Legal Note Investing With Scott Carson From Good Bones Real Estate Investing With Bonnie Galam

Hey guys, before we get into this week's episode, I just always like to give you guys a little bit warning if there's some colorful language involved in the episode. I know some of you listen with little people in close proximity and so just be warned. This week's guest, Scott had some colorful language. I always say colorful sound effects and colorful language. And so you've been warned. Now let's dive.

In any type of real estate investing, you got to have an exit strategy and figure out what your game plan is. And with note investors, our biggest bang for the buck proverbially is actually to buy debt that we can get re performing.

Welcome to the Good Bones Real Estate Investing podcast where building a thriving real estate investing business has less to do with subway tile and shiplap and everything to do with whether you've laid a solid foundation to support the life of your dreams. I'm your real estate lawyer turned legal educator host Bonnie Galam. In my years building a multimillion dollar real estate portfolio, the most important lesson I've learned is that being a successful real estate investor isn't about secret strategies or ninja tactics. It's about doing the basic stuff right and staying laser focused. If you're an ambitious real estate investor or one in the making who's looking to build a real estate portfolio that's secure, streamlined and creates a life you love, you're in the right place. Each week here on the show, you'll get clear, actionable, step by step strategies to help you build your real estate business and some tough love along the way to make sure you're not building a house of cards. Let's get started.

Hi all. Welcome back to the Good Bones Real Estate Investing podcast. Guys, I am so excited because this week we are joined by Scott Carson. Scott Carson and I got connected through the back dark interwebs of the real estate podcasting community. But I'm really excited for this show because we're going to go deep onto the legal stuff. But the way that Scott is an investor is atypical. I don't invest this way and I'm willing to bet he that most of you guys are not investing this way. But you've probably been curious about it. And so Scott has been an active real estate investor and entrepreneur since 2002. I won't tell you how old I was in 2002 Scott. But focus. He's been focused on the niche of distressed mortgage notes and since 2008 he's perched over ready for this $1 billion in distressed notes on Residential and commercial properties all across the US throughout that time, he's helped thousands of other real estate investors and entrepreneurs create wealth themselves through his debt buying tactics and classes, which help students close out thousands of deals. He's also the host of his own podcast, so go check that out. The Note Closer Show. And he is an avid sports fan. He spends his free time traveling, gardening, making memories, and he calls Austin, Texas his home with his better half, Stephanie and their four legged babies. So cool. I'm hoping you're not a Dallas fan. Where Philadelphia fans up here, but I'll let you plead the fifth if you are.

So I have to tell you a story. Yes, I am a big Cowboys fan. I went to. No, I played college football.

Thank you, Scott for coming.

It's been a great show. Great to see you later. I'll tell you a funny story of it at least a little bit. Me like to have fun. I was actually speaking a few years back at a big real estate expo in front of a couple hundred people in Philadelphia right before the start of football season. Right before the start of the magical season that the Eagles had to win the Super Bowl. Okay. And so I'm sitting in front of the crowds. I always like to get people riled up. You know, I'm like, hey, I put up on my screen behind me, who's ready for football season? So everybody's going, well, so I pull out four white T shirts that I had wrapped up in rubber bands and I who wants a free T shirt? And they're like, ah, you know, being stupid. So I'm throwing the T shirts, the crappy folks out. They open it up and it's a Dallas Cowboys T shirt. Okay.

And you're still alive after doing that?

I'm still alive. Two of them came flying back at me and the other two, I don't get ripped up. It was funny, is that when I went to the Dallas Cowboy store here in Austin, told them what I was doing, looking for some cheap Dallas cup of tea, they literally gave the shirts to me for free.

And please throw these at Philadelphia fans. We want to annoy them as much as possible.

But hey, you know what? You know football, it's good to have passions. It's good to root on your team. The Cowboys are having a great year while my Texas Longhorns are having a subpar, so. But anyway, good times.

I won't speak of how the Philadelphia Eagles are. We're still crying over Zach Ertz. That was a big loss.

That's, you know, he came to Philadelphia As a boys leaving as a man.

I know, but, like, it's sad to see him go because he was like, you know, part of that magical season and. But, you know, all good things must come to an end. But, Scott, I really want to get into, you know, the type of investing that you're doing. How did you get started? Like, most people think real estate investing, I'm going to go be a landlord or I'm going be a flipper. Like, where did you land on note investing? Is that even where you initially started?

So it is an interesting story. I was a banker for JPMorgan Chase back in the early 2000s, you know, 1999, you know, go move into that aspect of things.

Oh, like Y2K.

Yeah, Y2K around that. I was getting the finance industry, got into banking. There we go. As my memory's coming back to me and a buddy of mine that I worked with in the finance industry before that for Smith Smith Barney financial advisor, had started a mortgage company and was traveling around the country with a couple real estate educators and investors to these big expos and seminars teaching creative financing, you know, fix and flipping, owner wraparound, you know, subject to deals, stuff like that. And I was like, that's really what I do. So I left banking and joined up with them. And we started doing mortgages in 30 different states for real estate investors. And every week I was in front of a different audience, but learning all these different creative techniques. But from 2004 to 2008, when the mortgage was hot, I was also learning that creative finance space from Bob Leonetti and a gal named Jamie Kayla. They were partners. And so it was really great that four years from 2004, 2008, really having a second kind of learning experience, how to dive into notes. Now I was doing subject to deals, I was doing some fix and flips. I had some rentals here in Austin, Texas. But when everything hit the fan in 2008, with a great recession, I had my mentors, hey, this is a great time to get into the notes space. And I bought some notes previously to that, but it hadn't. It all been kind of dabbled in here and there. But when everything hit the fan, 2008, I sold my half of the mortgage company for a buck, basically because that's about all it was worth. And just started focused 100% of my concentration on reaching back out to banks, the same banks that have been original originating loans for. I started calling to buy their bad debt. So making 50 to 100 phone calls a day to get Lists. And then I started have lists sent to me that I could cherry pick. And it's just been an amazing, you know, 11 plus years since then.

