usually listed at 80, 85 cents a as is value, not what they owe, but as is. So we get multiple offers. They'll have a buyer come and willing to close. And then we basically say they owe 100, but they get an offer at 80, 85. Okay fine, 85 after expenses, we may net say 75 on that. Well, if I bought the note and they owed 100 and I paid 50 grand for that note, but I have a short sale offering at net where I net after closing costs and commissions at 75, I just still made 25 grand on that deal. Okay, so that's a beautiful thing. Letting the wheat then basically said, okay, yep, we'll forgive you of that 20 grand or 30 grand in debt and let you walk. In some cases, you're supposed to file a 1099. The borrower for that they can file against their taxes is deficient, so they don't pay taxes on that. But it's a. We end up approving about one to two short sales a month on our portfolio. As borrowers are moving on, you know, they got excited about the dream of homeownership, but then something happened. Now they're upside down. They want to get out from that nightmare and we can help them move on their way. So. Because if somebody's defaulted on their primary residence and payments and it's been reported, credit takes about two years to go back and re qualify, which is much better than a foreclosure, which will haunt your for. It'll haunt your credit report for seven years in a variety of reasons. So I always tell borrowers, like, listen, don't go out there and just walk off. I gotta foreclose. It's always better if you work with your borrower. Sorry, if you always work with your bank or your lender, work with them, it's much better to work that out versus just kind of going quiet and sticking your head in the sand and walking off.

Yeah. You know, especially when people, you know, they're afraid. They're kind of staring into the, into the dark abyss. They don't really know what to do. I mean, if you're kind of there to, you know, kind of break it down for them and say, hey, I'm providing you a service. I'm giving you, you know, some pretty decent options here. That's far better than having to deal with that foreclosure being a stain on your, you know, on your record.

Yeah, and that's. And that's the thing. It's. Everybody goes through tough times. Everybody goes through tough times. I've had ups, I've had downs. I know you guys over at Streamline have had ups and downs as well too, with different borrowers or, you know, I've been around, you know, I referred some investors when I was first getting started as an Investor back in 2002, 2003, over to you guys. And, you know, everybody does that. And sometimes we just got to pull our head out of our ass. If you're in a tough situation, say, look, I'm in trouble, in over my head. Let's work something out. And I do that all the time when borrowers call me, hey, I'd like to try to start up a payment plan. Like, okay, great, let's do this. You know, I don't want to foreclose, but I don't run a charity. You know, that's one of the big things that you have to realize is I donate to charities, I don't run one. I mean, I still have investors. I've got to put, you know, food on my table for my family just like anybody else does. And I'd rather at least have a conversation and trying to work something, a good solution. It may not be a hit it out of the park kind of deal, but at least it's somewhere of a win win to make things better for everybody.

Yeah, absolutely. You did a great job kind of breaking it down just from, you know, dealing with the borrower, you know, the loan mod, the short sale, that was terrific. But if you could just kind of roll it back a bit to, you know, I'm just thinking about the timeline here. So think about, you're doing your due diligence. You're kind of looking into, okay, is this a good note for me to buy from day one, from the time you buy the note, how long does this process generally take until you see that profit?

I love that question. We get that a lot. So from the time that we bought, usually we'll know some sort of angle of where we're probably going to go with the asset, whether it's going to be a reperforming note or a modification or we're going to go somewhere. A liquidation strategy either deep and loom, short sale or foreclose because of the due diligence. If it's occupied, we always go the route of trying to get the borrower to get back, bring them back to the table. So when we, but the day, when we buy the note, we notify our servicing company because it can take two weeks to 30 days for the servicing to get transferred. So let's say abc, let's say I'm buying a loan from Streamline. So you guys service your own loans or do you have a servicing company that you guys are using with?

We service them, yep.

