How to Make Money from Non-Performing Loans, with Scott Carson From the Real Estate Lauchpad Podcast

The biggest lesson I learned early on was that delivered is better than perfect. All right? I compare it to like the iPhone. You know, if you got an iPhone, what version of the iPhone software do they have right now? Like version 14 or something like that? If they waited to get it perfect, they would have never delivered iPhones for the last 10 years.

Welcome to the Real Estate Launchpad podcast. I'm your host, Jonathan Twombly. This is the real estate podcast that goes beyond the inspirational first deal stories and digs deep into the business of real estate. Each week we'll bring you an interview with a top flight professional from the real estate world, ranging from investors to brokers to bankers to people with cool jobs in real estate you've probably never even imagined. We'll also be checking in with regular real time updates from professionals working on the front lines of brokerage and lending, keeping you informed on where the market is now and where it's heading so you can make bids. Better investment decisions based on real insider intelligence. All this in an effort to give you the best possible real estate education and market information in the least possible time and keep you entertained all the way. Now for Today's episode. In 2007, Scott Carson was working as a mortgage broker. Then suddenly, as the financial crisis took root, the mortgage business dried up practically overnight. With his business gone, Scott had to get creative. It was then that he realized that the relationships he'd built with lenders over the years were very valuable even in a downturn because the lenders had access to mortgage loans that had stopped performing. Loans that Scott could purchase for pennies on the dollar, restructure, and turn into very profitable investments. A decade and hundreds of transactions later, in everything from notes on single family homes to retail to apartment buildings, Scott now runs We Close Notes. We Close Notes, actively invests in non performing loans around the country and teaches new investors how to do it themselves. Despite what you might think, even in a strong market, there are always non performing notes to buy. And as Scott tells me in this interview, after declining for many years, the number of foreclosures is actually starting to grow once again, as many homeowners and investors who overpaid for properties in the current upswing are finding they cannot afford their payments. Thus, distressed property is an asset that may be poised to come back in a major way, especially if the economy weakens. So if you're at all interested in learning more about this lucrative niche in the real estate field, this episode is not to be missed. Here's Scott Carson to tell you how to make money from non performing loans.

Hey Scott, welcome to the show.

Hey, glad to be here, man, thanks for having me.

So would you give our audience a really brief idea of who you are and what it is that you do?

Yeah, I'm known across the country as the note guy. And what I do is for the last 10 years I've been a very active real estate investor. And then I focus on the niche of buying distressed mortgages and distressed loans from banks on residential and commercial properties. And our goal is to buy this distressed debt. We then become the bank and then we try to work out a win win with the borrowers by trying to modify or get them to reinstate the loan. About 65% of time are successful. The other 30, 35% we end up foreclosing or giving them cash or keys to walk. But that's my niche in the industry out there. I've been doing like I said, for 10 years. Love what I do. I become the bank and my whole goal is to make America great, one defaulted mortgage at a time.

Well, so listen, of all the different.

Things in real estate that you could have done, why focus on notes?

That's a great question. So Originally back in 2002, I was a financial advisor and got into real estate by buying a couple rental properties. Lost my ass. I fell face first because the market shift here in Austin, Austin, Texas, which is home. And so for a year, year and a half I was a banker working in the finance industry. And a buddy of mine started a mortgage company, brought me on board in 2004. For four years we were just doing a lot of loans for investors and origination. And then of course the market changed basically overnight. 2008, I had a couple mentors along the way that kind of taught me about the mortgage game and owner finance and creative financing. So from 2008 to 2010, I just started dialing for dollars, calling the banks that I was originating for and started buying one offs and two offs of the residential commercial loans. And then it just, it's a great, great niche. Nobody was really doing it at that point. All the major buyers of debt, it kind of backed away from the table because of default rates. And so I like to say that I was living on crumbs, but really nice crumbs from the mortgage companies because we were, it was like a wild west. We buy stuff, you know, from Wells Fargo or capital one, make 1500 bucks or 100 grand. It just varied on what we were buying.

Let me ask you this question.

Right after the crash, a Lot of people, there was a lot of fear out there. There's fear that maybe it was going to get worse. People were seeing all these people defaulting on their mortgages. I can remember a whole podcast series.

About a distressed mortgage that somebody had.

Bought and they watched all their money disappear in it. They'd done it for research purposes, so they expected to lose their money. Why was it that you thought that this was a good thing to go into? I mean, looking back with hindsight, you're like, you clearly did the right thing at the right time, but that wasn't such an easy decision to make when you did it. So tell me what went into your thinking at the time, like why you decided you're going to start buying non performing notes at like the worst crisis in 70?

Well, you've heard that history repeats itself. And I had a couple guys that I really valued their opinion, mentors of mine that had made a lot of money during the RTC days, the savings and loan crisis back in the 80s, and they were just salivating. Like, Scott, if you do anything, this is history giving you an opportunity like we did 20 years earlier. And so I just, I listen to these people that really I admired. They kind of walked me through initially the phases and I was just seeing so much stuff. I mean, when you're buying some debt at 5 to 10 cents on the dollar and the house is worth a hundred grand, you're picking up for ten grand. Even in a depreciating market, it's hard to lose money if you're buying at the right price. And I agree, some people went in way overpaid for distressed debt because they weren't reading the signs of the market. And yeah, they watched their value drop. But I was buying stuff from banks that were going out of business that they just wanted off their books and they were willing to give it away basically almost for free.

