How To Make Money In A Downward Trending Real Estate Market With Scott Carson From PreReal Podcast With James Prendamano

You know, I started off buying an eight unit apartment complex note deal in San Diego and flipped it for 35 grand in 24 hours. I bought a 21 unit note in Houston and flipped it for 50 grand a week later and bought a 300 unit from a Banco Popular in Indiana for a third of the cost, re gentrified it and sold it 12 months later.

Welcome everyone to the Cassandra Properties podcast. So every episode we like to talk about a section of the podcast where we're going to deliver some value. And I can assure you that this entire podcast is going to be absolutely jam packed with value. We're joined today by Scott Carson. He's the president and CEO of We Close Notes. He has a really interesting model, extremely successful in his own right. We're going to be talking today about defaulted notes and the acquisition of those notes, a subsection of the market that I am extraordinarily bullish in. But we'll get into that as we move along. So, Scott, how we doing today?

I am doing wonderful, man. Honored to be here. I am loving you guys podcast. You're doing an awesome freaking job with it. And if you're listening to this guys, make sure you hit that subscribe button for them, all right? Definitely well worth.

I appreciate that and I enjoy your podcast as well. And I know you've been busy today because I listened to one that just dropped earlier today and you had said you were going from meeting to meeting. So it's been hectic for you.

It's been a good day. I mean, I'm always glad to be too busy versus not busy enough. You know, as they say, it's good to be busy. But sometimes, God, we'd like for you to close that window a little bit, but not too much, not too much, not too much.

Got to be careful what we ask for.

That's right.

All right, so I like to always give the audience a little bit of background. So if you can give us some history with where'd you grow up? What were some of your influences when you were a kid? Where'd you go to school? And then we'll jump right into how we ended up where we are today.

Yeah, no, I was born, I'm actually a Yankee. I was born in Minnesota originally, where all my family in Minnesota originally. But I grew up in. My parents moved to Corpus Christi, Texas when I was a young kid in three or four. So I grew up down on, you know, Gulf of Mexico. We lived in Corpus and moved to a small town called Ingleside, like 3,500 people. And my dad owned a local hardware store there. And so I grew up, you know, if I got in trouble, he knew it before I did a lot of times in a small town, you know, but love growing up, small town, huge work ethic. I've always had a really hard work ethic. Learned that from my parents, who entrepreneurs. And so had that entrepreneurial blood in me. Was successful and athletic enough. I had a. My first two years of school paid for. I had a football scholarship to a small Division 2 college out of Dallas. But that was 20 plus years ago. Took a year off to figure out what the heck I wanted to do. Ended up studying business and mass communications and graduated from Southwest Texas State University. It's now Texas State out of San Marcos, Texas, the Bobcats. But anyway, you know, I got it. I've always been to sales. Interested in entrepreneurship. I got into real estate because I was like, oh, okay. I kind of like it. You know, who doesn't like those three fictional TV shows like Flip this house, you know what I mean?

Absolutely.

So my college sweetheart got married. We bought our first house. Our Realtor's like, hey, you know, it's a good time to be investing. Should buy a couple of properties. So this is back in 2002. We bought two investment properties. We're gonna be landlords. And I was like, oh, I can fix everything, because I grew up in a hardware store, you know, from the slab to the roof. But then I got laid off from my job as a financial advisor and. And our two tenants got laid off from a computer company that rhymes with hell known as Dell. And so I went from being successful to being a deadbeat borrower as I was trying to make six mortgage payments. Three first three seconds on a private school teacher salary.

Wow.

Yeah. So I empathize for those that can't make their mortgage payment through some sort of fashion like a lot of people are struggling with now. Lucky for me, we got rid of the two investment properties. We were able to modify our primary. I licked my wounds for about a year as a. Learned the real estate investing the wrong way. You know, the only person that made any money on those deals was a realtor who made the commission.

Yep.

And, you know, I got back into financing and marketing. I started working for JPMorgan Chase as a vice president for them and did really well as the number one banker in all of Texas. And, you know, two years later, I got a buddy of mine that I worked with previously as a financial advisor. He started a mortgage company here in Austin. He hooked up with an investor who was traveling the country teaching creative financing, wraparound mortgages, owner financing, creating a note and selling the note off. And I said, this is what I want to do. So I said goodbye to my corporate job July 4, 2004, and started going on the travel and road show, doing mortgages and listening to investors in back of the rooms at huge events and started learning real estate the right way. We were just doing a ton of mortgages between 2004 and 2008 because it was a peak, and started dabbling in real estate. And then when everything hit the fan in the last recession in 2008, I left the mortgage company, sold my share for a buck because I thought all it was worth, and then just started dialing for dollars and calling banks and mortgage companies to see about buying their debt. Because I had really a four year apprenticeship with these investors that were teaching creative financing. So that's all I focused on really the last 12 years is buying distressed debt on residential and commercial properties from a variety of banks and lending institutions across the country. And we bought over a billion dollars in debt for our own portfolio. And then I'm most proud of the fact that we've helped a lot of people not only stay in their home, but we also helped a lot of real estate investors learn this niche of real estate investing and do some amazing things for their own family and their future as well.

So that's quite a remarkable story and in a very short period of time to have a billion dollars in defaulted note sale purchases under your belt. It really is quite remarkable being as familiar with this side of the business as I am. But I think most of the audience won't be familiar with this side of the business. So I want to take a couple of minutes and just talk about what is a defaulted note, how does it happen? What happens when you purchase one? Let's give the absolute basics to the audience before we get into some of the more advanced stuff so they understand exactly what it is that you're doing.

Yeah, let's talk the nitty gritty of the nuts and bolts, as we like to say it. So a non performing note is a mortgage where the borrower has not made the payment in usually at least 90 days or longer. You know, you could, you could miss 30 days and be, you know, get back, caught back up. I mean, before all Covid, you know, 1 in 10Americans is already 30 days later than mortgage.