Texas, you can service your own loans. If they're in Texas, that's okay. So it would probably be a very quickly thing. I would have you transfer servicing to my Madison management, which is my servicing company. And that way I have them redoing the borrowing. So it would Take usually in state laws, you have to give the selling entity at least 14 days before the servicing is transferred, because you have to give the borrower notice even if they're paying or not paying. So I buy the note from you. Usually the next weeks, the seller sends out a letter and say, hey, things are not paying us. You can now not pay. SCOTT Carson BANK okay, All right. So servicing takes two weeks to 30 days for that paperwork and that electronic kind of transfer take place to figure out. Okay, here's what you exactly everything you have and all the notices. And my servicing company sends out what's called a hello letter. Like, hey, thanks for not paying streamline. Now you need to pay us. Okay. And then we start that borrower outreach with phone calls, trying to make right party contact of either calling them at home, send them a letter, calling them at their work, sending out certified letters. I think you've ever been behind your mortgage. You've all got that. You would have gotten a letter. If you bought a house, you probably got a day, a letter 30 days after you closed on the house your mortgage was sold or servicing transferred. So that's the point of just trying to get the borrower to come to the table. If we can't get to some sort of resolution or get the bar to respond within 60 days, then we send it. If legal hadn't already been started by the previous seller in foreclosure, then we would send it to our attorneys in that state to start the foreclosure process. And that will vary depending on the market. Like Texas, it's fast here, you know, 21 days, basically, as long as you put notification before the 21 days before the first Tuesday, you foreclose really quickly. Other states, like New York, which I don't buy in, I wouldn't recommend it because you take up to three years to foreclose, and then you gotta hire an attorney to talk to an attorney to have an attorney. Okay. A New York foreclosure could take you 10 grand or more. Texas, depending on the county, could be anywhere from like 750 to 1500 bucks to foreclose. You foreclose, then you have the eviction handle, and then you have the property. You take it back, hopefully after the borrower's moved out, you kept it pretty clean, and then you're selling it. As an reo, we try to speed things up in a couple different ways. When we buy a note, we're usually buying properties that we know are occupied where the borrower is still living in or a tenant is still living in of some sort. Because we've done a lot of due diligence in front of either sending somebody out to look at the property, to drive by. We look at the notes, see the payment history. Obviously somebody's paying, somebody's usually something, they're usually in the house. So seven days after we buy the note, we send our own letter out and say hello, it's our own hello letter. Hey, we know that you're behind, we know you probably want to stay in the house. Please give us a phone call. You've got a two week window to give us a phone call, no questions asked. We can put you into a loan mod of some sort, automatically prove that you're willing to work with us, you know, a payment plan of some sort. And we get about a 70% response rate to those letters that really help us speed up the timeframe so that now by the time 30 days transfers rolls around, we know if the borrower is going to pay, we know if they're gonna get back on time so that we don't have to spend all this extra legal costs. It also allows for us to adjust what we're paying our servicer on a monthly basis from a non performing monthly fee like 90 bucks to performing, which may be 20 to 25 depending on the servicer we use. So sometimes you can see we try to shoot for that 30 to 60 day window to get the borrowers back on track. If not, then you gotta start the foreclosure process and go that route. That's not saying that you can't stop or suspend the foreclosure if the borrower comes back to the table and tries.

To work something out with absolutely, absolutely wonderful explanation. But you know, let's just, let's just assume, you know, maybe I have some experience of flips or new construction, or maybe I have no experience at all. You know, how would you suggest if someone has a decent amount of money in their pocket they want to get started buying notes? Where do you even start?