I think people often forget that during a period of economic distress, it's not like all economic activity stops, right? There are still people buying houses, there's.

Still a market for homes.

If economic activity drops by 10%, we're.

In a bad, bad recession. But that means we still have 90%.

Of the economic activity that we did before.

So if you're buying these assets at super cheap prices, you know that you.

Can get out of them at a decent price and make your money, right?

Yeah, I mean, one of the great things is we were buying stuff and we always like to check the occupancy. So if some of these assets I was buying the Bars had already walked. So it was a matter of just either a tracking them down, getting to sign some paperwork or finishing the foreclosure process. And then I own the real estate. In some states it's pretty fast. Other states, like God's waiting room of Florida, it could take a year or 18 months. But you know, like I said, I figured in those costs and when I was buying the assets, like, hey, I'm still going to come out doing pretty well here. It's just a matter of learning how to market these deals a little bit differently than a traditional property.

So when you started doing this, I mean, do you immediately jump into this full time? Was this enough to keep you busy and keep you paid? How long did it take you to build up the business to the point where this is what was sustaining you?

That's a really great question. I made the mistake early on of just dabbling in it and I was trying to do a lot of other things and I was kind of in the transition phase. I had some rentals, I was wrapping up some short sales that we're negotiating. I was also had a couple rehab projects. I was doing that kind of drag on for about a year until I finally said, listen, I'm going to make the most amount of money if I just focus on one thing versus trying to be a jack of all trades here. So between 2009, 2010 is when I kind of stopped doing everything else and went just gung ho, 100% into the note business. And in 2010, I literally, I guess you could say burned the bridges. I sold everything I own here in Austin, all the furniture, everything except my dog and my truck. And we jumped in my truck and drove around the country for basically three years nonstop just talking with investors and bankers and asset managers and you know, Texas and Florida and North Carolina. And that three year period which we originally I thought was be like 26 weeks as we were going to try to travel the ballparks of America. It just blossomed into three years. And that really just, it just paved the way for me to be where I'm at today.

So what were you doing on that trip? Were you talking to?

I was, I was doing it. I said, let me just get out and see America. And I had a couple bankers I talked to. I was wanting to go to Florida because I know there's a lot of stuff going down in Florida. So I literally just would drive down and meet with an asset. I set up appointment, go in, meet with them. When I wanted a bank, they'd Walk in their conference room, and it'd be just stacked with loan files from the ground to the ceiling. They're like, buy something. Buy anything, please. And it was like that at bank after bank after bank that I went to. And I was just like, there's nobody else looking at this stuff because all the normal debt buyers have backed away from the table. So I just really found a niche that really needed help. I like to say I was living on really nice crumbs in the mortgage industry at that point, but I just found a niche and dug into it like a dog on a bone and have been focused on it for the last decade, and it's turned out really well for me.

Why were the other buyers out?

Why was it that they had pulled.

Back from buying it? What you would now say is such a great opportunity.

Oh, good. That's a really great question. So most of the institutions that are buying debt, they want to buy performing debt. They like the cash flow. They're not set up to handle, like, a lot of workouts or handling the foreclosure process. That's not what banks make their money. Even though some people think that banks make their money on loans. And the normal debt buyers out there want really performing those. They want to see somewhere between a 7 and 15 yield, depending on what kind of firm it is. And they don't have the manpower, they don't have the relationships locally to do a work at. It usually costs them three to four times to do a rehab and a foreclosure and getting a house, winterizing. It would like, say, you and me talking to the local realtor who can go out and get it done today. You know, we have the ability to act a whole lot faster than what the bank does traditionally because they're just so big and bulky. So that's one of the biggest things. They're not set up to do these workouts. They got an hourly employee on the phone taking phone calls from Mr. And Mrs. Borrower, and they don't really care what's going on with the borrower. I call a lot. They lack common sense underwriting at that point. If a bar calls and tells you, hey, I can't make the 12 months of payments that I'm behind on, but I can pay you 2 right now and then start making up payments every month, that's a yes in my book. Whereas with, like, another bank that's doing a loan model, it takes them nine months to come to a yes. So they're just too big and bulky and don't have the flexibility like myself or other investors that know our markets. We've got our teams in place ready to rock and roll and really can take advantage of the situation and really create a win. Win the borrower to keep them in the property. Or if not, we can act immediately on the property and preserve it and look to get it sold.

So what markets are you focused on and why those markets?

I get a question all the time. It changes year in, year out. Right now I really like and I'll talk about football. I like the Big Ten markets like Michigan and Ohio and Indiana. I'll even look at Illinois outside of Cook county or Chicago. I like to call that Crook county because it's so corrupt they're trying to get something foreclosed on. But those other states are really great because there's a lot of inventory you can get at a great discount. I also like the Southeast Conference states like Missouri, Missouri, Alabama. Florida has been great for me for the years, although it's a little bit overpriced right now. South Carolina, North Carolina is also really good. Tennessee is a great state with some bigger markets in it. So those are kind of mostly the areas I'm looking at for the most part. And I'm in Austin. Texas people ask me all the time if I can find Texas notes. Occasionally can. But Texas is such a fast foreclosure state, Jonathan, that the banks really value the faster foreclosure states at a premium. So they're trying to get as much as for the bang for the dollar because they can foreclose relatively quickly. A lot of people ask me about California. It's just too overpriced out there. New York, New Jersey, I really kind of tend to stay away from. Because it takes about a year to two years to foreclose up in those states.