Is that right?

That was right before COVID Exactly. Think about that. All right, so when I started seeing this stuff, I was like, ooh, we're in for a hurting in 20, 20 and beyond. But anyway, so we buy distress, very distressed stuff where somebody hasn't, like I said, hasn't paid at least 90 days. Usually it's six months or longer. I mean, I looked at a portfolio yesterday where the bar hadn't made a payment in six years in some cases. So a non performing note affects the bank in a very derogatory way. A lot of people think banks want the properties or the real estate. No, they want the notes because they leverage all that money dramatically. You know, they will leverage every dollar that they have in deposits and saving somewhere between 10 and 15 times or up to 50 times the bigger banks do. Yep. So, so they want that performing note cause it keeps them rocking and rolling. And when a bank, when a borrower falls into default in some sort of fashion, job loss sickness pandemic, like we see right now, that value really on that mortgage and that note really starts to depreciate. And banks are often willing to sell that debt off at a big discount. If you know who to talk to and you know what's going on. There's a lot of things we look into. We'll get into that in a second. But we'll buy that debt at a discount from the bank. The borrower still owes the amount owed on it.

Right.

You know, so let's just give some examples. Say the borrower owes 100 grand, you know, or they owe 110 grand in a house that's now worth 100 because they haven't paid in a few months, they haven't paid in six months. We might come in and offer like 50 cents of the value of the property for that note. So we might buy that note at 50 grand. The fact that I bought it at a discount, the bar still owes it. Now I have a lot of flexibility to work out with a borrower. And that's how, and what we do is our primary goal is actually to keep people in their properties.

Right.

And so we'll reach out to John and Susie Q and say, hey, what happened? You know, I know you can't pay the year you're behind on now, but could you start paying something now and then? Okay, you can, can you pay a little bit extra? Let's work something out here. Because if you figure in, let's just say that interest rate is 6% on that mortgage. Well, a normal mortgage payment we'll just say is say 500 bucks a month on $100,000 rough mortgage. Well, If I can get them to start paying out of that 500amonth, 500 times 12 is 6 grand. 6 grand divided by $50,000 investment, that's about a 14.8% cash. And cash return to me, roughly.

Yep.

If I can get them to pay a little bit extra, my money goes up. If they, at the end of 12 months of paying, I could then it's now considered a reperforming note. I can now sell that note off back to the secondary market, back to funds, back to IRA investors at like 80, 85% of value. So now I made six grand in cash flow along the way, plus 35 grand difference between buying the note at 50 and selling it for 85. That's a $41,000 profit on a $50,000 investment over 12 months.

Okay, so for the sake of the audience, again, just to get them caught up here, because we covered a lot there. So you go and you purchase a property. We'll stick with the example Scott had used. You pay 130,000, let's say, for the property. And let's say at the time, the face value of the note was 120,000. Over the years you've been making payments, you got it down to 110,000. Now, that is the balance that's left on the note. That is not the total that you would be paying back to the bank if you made all the payments. Right. A couple of different spreads here that you're dealing with. You have first, the delta between what the face value of the note is and what Scott's team is purchasing it for. Like Scott said, they go in and they purchase this at 40, 50, 60 cents on the dollar. Contrary to what the mainstream belief is, banks don't want to take your home back. Banks don't want to take real estate back. They are absolutely not in the business of owning their real estate. It's the last thing they want to do. So Scott comes in and he takes this note. He buys it for 50,000. There is a balance that is 100 or 110,000. And if you add the total payments in, depending on how many years are left in that note, that may have a total PAR value of 130, 140, 180, depending on how far out that note goes. So now Scott is in a position between that 50,000 and that, let's call it that, 150,000. So you're actually working with people, and I really respect that because you don't see that too often. A lot of times people come in and we'll get into that whole approach also, but they don't look to work with the property owner. So you're getting the folks back on track. You're trying to get the notes to perform again. This way you can go back to the secondary market and say, hey, we're performing again. Now you're not using the 50, you're not using the 100. You're using the 150 number and you're saying there's $150,000 in payments left on this thing. I'll sell it to you for 120 or whatever that number is. Right. So that's the spread. Now are you actually doing loan mods on these things? You actually modifying the mortgages?

It depends. We don't do a loan mod for the first 12 months because if you do a loan mod immediately taxable, it's a short term capital gains tax. So then you get paid taxes on what you modify the loan for when you haven't received it. So we do trial payment plans. So we'll do a 12 month trial payment plan with a borrower and it may be below what their existing mortgage payment. It may have a stair step clause to it to get them back up. It may start with a lower interest rate and build it back up to a point and we put some incentives in there. So like hey, if you make payments for 12 months, at 12 months we'll reevaluate the property value and forgive 20 grand off because your house isn't worth 130, it's worth 110 now. Well, forgive 20 grand, I wouldn't make it back anyway. Or hey, well you know, you got a 9.9% interest rate because you did a subprime loan. Okay, let's drop you down to 8% or 7% or you know, so there's a lot of strategy involved with that. But you know, we do modify a lot. We get a lot of people that follow through that 12 month period and then we permanently loan mod them. And that's a beautiful day. I mean it is a beautiful day when somebody gets that, you know, a thousand pound gorilla off their back worried about foreclosure. And, and because we're, we're basically becoming the bank at that point, you know, and so we're working with them, we're giving them solutions, we show them like, hey, there are some other, your city has some programs or you say some programs, go try to qualify for them and let's work to create a win win. Now if they can't get Back on track. Then we go the route of, okay, do we need to, you know, do we need to have somebody come in and assume the mortgage? You got a family member or somebody can come in, or you don't want to stay in the property. Okay, let's do a short sale or a deed in lieu or, you know, if you, if we have to, if you're not going to work with us, you're going to hide your head in the sand. Then we go the legal route and foreclose. But if it's going to be a real troubled borrower, you know, somebody's going to be a pain in the rear. And we can see that stuff by talking with the previous bank and the servicing company.