I was gonna say there's not like an Amazon of notes, which is probably an interesting business model if someone, you know, knows how to code and can be like, hey banks, let's source all of your, you know, debt that you want to offload and have like an auction site thing for it. It will be interesting. Maybe not so much for the investors who are already in it. You know, the having the great equalizer is not always fun. But so tell me, like, were you just calling the contacts you were already dealing with when you were in the mortgage business and saying like, hey, can you get me in contact with like the people who would be offloading your distressed loans?

Basically yeah, I was calling the people that were still working at these lenders who.

Yeah, whoever was left.

Whoever was left, you know, when the banks, the subprime lenders went out of business or whatever like that. So I just start dialing and you know, it sometimes take a lot of phone calls. You know, it took me 54 phone calls to get my first tape that I could move. And it was a $5 million portfolio from a lender in Houston that we ended up making a quarter million dollars on that we split five ways. You know, I was like, hey, that's a pretty good day. Even if it took me 30 days to do it. I'll take 54 no's to get one. Yes, to make that kind of money.

Yeah.

So it just, I just started pulling up, you know, looking at foreclosure lists. Who were the banks on the foreclosure list that I could contact? You know, I don't reach out to bank of America, Chase, City of Wells Fargo because they, they don't want to sell a one off note. They'd rather sell. They will only really sell it as a $50 million portfolio. So that didn't make sense for me. So I started tackling good foreclosure auctions and seeing who the banks were on there and then target using those assets or going to foreclosure as my warm lead to get into the right department to get their nationwide list that was coming down the pipeline. And you know, we started buying stuff non performing, working out with the homeowners. We bought some stuff that the borrowers just walked away. You know, some we gave cash for keys, others we end up going through the foreclosure process and going from there. But yeah, it's, it's it's. You're not calling customer service, you're not walking to local bank. I want to buy your notes.

Right.

It's definitely an internal department that most people don't know about.

Yeah.

You know, depending on the size of the bank, they've got basically four kind of names. One's the special assets manager. That's usually the large at the larger institutions. Another one is secondary marketing manager. Third one would be, you know, like, for a larger, like insurance companies or some of these other large REITs. They call them as whole loan traders. And then for your smaller banks, you know, we target banks that have at least five branches or greater. They're known as the chief credit risk officer. You know, they're looking at this. So those four titles is what we would start looking for when we called or when LinkedIn got much more effective like it is now.

Yeah, searching by those names.

Exactly. So it's a whole lot easier now than it was back in 2008. 9 and 10.

Now, you said something just there that I want to touch on from a legal perspective. You said sometimes we do cash for keys to get the homeowners out. Now are you talking about like cash for like a deed in lieu?

That's correct. Exactly. All right, cash for keys. Yes. Or a cash for consent of judgment in case there's a second lien behind our first lien. And I only buy first liens, senior liens, I'm both residential, commercial. But we have bought some second liens or junior liens, but we only bought them when they were behind our first lien.

Gotcha. Gotcha. That makes sense if you, if you're owning all of them. And I think what you just touched on there brings back some horror stories from when I took the bar exam where there was this whole section on mortgages and everyone's like, I hope there's no questions on mortgages. And the bar prep people were like, if there's a question will be like one, maybe two. They're basically telling us, don't study for mortgages, you don't have to worry about it. And then there was like 10 mortgage questions. I was like, no, but I still pass the bar. So it's sorted out. Okay. But for those of you who have not had the grand pleasure of sitting through a three day bar exam, what this, what he's talking about in terms of priority means it's like who's first on title? And so when you purchase a property, there's usually what's known as the purchase money mortgage and that would be the first. Well say lean on the property that is the most superior. They've got like the most rights and usually because they got the most rates, they'll give you the best interest rate. They'll give you, you know, that nice 3% interest rate that we've seen over the last year if it's an owner occupant, maybe more in the fours if we're talking commercial loans, but that's the first priority lien holder. Now if you were to take out a HELOC or a second mortgage or you know, any other, you know, maybe you're working with a hard money loan for some, you know, construction that's secured to the property that would either be in second, third, fourth. I mean, I've seen investors get into some scary positions where they've got, you know, multiple, multiple levels of liens on the property but they will usually charge you more interest because they're in a riskier position that they may not get paid out or they'll get paid out on maybe pennies on the dollar versus dimes on the dollar in the event of a foreclosure. And so that's why they, they try to get their return more so upfront in the form of interest payments. And what Scott had mentioned before about this deed in lieu and so what this is, or the consent judgment is, is if you're going through the foreclosure process and someone's like, hey, let's just end this now. I'm not looking to fight it. I can see the writing on the walls. I, you know, there's no short sale opportunity here. There's no way for me to catch up. Let me just give you the house and be done with this. And the benefit for the homeowner really is it usually is less of a tarnish on their credit, on their record and than it would be for a full blown foreclosure. I know here in New Jersey I think it's, you know, three years where it's on your record versus, you know, it's five years in New Jersey actually on credit.

If you have a foreclosure, it affects your credit negatively for seven years across seven years.

Right. For the full blown. But what if it's just a deed in lieu?

A deed lose is basically 20 consent.

It won't even show up.

It won't be a bad thing because how lenders look at, then they'll just look at your latest mortgage payments and most banks will give you a new mortgage as long as you don't have any 30 day lates, 24 months out, sometimes 12 months out. So that's one of the big factors is when we're talking people like, listen, you're upside down, this house, or you're divorced, you can't afford it, just need the property over to us and walk away. And in 12 or 24 months, once you get back on your feet, you can go back and get a new mortgage. But if we have to foreclose, it's going to really condemn you for seven years.

Yeah. And that's not what people want. And so I do love that part of this type of investing is that it really is a financial safety net in a lot of ways. And when we have individual investors doing that, most of the time bank of America is not being like, hey guys, you want to do. They're just too big. They don't have this customer service aspect of it where it kind of explaining like, hey, look, the choice is yours. At the end of the day, I own the debt. And so you can either pay the debt and we can wait for me to foreclose on it, or we can just cut our losses, protect your credit in the short term and just be done with it. And so when Scott had mentioned a deed in lieu or these consent judgments a few minutes ago, I just wanted to explain and kind of flesh out what that is from a legal perspective. Because it's not just all bad like the foreclosure process doesn't. I mean, it's not a good thing. No one goes into foreclosure because they're having the best time of their life. But it doesn't have to be catastrophic. There are other options that guys like Scott can come in and kind of present as an alternative choice. Did I lay that out right?