Yeah. Why those markets in particular that you name, Is it really just the ease.

With which you can foreclose if you.

Have to, or are there other forces driving that decision?

There's two forces. One is there are deals available. The foreclosure timeframe is not too bad. And the third thing is the pricing kind of makes sense. You know, I want to be able to buy something at $0.50 of value or less and I'm still getting those type of discounts. There's still plenty of stuff in default. Or these markets are facing newer foreclosure, increasing foreclosure rates as well. So those are kind of things as well there. Makes sense. I will tell you this. I try to stay in either the primary Markets or the secondary markets, because there's plenty of realtors and vendors there. And of course, ultimately, if I have to foreclose, I want there to be plenty of buyers to buy that asset from me.

So the bigger the market, the more liquid it is?

Yes, sir, that's correct. Yep.

So I'd really love it if you would kind of walk me through the process. Like, you know how you go about finding a note to buy, evaluating the note, and then actually closing on the purchase of the note, and then what you do after that. So just sort of end to end. Tell me what happens in the life of an investment for you.

Well, I just sent an email out Tuesday to 4700 Asset Managers. Okay. With banks and hedge funds. And I've had 50 of them respond back already. I expect more this week, but I already had two of them send me lists that I can cherry pick from. So I'll look through those lists, find an asset or two that I like. We'll talk about pricing. If it makes sense, great. I'll make an offer. If they accept my offer, great. Then we usually, depending on how much we're buying, we'll have anywhere from like, a couple days to do due diligence or up to 30 days. We'll check the values of the asset. We'll have a realtor or somebody drive by the property, put eyes on it. We'll call the tax office to make sure taxes are up to date or it hasn't got a tax foreclosure. We call the utility department to see if there's a balance or power still on in a property. If those things look good, great. Then we'll also take a look at the collateral files, the loan files, to make sure everything is good with the collateral files, that there's not something that would stop us from foreclosing if we have to foreclose. All right, if that all checks out, then we'll go ahead and, you know, sign a contract fund, wire to it. About a month later, the collateral file will show up. But in that month between there, we're having our servicing company, which handles all the borrower outreach for us. They're working with the seller servicing company to get the servicing transfer. Letters are going out to the borrower saying, hey, thanks for not paying us. You can now not pay Scott Carson and his company, our company, say, hey, thanks for not paying ABC Funding, but now you have to pay us. You know, that kind of thing. And then it's borrower outreach. Really aggressive borrower outreach for the first 60 days. For the most part, if the borrowers were not able to get in touch with them or they don't respond or they tell us to pound sand, then we boot it over to our legal team, our attorneys in those states who start the foreclosure process. If the borrower responds in the first two weeks to 30 days with our outreach, we love it. We try to work out a loan mod with them or a trial payment plan to get them back on track. And that's our whole goal, is if in 30 days we can get half of what we're buying on track, those are the numbers we look for. We're successful about 65% of the time I get them re performing. The other 35% is in some sort of liquidation strategy either to foreclose or we're talking with a borrower about doing a cash for keys or signing over the property and doing dean and letting them walk scot free, basically. And if we get it reperforming for six to 12 months, then we'll start targeting to move that as a re performing note to banks and hedge funds that are looking for performing assets, which is really nice because we pick up an asset at 40 cents to the dollar. When you turn around and sell it at $0.80 12 months later, it's a nice windfall for us and our investors that we use along the way to fund these deals.

So what does it mean for the note to be performing again? Are you modifying it so that the.

Payment is reduced or it's a longer.

Term, or you cut some of the principal? How does it work? Explain to me what that looks like.

That's one of the most asked questions of investors and it could be all the above. Jonathan, it's just a conversation. That's one of the biggest things that we're trying to make right party contact with the borrowers is to find out what's going on, what's the story? What's your country western song? Did you get divorced? You lose a job? Do you get sick? What happened to cause you to stop paying on time? And some of it is just, okay, let's take the back payments and put it on the face value. Some of it's like, okay, let's have you make partial payments for a while, let's adjust your interest rate, let's drop what's owed. If you owe 150 grand, the house is only worth 100, start making your payment and then in 12 months we'll forgive a chunk or for every dollar you make, we'll double that and forgive A dollar towards the back payment. So it's just, that's one of the things I love about this business. It allows for us to be kind of creative and truly creating something that makes sense for the borrower financially. I like to, like I said before, I like to call it common sense underwriting. You know, what can they afford, what makes sense? You know, let's see if we can't get them caught up a little bit. You know, we're here to help them, but we're also very serious about, hey, you gotta start making payments, you gotta start doing something with us. Whether it's adjusting the interest rates down and then bumping it up or if it's not gonna make sense for us financially too, then we start exploring the option of buying them out of the deal. You're giving them some cash to walk from the property if they can't pay appropriately.

We need to take a quick break, but stay tuned because when we return, Scott shares his secrets for picking good non performing notes to purchase and profit from. Be right back. I want to take a moment to.

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Earlier mentioned. You know, when you get these lists from lenders of these non performing notes, you know, you're looking through the list and you spot something that looks good.

Like just, you know, from a list. How do you know?

What does it mean that it looks good to you?

What can you tell from just looking at that list?