Sure.

And if it's going to be a trouble borrower, then we would try to offload it to somebody who's more local, who doesn't mind dealing with, you know, borrowers that want to be a little bit more problem.

So that was one of my questions is, I mean, it sounds like you're legit servicing these loans, like far beyond what I had even anticipated. So you're really getting in the weeds here. You're working with these folks. What percentage of the portfolio? And maybe you can't answer this because maybe it's by type of note, but what percentage of the notes that you're buying would you say go the full boat route where you have to go ahead and you have to foreclose.

It comes down to kind of two things. A lot of real estate investors get in their space. They go after vacant properties because they want to add that real estate to the portfolio. So if you have a vacant property, almost 90% of them are going to go to the foreclosure route.

Wow.

Because the borrower's already walked away. You know, they don't answer their mail. They don't want. It might be 75, 25, 75% foreclosure, 25%, where you can get a deed in lieu or a cash for keys or cash for consent. If there's a mortgage behind it, where you give a consent to it on the owner occupied. On the occupied side, national average is about 40%, you know, because if it's occupied, you'll get probably, you know, two out of five that will modify and work with you. One will just sign the property and we're going to walk away. The rest of you'll have to foreclose. We're really good about doing our upfront due diligence and really diving deep into the property history. The Servicing notes, the collateral file. We'll do some social media sleuthing or Facebook stalking on the borrower. And so we've got about a 70% success rate and get the bar get back re performing back on track.

So how large of an operation do you have?

You'd be surprised. Note investing is a very vendor driven space. So I have a servicing company that's out of New Jersey or they were out of New Jersey, they just moved to Reno. But Madison Management, I have a full time employee who used to work for Madison Management. She handles my portfolio. So she handles talking with the borrowers. She's licensed to do that. She logs in deals with our attorneys. So she's a full time employee that works for me that handles that. But a lot of times if people start off, they'll just have the servicing company handle that borrower outreach, which is the best thing. You should not be talking to borrowers if you're not used to doing that because they'll ask for an inch and you'll give them an inch, but they'll try to take a mile like anything else.

Can you explain for the audience, the servicing company, what exactly do they do in the process?

That's a great, great question. Glad you brought that up. So a servicing company, when you're dealing with debt, okay, there's often licenses that you have to have at the state level or the national level to collect debt, especially on the residential side. There is, there's something called the Consumer Finance Protection Bureau. Okay. Or the Fair Debt Collections act, fdca. So this basically means you can't show up to somebody's house with a bat and threaten them to get them out of the house or you know, threaten violence. You can't call them at midnight threatening them. You got to follow through specific laws. So the servicing companies, they will handle the borrower outreach. They'll handle the, the documents. They'll, they'll be licensed often in the state so that you don't have to get licensed except in a few, few different situations, estates. But they're handling that borrower outreach. So if you become seven days late on a mortgage, I think you've always had the phone start ringing off the hook. Then that's what they do. They're the ones that are calling, they're the ones mailing out the letters that you've got to be compliant in like 40 different ways with the, you know, the licensing so that it's, you know, uniform across the board. So they're doing that for anywhere for like a performing Note might be 20 to $25 a month for a performing note and then a non performing note will cost you like 90 to 95amonth.

Okay. So I would assume that in this instance Madison is licensed in multiple states and they've got the ability. Okay, so I have so many questions. My gosh, when you're targeting a portfolio, are you staying away from certain geographic like, you know what I'm inferring is legislatively there are certain protections. New York for example, is a very, very, very difficult state if you have a troubled borrower and they file bankruptcy. I've done a number of defaulted note sales and I think the fastest we've ever gotten through the process with the bankruptcy is two years in chain, right. Minimum. So are you factoring that in when you're looking?

Oh yeah, yeah, definitely. So if I'm going to buy something in New York, it is going to take two to three years to foreclose. I'm going to have higher attorney fees. And you know in New York you got to hire an attorney to talk to an attorney to have an attorney. Right? Yeah, yes you do. Especially in New York City. But I've bought a lot of debt like in Rochester and Niagara Falls and other areas up there, you know, cheap property that I could pick up for a nickel that would rent for $800 if I had to take the property back or I can get the borrower back reinstated. So yeah, the longer the foreclosure timeframe, the bigger the discount you get because the bank or the lender realizes that you're going to have to take over that problem child and kind of hold its hand through the process. Now bankruptcy actually works in our favor. A lot of times somebody files chapter 13, it turns into a loan mod for roughly five years for us. If it's a chapter seven, then we go through the liquidation part to take the property back as long. So yeah, that's definitely, that's part of the due diligence we look at. We don't buy in Kentucky. Kentucky wants you to have a million dollar bond there if you're buying notes and it doesn't make any sense. New Jersey is another long state that if you're buying a non owner occupied or vacant property in New Jersey they have the accelerated foreclosure process for vacant properties there in New Jersey, which is a good thing. I would avoid Chicago and Crook county takes a long time to foreclose there. Plus if you're an out of state investor, they will almost always, always, always side with a local borrower or Tenant and give them chance after chance. It's very corrupt city. So anything outside of Crook county or Chirac, okay, but those are probably the four biggest areas that we probably don't buy a lot in. You know, because of that. That's not being said. I don't buy portfolios. I end up stuff with New York and other things I do that. We work it out. You know, we'll often go to the borrowers and offer them especially in those longer foreclosure stays. Like, hey, we'll give you some cash to walk. You know, if it's going to cost me ten grand for attorney fees, I might as well give you 10 grand now and get you out of the property and save me two years.