Yeah, I mean, we. I want to make sure and clarify something is I don't work with consumers. Consumers don't contact me and say, hey, can you buy my note? It's not.

Oh, yes, yeah, want to make it clarify?

Because we have that happen. Oh, can you call and buy my note? Like, well, can you start making. No, I can't make payments as well. I can buy it, but I'm just going to foreclose on it anyway, you know, because you're not following through on the payment plan, you know, or doing that stuff. So, yeah, I mean, we get these lists in from banks on a monthly basis that we can cherry pick from or buy in bulk in a lot of cases. Like today, I'm submitting a bid on 42 notes in 12 different states out of a tape. That was 231 assets that I can cherry pick from.

Cool.

Some of them will get modified. We'll get the borrower back on track with payments. Some, you know, we'll offer cash or keys or deed and loon, like we just explained. And others will go the foreclosure route. Some of them hopefully may come back to the table since there's some equity in some of these positions that they'll either sell the house off and pay us in full, or some of those that are upside down are in nice markets that we'd be willing to do a short sale and agree to the terms of a short sale to help them walk. Because the fact that we bought the debt so cheap.

Right. No, I think that's really interesting. Now, a question for you that I'm always curious with these note investors is what. What's your end plan with these. Like, with these properties? Say you do end up, you know, you foreclose on a property, Are you flipping it? Are you wholesaling it? Like, are you keeping as a rental? Do you kind of just. It depends literally on like the asset, which I guess is kind of nice. Like, you. You can kind of pick like, this is a property for me. This is a property. And get rid of, like. I'm curious for you, Scott, what. What are you doing with these properties that you end up with?

So the good thing is.

Oh, did you just make that sound effect do that? I love it. Oh, I need to get a sound effect. You guys can't see that this video is going nowhere. It should be.

It's a good video, but it's a sound machine. It's a $10 noise maker that I got in San Francisco that I order on Amazon. So, yeah, it's a fun sound machine, but.

Oh, this will upgrade the whole podcasting experience. Guys, guess what? This is getting ordered. There's gonna be all sorts of new cool sound effects. Scott has now gotten me hooked. I'm going to get this thing. It reminds me of almost like that staples. Like, it's. Was it. It's. It's simple, it's easier. Whatever it is. I got that button Smash. Oh, he's got it too. My God, you're a man of batteries.

Out. Yeah, I've got about 10 different noise buttons here around my. My computer here to have fun with my own podcast.

I love it. I love it. We're going to have some more fun on the Good Bone show, guys. Moving forward, we now have sound effects as soon as we Hang up. I'll be giving some money to our good friend Jeff Bezos and getting some sound effects. But tell me, tell me that we got the Cha Ching.

I'm glad you bring it up because you needed any type of real estate investing, you got to have an exit strategy and figure out what your game plan is. And with note investors, our biggest bang for the buck proverbially is actually to buy debt that we can get re performing and turn it into performing notes that cash flow for a period of time, because cash flow is king, which is always nice, you know, but that doesn't always work. You know, borrowers don't always want to come to the table. They've not paid their mortgage for a year. They want to continue not paying, and that's fine. Then we foreclose, and then usually we'll sell the asset off on the MLS if we don't sell it at the foreclosure auction. Okay, now you can hold. If you find a very difficult borrower who's dragging things out, and your timeframe was a lot sooner than what they may have. If you're buying a New Jersey, you can wholesale a note. I mean, we have a lot of people that start off wholesaling. They get notes under contract at a decent price and they'll flip the paper to somebody else. Or if they bought a note that is going longer than expected or they need to cash out, they can sell that note to another note investor and let them deal. Especially if their goal is to buy notes, they can get reperforming, but the borrower is foreclosed and it's a longer foreclosure state that it makes sense for them to sell the note at a small markup and still make some profit and let somebody else more interested in taking the property back. I don't like rentals. I don't like fix and flips. I've done all those in the past. If I'm going to rehab a property, it's going to have to be in Texas or Florida. God's waiting room, as I like to say. Otherwise, I don't want to rehab in the middle of winter in Michigan. Even though we've done that, I prefer to look at occupied assets and work with the bars. Now, some people like to ask, like, okay, why would a bank sell you a note? Why wouldn't they do the workout themselves? And many banks will do attempt to do the workouts, but borrowers oftentimes will hide their head in the ground. Kind of like Punxsutawney Phil on April 1 every year, doesn't want to peek out, doesn't want to see anything. So sometimes you need a new letter, a new action of direction when it comes to trying to make right party contact with a borrower. I've had borrowers I hadn't paid in two, three years that when we bought the note they started getting new letters and they actually came back to the table and corresponded or we would bought, you know, bought a portfolio and we sent out door knockers or realtors to go talk to the borrowers and said hey, we're willing to work with you, we're willing to give you some options whereas the previous bank didn't look, you know, let's do something. Otherwise, you know, we can be your best friends, but we can be your worst nightmare as well too.

Right? No, that's really interesting. And that you know where my head is is like what does your team even look like at this point? I mean you're now at this point where you're not 2008 Scott, you know Colin Banks, you are now 2021 Scott. Who's got this? And now we're you know, teaching even other people how to do this at this point. But like what does your team look like? Because I'm thinking from a legal perspective like foreclosures, state specific. And I know you target places like you just said, where ideally we're foreclosing in under a year of non performance. And so what does you know that's a different foreclosure lawyer in every market then which they're not hard to find but it's still building at the team. And so I'm curious like at this point what does your team look like to run this business that you've got going?

So the beautiful thing is that you could do this business from anywhere. You don't have to have a big office, you don't have to have huge overhead of employees. Sure happen. One of the most important, I mean we've got a servicing company out of Reno, Nevada that handles a lot of the, the mailing out, the borrower outreach, you know, collecting payments, making sure taxes are paying your interest pay. So servicing company is really the number one team member that we have. But it's ours is massive management. A few others that we use but they're you know we're paying them for every performing up 20 bucks a month to handle the collection.

I know that those servicers are very cost efficient at good bang for your buck.

Exactly.

Non performing sound effect.