So what I look at is I look at markets that I like. I always narrow it down by the states that I'm buying in. I look at assets where the borrowers usually owe more on the property than what it's worth. That way I can kind of control that situation. Now if there's a deal where they owe less than what the property say, they only owe 50 and the house is worth a hundred. Well, if I can't get them to modify with me or adjust something with them, they're gonna fight me when I foreclose. So I usually avoid those because I don't want them fighting me and dragging the deal out. I also will filter the lists by values. I'm really looking at properties that are worth 50 or more, you know, 50,000 or more on the residential side and the commercial side. Depending on the area we're looking usually for a commercial asset that's at least a quarter million or more. And then we'll look at how late they are, how many months in default they are. And then we'll start looking at condition, you know, pulling up pictures of the asset, looking at the payment streams, and start to dive into that. And depending on what the pricing point is, we'll adjust those numbers. You know, if a bank comes in and tells us, hey, we want 65 cents of unpaid balance, and then we'll run those numbers and see if that makes sense compared to what the value of the property is.

And how are you valuing these properties? I mean, are you using comps to.

Look at them or what's the process?

Did you go with it so that you know that what you're buying is you're buying it at less than it's worth or whatever?

Sure.

No, that's a great question. We spent a lot of time looking online values. You know, we gotta realize if we're getting a list of 400, we're not gonna send a realtor out to 400 addresses. We're not gonna pay for 400 BPOs. So we look quickly online at what the assets are and run kind of some calculations based on it, kind of taking, okay, what's sold recently in the area, what we sell off of Zillow, Trulia, things like that. And then we also run some online numbers that we have a couple algorithms that we do to take a look at if that high crime area or a low crime area is the area appreciating. And that helps us identify assets that make sense. And then we'll make an offer and we'll probably, you know, we get counters back on all of them or sometimes the bank will accept them right off the bat or if they counter. This is looking at, okay, once we got a solid number that we're working with, we either accepted or countered, then we get the realtors involved to pull comps, then to drive by the properties, then pay for bpo. On the residential side, it's pretty easy. On the commercial side, it's a lot longer process than like three days. It's. You're usually talking 30 days or greater because you got to pull comps and look at the cash flow, you know, the cap rates and stuff in the area that takes a little bit longer to pull because you don't on commercial, you're not often getting the cash flow. You're not getting the rent rolls if the borrower is in default. So you only you kind of. I feel like I compared to being like Sherlock Holmes on the commercial, you kind of got to research the things, you know, call the borrower sometimes. Say you're looking to lease up, you know, to rent a spot in their office or complex and like that and see what, you know, kind of ask some questions or the phone, how occupied are you? What are you charging per month, you know, what are the other tenants in the area and stuff like that.

When you're dealing with a commercial property as opposed to a residential property, and by that I mean like a single family house, is the negotiation with the owner more difficult or, you know, maybe I shouldn't put words into your mouth, but like, what is the difference in the negotiation between dealing with a single family homeowner and dealing with a commercial property owner when it comes to buying this note?

Actually it's a lot easier with commercial loans. If the property is rented and the borrower is collecting rents and they're not paying the mortgage, you have the right to collect on those rents. And that really is a come to Jesus moment with the borrower. When they can't use the property as their own personal ATM anymore and you enforce their right to collect rents, that really makes them sit up and take name. Now a lot of borrowers will go file bankruptcy, which is completely fine. We love it when they file bankruptcy, whether It's a chapter 13 or a chapter 7 or chapter 11, because that now gives us an attorney that they have to talk to us on. And when somebody files bankruptcy, you know, we can just go to pacer.gov that website, and pull up their bankruptcy report and what they file, what the value of the property is, what assets they have, what other debts they have. So it makes the due diligence even easier when they filed bankruptcy. But it also gives us somebody to talk to. And we always know if they file bankruptcy, okay, we're either gonna get the property back or it's gonna be a payment stream, like a modification for at least five years. And if they fail to fall on their payments, follow their plan, then we just, the bankruptcy gets discharged and then we look to foreclose at that point. But it's usually an easier conversation with commercial investors, commercial borrowers, the emotion is still there, but it's not as extreme as if it's somebody's family home that they've been living in for five or 10 or 20 years.

I wanna shift gears a little bit and talk about the business of your business. How did you go from doing a couple of loans that were you made 1500 bucks on you said to scaling up to this business hour. I think you told me in our pre interview that you have 400 assets that you're managing now. How did you go from A to.

B there over time? One of the things I always tell people in this industry is you have to build your systems and you often have to act like a general manager of your business. You know, I compare it. It's football season. I'm a Cowboys fan. Don't hold it against me. I'm like the Jerry Jones of my company. Jerry Jones isn't out there handing the ball off. He's not in the stand selling hot dogs or beer. He's from his press box and he's directing the people to make things happen. And that's what we do. When you start off, when you're buying a couple assets here, yeah, you can do a lot of those things yourselves. But in this industry, there's a lot of vendors that are there to help you, servicing companies that everybody should have. You're going to have real estate attorneys handle the foreclosures. There's realtors or property preservation teams that will go out and be your eyes and ears of an asset. Because if I'm in Austin, Texas, I'm not going to jump on a plane, fly across the country to look at 10 assets every time. I need to rely on my vendors and the people on my team to make that happen. And so you grow a lot of note investors. They start off 1, 2, 3 assets. They'll bump up to 20 assets and really kind of 20 to 30 assets, about all anybody can handle themselves without having to bring on vendors full time, bring on attorneys full time to really make things happen. And the beautiful thing is those vendors are all paid for success. They're paid most of the time to finish the foreclosure out so you can take the property back and make a big check. Or if they get a note re performing, there's a la carte fee for them having success on performing loan. So that's the beautiful thing about this is you can grow your business exponentially as long as you're using your vendors and you put systems in place for you or your assistants to kind of follow.