Right. So for those who are wondering, well, why would anyone cooperate with Scott and his team? What's the benefit of us doing that? So if you pursue a foreclosure and Scott's team takes it the distance, they can actually end up with a default judgment against, against the borrower. So now at this point the borrower has lost the asset. They have a bankruptcy, probably a busted bankruptcy on their, their books, they have a foreclosure on their books and now they have a default judgment for the difference between the note and what the asset actually was worth. Right. And you can end up. What Scott's doing actually does create a pathway for folks that a conventional bank probably is not. Well, definitely is not going to make as fluid and as easy and it can save you a lot of heartache and a lot of pain down the road.

Yeah, that's correct. On the commercial side, yeah, you get a default just. But a lot of states will have just a one action suit basically that you can't. I mean you, if it's a residential owner finance and you foreclose and take the property, that's your one action and you can't go after them for the default.

Oh, is that right?

Yeah, some states don't will only allow a one action state. Like Texas is a one action state. You foreclose, you take the property, that's your one action. Even if it's sold at the auction for 30 grand last you know you got the property, that's your one action is all you can do. Florida is also a one action state and it varies across the board out there. But yeah, I mean other states though, yeah, you go after them. If they got a rental portfolio that's in the same entity, the same name, we can slap that judgment on all those properties and that works really well.

We got A lot up here. Unfortunately that's the result because in New York that where I do most of my business and I've sold quite a bit of defaulted notes up here and that's the result on the commercial side is that you end up with a default judgment which is another set of court battles. And it's not as simple as you would think. So Scott, what, what percentage of your portfolio do you end up keeping after the fact? Let's, you know, let's say things have been worked out and you've got a servicer who's working like one on one. I'm thinking about multifamily. Right. About commercial assets where there's no substitute for boots on the ground. Who's handling that for you and how much. You know who's back back filling vacant apartments and you know, is that part of your model or are you strictly. It's not.

So here's the big thing I've always found, and I was very fortunate, had some great mentors along the way that always told me stick in your lane. If your lane is working, stick in your lane.

Yep.

And so the only property, the only states I want to take property back in and keep it and a rental portfolio aspect of it is Texas because I'm here and I know the major markets here. I've got people I trust. And then Florida, God's waiting room, you know what I mean? New York south, you know what I mean? I thought you'd like that. But and that's because I have great teams there. It's all about teams. If you try to start taking things down willy nilly and turning a property and Lansing Mission into a rental and you're looking at something in Cape Coral, Florida and you're in New York and you got another deal and you end up chasing these outliers that take it, don't make it happy. So our biggest goal is to buy non performing, get it re performing. If it becomes an reo, we take back, we look to dump that thing to somebody else, recoup our collateral, our investment and then we have the double or triple down approach. So if we bought it at 30 cents we'll get our money back and then go buy two more assets. And go buy two more assets. You know, banks are in the are the biggest companies cause they focus on cash flow and loans, not fix and flipping, not property. Nothing wrong with that. I've been there, done that, bought a lot of rentals here in Texas and stuff like that over the years. But if it's a big commercial property. Then I hire a professional property manager to take that down because we're gonna see, and I know you agree with me on this, we are going to see a huge amount of smaller commercial notes that are gonna hit the market and be the biggest bloodbath right now that's the biggest opportunity out there right now in the debt space is dealing with banks that have the small balance, 5 million or less commercial stuff because that's what's clogging up their books. And with everything that's happened here in the last couple years, your banks have financed the bigger portion of that. Over 60% of the distressed commercial properties are financed by banks compared to 12 years ago where it was Wall street financing most of that stuff. And those borrowers don't have the government bailouts. They're not getting the delay to six months. And you can really come in and pick up some commercial property cheap with tenants in place and work to keep them in there and keep that business going as possible. So a lot of opportunity there.

That is, there was a lot of opportunity. After 2008, we did some work through a company called Reka down in the Carolinas. Yeah, the name was Odell Barnes who was buying massive, massive crunches of notes in. Reka was one of these servicing companies that were selling the notes. So right now, and that was an interesting run, but I think right now this is going to be the largest opportunity that I'll ever see in my career. So we're working very diligently on putting together an offering to start with. You know, it's probably going to be a $20 million raise. And then we want to go after some of these notes where uniquely positioned because we've got the commercial background here and we have Capex Funding, which is a commercial lending arm. And you know, we know the values, we know the assets, we, we've got a really good handle on that. So I just want to explain to the audience because this is something that anybody really can do, right. And I want them to understand intimately what is about to happen or what is happening with the banks. So Scott had mentioned earlier that, you know, the banks take, take the deposits and then they 10x it a 20x or 50x which means the money that you're putting in the bank, the bank is then leveraging that money and that's your cash that they're paying you a fraction of a percent on. They're then using that leverage to borrow money. And they're forecasting based on a myriad of different metrics that they go through in underwriting and based on all sorts of wonderful models, they make determinations if you're worthy of credit or not. Right. So now, if you can imagine, the banks have tightened up a lot of restrictions. It's a very different world than it was during the subprime crisis pre 08. And banks have, while many of them have gotten more aggressive over the last couple of years, it's not anything like it was back in 2003. 4, 5, 6, 7. So the bank has now gone out and they're providing debt to what appear to be very stable borrowers in very stable markets with solid equity. Along comes a global pandemic and so many shoes have dropped now out of the bank's favor and out of the landlord's favor that the banks who were solvent and liquid because they were collecting the debt service and they're replenishing their deposits and they're staying above the that threshold. Right. So a bank has to remain liquid and they have to have a certain percent against what they've lent out at all times to be in compliance with their charter. Right?

Yeah.