Well, here's the thing too. You don't need your own money to fund these deals. I'm going to tell you right now, there's $9 trillion retirement money out there all across the country. In IRAs, you know, 401ks, there's a lot of retirement money. So we use 95% of what we're using is other people's money. Like in Austin, I'll give you an example in Austin. There's basically 21,000 people in Austin that have an IRA out of that 21,000, there's 14 of them. Two thirds of them have at least 150 grand or more sitting in an account, roughly making 0 to 4%. Okay, so we are a very rich county with a lot of investors. And then if you figure out what's in San Antonio, it's about the same amount, if not more. So the best thing to be doing is a starting to reach out to banks and hedge funds. There are different titles at different banks, and I like to use LinkedIn. LinkedIn is a great resource to go on and look for people that have the title of special assets manager or secondary marketing manager or Chief credit risk desk or whole loan sales desk. So those four names, if you look Google them in LinkedIn will give you literally lists of people. And then what I'll do or I'll have my VA do is they'll go on there and say, hey, see that? You're the person in charge of this. At Quicken Loans, do you have anything on your portfolio that you're looking to move this quarter? Because banks will sell notes off. They'll be selling on a regular basis, but oftentimes they're selling them on a quarterly basis. Busy time in a year is always the fourth quarter or the first quarter. Right now, in the middle of summer, you can still sell. Trust me. Banks are looking to move stuff off, to recapitalize stuff, but it's always gonna get busy into the fourth quarter. So if you're looking for stuff, always go out and get deals. The beautiful thing that I like about this, we don't do direct mail postcards. We're not dropping out yellow letters. We're not putting bandit signs out looking for deals. We're dealing directly with a bank that feeds us list every month or every quarter that we made via contact, via email, phone call. LinkedIn jumped on a website like Lane Guide and found them. Or you can go to some of the websites like Loan Exchange or DEDX or Auction.com will often sell notes as well, too. For you, you're familiar with those. Get on there. There's some of these individual websites. You can take a look and start looking at notes. These days, that's where I would go to start getting my due diligence and evaluation down. But just get on. You know, if you make 50 phone calls to banks, you'll probably talk to 14 to 15 bankers, and probably three to four of them will have something at any given time that they can send over for you to take a look at and then just rinse and repeat. And doing that, we send a big email blast out once a month, you know, usually the second week of the month on a Tuesday, and then follow up with another email on Thursday. And we'll get lists sent to us from the bankers that have stuff available that month or that quarter. And then we'll just cherry pick from what do we want, what don't we want? You know, and then make some offers and then it's a back and forth. If they accept the bid, if they don't accept it, that's fine. We may counter or we may just wait another 30 days and fall back up. Say, hey, do you still have that loan for sale? If you haven't sold it, it's now another month distressed or two months in distress. You sure you don't want to take our offering? And you move it off your books because you got to realize lenders don't like having bad loans on their books. Most lenders and banks make money because they will leverage your funds out 10 to 15 to 20 times, right? They get that money, they want to churn that money. Now if there's a loan sitting on their books of 100 grand or 200 grand, that's not performing, they're losing roughly 100 to 200 grand in fees on an annual basis. So that's why when you go seven days late in your mortgage, that phone is ringing like crazy as the banker's trying to get a hold of you to get started back up again. So don't be surprised at that. But that's why it's, you see this stuff, you know, we'll make offers and sometimes the borrowers will reinstate with a bank or they won't reinstate, won't call the bank and we buy the note, they can to foreclose and suddenly with one phone call or one letter, it just comes from a new source and the borrower wakes up and wants to stay in their house and is willing to play ball with us a little bit. So, you know, it's a, it's always an interesting day because it's. Varies. Right now is a crazy time, you know, but you see deals on so many different things right now. Residential and commercial construction. You know, we live in a crazy world and we're gonna see a whole lot of it. I mean, you look at, you know, back in March, the commercial mortgage backed security market lost $50 billion in value basically overnight. And they're talking about banks like bank of America announced last Friday, they expect to lose like $5.1 billion debt bad loans that they made. And then you look at commercial properties too. There's a lot of the bank and stuff that the banks financed this time around versus 10, 12 years ago that they're looking to move. You've got a lot of offices, you've got a lot of hotels, you've got a lot of strip malls, retail student housing. I've got some buddies that have taken some hotels and converted them into apartments here in the last couple months to make make lemonade out of lemons. You know, you see a lot of great deals, but the biggest bang for the buck, that it works really well for a lot of investors is that smaller balance. Commercial stuff is what's really clogging up the smaller balance. I mean like two and a half million dollar value or less. There's a lot of that stuff that's been financed by the bank that's too small for like a big like Wall street firm to spend time with. But it's ideal for investors like you and me and other local guys that understand what's going on with that asset and can really kind of gentrify it or reposition the asset in some sort of fashion.

Okay, you know, could you kind of provide an example of that? You're saying it's kind of too, it's too small for the big boys in New York to deal with on Wall street, but you know, it's kind of a sweet spot for someone like you or me. But you know, how would you explain what one of these properties would look like and then what would you do with it after?