And what about the inside of your company? I assume it's not just you at this point.

No, I mean, it's. I've got myself, I've got my VP of operations who does a lot of stuff on the back end. I've got a marketing team here, and then we've got four people that work remotely for us. You know, one person Works in Jersey, another one works in Orlando, another works out in Temecula. And so that's the beautiful thing about this business is since I have assets everywhere, I can be really anywhere as long as I got Internet access and my cell phone. So I've like last May, in June, I was traveling on a vacation in Europe, and I was on the phone a couple days out of that trip, just talking with my attorneys or text messaging back and forth as they were negotiating loan mods for a couple borrowers or negotiating going through a foreclosure process. Give me updates on that stuff. So that's the biggest thing is it's not like a fix and flipper that they got to be out there to meet the general contractor or they got to meet the vendors there to put tile and carpet in. If one of my least favorite things to do is take a property back and then have to rehab it, I'd rather just go and sell it as is at below value and let somebody else deal with the headaches. Because it's in our industry, it's all about the velocity of capital. How often can you flip that capital? Every 12 months or every six to nine months if you can.

And what are you actually doing all day, sir, Personally, what does your day look like?

I'm just sitting here just eating donuts. I'm just joking. We have an education platform to what we do. So when I come in the morning, it's usually okay. Checking a couple things. Updates from our attorneys, our servicing company for the week. I have a podcast that teaches people how to kind of do this. So I usually film an episode each day. I'm meeting with investors throughout the week with phone calls, give them updates and stuff like that. We're getting an update from our servicing company. I talk with my asset manager, who handles that aspect of things, what's pending and just going from there. And then we're constantly marketing, kind of pick a day out of the week to do the marketing. So usually Wednesdays, Tuesdays or Wednesdays, we're sending out email blasts to asset managers. Wednesdays or Thursday, we'll get lists back in and then start evaluating them and try to get bids out by Friday or Monday. The banks, the asset manager, so that we have that process going. So part of the day is on marketing and balancing the portfolio, seeing where it's at. And the other half is about acquisition and raising capital.

I mean, I'm always curious to ask this question to people because one of the things I've discovered just in my travels and also really Since I started asking this question on the podcast is people who have been the most successful in business tend to figure out what it is that they're good at and do that and find people to do the other stuff that they're not good at. And I'm just wondering, like, has that.

Been a process that you've also followed? Are you focused in your business on.

Specific tasks and you kind of delegated all the other stuff to other people, or are you sort of still got a hand in everything?

What does that look like?

You're 100%, Jonathan. If you're going to grow your business exponentially or really hit bigger goals, you've got to learn to delegate. Delegate what you're not good at. All right? I'm great on the phones. That doesn't mean I'm the best person that should be talking to the borrowers every day. I had to value my time appropriately for what I want to make. And the minute I start valuating my time at the right level, my income goes up. Because if anything, that I would be doing that would. I could pay somebody else at a cheaper price per hour to do. It made more sense for them to do it versus me. I was actually losing money if I was on the phone. So that's the biggest thing I look at. I've gone back and I constantly look, okay, what am I doing this last quarter? What are some of the activities that I'm doing? What's paying the best? What's my best use of versus My best use of time is marketing for deals and raising capital. All right? And then everything else is a lot cheaper for me to pay somebody to service the loans, pay somebody to handle on the outreach, you know, that kind of stuff. Working with the vendors, that's not my best use of time. I mean, if I have to, I can get involved occasionally if there's a escalated situation. But my best use of time is marketing for deals and marketing for raising capital. And that's what I spend most of my time on.

And what is it about those activities that you like?

I'm just. I've always had a marketing mindset with what's going on. So I like the fact of helping. Part of what we do is it falls in line with some of our education stuff as well. So it's creating the curriculum and following through with that and then getting the word out on what I'm doing, which helps us raise capital. So the two kind of go hand in hand. Our education side is more so for us to find people that want to do this. So they go out and find portfolios as well. They buy what they want to buy and then they send us the lists of us that we can look at. So that's kind of the, I guess you'd say the tripod aspect of this. Marketing for raising capital, marketing for buyers, and then also marketing for deals for ourselves. So I love that. I love seeing the light come on from people when they're out closing deals or they've getting their first portfolio. That's always a fun thing. That pays the best too, to get a list of portfolio like the list I got in yesterday that we're looking at. You know, there's some really nice assets on there. They're gonna make us some great money. But it's not, you know, that could be a million dollar relationship with a bank that's not worth my time to be the one calling the bar at 15 bucks an hour. That makes sense.

Absolutely, absolutely. I just see this again and again. And the people that I talk to, I mean, they've just, they have figured.

Out what the highest and best use.

Of their time is and they focus.

You know, as much as they possibly.

Can on that and then try to find good people who are good at the other things and like doing the things that they don't like to do.