Now the pandemic hits. Not only has there been a massive amount of jobs that have been lost, portfolios are starting to slip, cash is becoming more tight, people are being laid off legislatively. People are moving with the intent further and further to protect the everyday Joe. Right. And what's happened is there's a massive amount of people here in New York City in particular that went out and bought that building or them and their partner went out and bought two buildings or three buildings. And they're in that mid market, exactly where you said, 2, 3, 4, $5 million asset. And they had solid debt service coverage ratios, which means against the amount that their payment is, they're getting that Plus a Percentage 1.25, 1.5, 1.75, 2.0. Whatever it is, it felt like a solid, really safe investment. Right, Scott?

Yeah.

And now that this has hit and it's starting to really. I believe we've seen the tippy, tippy, tippy, tippy iceberg. Right. So what's going to happen now is the banks, in an effort to remain in compliance, are going to have no choice but to start unloading this debt.

That's correct. There's a couple of things that I'm glad you brought it up is commercial banks and banks that are lending on this stuff, they're not lending at like 95 or 100%. Like we used the residential side. They're lending like mid-60s, maybe 70%. Okay. And that 70% is based off of, like you said, the debt coverage ratio, the market values, their cap rates. Okay. And how cap rate is figured is you take a look at what's coming in as far as income and expenses and you figure by a multiplier, well, if you no longer have tenants paying, your income is being reduced. Right. That reduces your income, that reduces the value of the property. So now the bank is no longer at, let's just say $0.70 on the dollar. They're now financed at 80 or 85 compared to the true market value. So you might even have somebody who's paying their debt that the bank's like, listen, you now we needed to get you down below 70, you need to bring 10% cash, 20% cash to the table to restabilize this loan. And people just don't have that. And so you'll see not only non performing, but you'll see some really pretty assets performing wise that the banks will offload because they need that cash or the cash deposits. And there's a service that we use called Bauer Financial and they are a third party ranking industry, a rating company that evaluates banks and credit unions. So and every quarter a bank has to file their quarterly report with the FDIC and they'll disclose all this information. What they have in deposits, what do they have in loans, how much of their portfolio is in 30 to 89 day lates, how much of it is beyond 90 day lates. And then they'll split it up between residential and commercial and multifamily stuff like that. So we buy this report every quarter for, from Bauer Financial and it shows us down like one bank went from being a five star to a four and a half star, or they went to a three and a half star. Or they went from having $50 billion in 30 to 89 days. Like now that number's escalated. Plus their 90 plus days escalated dramatically. So we'd like to track banks that have at least five branches. Cause those are, they start being a little bit more flexible and lenient in their lending platforms. Cause they gotta bring these deposits in. Okay, right. There's 1784 banks across the country that have five or more branches. If you add up what they had last quarter, they had $85 billion in loans that were 90 days or later. This quarter that number increased from 85 to $130 billion. Wow, okay. And so everybody's talking about, hey, it's a great market, we're not gonna see anything bad happen. I'm sorry, we are, ladies and Gentlemen, you can't help but see that. And while, yes, there are record people buying houses and stuff like that, we've never been in such a big thing between the haves and the have nots right now.

Yep.

You know what I mean? And so that you, I mean, you're agreeing with me. You know exactly what I'm talking about. It's going to be this wave that hits this next year. If you're looking for like foreclosures, you may have to wait 24 months because guys like James, I mean, to come in, buy these portfolios and then try to keep the borrowers in the house or in the property by modifying taking over operations on some of these commercial assets. Banks are often sometimes willing, especially when you get on assets that are a million or more in value, they may even carry the paper on the paper to keep it on their portfolio as well too. For you, which is. It's crazy, but I've seen it done. But if somebody comes in with the management background or even the team, you may not need to have any experience. But if you've got a qualified team.

Yep.

Oh, hey, you're going to manage this. The borrower is going to walk away and you're going to take this over. Okay, let's keep it on the books. We'll just, you know, a couple buttons and we'll move that loan over. You bring 10% down off what we're selling the note for and we'll carry the 90% that way.

Yep. Again, because the banks want to grab that 10%. They need that liquidity.

Exactly. The service scene. Yeah, yeah.

That process to take it from that point to actually owning the asset, which is the last thing in the world the bank wants to do, is a very long, painful, expensive process. It's frowned upon. Right. There's a civic obligation that became more and more prevalent after 2008. So how did you go from, you know, how did you scale so quickly? I think in my notes I have, you're online with 2,700 banks and institutions. Like, how did you do it? Is remarkable. Like, you know, how do you get on the list of, hey, you know, consider us when you're going to be disposing of a portfolio.

So it is back in 2000, 2008, I left the mortgage. I just started dialing for dollars. I mean, I would pick up, it was like something like Jordan Belfort out of the Wolf of Wall street making 50 to 100 phone calls, like Will Smith from the Pursuit of Happiness. I would literally, I'd Been that financial advice. So I was not afraid to take no for an answer. Every no I got, I knew I was closer to a yes. And so I just started dialing for dollars. Not every bank has something but you make that connection. And I just, with a phone call and then I would follow up with an email, a capital one. Okay, what's in your wallet? Okay. It took me 70 phone calls over a three week period to finally get the right person in the right department. They're in New York State actually. That would send me their list of commercial notes that they would sell. I can't tell you how many times I got transferred to Pakistan or India. And a guy, hello, my name is Steve. No it's not. But thank you for being the right person. And finally when I did, I just signed an NDA. They sent me over a 33 page PDF that had everything they had below a million dollars on the commercial side balance. And so it was all so much on there. It was in six point font, James. It was so small I'd take a magnifying glass to read the list. But they were like, buy something. And that's one thing I want to put out there. Because a lot of these banks aren't going to require you to have 5 million or 10 million to buy something. They're gonna be like, hey, just pick something and take something off our hands. It's good to have the cash. You can do more when you have stuff in bulk and you can be flexible. Cause then you can be, you can, you know, say yes to good deals and no to skinny ones. But we saw, that's how I started, I just started, oh, you got something. Let me look at what you have. I'll buy, you know, buy it. Well, one off deal, you know, but that relationship with capital One, you know. I started off buying an eight unit apartment complex note deal in San Diego and flipped it for 35 grand in 24 hours. I bought a 21 unit note in Houston and flipped it for 50 grand a week later and bought a 300 unit from a Banco Popular in Indiana for a third of the cost. Regentrified it and sold it 12 months later. Yep, you just gotta be flexible to see where the deals are. And that was, it comes down, I just make a list, I follow up with them. I mean there's been bankers that I've been, they've been getting my email every month, the first and third Tuesday of the month for six years. And when they finally have something, they're like, oh, I'm looking for the Green email. You know, let me call Scott, I got something for you to take a look at. Or I've got something from a peer of mine at another bank that you need to take a look at yet.