Exactly. 90. 90 bucks a month. For non performing, if we need an attorney, if we don't have an attorney in a state that we send a file to, they help us find an attorney. Then we pay our retainer to the attorney and they go the foreclosure route. You're going to use other vendors like Realtors to values BPOs for you. That's pretty easy to find on realtor.com or we, we leverage groups in our community. Who's got a good Realtor, say in Zanesville, Ohio? Yeah, it's a smaller. Well, I did a foreclosure and saying call Mary Ford. Okay, let's call Mary Ford. Go that route. I have, I do have a full time staff member who used to work for a servicing company that we hired her and she works out of New Jersey remotely for us and she does a lot of the borrower outreach initially and when borrowers go non performing, she's that very aggressive outreach and she does a great job in keeping our portfolio clean, letting us know, hey, there's some stuff going on with asset or hey, the attorneys come back. She's really kind of my go between the attorney and the servicing company. So I don't spend time, you know, at my computer 24 hours a day trying to get some stuff done.

Yeah. Doing all that handholding.

Yeah. And then our. Another big thing is marketing. You're. We're constantly marketing for deals, constantly marketing to raising capital as well too. So we've got some VAs that help out with that. The podcast is one of the big, you know, one of our biggest marketing pieces. Getting the word out on it and sharing it because notes are very popular these days as a lot of fix and flippers and landlords can't find deals that make sense, that aren't overpriced. So at notes, one of the beautiful things we're buying deals often well below what retail is. And people are trying to learn out and figure out what the heck is a note, you know, added a big discount and make it profitable.

Yeah, no, I think it's a fascinating area and that's a big reason why I wanted to bring you on. Because it's a growing, I would say, I think, I don't want to say it's always been there, but maybe emerging as a better word where it's coming more to light that this is an alternative way to own real estate. And before we hit record today, I was talking with Scott. Scott and I was saying that it's, it has in some ways some of the passive benefits where you're not as hands on as you would need to be in like a flipping or a landlording situation. But you're still in control as opposed to like a syndication where, yeah, it's passive, but you aren't. You also don't have control. Like, it's kind of like, here's this deal, you can take it or leave it. And I know with, you know, working with Scott, there's ways you can invest with him in a passive way within his own investing business where you can kind of. How do you, how do you structure that? Why don't we go into that a bit like, how is that structured for people who invest with you? Is it.

We have, we have a fund that we're working on.

Okay.

Actually, we got a phone call my attorney on that later today.

Good stuff, good stuff.

So we give a flat return on investments, you know, depending on what somebody's looking for. If they're really looking passive, we'll give them a flat return and a percentage of the back end.

Yeah.

If somebody's looking for more high returns, then we have a coaching program. We're kind of help hold people's hands through buying deals.

Yeah.

And help them, you know, hey, you need to do this now. I had this happen. What happened? Call your attorney. You know, that kind of stuff. This is what you tell the.

Glad you were coaching on that. Because I cannot tell you how many people are like, hey, my coach, my guru, whatever they call them, told me to do X, Y and Z. And I'm like, what state are they in? And I'm like that, that doesn't fly here. Like, the answer should just be like, just call your lawyer. Just call your lawyer. Like, here's the strategy when it comes to sometimes, like the implementation of it. Like, what does this contract need to look like? Just call the lawyer.

That's important thing. Because, you know, some people try to do things on the cheap. Well, cheap will get you hurt very quickly if you're doing something incorrectly. And that's the thing about note investing. It's different. It's a big boy, big girl investing as well as the fact is it's, you know, you're dealing with debt. Everything is reviewed by the Consumer Finance Protection Bureau. You know, Dodd Frank is important on that stuff. So when you start dealing with government entities, you have to up your game. I say, I like to say in a lot of cases. So this is why you need attorneys, is why you don't need to be buying in your own name and you need to be leveraging your business with LLC and and S Corps or stuff like that too for you. And you really need to look at asset protection because here's the thing is you may not own the property when you buy a note. That's one of the biggest mistakes people make. They think, oh I'm a buyer, note I'm on the property. Unless that borrower signs the property over to you or you foreclose, you don't own the property yet. You've got to, you're the bank now. You have the great, the same rights that a bank does and can be very beneficial that way in forgiving debt or restructuring stuff to make things a win win for the borrower. But you don't actually own the property, you're just buying that actual paper file as we like to say, which controls the, the loan. So in this case we like to say that the pen is more powerful than the hammer when it comes to being a real estate investor. So that's, that's a different mindset. You think like a bank, a lot of investors out there, they get excited about oh there's all this equity, you know, I'm a buy this property and take it over and have all this equity with us as the bank. We don't see the equity because that's value to the borrower unless they sign their property over to us. So it's a different mindset being a note investor. It's a banker mindset versus a fix and flip mindset. Both can be very powerful but you got to know what kind of capacity you're in and what you have rights to do and what you don't have rights to do. Like we had, I want to say a student but somebody who bought a note. The house was vacant so they went in and changed the locks and started rehabbing the property and they didn't own the property and then the owners came back and sued them and the borrowers one because this investor didn't file the proper documents, they didn't foreclose.

They were saying, I'm like, there's just like trespass, there's like total trespass conversion, all sorts of issues going on there.

Total, a lot of issues, stuff like that. So you can get burned if you, you don't have the right type of advisor council education to go along with it. I was very fortunate. A four year apprenticeship in learning it. It's note investing. It can be very simple. You just got to learn and be a little bit different when it comes to how you're approaching the deal and the numbers are different. We don't like we don't live in our, you know, people. Most real estate investors live in this after repair value fictional area. We don't deal with that because it's as is the value. When you buy a note, you hopefully will end up if you want to, but if it's occupied, there's a lot more chances that you'll end up retaining just the mortgage. And there's a lot more extra strategies that way to keep the bar back in place. And you're still going to come out spelling golden without having to put a lot of work into it. Rehab costs, attorney fees. A lot of times if you just start talking to the borrower and say, hey, what happened? What country western song are you going to give me? Let's keep. Do you want to stay or do you want to go? If you want to stay, let's work out a payment plan today and get you back on track.

