How to Start Note Investing With Scott Carson From The Real Estate JAM With JD Monroe

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He would always buy these flip houses and I just remember thinking, this guy is crazy. Why would he buy that house?

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Welcome to the Real Estate Jam. Whether, whether you're just beginning or the best of the best, we're glad you're here. We will share successes, failures and strategies for the action taking real estate investor. And now to your hosts, JD and Melissa.

Hey guys. Welcome to Real Estate Jam podcast. I'm JD with my wonderful co host. Hello, jd, Melissa. Melissa, thank you so much for being here on time.

Happy Monday.

Happy Monday. The week just flies by, you know what I'm saying? Awesome. Well, we have a pretty good show today and it's something that we've talked about a few times, but I'm sure that we're going to get a ton of information. It's an important part of real estate investing, especially as you start to run out of time to manage your own rentals and deal with tenants, termites and toilets. So let's. I'm excited to introduce Scott Carson. He's the CEO, Founder, Chief Bottle Washer of WeClosenotes.com Scott, thanks for coming on our show today, man.

Thanks, Scott.

What, what is going on, y'? All?

I'm doing great.

Happy, happy Monday. Monday. It's a good day, right? It's always a good day when you're six feet above ground. But honored to be here. Honored to give and congratulations. You guys are just doing amazing things with the show. So thank you.

Thank you.

Ditto.

Yeah, we really appreciate your time, Scott. I'm hoping that you wouldn't mind introducing yourself to our audience and letting people know who you are and why they should listen to you.

Yeah, no problem. I'm just a crazy guy out of Austin, Texas. You know, I've been an active real estate investor for over 20 years now. Wow. Hard to believe that. But I focus on the niche, a niche within a niche of real estate where I buy notes, I buy distressed debt, I buy distressed mortgages. I'm known across the country as the note guy. And I know most people, when they think of notes, they think of like owner financing, buying on terms, and that's an aspect of note investing. But I'm a little bit different I like to say I'm on the sexy side of real estate. You know, if you're a fan of Christian Bell, Brad Pitt, you've probably watched the Big Short in the past, which is a great movie. I'm kind of like Christian Bale's character in that movie where I'm buying individual or portfolios of mortgages, first liens on residential commercial properties direct from banks. And the fact that I'm targeting non performing notes, which what that means in layman terms, that's where somebody hasn't paid their mortgage in a period of time, either six months or six years in a lot of cases as well. So we go in into these banks and different investment firms across the country and these banks will sell us their debt, sell us their notes, their mortgages, usually at a pretty significant discount, usually below 60% of ass is value. And so we buy that debt, literally step into the bank's shoes and we become the lender and we make our money. And that's what we're all about is making money, baby. Right Is how we make our money. Since we're the bank, we now can reach out to the borrowers and say, hey man, what's going on? You know, what's the country western song that's happened to you? Did you lose your job, get divorced, grandma got run over by a reindeer? You know, whatever it is that you couldn't make your mortgage payments, Covid, whatever, let's get you back on track. You know, I know you're behind by a year or two years. Let's can you start making your existing payment again? And so, you know, if they can't make a payment, do you want to sign the property over to us and walk away? You know, do a deed in lieu or we will, you know, often incentivize them with cash for keys. They won't do that. Or they just tell us to go pound sand, give us the bird, we give them the bird back by just, you know, putting the file with our attorneys and then our attorneys handle the foreclosure process and that kind of stuff. So we literally become the bank. Don't get me wrong, I do. You know, I originated a ton of owner finance notes back in the years. And we do buy on terms doing our other side. We offer terms on our real estate a lot of times too, but we're literally buying the debt from the banks and becoming the bank. And it's a beautiful thing. So we don't deal with the three or I guess you say four T's. You forgot Trash outs on your first. You know what I mean?

That's not the part.

Exactly. And I actually don't want to own property. I actually just want to own debt where it's passive income or residual income each month. If I have to take a property back, okay, we'll sell it at auction for the most part. But I've rehabbed properties, been a landlord, done all that stuff in the past. And being the bank is awesome. Great.

Well, that's a lot of information to unpack. I think where I'd like to start is on the front end. You're buying these tapes or these portfolios directly from the bank. Now when it comes to funding those, are you bringing in partners?