So does that model still apply today? Someone that wants to get in and do this? Can you still use that method? I mean, can you still ground and pound and just try and get to the right contacts?

You have to. Because banks are so sensitive about what comes in digitally to them. So yeah, so we leverage, we still pull lists, you know, we'll still dial for dollars. Now you're not going to call the customer service number. You got to know who you're calling. This is a key point. You're not, you're not walking into Wells Fargo and say I want to buy your notes. They're going escort you out because they're gonna say we don't sell. But the bank's internal departments go by usually one of four names. The biggest banks, the biggest institutions, they have what's called a special assets department. Special assets. And you could jump on LinkedIn and type in special assets, PNC and fine, these are the right people to reach out to. Mid sized banks will usually be called secondary marketing, not marketing, secondary marketing. All right. You also will see chief credit risk officer is often for smaller banks. You know, you know, 20 banks, or let's say you have a chief credit risk officer who's looking at a portfolio and then the big institutions like the big lenders that aren't fdic, you know, banks, but they're still originating last stuff, they'll often have a department called the whole Loan trading desk. And so we'll do that. I'll pull up a list of banks who have struggled this quarter. We'll, we'll, we'll call their main office. We don't call customer service, we try to call their main office. And then we're using LinkedIn to try to find a name that we can drop. If we don't, we're not already connected with them and say, hey, is Steve available? Or Matt Smith or Matt Key, whoever, you know, whoever it might be. And that's just a matter of dialing for dollars. If you make 50 phone calls, you may talk to 15 to 20 people. You probably get four of them to send you an NDA, a non disclosure agreement. And you'll often get a list from them off of that one out of four. I still do this on a regular basis and I do this publicly. You might crack up about it one Wednesday a month. I literally do A zoom call for five hours. So people watch me make dial for dollars and ground and pound and they hear the conversations and the back and forth and the callbacks as they call back. Because these days bankers are calling you back in a good time. They're not calling you back like oh, we don't have that much. But right now we know we're gonna have something and we need to, we need to make sure I got your connection so when I might I get the okay from the guys upstairs that we can call you and move this stuff.

So are you still buying one off deals or are you only buying packages at this point?

It depends on the source, you know, so we buy usually in bulk, mini bulk to larger Bulk, you know, 175, 200 assets is some of the bigger trades we do. But like I got this deal today, come across from a fund out of Florida. It's a kick corporate. The borrows roughly about 330. The house is worth 403. The fund wants 180 for it. And I'm like, I can take it, buy it at 180. Maybe it's already got a judgment in place so that they're just waiting for the foreclosure to open back up. So the max I could have my listing or my bid at the auction would be the 330 that they owe. Anything above that would go to the auction. So I'll buy it at 180 and list it for 250, 260 at the auction. You know, make my 70, 80 grand and let somebody else take it over and then deal with the evictions and stuff like that. But you know, or if it doesn't sell, I'll take the property back, evict the borrower and then sell it at 430 when I'm only into it for like 190 to 200.

So you're referencing the auction. So you're buying these assets. And then how are you disposing of the notes so quickly?

So usually we're buying. Well, it depends on where it's at. If it hasn't like this one, that all the legal works already been done in Florida. It's basically been just delayed because of COVID Now if we buy the note and then we reach out to the borrowers a lot of times and they won't work with us in the first 90 days, then we'll start marketing it to other people, other Note investors. There's some platforms like paperstack.com or loan MLS and these individual websites. That you list individual assets for. You know, I've been teaching this for 10 years, so I've got a good database of people all across the country that I'll email. Say I got something in your backyard or something you're looking for. For. If you want to take this over, go ahead, take it over.

Wow. So when you're making the purchase from the bank, what does that process look like again? Just to give the audience a deeper understanding. It's not like they're giving you a contract and four months to close. Right. So can you walk them through with that process?