There's two things that I think I struggled with for a while. I think every entrepreneur is a control freak and we all want to control everything. And a lot of times, especially those that are successful, you know, I won't say business owners, but self employed people is they've had to do it all themselves. All right? They've had to do it because they wanted to see it done right. And a lot of people are scared to delegate it off to somebody initially because they know they're not going to do as good a job immediately. But the biggest thing and the biggest lesson I learned early on was that delivered is better than perfect, all right? I compared to like the iPhone, you know, if you got an iPhone, what version of the iPhone software do they have right now? Like version 14 or something like that? If they waited to get it perfect, they would have never delivered iPhones in the last 10 years, you know what I mean? And so that's why I look at, hey, I bring somebody on there may not do as great a job immediately, but it gives me an opportunity to train them or to coach them up so that eventually in 30 days or 60 days, they're doing pretty damn good a job or even better than what I could do.

Yeah, you Move faster when stuff gets done right as opposed to waiting for it to be perfect.

We're going to take another quick break here, but when we return, Scott explains why foreclosures have started to rise again. Stay tuned. Hi, it's Jonathan.

Wouldn't it be great if you could.

Get the best multifamily real estate education in the world, taught by an investor who's built a multi million dollar portfolio and can show you exactly how you can do it, too, all without having to spend tens of thousands of dollars on some guru? Well, I thought so, too. So a number of years ago, I created my own multifamily education program based on my experience going from 0 to 400 units in just 11 months. I charged just $5,000 to take you personally through my material and to hold your hand through your first deal. It's a huge bargain compared to the gurus, and my students love it. They've gone from sitting on the sidelines, stuck in analysis paralysis to getting out there and taking action. But you know what I found? $5,000 may be a bargain compared to the gurus, but it's still a lot more money than most people can afford. And many people don't actually need my personal handholding. Maybe you're like that. Maybe you just need the content. You need to know how I did it, what I learned, and how you can do it, too. But you don't need me personally guiding you through it all. So a light bulb went off. I realized that if you just need the content, I could dramatically lower your price to something nearly everyone can afford. So here's what I'm doing. I'm putting my entire program into a monthly membership community. You'll get all of my educational videos, underwriting, model checklists, Lois contracts, syndication structures, everything new valuable tips and training. Every month, live Q and A sessions with me to answer all your questions, a Facebook group just for members and much, much more. I'll still offer personal coaching for those who need more individual help. But if you just need the content and it's the exact same content, then you're going to find this new opportunity perfect for you. But here's the catch. I'm opening the program to charter members at a very special discounted price. In January, only 100 charter memberships will be available. And as soon as they're sold out, the doors will close until April when they open again. Memberships will be offered at the regular higher price. Of course, the charter members will keep their special love price for as long as they continue in the community. No matter how much the membership price rises in the future. So if you want one of those limited charter memberships, what's the next step? Join the Waitlist. Of course all you need to do is go to www.mflweightlist.com there you'll learn all the details of membership. If you join the Waitlist, you'll be eligible for the special discounted charter member price and you'll be able to lock in your discounted membership price for life. On top of that, there'll be chances to win cool stuff only for Waitlist members. Like a free one on one coaching call with me or one of five free lifetime memberships in the community. Details won't be given on this podcast but or in my Facebook group or to my general email subscriber list. Only members of the Waitlist will get them. So don't miss out on your chance to get one of just 100 discounted charter memberships or to win cool free stuff. Just go to www.mflweightlist.com and sign up today. Some restrictions apply. No purchase necessary to win.

So I want to shift gears again a little bit and talk about so what you are seeing in the market for non performing notes right now. And I had mentioned before we started the recording that just like anecdotally in me kind of pouring through housing listings just because I'm in the market for buying a new house, I had noticed something I hadn't seen in a long time which was more foreclosures popping up on the Internet just in the regular listing sites. And I wanted to talk to you about whether that was just my imagination or whether there is something going on now with the foreclosure market that you've noticed.

Some were cute. It was just my imagination. No, no, you are correct. We are seeing an increase in defaults people. We're seeing an increase in foreclosures in different markets. Florida and Texas have been 12 for the last couple of months. They call that due to the hurricane effect from a year ago. The banks have been nice to delay foreclosing on borrowers that were hit by the hurricanes for a while but now they're tired, they want to get their money back. We're also seeing an increase in higher end markets as higher value properties are starting to drag on the market and so investors that have bought these properties and fixed them up, they're starting to drop the prices or their short term financing is starting to get expensive to them so they're in default as well. So we're seeing an Uptick, I think last I checked, I think the national default rate was like 4.6% across the country. But another staggering number is that basically one out of every ten Americans is either behind on their mortgage or upside down on their mortgage payments.

So can you put that in context?

Like 4.6% of mortgages being in default and I'm sorry, repeat those statistics again.

Yep. So 4.6. Basically, Adam Attom tracks the default rates across the country on loans residential. They say the national average is about 4.6, 4.5% right now. Okay, that's all things, but literally that does not track equally if somebody's in Florida, where they got a 12 month foreclosure cycle, or Texas, which is a 30 day foreclosure cycle. Okay, so based on other things that we see, based on numbers put out there, they say literally right, about 1 out of every 10Americans is defaulting either somewhere between 30 and 90 days late on their mortgage payments. And so once they go the 90 day, once they go past the 90 days, that's when a lot of times the foreclosure cycle starts to kick in. So there's this whole wave of people that are one less overtime or they risk being in default again or losing their home to foreclosure because they're getting laid off, their hours are being reduced, or they're going through some other sort of financial crisis.

And to put that into context, that.

10% is that high, is that low? Where does that compare?