I don't know.

It wouldn't be necessarily a syndication, but starting a fund, what are you doing to acquire the capital needed to purchase these discounted notes?

Yeah, we don't always just. You don't often buy just in the portfolio. That's one of the big misconceptions is that you need to have $5 million to play in this game. That's not the case. We buy a lot of one offs from different institutions. So we partner with other people and other people's money, our financial friends. If people have an ira, we'll borrow money from their self directed IRA and use that to go buy the deal and get back on track for 12, 24, 36 months. We are in the process of putting a fund together that we are working through all those SEC, dot and t's, crossing I's and all that good stuff.

$60,000 in attorney fees before you even started taking people.

Oh yeah, it's a little bit more. We're upward to the 75, but it's okay, it will pay off in leaps and bounds. So yeah, we buy these individual assets, it's called the tape, which is just a fancy term for a spreadsheet. And then the bank sent us these lists after we contact the right person or the right department. And then we can cherry pick, we can pick one, we can pick 10, we can pick 20 and make an offer on there and go from there. I mean the biggest portfolio I've ever bought was 250 assets at once. And then I bought one note for seven bucks before and flipped and wholesaled it for $5,000 profit. So it's a good mixture in between.

So when you're pulling in these portfolios, you're not necessarily buying the whole portfolio, but you do do that. And are you just cherry picking and then you're selling the notes off to the other investors or how does that process work?

So I'm always buying for my own portfolio first. I've closed on over a half a billion dollars in debt since we started on this residential and commercial notes. And I'm always looking for my own portfolio. That's the biggest thing. Now if we get a pool in, yeah, we'll wholesale. We've got some students that will co bid. Whether they want to buy two or three, we want to buy 20. So it's kind of like, oh, they get a bulk discount by being partnering up with us. Or I'll buy 25. I may flip a couple off wholesale, a couple off for 1,000 or three points like that. But I'm always looking to buy from my own portfolio. And I'm buying in about 20 to 25 different states out there. And I actually prefer. One of the things that we focus on is actually we like to buy occupied assets, occupied notes, because the property is usually in better shape and we have a much higher hit rate to get that bar back on track and re performing. One of the biggest mistakes I made as a note investor early on was coming out of the fix and flip side and all the debacle from 2008, 9 and 10 was I tried to foreclose on everything initially and I actually I was paying out money, paying out attorney fees, paying out repairs. And you know, each state has a different foreclosure timeframe. Sometimes foreclosures taking two years. And when I look back at it, if I'd have worked to modify more of those or work more of the borrowers, we would actually made a whole lot more money and gotten cash in immediately versus having a lot of cash and waiting for a bigger payday? Like I said, 12 or 20 minutes later.

Sure. Okay, so that makes a lot of sense to me. The part that I'm having a hard time wrapping my head around right now is when we do our direct mail to find properties to wholesale or flip. I know exactly what my buy box is. And so if we get deals in that don't fit that, I know that those are the ones we're going to pass the other other investors or JV on or do something like that. But I have this buy box is what we call it. And I'm wondering what does that buy box look for you look like to you? And then are you researching each of these properties, going out and taking pictures, understanding what the asset is prior to acquiring it, or are you just kind of looking at the numbers, deciding that it's a Good, good thing to take down and then doing the research on the property. How does that, that process work?