I totally can. So yeah. So if you're buying a one off note, they'll usually, you know, a bank will usually give you 30 days to close, whether it's a one off, if it's a bigger asset, they may give you 60. I've even been able to negotiate 90 days on a portfolio. I negotiated one where it was 90 days for due diligence and then we had a six month period after we closed to swap out assets. Yeah, it was a unique deal a few years back, but it was a lot of their low bottom hanging stuff. They didn't know if they had all the hard collateral files. So that's what you're buying. So when we look at it, when we talk to a banker and they send us a spreadsheet or they call it a tape and it'll have all this information, it's like 40 columns of borrower's name, address, you know, FICO scores, all the information about the mortgage. Last time like right party contact was made, last payment made. They may give us the last 12 to 24 months of payment stream as well. So we will look at the note, see if it's performing or not performing. We'll look at the value of the property because we want to make sure that we're buying the note at a good investment to value the property. Especially if they're way upside down, they owe more than that. We make sure that number would make sense. We'll then look at also the, like I said, we'll stalk a little bit on the bar. Look at what they're doing on social media. I mean we've had like one borrower who blatantly said online, am I going to pay my mortgage or go to Disney this world this year or this month? I'm like, okay, we know that's not going to be a loan mod. Okay. We had another guy out of New York who was going through a transition. He was using his mortgage payment money to pay for his breast implants. Okay. And we, we found another guy who was self employed. He broke his leg. You know, we said, okay, I don't mind working with that guy, you know, if he broke his leg, gets back on track, you know, we'll work with. So there's that. Then we dive into the collateral, the loan documents. That's a aspect of things, you know, is the full loan file there? What is this? You know, the notes from the borrower to the bank, have they been friendly? You know, we've bought files that were anywhere from like, you know, very thin with just a few loan documents all the way to being like, you know, two foot tall. Where the borrower had been trying to do a loan mod for four years. And so their loan had been sold four times. And so they had the hardship letters in there, the tax return. So we learn a lot about that borrower and that property by diving the collateral file. The one thing we don't get that people that come from the fix and flip side, we don't get to go into the houses. Somebody's usually living in it. Right? You can't get an internal bbo, you know, you can't, you know, you don't have. The property's in good condition or bad condition. I mean, you can tell a lot about a bar and internal condition of the property by looking at the exterior. You know, what kind of car do they drive? Is the lawn mow? Do the kids? Is it the grass cut in the backyard or is it Jumanji? You know, and then you can also. Most people don't realize this, but we will call the actual, the utility departments and being the bank, they will release more information to us versus just being some random investor who doesn't have a vested interest. So the serve, I mean the power companies, the gas companies, they'll often tell us, oh yeah, that borrower's on time. Or oh, we've got three termination notices or they're on a payment plan to pay their utilities. Or they were in here the other day and got in a fight in the office. So we get a lot of internal information and then when we make an offer, the bank accepts it. Great. They may counter back and we'll go back and forth. And once we, you know, once we finalize that, great. Then we'll have usually another period of time for due diligence to finalize where we'll pull title reports and pay for external BPOs and then we'll go to closing. When we're wiring the money into the bank, there's not like a traditional closing at a title company most times. So we wire the funds and then usually they will overnight what's called the assignment of mortgages, showing the transfer of that mortgage that you would record that the county clerk or the recorder's office showing the transfer ownership. It usually takes about two weeks to a month for servicing to transfer from. If we're using, say, their bank was using Wells Fargo just as a servicer and we're using Madison's, the banks have got to give the borrowers at least two weeks to let them know that things have changed. The borrower gets a letter saying, hey, it's a goodbye letter. Hey, thank you for not paying ABC Bank. Now you got to pay Scott Carson Bank. We'll send out our own hello letter as well and say, hey, we bought your mortgage. You know, we're now the bank. We see that you're behind. Let's talk, let's try to create something. If you want to stay in the house, please let us know. We're glad to work with you in some sort of fashion. And then it's kind of off and running and that relationship is getting built. A lot of times borrowers want somebody just to talk to. You know, we've seen lenders or servicing companies that try to do everything automated. And some people, especially, like I said, a little bit more seasoned in life, can't hit the buttons right on a phone. And so there's even some deals that we target where we know that this loan is being serviced by the servicer, the servicing is being horrible. And so we'll target those assets knowing that, hey, they've got somebody they can talk to immediately that we can get back on the right track. And that saves us a lot of money in legal costs where we don't have to foreclose on them now we can actually get them off and running.

Well, I think everyone can, can relate to the frustration of just not being able to get someone on the damn phone.

Amen to that.

Yep, it's there. There's such a, a lack of personalization. You know, it used to be, particularly in the banking world, it used to be the neighborhood bank. And I'm not talking about in the 50s, I'm talking about when I first got in the business 20 years ago. Yeah, you knew all the faces. You had a relationship with the folks at the bank you did buy right, right by them. They did right by you. Now, like you said, you pick up the phone, you're talking to someone in Pakistan, someone in Ohio, someone anywhere. But in Staten island, if it's a Staten island related asset. Right. And there's something to be said for that. So just to be clear here, folks, what Scott's doing is as he's going through this process and he closes on the transaction, he's not getting the asset, he's just getting the paper. Right. So he's only buying the note. So when he's buying this note, although he's doing a title report and he's. He's taking a peek behind the curtain to see what's there, he's buying the note. And in many instances, there can be other liens and other issues that have surfaced around the property. So can you walk the audience through that? How does that work? How are those liens treated? How do you insure the property? I'm sure you're doing forced insurance. Right. Can you talk them through what that looks like?

Yeah, great questions. I'm glad you brought that up. So, yeah, we do a title report to see what other liens are outstanding, whether it's a common thing, is an O and E report and owner and encumbrances report. Because we don't need to pull a full title report back to when the property was created. Because since we buy directly from banks, 99.9% of the time, that title was still good because it's. We're buying the existing loan. So we do need to see what kind of nuisance liens if the borrower went and got a second mortgage. So if there is a big like second mortgage or big same thing when we go, that won't affect us if we're modifying the loan and working with the borrower. Okay. Those junior liens, it'll stay in space if we modify or get them back on track. The borrower's responsible for those still. Okay. But if we have to, if we go the legal route, then that, if there is a big second lien and other liens on that, then we do have to go through the, usually the full legal route to foreclose to wipe those all out. Okay. Now, in some cases, if the borrower is willing to work with us and there's a second lien on our property, we'll do what's called a consent to judgment. And that's basically a legal proceeding where the borrower agrees to our judgment. We're not going after him for that, but it helps us expedite the foreclosure process to wipe out the second lien and anything else that might be clogging up title. Now, I don't buy a lot of junior liens. I like to be in the first lien position where the only thing it could screw with me would be God or taxes. Okay, so you always have to double check taxes. Make sure the taxes are getting either paid by the borrower or in a lot of cases, we'll pay the taxes to avoid a tax foreclosure or tax sale. All right, but we'll offer a second lien. Like usually 1500 bucks. I'm like, you can either get 1,500 bucks because that's what's going to cost me to foreclose you, or get zero and wait six months for us to foreclose. Either way, how do you want to play this?