Yeah, no, that. Those are all great points. And so that there huge asset protection snafu, I'd say, for your student. The, you know, the way I approach asset protection is that asset protection is how can we prevent losing money? And a lot of lawyers are like, well, you cannot lose money by containing your risk within an llc. And I'm like, yeah, that's part of it. But also it's just like, how do we do our business? The operation so that we were not screwing things up. We're not having either this drip, drip, drip of like sloppiness having, you know, contractors screw you over, tenants screw you over just not knowing what the heck you're doing. But I'm curious if you have any other stories or like, what types of things you've put into place to protect yourself as a note investor. I mean, this is not something where I imagine it's the typical, like, we want land trusts and like all this nonsense that, you know, people will spew on, you know, YouTube, not naming names. Guys, you know who I'm talking about.

But how, how do you want to.

Different with you guys?

How do you want to avoid legal doom? Basically, yeah. Yeah. We use a variety of entities that says it, but there's also, you always have to do your due diligence. Yeah, that's one of the biggest things. Not just a due diligence on the property, which most people will jump on Zillow or something like that. They'll buy. You also got to do due diligence on the borrower. See what's going on with that? And that's the beautiful thing is that we are seeing really underneath the kimono. In a lot of cases, we can see the servicing notes from the borrower right now with the existing servicing company. So we see that. We see the borrower's been friendly. If they've been responsive or if they've sent in a loan modification packet, we can see that and see what kind of mindset they have. We also see that they've called in and been abusive to the service. They're telling them to go pound sand or to f off. So that leads to a lot of. We also social sleuth. We're jumping on Facebook and LinkedIn seeing what people are posting as borrowers. And we found some interesting stuff. You know, like the borrower one time posted on there, should I pay my mortgage or go to Disney World with the kids? We're going to Disney World. I'm like, okay, you're not going to be a good borrower to modify.

Yeah.

We also found another one was a professor from the University of Missouri, wasn't paying. We're trying to figure out what he's paying and we found out on his social media profile that he was going through a transition. He would rather pay for his breast implants then pay for his mortgage. I was like, okay, it's probably not going to be a modification either. We've also found like a borrower in Illinois. He was an out of work speaker because he broke his leg. And we saw this, he'd been on time, on time and suddenly for like six months he was behind, behind, behind. Could never get caught up. And so we bought the note and with the first phone call we were able to get him back on track by just taking the six months and put it into the face of my note. So there's a lot of moving parts and a lot of scenarios. It's almost kind of like you choose your own adventure in a lot of cases. Those books back in the days, I used to love reading those. But it's besides this that it's also when you're raising capital, you always got to make sure do a little due diligence on the people lending you money. And sometimes there's people, especially as investors, there's times where like, hey, we need that money to close on a deal and we get a little desperate. Stick to your guns. We do as just as much due diligence a lot of times on bar and at bars, but investors say, hey, you're a great fit. Or you know, I'm just not feeling a good fit here. Let's part as friends and you can Go here. I think you'll do you better to buy your own stuff versus partnering with me because based on what you're sharing, you're kind of a PETA, a pain.

In the ass and you want to avoid that PETA. I think what you just touched on right there, it also brings up a good point because I think whatever your investing strategy is, I think a lot of people think that, like, oh, I've read the book or oh, I've taken like the course or the whatever and now I can plug and play. And I think what you just heard from Scott there is you can know the framework, but there's so many moving pieces. It's always going to be an analysis that you have to do and you may have criteria that you can start applying and. But even just the act of figuring out what your criteria is is going to take time and then it's still going to evolve as you do things and you learn things or you screw things up. I mean, nothing teaches you better than making a mistake and you don't want it to be an expensive one. But when you, when do it, you're like, man, what a learning experience that is. And then you can, you know, put your systems and processes or get your docs better so that way that doesn't happen again. Because real estate investing is like you said earlier, Scott, it's simple in some ways and it's not in others. I think it's, at some point you can be like, okay, I understand how note investing works. But then when you get in the weeds of it and there's gonna be all these different scenarios of like, hey, this is how this bank is packaging it, or this is how these lender are, these borrowers are behaving, or this is this. Any number of variables where it's, you just got to come in and say, hey, I know these fundamentals now what are my choices? How do we let this play out?

Well, that's the most important thing about having a mentor.

Yeah.

Have somebody who's been down that road, been through an up and down market. And that's part of the reason why we started teaching. Because when we started teaching back in 2010, we had so many deals that were flooding us. People were interested, but they know the nuts and bolts aspect of it. And I love what you said. You're going to learn more from taking action and closing on your first deal than you would have any class or workshop or book or podcast. And you have to put specifics in place. And part of, you know, part of learning as business is, figuring out what you want to focus on, what you don't want to focus on, and then avoiding the distractions or like the states that you want to invest in versus states you don't want to invest in. The asset classes, the prices, the, you know, the locations. And we avoid rural assets. A lot of people like, oh, I'm a buy a note. And I'm like asking where it's at. And I'm like, where the hell is that? I'm like, how big is that town? I was like, 835 people like, wow, that's a small ass market. No wonder you're getting it at a good deal. But what's the days on market? 655 days. Yeah, you're gonna have to hold onto it for two years before you sell it. No, but that's the point. You know, we all the most successful people in any type of niche, any type of field, they have mentors that have helped guide them along the way and make the right decisions and avoid the potholes or the landmines. You know what I mean? You want to avoid, avoid the nightmares, you know, the scariness of it. But it's also, you don't want to suffer from overanalyst paralysis and never pull the trigger.

And I agree. I mean, I've worked with a number of coaches in my career and it's one of those things where it's like, hey, if you can learn from someone else's mistakes, then hopefully you'll avoid them yourself. But then it's also just someone to bounce things off of. It's like, hey, this is coming up. And then rather than being in analysis paralysis, you're just constantly having that forward momentum. And so in the show notes, I'll make sure, I'll link Scott's contact info and all of his resources that he shared with me beforehand. So that way, if you do want to get in contact with Scott, definitely give his podcast a listen. The no Closer Show, I have definitely given it a lesson over the last few weeks since we are put into contact with each other a few weeks ago. And I've just, I've learned a ton through it. It's an area that I've been personally curious about, largely because the writing on the walls and the whisperings among us real estate attorneys is that not that we're heading to another 2008, but that there is going to be a major market shift because there's been a moratorium. And so there's going to have to be a return to normalcy because what we're in right now is not normalcy. And so what is that going to mean for, you know, me as a real estate attorney? What does that mean for my clients? And so it's something I'm really trying to be abreast of. And I'm curious for you, Scott, like, where do you think this stuff is going? Where do you see, you know, and look, we're not going to hold you to it. Maybe if you're right, you know, a year and a half or, you know, I'll send you some flowers in the mail or something. But the I'm curious to see, like, from your perspective where you are is now, I'll say, even like the lender. You're the lender side at this point. What's the writing on the walls? What are you experiencing now as these moratoriums are about to be lifted? And where do you see, like, the opportunities perhaps in the next year or two?