Great, great question. So I'll give you an actual deal. I'm working right now. It's actually in Denver. It was a 107 unit office space. Okay. Third floor downtown Denver, 107 unit like mixed like a Regis executive office space. They're going to rent these out. The borrower took out a loan from a bank, redid the property and broke it up in these things. They got seven covered parking spots. Well obviously nobody wants to be an office space in the world of pandemic. Okay? So the guy got smart and he repositioned the ass and said okay, what do we need? And he turned it from an office space to a self storage unit almost immediately, overnight by getting the city to rezone it. Now he's got it completely booked for the most part with a lot less aspect. So that would be kind of a great thing looking at a property like here in Austin, now that we're gonna get the new Tesla battery, Tesla trucks aspect of things. Looking at office space that's distressed and then a converting that or reaching out to a company like that, saying I've got some open office space. Looking for those that are looking for space. Talking to your commercial real estate agents, your CCIMs here in the area, who's coming to town, who's looking for stuff, taking like a big box store, like a standalone Walmart and converting it to maybe a climate controlled self storage. Because then you just put in some of those truck boxes and you've got a storage unit there which is at a high end or looking at what's one of the nice things that you could do is also like gyms. We know a lot of gyms are closed. Like 24 hour fitness is pretty much gone. Big open space, you could turn that into storage pretty easily turn into an executive office if it was a need for that, or turn that into warehouse space if you could get it zoned that way. And then dramatically it all depends on what you would pay for the asset. Okay. But looking at what the cash flows would be, looking at what the need is for a property or need for that type of asset. Self storage is always big. Multifamily is great if you can put it some sort. That's why I think that if you look at all these small hotels that have been hit hard, that aren't national change, there's gonna be a lot of opportunity to come in and pick up those relatively cheap from the banks that finance those and then turn them into an apartment complex and hold onto them for a while. Or, or condo, convert them, turn them into condos because they're already set up basically as residential. You just got to tweak a few things at the level. And hey, people are looking for affordable housing so you can find something cheap enough that you can put housing in place. That's what I would do. Look what the biggest need is, what the lack of is in an area and then get creative with what you're doing. I was talking to a buddy of mine in Seattle who bought a, he bought an office spot, you know, strip mall. Three in a strip mall. I'm like okay. He goes, I'm turning into my own video center. What, you're going to open a Blockbuster? He goes, no, no, no, I'm gonna put it up in my own like podcast, recording office, podcast studio. I'm gonna, I'm gonna reach out to local entrepreneurs who need to do like video marketing. We're turning this whole aspect. He picked it up for like 20 cents on the dollar. Of as is value. So he's gonna be very creative on it. And the fact that he bought it up well below value, he's willing to ride this wave as it comes back up so it increases in value over the next 12 to 24 months. So, you know, there's. If you can get creative, now's the time to be really creative in some sort of fashion.

Yeah, well said. Absolutely. You know, it kind of seems like the numbers are only one. One aspect of this part. Let's assume all the numbers check out and you're, you know, let's say maybe you're unfamiliar with zoning. You have that. That little motel, that hotel. You kind of have that property that, you know, it could. It could be rezoned. How do you go about rezoning something and how. What does that process look like?

You know, that's where you really have to rely on professionals in the area. Like, you want to make sure. And have a good real estate attorney to help you out with that stuff to take a look at that. You want to make sure you've got a good. If it's residential, a good residential agent or if it's going to be commercial property, good commercial agent, talking with the title company, see what it's availability for. If you got to get rezoned, then you got to go before the zoning committee to find out what's going on. But the great thing is most cities will work with you if you're going to provide a necessity that they need. Okay, so going and talking to the city manager, hey, what do you need? You know, I've got this opportunity. I know that say the city needs more apartments. And I've got this eyesore of a. I'll give an example. There's like a sleep in here in Austin that they was a kind of a shady motel that they turned into an apartment complex just recently. Right. It increased the value. So what they did, they went to the city because the city needed some help with this, with apartments to put homeless people in versus hotels. So the guy that bought that, he was able to get it pretty much fast Track three just has to get approved and notice goes out. It's gonna vary by the city for the most part. But that's why, just go find out what's going on at the city, talk to the city manager, the city zoning community, and say, hey, are we able to do this? And right now a city would rather have occupied assets that are producing revenue and dollars and tax dollars versus vacant assets that get dilapidated and are just, you know, taxes are probably aren't going to be paid on because they're not performing as well because it's just not the banks getting paid, it's the county getting paid. And the tax is a big chunk of the time. So anytime you can come in, increase the value of the asset, that's going to increase the taxable amount too. So it can be a really good win win here. You always want to try. As you're doing your due diligence, you want to try to make that, make sure you can get that approved. The worst thing you want to do is buy an asset with a great idea, but never talk to anybody and then find out they can't do what you want to do. So I've seen a few investors make that mistake. But in this crazy world, if you've got something that makes sense, it's not going to be too difficult to do, that's going to be in the best interest of the city. In that aspect of things. You can often get a pretty fast track through with professionals.