Historically, it's ticking up. It used to be 1 out of 11, now it's about 1 out of 10. It's actually, it's lower than it's been the last couple years. Sorry, it's a little higher than it's been last couple of years, but it's lower than it was a decade ago. So keep that in mind out there. I mean, we had a lot of. Everybody's talking about the housing market being great, everybody's buying houses and mortgage companies are coming out the wazoo. What you have to realize too is that the return of subprime loans has reared its ugly head again. You know, There are about 89 different lenders across the country doing. They now call it non prime loans. Okay? They're giving loans to people that don't really need to have a loan. So that's what's causing the uptick. People are buying property for the first time, buying a house, getting a subprime or 100% financed loan on a new house, and then six months later, at the end of the year when that property gets reevaluated for taxing purposes, they go into fall because now they can't afford to increase taxes on the property. So we're seeing that across the board. I mean there's a lender that in Miami recently held an open house or event to help offer up subprime loans and they had 4,000 plus people show up and they're given loans with as little as like a 520 FICO score, which is just disturbing.

Well, I was going to ask you.

What'S driving this because I think in a lot of markets around the country, you see still home sales are very strong and there's a lot of demand for homes. So why is it that people who own these homes aren't able to just sell them?

Because the fact is there is a. I mean they're selling them, some are selling them, you have some stuff and selling them. But other times they're in other areas of the country. It's not just the Miami's and the New Yorks or the San Franciscos. I mean property goes pretty fast in those areas. It's the secondary markets that are driving a lot of the stuff. The smaller markets that are dragging with foreclosure timeframes. They're dragging because some people they owe more in their house is worth now then they don't know that they can do a short sale. They don't know they can do a loan mod. And they're just getting. We live in a highly financially uneducated society and so people just own their options. And so it's kind of a remake of what happened 10 years ago. It's not going to be the same huge wave that we saw, but we're still going to see some financial upheaval in the next couple of years. I think it's going to be closer here in 2019 than what some of the other people are saying. Oh, two years, three years out from. I think it's closer than we expect.

Well this is an interesting.

I wonder why you think that. I happen to be of the same view that I think the next recession is probably closer than most people think. And it's an argument that falls on deaf ears a lot when people say hey, but there's 3.8% unemployment and the economy is doing great and look how great everything is. But what you're talking about, these foreclosures I think can fairly be characterized as a leading indicator of where the economy is going. So I'd love for you to talk.

More about what, what it is you're.

Seeing sort of generally in the market and why your view is that you think we should kind of get ready sooner rather than later.

So I'm a big advocate of tracking other default numbers. Like there's an increase, we're at all time default rates in student loans, we're at all time default rates in credit card debt. We're at huge default rates when it comes to car loans. And so a lot of people are paying their mortgage because they don't want to lose their house, but they can't afford to pay the other debts. Well now at this point, if they lose their job or they get their hours cut or things like that, they can't afford to make their mortgage pay more. They have no place they can borrow on credit either. And so it's not just the housing market that's being affected, it's these other default deep debt markets that are being affected that's ultimately going to cause the mortgage market to kind of melt down a little bit again. You know when you start seeing more and more institutions or companies get into offering up subprime or all day lending and stuff like that because they're getting greedy. They're finding that people can go get a loan from a traditional bank. So we'll give you a loan at 6% or 7.5%. Oh yeah, you don't have the down payment. We'll donate the down payment to you. People that don't have 3% or 5%, they don't have any skin in the game. There's no real incentive then for them to stay in the property. There's no incentive them for them to pay their mortgage at that point because they're not financially bound to that property. So the increase of those default non prime loans, you're seeing a complete directly related increase in the default rates because of that stuff.

How quickly is this happening? Because this seems to be a fairly new phenomenon that the subprime loans are coming back. Are people buying homes and then default?

Defaulting almost immediately, usually in the first six to 12 months. And actually non prime loans that they've been around for over two years now. It was a company out of Michigan started doing subprime loans in Michigan to people that couldn't afford the traditional mortgage. And then that blossomed from Michigan into Ohio and then the 17 other states. And then that has blossomed into basically being all across the country with these other companies seeing what this other company is doing and doing the same thing. So that's blossomed that way but two years. So you're looking at things like I said before, they're hanging on, they're working more time as jobs and hours are being cut or companies are going out of business with the tariffs or other things that are going on to. They're just, they're defaulting, they're trying to do where they can. And I make the running joke, I think Uber is going to be the end of America, okay. Because so many people are going to these side hustles, which is great. There's something wrong in the side hustle, you know, working for Lyft or Uber or UberEats or stuff like that. But I'm a big believer that in like probably 12 or 24 months, Uber is going to have more automated cars, you know, self driving cars. They're already testing it out. That's going to lay off a lot of people off of Uber. It's going to lay off a lot of the taxis and they've all this. You have a true divide between the wealthy and then the poor. There's not a lot of middle class. That's when we're going to see a lot of troubles because people are going to lose their homes and they're not going to be able to do those side hustles to make money anymore. To be worse.

Speaking of Uber, I don't know if you are aware of this, but you know what the largest job category in the United States is?

Is it Uber now its driver? Oh yeah.

So, and that's going to be one of the first, you know, completely automated job. Right. So you know, we're looking at potentially devastating dislocation of a very large number of people. Now I know, like for instance, in the trucking industry it's going to be less of a problem because they're actually.

Having trouble hiring people because most truckers.

Are retiring and young people want to be long distance truckers because it's very difficult.

So AI for that, you know, that's great to have the truckers, but there.