So. Good question. Glad you brought that up. So for our portfolio, we did okay. We had people that didn't pay people, we did put on forbearance agreements, people that just went silent. And we as depending on which state and which location there, and then we've got aggressive and doing the back of the workouts or the foreclosures in that case. So we've got a few more foreclosures than we normally have on the books. But it is what it is. Where do I see the market going? I will tell you this. I do not believe if anybody's telling you that it's just going to be keep going and going and going up and up and up. That's not possible. Now, there may be some markets like Austin, Texas, where I live, is a stupid, crazy expensive market, but it's also one of the most overpriced markets in the country. If you look at the numbers and the sales and stuff like that, people are coming in here, Austin, and paying 50 to 100 grand above the value just because there's a lack of demand here in the area, such a low demand of available property. So looking at the future, my crystal ball tells me, and we've already started to see this down in the debt side. We see stuff six to 12 months ahead of most people that focus on foreclosures because we're seeing a variety of things. So like in faster foreclosure states like Texas, Georgia, North Carolina, Missouri, we're very starting to see an uptick in foreclosures taking place. Now you also, if you look at other States, Florida, New York, New Jersey. You're not going to see a lot of REOs in those states because they have a little bit of longer foreclosure process of 12 or plus months. And so you're not going to see stuff till the end of next year or even into the year beyond that for stuff that just started coming out of the moratorium, you know, in the last couple months. So it's kind of a domino's effect across the country. But we are seeing an increase in foreclosures, you're seeing an increase in defaults. You look at all the other economic factors that are taking place. Something that's not really talked about looking at like GM closing a lot of their plants because they have this huge chip, you know, deficit, so they can't create any new cars. That leads to a lot of people getting laid off or not making income for a period of time. Ohio, Michigan, which was huge epicenters in the foreclosure meltdown back in 2008, 9, 10, hey, they're barely getting back up to where they were beforehand. Now are we starting to see them getting kicked in the shins and falling down on that stuff? You look at, you know, other parts of the country, you know, what's going on economically in those areas. I would not, I will tell you this. I love Florida. I call it God's waiting room. You know, it's a great market. I've loved bought there. Yeah, it does have about a year long foreclosure process. I'm just not buying any high rise condos right now.

Oh, gosh. Yeah, no beachfront property.

Insurance costs are going up dramatically on those. But you also have to look at the flooding. I avoid Miami now because Miami is starting to see a lot of issues with global warming and the seas rising. So you want to try to avoid being that. I think a market's going to be that has been hit hard. That's still not. Is Orlando, you know, Orlando kissing me? Yes, the parks are back open again, but people give this huge, huge staff of employees that aren't back to full time. You know, they relied on those, I hate to say it, minimum wage jobs to make ends meet when they get laid off. That leads to a lot of those people seeing defaults. With rents skyrocketing across the country as well. Rents being raised, that's also out pricing. Your first time home buyers, your service facilities, the waiters, the bartenders, the housekeepers, you know, the people that are picking our fruit, you know, digging the ditches, that leads to A lot of defaults that way. And we've never really seen such a bigger divide between the haves and the have nots before. And so I, you know, it's, we're already seeing, we're already getting phone calls, we're already getting listed to us from banks on stuff that's discounted that we hadn't seen in a while. That's the first sign. You know, I don't believe you're going to see a lot of REOs, even with foreclosure. I think what you're going to see is a lot of institutions, investors, funds, kind of like what we have coming and buying up this debt and then trying to work it out because we bought the debt at a big discount. So we now have the flexibility to modify and keep people in their homes if we can. But who knows, we could have. It could be the nightmare on Elm street when it comes to foreclosures. And then the government could do something silly like, oh, we're going to stop all foreclosures for the 2022. Again, who knows what's going to happen?

Right, Right. I mean, I've thought about that a lot. I'm like, would the government let 2008 happen again? I don't, I don't know. I mean, it was very much, I think, protective of Wall street more than Main street, what happened in 2008. And I'd hope that they would take the approach of protecting Main street and not Wall street the second go round, if need be.

Well, I think what you'll have happening more so than anything is like what happened in 2008. 2008, you had states stepping up to stop it. Like the attorney general from the state of Massachusetts stopped all foreclosures for 12 months. The attorney general for South Carolina stepped in and stopped suspended foreclosures for all of 2008 to give people a chance to get back on your hands. And you've seen that in different places. Great examples like Nevada, Las Vegas. You can't foreclose this. It's decimated. You know, actually tomorrow I'm actually interviewing a realtor, a big investor in Las Vegas to talk about how they're overcoming things.

So I know if that, if that isn't a bounce back story, I don't know.

Yeah, there's, and there's this divide. I think we see a lot of people, like I've had guys reach out to me, hey, we want to buy notes, but we want to buy them at 25 cents of the dollar. I'm Sorry that we're not in that market. You know, there's a big divide between what banks and lenders want to sell stuff at versus what investors want to pay. There's still, you know, that and that market, that divide is closing every month that these notes go more in default, the banks become more motivated to move it and the investors are willing to come up to take care of, take advantage of the opportunities. But it's not $0.05, $0.10 on the dollar, $0.20 on the dollar, it's still very good discounts compared to what you would be buying at a foreclosure. Even below that in a lot of cases you just got to know your numbers and you know, you got to make sure you're in the right market and you've got the right team, get the right attorneys, the right vendor vendors to help you really accommodate what you're going through and what you're working with.