Absolutely, absolutely. One thing I thought was interesting as well, you kind of talked about doing that deal in Southern Illinois. I have you on Facebook, obviously. I know you talked about, you know, talking to people in San Diego, Indianapolis, you know, all these different places around the country. And you talked about getting in touch with those good real estate attorneys that can help you get things rezoned. How do you get in touch with those, you know, how do you build those relationships with real estate attorneys across the country and how do you build your own team to kind of be able to sustain your node business?

No, that's, I love that question. Because that's one of the big things is people get really scared about investing on a side of their zip code or outside their city where they can't go touch it and feel it and rub on the asset. You know what I mean? So the first thing, there's two things. One, I always try to reach out to local real estate investment clubs in an area. It's a really valuable aspect. Reach out, say, hey, who here is a great real estate attorney that works with investors or who's a great realtor or commercial agent, who's a good hard money lender in the local area, who's lending on this type of stuff. So your real estate club can be your focal point, point where a lot of people come together. Often they've got people that are doing deals. If that doesn't work, then on the attorney side, I will jump on a couple websites. Like there's a website that I use called Legal League 100. Legal League 100. It's a free website I can jump onto and it lists attorneys that are paying to advertise that they do all sorts of things. So you can literally just pick on a state and a list of terms and it'll list what they do, foreclosures, zoning, real estate, whatever, you know, debt collections, whatever. And then you can pick out and phone call. I'm a big fan of asking referrals too, of friends and families. Hey, who do you have? Title reps are a great resource in an area as well because they're the focal point of where everybody's coming to close a deal. So a good title rep. Hey, who do you recommend to use this and why not? Just asking for references is one of the biggest things. And then just communicating, set up how that person likes to communicate. I will tell you this. If you're doing stuff in other states, the best, best thing I can tell you is find an assistant, whether it's somebody in person or a virtual assistant that can help you stay in tune. Because there's a lot of moving parts in real estate, regardless if you're in the note business. So you want to try to find somebody can help you out to manage that with systems with your. Like you're a CRM tool or a system, whether it's in person or a VA that you can pay for four to six bucks an hour to help you online. So. So yeah, I couldn't do it without my virtual staff. I have a very lean staff. I got a lady in New Jersey who handles my borrower outreach. I have a servicing companies in Reno that handles the heavy listing. I've had a real estate attorney in just about every state we invest in. And then I have contacts that I trust and investors that I've worked with and most of the major metroplexes that I can reach out to to be my eyes and ears on the ground if I, if I'm not going to jump on a plane, go take a look at it.

Yeah, absolutely. And I mean to run this sort of operation, you need that, you need that team around you especially, you know, with all the outreach you're doing. You're writing those hello letters, you know, you have your attorneys, you have, you know, people contacting the borrowers, trying to work things out with loan mods. It's a lot of work.

Yeah, it's just, it's a lot of them. In part, you get. You build systems like with anything else. And so we know what we're doing on A Monday, we know we're doing on a Tuesday, we know we're doing the first week of the month versus the last week of the month, you know, so you start building the systems and understanding what's going on. It's a different mindset in the note business than a fix and flipper. Fix and flipper looks at a property and think about ARV after repair value, when it's going to be in the note business. We look at what it is right now and look at, okay, what happens if a they do start paying or what if they don't pay? So we've got a little harder. Sometimes engineers kind of have a difficult time with it because there's so many different options. You can kind of almost melt down a little bit. So that's why the fact that we pick stuff up cheaper than your traditional investors and there's more inventory of this stuff that we see six to 12 months ahead. Everybody else gives us a lot of advantages of being able to. Okay, okay, let's go A. If it doesn't go A, let's go to plan B or plan C and kind of go from there.

Yeah, absolutely. That was a wonderful explanation. Just kind of on your process with the notes, getting that team around you. I also meant to ask you, on an unrelated note, on your hat, is that a Tony Robbins hat?

It's a black clover hat, yeah. If you were a part of Tony Robbins. Tony Robbins sport knows. I was actually just recently a part of his Unleash the Power within virtual event with 30,000 people across the country. And blue is one of my favorite colors. So, yeah, I got a blue, a black green, a white wine. I went ahead and ordered a few of those out there. But yeah, I get up every morning in prime is one of the things that I do every morning, listen to Tony in the morning. My first 10, 15 minutes while I'm sitting down outside my patio.

Absolutely. Got to do it. You know, you're, you're obviously pretty vibrant. You're, you know, you're on a, on another level. You know, I can see that you have a sense of clarity and you enjoy what you're doing.