That's, that's a really good question. So we have our buy box of our biggest. I guess our wheelhouse is assets that are at least 50 to 250 in fair market value, where the borrower owes more on the property than what it's worth. We want mortgage payments to be at least $500 a month or greater. We want to be in cities of at least 50,000, prefer 100,000 people, population three bedroom, two baths. We want at least that 1,000 plus square feet. And rent rates on the property to be that will vary but the lowest of the lowest is $5 a month on the rent rate. And that's usually in Detroit or Columbus, Ohio. Usually we want to be at 800 above. So we look at those quick numbers and when we get a tip and we'll make offers, it doesn't make sense for us to go out and look at every property before we make an offering. Because if we're making 100 offers, we look at the numbers first. Yes, we'll look at online images to see what it kind of looks like. But if we make throw 100 against the wall, the fund or bank may come back and only approve 50. And then we may counter those back based on where they counted back and maybe at 25. So when we finalize that final number of 20, 25, then we send out our BPO agents. I love working with agents. They're one of the biggest lifebloods. I'm not one of these guys that says you have to do it. All agents save us a ton of money and a ton of time. And so we let send them out, they're pulling comps, doing external BPOs on it. When you're in the note business, you're not just looking at the property, you're also looking at the, the borrower. Because then we're going to get notes from the existing servicing company who's been had conversations the borrower. We can see if the bar has been friendly or not so friendly. Sure. And then we also looked at the actual loan file, the actual collateral documents to see that everything is there. If we have to foreclose, we also will see a lot of information like what the borrower did beforehand, what they have for retirement accounts, if they own other real estate, the borrower has filed bankruptcy. They literally like opening the kimono to us. So we can see everything that they're into and see what kind of fit they might be for A modification or reinstatement. And so it's kind of a three prong approach to looking at that. And if the asset passes those three, then we'll go to foreclose. But let's say the value. We think of value and assets 100 based on what we look online and it actually turns out to be 50k. Well, we can kill that deal just by saying value didn't come back where we want it or we can fade our bid or reduce our offering to the bank. Or the seller said, listen, if value came back at half, we're going to reduce our bid by half. Take it or leave it. If you don't like it, then we can do it. So we may end up out of that 25, we may end up at 5 or 10 that we really, really love and go from there.

Right. And how are you basing that offer? Are you in the fix and flip world? You have 70% minus repairs. What is the note investors general rule of thumb?

Yeah, so that's one big thing. We're not a real estate investor, we're a bank. So you have to approach it with a banker's mentality versus a fix and flip mentality. Otherwise you're way overpay and get yourself in trouble. So like we don't have arv, does not exist in our world because we, we don't want to take the property back and fix it.

Right.

Okay, Now I'll do that in Texas and Florida, my two bigger markets for the exception. But ours is all about as is property, and then the upb, the unpaid principal balance and then the payoff or legal balance, what's the total payoff amount. Now if the borrower owes more than the property is worth, then we go off the lesser of the two, which would be the fair market value. And we want to be usually below 60% of the fair market value. And if we can get below that, which a lot of times we can, great. If the borrower doesn't owe more than the property's worth where they actually have some equity, we don't want to chase equity deals because as the bank, we're only going to be able to get really what the payoff is. And most banks, when there's equity, they're going to want us to pay somewhere between 80 to 90% of payoff. And that just doesn't make sense for us to do that. And whereas a lot of investors chase equity deals, we don't because that equity does not belong to the bank, it belongs to the borrower. So like if You've got a borrower who has a house that's worth 200. They only owe 150. The bank may want us to buy that at 95 cents on the dollar of the balance and that would only be like a 5 to 10% profit. If it's sold at the foreclosure auction for us to collect, our highest bid would be the 150. If it's sold for 180, 190, that 30, 40 grand goes back to the borrower. So we like underwater deals. It also takes away a lot of, I guess you could say heartache with the borrowers because if they've got a ton of equity they're going to fight you and drag things out for that equity where they're underwater. We look like the white knight coming and said, Listen, Mr. And Mrs. Barr, Melissa, I know you haven't made your mortgage payment in a year. What's going on? Are you back to work? Can you get back on track? Okay, great. Pay 12 months of payments to us on time, a little bit extra. At 12 months we'll recast your loan or modify it. If you owe 175 and the house is only worth 160, we'll forgive that 15 grand after a year. But you gotta make payments on time for a year to us to recast it and go from there.

Sure. And when you're buying it at a big discount, you can provide that. Really? You're still able to provide a solution that the big bank doesn't have time to offer or the servicing company doesn't have time to work out. So I think that that does serve them. And then a lot of times it's not going to be like that and you guys are going to be able to make your profit in there. I guess this rolls into my next question or what I'm thinking about with all of these forbearances coming due and all of that kind of stuff, how does that play into the note investing side of the house?