That, that's awesome. And one thing you just said there, it made me think of another big area where I feel like lenders and investors, they don't quite meet and definitely attorneys are. And I'm curious for your perspective. As you know now the lender in a sense is what's your thoughts on the due on sale clause? There's a lot of investors who are doing wraparound subtos or just pretending they don't exist and moving properties around. I'm curious about your perspective as a lender. Are you tracking, you know, title on these properties? If someone's moving them to trust to an llc, to whatever the case may be is like, what's your perspective on that? And then I'll share you mine afterwards.

So I, I'm actually, It does not bother me if somebody. That's actually one strategy that we tell our borrowers. If you can't pay, do you have. Somebody can come take the property over? Can you? Because we'll allow somebody to assume the mortgage, you know.

Right, right. And whereas like a big bank wouldn't, you know, probably, yeah, they're not going to.

That's a good opportunity if it's, it's got to be paid. I mean if not if a bank, if the bank starts accepting payments and then they find out that the deed's been transferred, they've been accepting payments legally, they have to, you know, like, okay, you've accepted payments. I've never seen a judge rule against a investor who started making payments on a. He took a property over subject to, to the existing financing and made payments and disclosed it. Never seen a bank file on Behalf of the bank usually I mean if you look at well you've accepted payments you've known about, they notified, they sent you a notice that things were taking place. If you do a subject to deal right now is if a borrower, if somebody takes over a mortgage subject to and puts it in you know, an LLC or trust and then they don't start making payments, shame on them. There should be a, there's a hot.

Oh a special place in hell for those people.

Exactly. Unfortunately you see that happening. Some people will target people that are facing can't make the mortgage, they'll take over such two and then they don't make the mortgage payment.

Right. And then you're just trashing someone else's credit.

The credit's already trash.

Right. But like you're, you're not helping them either.

You're not exactly. So that's the thing that I worry about because if you look back at what happened 2008, 9 and 10, you had, you had some ne' er do wellers out there who were targeting people taking over their properties, selling them or renting them out without actually owning them. I mean we still see that to the day with fraud. But yeah a lot of people like oh hey for five grand I'll get you a loan modification or I can help you with this stuff. And they just take the five grand and run. And so yeah, I hope we don't see a rush of that. I'm not the due on sale clause is a good thing. I like I have enforced it when we haven't been notified when they tried to. When a borrower tried to move the property, somebody else. It was one thing that we use because we weren't notified and then other things we've used it because we do target when we get these lists in from banks, even stuff that we don't buy or if the bank won't work with us. Those are great deals for us to market for potential subject to deals as well.

Oh yeah, that's a great, you know, hand in hand type of business. My thought on the due on sale clauses is, you know, by and large it's the boogeyman. As your lawyer I'm never going to tell you or advise you to violate it. But I've also said I'm like it's in many ways been in the bank's interest not to do it. We've been in a depreciating interest rate environment for the better part of a decade now. And if you know interest rates are going back up and they're going to, you know, hey, bro, you. I see this little movement over here. How about a refi into our nice new 5% interest rate? And so I think it's, you know, if it's in the bank's financial interest, they will create a department and they will enforce it for the time being. It's not. They've got, you know, bigger fish or more interesting fish to fry. And so I just say, never say never. I'm like, just because this is the landscape of lending and enforcement right now doesn't mean it's how it's always going to be.

That's exactly correct. You just must be a Bond fan. Never say never again.

Oh, that's exactly how I would sing it as well.

Acapella, baby. Good times. Good times. But, yeah, here's. Here's the thing, ladies and gentlemen. You have to be. You have to. If you're targeting, whether it's notes subject to investing, every market's going to be a little bit different. So you need to learn the market. You need to learn what's going on. You need to seek counsel from good attorneys that can tell you the black and white and the gray area out there. And there are some investing strategies that do fall in that gray area. So do two deals and kind of one of those areas as well. But it doesn't mean it's illegal. It's illegal if you don't act legally. It's illegal if you're not taking care of that borrower, paying the taxes and ends up going to foreclosure on you anyway. That's a bad day. But knowing what's going on in market, like some people, like, hey, I want to buy in this one state. I'm like, don't buy. No offense. New York, New Jersey just takes too long to foreclose, you know, or people. I want to buy in California. It doesn't make sense to buy in California because it's so freaking overpriced right now, you know, so there's a lot of intricacies.

It might be changing.

It might be. But it's a sad day when, you know, the 49ers, the San Francisco 49ers teammates can't afford to buy in Santa Clara, their own home city. Either way, you see that there's an article about that, that the new guys, the rookies, or even the guys that are just on for the league minimum, they've got to commute 45 minutes or they're teaming up to rent an apartment together because they can't afford to buy in that neck of the woods. It's craziness.

Wild. Wild. Well, the way I like to wrap up every show is by asking for rapid fire investing questions. One of them we kind of already tackle, which is like, where do we see the market going? So we'll skip that one. But the first one I wanted to ask you is, what is your favorite business or real estate book? I. I'm a book nerd. I know a lot of my listeners are as well. It's one of my favorite things to share with guests is, you know, add something to the. To the nightstand.

So there's two big books that I think are really relevant. They're probably the two of the most that we hand out the most or we've given away or we recommend. One is Outwitting the Devil by Napoleon Hill and Sharon Lecter. Mm, Read that, Bonnie.

I've read the other Napoleon Hill book.

Okay. There's a bunch.

You can grow rich thing.

You grow rich.

Yes.

Top 10 ever. Yeah. Outwitting the Devil. Napoleon actually wrote it back in 1938, but he never published it. He wrote it. And it's a conversation with him and the devil talking. He's asking the devil how he is so successful in keeping people down or stopping people from finding success. And in the book, the conversation, who knows, his wife didn't want him to publish it because it was a little back in 38. It would sound like he was possessed or anything. But in the book, the reason that I'm successful is I throw distractions at people. I make people drift. The most successful people in any given field are the ones that are most focused, and they say no to distractions. And we all drift as entrepreneurs, we all drift as podcasters, marketers, whatever it is. We all sometimes will hit those skids where we'll slide off and just get distracted. The idea is to not be so hard on yourself and get back on the main path and being focused on. So that's the number one book. Second one, I think, is one of the most important things that you have to do in today's world. And you've seen Bonnie doing this here with her amazing podcast. It's a book called Tribes by Seth Godin.

Great book, Great book. I love Seth Godin. Have everything he ever wrote, anything he's.