Well, you know, it has come with plenty of ups and downs. And I will tell you this. If you're in the real estate business, you have to build a thick skin. You're going to have good days, you're going to have bad days. I've, you know, I've been sued before. I've been in your bankruptcy on when things went south on different projects. But I'VE always pulled my belt up. I know I'm gonna be in real estate a long time and I think that's a lot of people realize the more you put into your systems, the more you put into your marketing realize that not every deal is a grand slam. A lot of times I like doing singles and doubles. If I buy nothing, the bar starts paying me 200, $300 above what we've got to pay out. That's a win, win for me. I look at it, they're staying in the house. It's a win for my investors and it's a win for me because I have a big goal at some point to really, really do some big stuff. And I'm excited. A lot of people are nervous about where the real estate market is right now. I'm salivating because I know the next six, 12 or 24 months are going to be something that comes around just basically once every 20 years and can be life changing for a lot of people. So I set a goal for myself. By the time I turn 50, be sitting somewhere in a tropical place handling real estate from the Caribbean, you know, little, rubbing my drink on a daily basis or. And I'm excited. I may have to bump that goal up five years. I'm 42 now. I would love to do it by the time I'm 45. Look, I'm never going to stop working. I love what I do. I love working with banks. I love working with investors. If anybody's interested, you can reach out to me@scottclosenotes.com I've got a 73 page book that I wrote on how to buy notes in real estate at 40% off or greater. I'd love to give it to your audience for free if they're interested.

Absolutely. I'd be happy to, you know, link that in the description and, you know, make sure people know where to reach you. Scott, is there anything that you haven't said that you really just like to hit home?

I will tell you this is we all as real estate investors are going to learn more by doing more than Podcasts are great and Aaron is just doing an amazing job. So if you're listening to this, click on over and hit the subscribe button and leave Aaron a five star review. You got to do that now. Come on everybody. It's how we as podcasters know that our audience is listening. So go on over to leave a review. That's the big thing.

That's right.

Good man. You're welcome, buddy. The second thing is just to start Doing, learning, reading is a great thing. YouTube is awesome. Podcasts are amazing. You're always gonna learn more by taking action. Don't be one of these investors that goes from workshop to workshop or seminar to seminar. Never pulls the trigger. Go out, take some action. There's plenty of deals out there. There's plenty of capital out there. The banks don't care about your credit when you're buying debt. They don't care where the money's coming from. Be a deal engineer. If you're scared to pull the trigger yourself, go find a deal and go find a local investor to take it down. Hopefully give me a phone call or Aaron a phone call.

Yep, absolutely. All right, Scott. Well, where else? I know you kind of mentioned about your book a little bit. You know, where can, where can we find you?

Yeah, the easiest place is one of two places you can go to. We close notes.com. that's my website. You can see all the different things that we do in there, from the assets that we buy to our podcast to our educational cycle. We do teach classes on this note, investing stuff pretty regularly. Or you can always go over and listen to my podcast, the Note Closers Show. We're excited. We're gonna have Aaron on next week actually, too, talking about hard money and some of the great things that hard money can do for you as real estate investors. So check out the Note closers show. It's thenotclosershow.com is a website that'll take you there. Or you can listen, watch, or read every episode that we've done. 600 plus episodes, 30 million listeners across the country because our show's syndicated and we're pretty, pretty excited about that. So weclosenotes.com or the note Closer show podcast.

Absolutely. I'll put the link in the description. And, man, I'm looking forward to coming on the show next week.

I'm excited, buddy. Two Corpus. Who want to know? Two Corpus boys in Austin doing some cool stuff, huh?

That's right. You know, I, you know, I wouldn't say it's an old saying, but just kind of between friends, we'll say Corpus kind of follows you everywhere. Everyone knows someone from Corpus.

It does. People have always asked me, why would you want to leave the beach? For 18 years, I had sand in my shoes. It was time to do something else.

But. Yep, that's right.

Good stuff, brother. Good stuff, man. Well, thank you so much. I'm honored to be on here. And like I said, any of your listeners, anybody listening to this, they look for a little bit more advice, feel free. You can always connect with me on the website or you can go and connect 30 minutes with me talkwithScottCarson. Com and they'll put you directly on my calendar, too, to share any information I can for you. So happy investing, everybody.

Absolutely. Thanks for coming on, Scott, and we'll talk to you soon. Take care.

Thanks.