Mortgage Notes For Sale Could Be Your Ideal Cash Flow Hack, with Scott Carson

Welcome to the Cash Flow Hacking Podcast where we help people increase their cash flow. We do this by talking to the experts who have a proven financial strategy that has worked for them. We get the inside info with the.

Smartest people by taking a deep dive.

Asking the right questions, and getting specific action steps that you can use. We study the experts who have defied conventional wisdom, who have unlocked the doors to greater wealth, and we share it with you. For those of you who realize that you're not yet at your full potential, you're underemployed, or you're simply looking to grow your cash flow, this is the podcast for you. Welcome to the Cash Flow Hacking Podcast hosted by Casey Stubbs.

Hey everyone, this is Casey Stubbs from the Cash Flow Hacking podcast. And today I'm very excited because I have the CEO of We Close Notes, Scott Carson. Thanks for being on the show, Scott.

Hey, man, thanks for having me, Casey. Good morning, good afternoon, good evening, everybody. I'm excited to be here and share some cash flow strategies from a little bit of a different angle.

Yeah, I'm actually pretty excited about this because last week I had Ross Striker and he was talking about creating passive revenue through investment properties. And I'm starting to get into that myself and trying to generate some extra revenue there. And I think you have an additional way to make some money in real estate that I think our listeners would be really interested in.

Yeah, it's definitely interesting. I've been buying mortgages actually since 2005, so going back over 14 years. And what we love to do with we close notes is that we're actually buying distressed mortgages from the banks and different hedge funds that we're coordinated with. I mean, I've got contacts, over 5,000 banks. For those that don't understand if you've got a mortgage or you've got a credit card or a car loan, student loans, whatever, everybody's in the paper game. We're just most people are on the wrong side of the payment streams you're paying out versus getting in. And what I do is we're buying these mortgages from banks on residential and commercial properties, but since the borrower is not paying on time, they sell that debt to me at substantial discounts. And so what our goal is when we buy this debt at a discount is then to reach back out to the homeowner and try to work out some sort of trial payment plan, loan modification, some sort of win win to try to get the borrower back on track. Now, that doesn't always happen 100% of the time, obviously. But about 60% of the time, we're able to negotiate with a homeowner in some sort of fashion and really start get them re performing. Whether it's. They just went through a bit of a financial hiccup, you know, divorce, job loss, got sick, you know, whatever it might be. You know, the banks aren't always the best at negotiating with homeowners. And the fact that we buy the debt at substantial discount gives us a lot of flexibility to be creative on our side.

Okay, so you're basically kind of like a collection agency for real estate, except hopefully you're like, a lot nicer than those collections guys, because those guys are ridiculous.

Well, so that's. Yes. No. I become a bank, basically. I become the bank. I'm not a collection agency. Collection agencies is just gonna try to collect, collect, collect.

Right.

What's owed. They're not gonna really offer up a lot of things. So when I buy the note, when I buy the debt from the bank, I don't own the property yet. Cause the homeowner still owes the property, I own the mortgage. And we've got about 10 different ways of working out with the homeowners. Now. If the homeowner tells us to pound sand and go F off. Yeah. Then we'll just hire an attorney and our attorney, then we will hire the collection agencies to do that. But if you've got a mortgage on your house, you've got probably a servicer that's sending you statements monthly. Or if you bought a house, you probably got a letter about a month afterwards that your mortgage has been sold to somebody or the guys that are buying that stuff.

Typically, when you purchase a mortgage, how far behind is someone on the payments?

Good question. It varies. Sometimes it could be 90 days. Other times it could be like five years. And so I have bought. The worst was seven years that I bought a mortgage where somebody had not paid in seven years. That's pretty cool. They were still living in a house, right? Yeah. Impressive. The mortgage had been sold like five times. Okay. That didn't necessarily mean they were a bad person. They're just that they were trying to do a low mod. They were way upside down. It wasn't anything to any fault of their own. It's like they owe 250,000, but the property's only worth 100 now.

Right.

You know, there's a lot of people that, back going back 10 years ago, we're in the same kind of boat. And still to this day, still to this day, there's still about four and a half million homeowners across the country that are upside down in their house, one out of every 11 homeowners is late. So roughly 9% of every homeowner in America. And there's literally just under a million people out there that still owe twice on their house than what it's worth.

Yeah, I can understand that. I've been in a couple situations in a couple of the houses I bought like that. And what I've done is this like, okay, well, I did the deal, so I'm gonna pay it, you know.

You know, that's a good thing.

Yeah.

You know, and some people are doing that. Depends on how long you're gonna keep it. But there's some things, I mean, if you get out of work, you know, you're laid off, stuff like, you know, not everybody can do that. And I only. I empathize with borrowers because back in 2003 and 4, I was like that as well. I bought a couple investment properties here in Austin, Texas, at my primary residence. I was gonna be a landlord. Didn't know I overpaid for the properties. Our primary employer in the area where my houses were laid off, a ton of people. So my houses went vacant. I was trying to make, basically, and then I got laid off as well. And so I was trying to make six mortgage payments, three first three seconds on a private school teacher salary for my ex wife when I was married at the time. So bad things happen to good people all the time. Unfortunately. The banks, when they're reaching out to homeowners, you know, they don't really empathize. I mean, it's kind of a. You have an hourly employee who's just getting paid to process paperwork for the most part. And then you have somebody who's very passionate who just wants some options. But unfortunately, most people don't realize that the banks are going to want the full amount back to you. If you're six months, they want full six months. And most people don't have that six months to pay. And that's one of the things that we take in consideration when we buy the debt is if we can get the homeowner on the phone and they can start making their existing payment. Hey, let's start there and work our way backwards.