It's a beautiful thing because when people aren't making payments, it means more inventory for us. Right. You know, And Melissa, are you guys seeing an increase in like short sales or distress listings in your guys there? Not yet. Okay, it's coming. The reason you're not seeing that is because companies like me come in and buy the debt and then we negotiate with the borrowers to keep them in the property. Sure. Now we do a lot. We do short sales. I mean I'm the fastest short sale negotiation company settlement in the world. Give me what I paid for the note, what you owe. Okay, approved. As long as the spread. Let's get this thing closed versus it taking nine months through Equator or something like that.

Well, the bank's already taken that loss on the. So, you know, for you, you're not taking a loss usually.

No, yeah, yeah, exactly. I don't want to buy a note where I'm going to take a loss on. We're always going to buy at a point that we're going to, you know, depending on the timing and it'll vary on the state to the foreclosure timeframe. Like New York, New Jersey. We don't buy a lot there because it takes three years to foreclose in New Jersey. I mean, in New York, two years in New Jersey, you know, and 10 grand and you got to hire an attorney to talk to an attorney to have an attorney up there. So. So we like states that have, you know, we're usually less than 12 months to foreclose. You know, we don't buy. I don't buy a lot and forgive everybody. I don't buy a lot in Chirac or Crook County, Illinois. You know what I mean? Not fun to foreclose if you don't live there in the area. But there's other areas out there that are really great. You know, if any of your listeners, anybody's out in the west coast, you're like, oh, can you buy notes in California? Yes and no. Yes, you can buy, but you're going to pay through the nos, because everybody knows everybody's. So it's overpriced after kind of like it is here in Austin. But there's a lot of better deals for what I would pay for. Like one property in San Diego. I could buy like a block in Kansas City or a block in Jacksonville, Florida, and leverage my risk out across those in a lot more effective manner.

So I just have a quick question, if that's all right.

By all means, go ahead.

So I'm just interested from the business side of this, how do you man a business like that? Like, what does that look like? How many people do you have reviewing that kind of thing?

So most real estate investors. Raise your hand if you're a control freak. Everybody in real estate is pretty much a control freak for the most part. With note business, we leverage vendors. We're like a general manager, you know. You guys football fans? You a fan of any big football team? Like who? Like the Cowboys. You Cowboys fans? Is that right? No. Okay. No, I'll use the Cowboys for example, Jerry Jones, he's the owner. He's not out there slinging Miller lights and hot dogs. I mean, he wants to coach, but he's not coach. He's up there directing people to do that. And that's what we do as note investors. A lot of the heavy lifting and the borrower outreach and communication of the bars is done by third party servicers that we're paying, you know, $15 a month if it's a performing note or $90 a month for them to call on an aggressive to work with the bar. Getting back on track. If it's not gonna work, then we kick it to our real estate attorneys and they run with the ball and handle the foreclosure process. On the front end side, we're looking at spreadsheets and online values. When we have to do due diligence, then we're sending out agents or people to pull BPOs and we look at those numbers and go from there. So the beautiful thing is most people in the note space can do this from anywhere. You don't have to be local. If you've got the Internet and a cell phone, you can do this whether you're here in Naples, Florida or Naples, Italy. I've closed deals both places from traveling. It literally comes from that. Now, I've only looked at maybe 5% of my actual properties that we bought are the notes because we get videos or we get views, bpo, as I said, comps from the local agents or other investors to take a look at it. And that helps us determine value as well.

Interesting.

Sure. I think for beginning level investors, this seems like something that's so far out of reach or outside of their comfort zone because it's not what everybody is preaching. It's not what all your Facebook gurus and your Instagram real estate superstars are pushing out there. So can you help break it down? If a newer investor was interested in the passive income that comes from notes, where would you direct them to get started and how could they get their foot in the door dealing with these institutions and looking at this grand thing that is kind of hush hush in the investor community?