And you're wiping that second lien straight away.

Yeah, yeah. Especially they're over encumbered. Then there's no equity there for them. Now if there is equity, then we just take it to foreclosure and they can, you know, we'll just go to the foreclosure. I'll get paid off in full and let them get, you know, $0.05 since on the dollar. But you still got to double check that. You need a real estate attorney who understands foreclosures. You got to have an attorney that's licensed in the state you're foreclosing in. You mentioned something earlier about servicing company. Our servicing company is licensed in 30 states. They're not licensed in all 50. Cause they're not servicing loans in all 50. But that's an important thing. There are some servicing companies out there that are only licensed in 10 states, but they're servicing in 30 states. So you gotta be very careful about that. If you're gonna use a servicing company, hey, make sure that they're licensed in the state that you're gonna be buying notes in.

I'm sorry, so you just triggered a thought for me. Can you talk the audience through how you're dealing with the gain? Right. So Is this a 1031 able occurrence? Is this short term capital gains, this ordinary income?

So that's a great question. Unfortunately, in the note game, you can't do a 1031 exchange into another note. But there is a way around it. You could do a tax deferred sales trust.

Okay.

And basically set up, you know, if you're selling a property, like I get people who have 1031 exchanges, they want to buy portfolio notes. I'm like, no, no, no, it's not gonna work that. Cause it's not an asset client. Sell your property on a tax deferred sales trust. So it's like your owner financing and then the money you get from that, then you can use that money to go buy a portfolio of notes. Okay. Now when I'm selling a note. Yes. If something happens, if I foreclose and it's less than a year. Yeah. Short term capital gains tax on that deal. If it's longer than 12 months, then it's a long term capital gains tax. Okay. Our investors that are investing with us and we're sending them K1 reports on an annual basis on that, depending on how they're either set up on either a flat percentage rate, they're lending to us, you know, 6 to 10% or on some of our bigger deals or individual investors there on a joint venture split, we're splitting profits 50. 50.

So this is a lot of information and I really appreciate you being as candid as you've been here kind of giving the playbook again. I think that this is the single biggest opportunity that I'll ever see in my career. I think that there's a lot of opportunity for folks out there that are interested in learning more. Scott Offline, you had made a very, very generous offer which I'm really appreciative of. Can you walk through the audience, the offer you had made and what you're going to extend to the listeners?

Yeah, I mean you're not going to learn. The note business has a lot of moving parts, just like any bit of real estate. Okay. And I've had the good fortune to have some really great mentors that help, you know, walk me through and did things. So I teach kind of a, I call it a dip your toe in the water class monthly. It's a one day class. We call it Note weekend because we'll live stream it live via Zoom on Saturday and then the replays are out by Sunday if you miss it. So it's a one day course, nine to five with yours truly going through, as they say, the Cliff Notes version of note investing. It's normally 49 bucks, but if you're listening to this and you use the code CASA C A S A, we'll comp you into the class for free and you'll get not only with the class, the replays to that class. You'll also get a 34 page manual with a lot of forms and contracts, you know, FAQs and over another 10 hours of video training as we talk with vendors and other people that work in the note industry. So you have a good grasp on. So it's really about, roughly about 24 plus hours of training that we're gonna comp in for you guys, being a loyal listener here. Cassandra properties in the Cassandra Podcast and Lily for free. So noteweekend.com when asked for discount code, type in CASA not case sensitive and we'll copy the class for free. And you can attend the third Saturday, whether it's this coming one in November, the one in December or next year sometime. It's up to you.

Oh, that's really amazing. I can guarantee you I'll be there. I'll try. I'm going to try and make myself available to be there this coming Saturday. Well, it would be, it would be the 21st in this month. Right. So I think I can do that. So I'm going to attend. This has been super, super helpful and very informative. I can't thank you enough for the opportunity to just sit and chat with you today and then to extend that generous offer to the listeners. How do folks find you and follow you? I know you've got like 33,000 followers on Facebook and you've got, you know, 120,000 views or 160,000 views on YouTube. Like you've got a lot of content out there. I'm a listener now and I've subscribed. How does the audience find you and how do we, you know, jump on the Scott Carson train, if you will?

It's easy. Just go to our mothership on our website. Basically we close notes dot com, that's our main website. We close notes, plural. We close notes.com and you can see the different podcasts we have, the different training, you know, like you said, it'll connect you to our YouTube channel, which is, I think we've got 1300 videos on there now. And check out the Nook Closer show podcast that we just pretty honor. We just recorded episode 640 today and we surpassed the 1 million download mark in our four year. So pretty excited.

This was, this was great. If you have any assets up this way, don't forget your local friendly realtor here already.

Already got you down on the hot list, man. Already got you down on that there for you. When you minute you said New York, I like, oh yeah, put that in place there. Definitely, definitely. And you know, that's the biggest thing. There's opportunities. I mean, I got started my first deal, I flipped a note for 1500 bucks. You know, I wholesaled it. I bought a piece a POS property in Detroit for $500 on a debit card from Wells Fargo Financial and I called the local investor, Hey, I got a house. Would you give me $1,500 for the scrap? He said yes. So, you know, biggest trade, we bought a couple million dollar assets. You know, like we said, we bought some hotels, we bought some apartment complexes. And in the day, look, the commercial market's about to be on sale. If you know where to go and you can really beat everybody else out there six to 12 months ahead of the traditional investor.

Look, man, God bless you. You've built an unbelievable outfit here. Best of luck. We will be in touch. So thank you so much for the time today.

Thank you. Thanks for having me. Been an honor. And everybody make sure you hit that subscribe button and leave them a five star review as well, all right? Do it for him. We love it.

Appreciate you, everybody. Stay safe.