Written, I've read, which is just great. And I follow his podcast and things like that too. But Seth talks about in the book Tribes, that we're all surrounded by people tribes, whether it's your friends, your family, your colleagues at work, your, your kids, PTA members, whatever it is. And in today's world, we all really need leadership now more than ever. And you might as well start sharing that leadership and speaking loudly, because in the lack of leadership, people will listen to the loudest voice. And I think we've seen that not just in politics, but everywhere social media, you have people spewing off stupid stuff that makes no sense that the era of fake news. And I don't care what religion you are, I don't care what political party affirm yourself with. We are really in the need for true leadership and tribes. And so your tribe might as well listen to you as long as you're providing good quality content. And I think one of the most powerful things about podcasting is being able to communicate with the tribe on a daily, weekly, monthly basis for you. So those are the two biggest books that we love.

Couldn't agree more. Two great picks. I'll make sure I have those linked in the show notes for you guys so you can go snatch them up if you don't already have them. Another book question. What's your favorite fiction book? Or are you a fiction reader?

Yes. I don't haven't read much stuff here, but I think probably the most favorite is a series by Stephen King, the Dark Tower series. They took in like 20 years for me. They had the first movie called out, the Gunslinger with Idris elba and Matthew McConaughey that came out a couple years ago. The Dark Tower series that by hands down is the number one fictional book series that I've loved. I'm not into vampires. I'm not into zombies, you know, but we will. You know anything about the Gunslinger, Roland or, you know, Stephen King stuff I like to read.

I have only read one Stephen King book. It was, it's like 11, 1363. And I know I have that date wrong. It's whatever the day that JFK was assassinated. I know it was November in 1963, whatever. The actual day was escaping me right now. And it's basically like a flashback in time as to like, what would have happened if he didn't get assassinated and like reconstructing the whole future. Fascinating. Huge. It's like an 800 page, right? It is like not a, like weekend read, but it's a really fun one and it got me into Stephen King. So I will definitely put that one onto my to read list. And the last question is, is what does being a real estate entrepreneur mean to you? One of the things that I hound on this podcast is that being, I feel like real estate investor is a misnomer for what most of us are doing. What we're doing is active, it's hands on. We're business owners. And so I consider most of my listeners to be real estate entrepreneurs, not real estate investors. And so I'm curious what that means to you.

An entrepreneur is you're always looking at what's available in the market and honestly making lemonade out of lemons in most cases, especially in the distressed debt spy. So we see people who are at their worst. They've lost their job, lost their loved one, gone through divorce. Nobody wants to go through that. Bit of a nightmare, you know what I mean? And we've all experienced financial hiccups and I empathize with people. I've been through that, I've been through divorce, I've been faced bankruptcy in the past before. And you have to realize that you have the ability to control your really own destiny. You're not working for a job, you're not working 40 hours a week. Most real estate entrepreneurs, investors work more than 40 hours a week for the most part. But it's not work when it's something you enjoy and you're really solving problems. And that's where you make the most amount of money as a real estate investment, is solving issues, solving problems. How can you fix a property that needs fixing or how can you rehab a borrower? How can you help a bank get rid of the debt off their books? You know, you determine your destiny more so than anything else. And it all comes in the day in and day out activities of what you're doing. And honestly, most people screw up because they focus on the real estate side, but it's really more about the marketing side, how to market your business.

I couldn't agree more because I think the front end determines the end result. And so what you're putting out is really going to determine what you're bringing in. And Scott, it has been such a pleasure having you on this week. I know the listeners are going to find this was absolute freaking gold. As I mentioned before, Scott's contact info will be in the show notes that'll be linked right here in your podcast. Players can go ahead and just click that, check him out, definitely give him a follow on Instagram. And I see him popping up, doing Facebook lives all the time, constantly delivering content about this crazy world of note investing. And so if that's something you're interested in, I wanted to, you know, shake things up a bit this week. Step out of you know, the traditional landlord flipping kind of conversation, because that's really, that's not all there is when it comes to real estate investing. And if I was to talk about only that, then you'd be missing out on a lot of the legal stuff. And even if you don't think you're going to go down the road of node investing now or in the immediate future, I think it's important to understand this world of lending, this world of debt, because chances are you're on the other side of it. And so it's important to know, even as a borrower, what kind of considerations are, what your rights are and what the other side can do as well. And so with that being said, Scott, thank you so much for joining us this week.

It's been an honor and everybody out there listening, make sure you hit that subscribe button and go over and leave a five star review for Bonnie. Yeah, love to hear that stuff. Love to communicate. So do that. We work our ass off, we can as podcasters to bring content to you and the quality people. Bonnie's doing a great job with this. Show her some love. Hit that subscribe button, hit that five star review and really leave her a five star review.

Scott, you're coming on every week. You're going to level up my podcast. Next thing is people know I've got all sorts of bells and whistles going on and so you have set really high. And I've enjoyed, you know, listening to your podcast as well. The real estate investing podcast community is just a really cool place to be and I'm happy to be a voice and just a part of it with a lot of other, you know, really niche down, interesting thought leaders and it's a special place to be. So thank you so much, guys. Thanks so much for joining in again this week. If you couldn't tell, I had a lot of fun during this interview with Scott and I thought it would be fun to have someone come in and talk about a totally different area of real estate investing than what we normally cover here on the podcast. I'm going to make a concert of effort to have more guests like that on the show as well so we can talk about the legal stuff in some of these more niche real estate investing exit strategies. Next week, guys, will be the Q and A episode. Earlier in the month I asked for your questions all about financing in the Good Bones Facebook group. I've got some great questions and also sourced a few from some horror stories that I saw percolating in some Facebook groups. And so stick around, same time, same place next week. I think you guys are really going to enjoy that show because I know that there's a lot of misconceptions and concerns when it comes to financing. Unless all of us are acting as Dave Ramsey or something, most of us have got a loan here and there. And so I think you'll really enjoy next week's episode. And until then, I'll be over in the Good Bones Facebook group. Bye for now.

If you want to to continue the conversation, jump on over to the free Good Bones Real Estate Investing Facebook group. That's it for this episode of the Good Bones Real Estate Investing Podcast. I'll see you here next week, same time, same place. Until then, go out and build the real estate empire of your dreams.