Are so many people doing the short distance driving, you know, delivery vans and taxis and Uber and all these other categories of driver. If those people are all replaced, I mean that's something like 12 million jobs that'll be gone just for that. And that's going to affect real estate across the board.

And then you look at what Amazon's doing with drones. We live here in Austin. They're expecting to have drone rollout here the next 12 to 24 months as well. So it's really important for people out there that if you're struggling with that to start learning something online, something that you can do to really build an entrepreneurship facet of what you're doing, some sort of job skill, whether it's online or something that can't be replaced by with a robot.

Is there anything else that you're seeing.

Other than AI, which I think is.

A little bit, maybe more long term in the economy that is affecting what you do or is showing up in non performing loans and foreclosures?

I track default rates in different counties based on their different timeframes. So like I look at default rates in Miami, I'll look at default rates here in Austin, Texas. I look at default rates in like San Francisco and San Diego as well. So I look at those markets when I start seeing upticks on those things, which are supposed to be some of the better markets out there with a lot of growth. That concerns me for the secondary markets because you know, there's always usually pretty much enough jobs in the bigger markets. It's the people that live basically an hour outside of town. So I'll look at the counties outside of those bigger markets as well and we'll often see default rates increasing up there. And that leads to default rates in the bigger markets as well too, a lot of times because people then have no place to go or they're moving in with their parents, we see that a lot. Or people start trying to turn their extra bedroom into an Airbnb for the most part too. So I look at foreclosure rates, I look at days on market is another thing. When you start seeing days on market increase past 120 days, it's usually a sign that trouble is brewing.

And how much of this uptick in foreclosure is related to investors. So what I've noticed in the investment side of things is when you start climbing up the slope of a market, as you get closer and closer and closer to the peak, it draws out more and more and more would be investors.

The further you go up and the people that it's drawing out are the.

People who are really, really cautious. They finally get in when they've seen everybody else making money at this and they're like, you know what?

It feels safe to me now I'm.

Going to jump into, I'm going to throw my hat into the ring.

And these tend to be least sophisticated.

People of all get in at this point and the most likely to overpay for assets because they're convinced that hey.

Making money in real estate is easy.

Because look, everybody else is Doing it. How much of the foreclosures that you're.

Seeing, the uptick do you think is.

Related to investors who've gotten in over their heads?

I would say some of it is to that a lot of the investors are paying with cash right now because there's a lot of cash out there. Or they're using private money lenders or hard money lenders to do that kind of stuff, you know, to finance a purchase. But I see this happen all the time. Somebody goes to the foreclosure auction, they overpay for an asset. You know, a lot of people are paying 80, 90, 95 cents on the dollar for a property with the idea they're going to rehab it, be the next HGTV star. And that's just not the case. You know, they get deal itis. They over rehab a property and then they try to sell it and they can't sell it for what they owe or what they're into it now. So they're upside down. So there is always a good chunk of percentage of that. I don't have the numbers on that aspect of it right now. But as more and more lending companies start doing investor loans, start doing the NINJA loans and no income, no job verification, just based off the assets, we'll see obviously more of that pop up in the future.

So we kind of hit up against our time deadline. But before we go, I really wanted.

To see if there's anything that you've left out that you really feel our.

Audience needs to know. Any topics that we haven't had a chance to cover yet that you think that they should know before we go.

The beautiful thing is when I got started in this business, I didn't have a lot of capital because I got rid of a couple bad rehabs and it was a tougher time in the market. So if you're going to be a real estate investor, the two biggest things you got to keep in mind is one, get educated. And there are so many different videos and different things online. You don't have to pay somebody 40 grand to go to a workshop that they're not really going to teach you anything. Go to your local real estate clubs, go to your local networking events and talk to people. There's. If you don't have capital, don't stress out. There are plenty of people that have money sitting in an IRA or money in an old 401k that they're looking to do something that's just not making any money at all sitting there on the sidelines. So get educated. Surround yourselves with great people, great mentors and have them hold your hand through the first couple of deals and you'll be able to raise capital and have somebody that'll fund your deals for you for a split of profits. So keep that in mind. You don't have to have the capital in your own pocket to go out and make something happen.

With that thought, if people want to.

Get in touch with you to learn more about what it is that you're doing, what's the best way for them to get in touch?

Really easy. Just go to our website we close notes.com we close notes.com and you can always email me@scotteeclosenotes.com so glad to help out. We've got a wealth of information, wealth of videos. Our podcast, the Note Closer show is out there as well that we do almost daily to provide some great information and training for those who are looking to get into the note business.

Awesome.

Well Scott, I really appreciate your time today.

It was great having you in the.

Show and great getting to know you.

Hey man, thanks here. Thanks so much for having me. It was a lot of fun.

I hope you enjoyed my interview with Scott Carson. If you'd like to learn more about Scott and the non performing note business, be sure to go to www.weclosenotes.com where you can read his blog, listen to his podcast, and get access to more training on how to invest in non performing loans yourself. If you'd like to speak with Scott directly, you can reach him at ScottCloth. That's Scott with two T's. We'll link to all this in the show notes so be sure to go to realestatelaunchpad.net to get those links. Remember, that's.net if you love today's show, please subscribe to us on itunes, Stitcher or wherever else you get your podcasts. And nothing says thanks better than a five star review or referral to a friend. Please help support the show by telling your network about us. Thanks in advance for helping the show grow. See you next week.

Sam.