Well, it's not that difficult because if you're working full time, the last thing you want to be trying to do is flip properties or deal with rehabs and toilets, tents and trash outs. That's creating a full time job. In a lot of cases, a lot of our investors or students, they'll take 50 grand in their IRA or their 401 or in their savings and they'll go buy a couple performing notes that are going to perform at 6 to 15% on a regular basis. They may buy a note that was once non performing like something that I bought, got the bar back on track and it's going to sell it now as we performing up make a double digit return. That's a great place for most people to get started is buying that performing notes and you don't need to have there's a lot of stuff that's under $50,000 that you're buying. That's you know, you're below 70% of value of the asset as well too in a lot of cases. So the bar no pay, they no stay. You just kick it to the attorneys and let them go that route. So that's a good starting point. If you want to be more aggressive and you don't mind a little bit getting your hands a little bit dirty, then the non performing stuff is me bigger discounts for you but it's usually going to be a 12 to 24 month period of either buying the note then working with a bargain back on track then getting that note seasoned for 12 plus months before you sell it off or you retain it for cash flow. I had just a student of mine just bought a note In South Augusta, S.C. house worth 80 borrower owed 45 had made a payment a year. He bought the note for 13,000 from a fund. He got an investor to fund $20,000 at 6% interest. So he's only paying the investor $100 a month. Sent a letter out to the borrower and got the borrower back on track with the first phone call. So now the borrower's paying $340,000 a month. The investor's only paying $100 to his money partner. He's pocketed 240amonth plus $5,000 $6,000 on the front end as well too. So I mean we buy plenty of notes that are on that smaller side too because you know, not everything is crazy expensive like it is here in Austin or California, other parts of the world.

Sure it makes a lot of sense. If some of our listeners were trying to find more about you or wanted to take a look at your coaching program. Where should we send them really easy?

You can go to the mothership website weclothesnotes.com we've got all our different training. We have a one day class is a great starting point. It's called Note Weekend noteweeked. Com. If you go to noteweekend.com Enter the code jam J A M All right. Yeah, well, I'll give it to you for free. It's normally a hundred bucks. We'll give it to you for free. So. Replays. We host that class every third Saturday of the month, but we've got that. We've got the Note Closer show podcast. We do 700 episodes on there every Monday night. For the last 12 years, we've been doing a webinar called Note Night in America. You can go to notenightamerica.com and join in. But I just, you know, we're here to provide, I mean, 1200 plus videos on YouTube and stuff here. There's a lot of different moving parts to note, just like there was anything else. But the beauty of it is sitting at passive. And as we all know, the banks are the biggest buildings out there because they understand cash flow. The bank always wins, baby. And everybody who's listening to this is already in the note business. If you've got a mortgage, a car, credit card, student loan. Oh, bubba down the street, 50 bucks, you're in the note business. You're just on the wrong side of the payment stream. So let's get you on the right side. Let's get you on the sexy side of real estate and become the bank.

Therefore, if there was just one thing that you would tell the new guys looking at notes to avoid or watch out for, what's that big thing that they shouldn't make that mistake on?

Oh, my God. If you have no knowledge, don't do it, because you will overpay. You cannot approach a note deal like a fixed flipper. You've got to understand it's a different mindset, but you will learn more from pulling the trigger on your first deal than you would from any class or workshop or podcast as well, too. So get educated, understand it, and then don't be afraid to reach out and ask questions. I mean, that's one of the biggest things. I get questions all day long for people. Oh, I want to get ready to buy this. Well, okay, let me walk you through that. Does this make sense? Yes. No. No. Then don't do it. You know, wait, you know, don't get so itchy. Figure to do a deal because you don't want to pay the school of hard knocks, you know, School of hard knocks. More tuition. We've all been there, pay there. But there's a ton of information out there, and. And don't be afraid to ask questions.

Awesome, Scott, that was terrific. It was awesome. We really do appreciate you coming on.

And I appreciate you guys. And, hey, everybody listen to this podcast. Aren't they doing a great job? I mean, what is this? 97, 98 episodes like that every everybody, if you're listening, go over, hit that subscribe button. However you listen to podcast and then little five star review and leave these folks a five star review. We as podcasters love to see that. So help them help you.

Thanks, Scott.

Appreciate it. All right, my friend, we'll see you later.

Thanks, guys.

Thank you for listening to the Real Estate Jam. We hope you enjoyed today's episode. For more information, check out our website, the Real Estate Jam, or find us on Instagram, Facebook, and Twitter at the realestate Jam. If you have any questions, feel free to drop us an email at therealestatejam at gmail com. See you next episode.