Okay, well, this is really. This is pretty good. I like what you're saying because for one, like, the idea of helping people make it through okay. Because I'm in the same. I'm just like you, man. In 2008, I was in a construction Laborer. And I lost my job because of the market was dead. So I was laid off. No construction jobs. And I'm really struggling. I couldn't make a couple house payments. I couldn't make some other payments. So I know what that's like. What I did, my strategy was I would just reach out and call the bank many times and be like, listen, just trust me, I'm going to pay you something. And so I would just even pay as little as like 50 bucks just to keep them off my back, just to give them some confidence. And that worked. But I like what you're doing and helping people out because I know what that's like. Now, my specific question is, how can what you're doing now be used for regular investors like me? Like, how can I jump on and try to do this type of strategy? And is that something you do also as you teach others to do what you're doing?

Yeah, great question, Casey. So, yeah, since 2010, I've been teaching workshops on how to do it. That's where kind of we close notes popped up. I was the note educator of the year in 2014. We teach about three to four online workshops a year. There is this niche. When you think about landlords or you think about fix and flips, they've got huge, hundreds of thousands, not millions of people in the country are doing that well in the notes space. It's a much smaller niche because most people don't know about it. And there's probably religiously, maybe 10,000 total note investors like myself out there that are tapping because really this type of market hasn't been around. It used to have to have like 5 million, 10 million to tap into it to buy a portfolio from a bank, but happened 10 years ago. The banks became a lot more lenient and who they sold to because they just didn't have the big buyers around anymore. So you can get to it. You can get into it. I mean, if anybody learns anything from this podcast is that you're not going to call your bank of America or Chase or Citibank and go in and try to buy your mortgage or somebody else's mortgage money. They're just way too big, right? They want you to still write a $50 million check and the price doesn't make sense. But there are still a tremendous amount of over 4,500, 4,700, something like that. Different banks and lending institutions across the country that all have bad debt. They all have, as I like to say, naughty notes. And they're oftentimes once A note goes into fall, especially if it starts hitting like six months in default, the bank is ready to move that because the value of that note is somewhere around really 40 to 60 cents of what the note was written at. And the banks don't want to own real estate. Whether you believe that or not. They would rather own the paper and then the payments.

Yeah, I believe that. Okay, well, I've got a ton of questions now. You just opened it up for me. Now that I'm just going to start with probably the first question that everybody asks, which is probably not the right question, maybe it is, how much? What kind of ROI are we looking at? So per dollar return on investment. Because that's what I always look at when I'm doing investments.

Great question, great question. So there's kind of two categories. When you're a note investor. People will either like buying non performing notes and then trying to work that out with vendors and servicing companies and attorneys. That's where you're going to get the highest return on investment. Because if you're buying, I'll give you an example mortgage. Let's say this mortgage is 100,000 on a house, it's worth 80. A normal mortgage payment on $100,000 mortgage, probably around, you know, $800 a month. If I come in and buy that mortgage, I'm not gonna pay premium. I'm probably gonna pay about 50 cents on the dollar as a value. So if it's worth 80, I'm not gonna really pay more than 40 grand for it. All right, Now I'm gonna reach out to the homeowner and try to say, listen, hey, I know you're six months or 12 months behind. Let's work out something makes sense. Can you start paying $800 a month, which is our big goal. So if they start paying $800 a month, P I 800 times 12 is 9,600, right? 9,600 divided by 40 grand of what I paid for the mortgage is almost a 20% return right there.

Okay.

So I'm gonna ask for the borrower to bring a little bit extra to the table, you know, a little bit extra skin in the game to try to keep them in the property. And so that's the thing. I like to get nice cash flow along the way. So we try to shoot where if we get them re performing, the cash flow is going to come in at least 15 to 20, maybe 30%, depending on what we negotiate. And then what happens after we get it re performing is that we'll sell that Note off now to a fund at like 80, 85 cents of the value of the property as well to a fund in New York or California or something like that. So we've got cash flow over 12 months, about 10 grand coming in cash flow. And then we sell that note which we paid 40 grand for, we're selling it 85, let's just say 80 cents on the dollar just to keep it simple. So 80 cents of 80,000, that's we sold it at 64. That means we just netted another $24,000 but will be paid for the mortgage. So if you take the 24,000 between what we bought the note for and sold the reperforming note at, plus the 10,000 in cash flow, we just got in basically 34,000 on a $40,000 investment over 2012 months.

Okay, now you actually lost me a little bit there for a minute. I think there was another step somewhere. So once you get the note back on track, you then resell it at a higher rate. So you are really rehabbing the loan essentially.

Exactly, we're rehabbing the borrower. Exactly. And that's the thing. We can get them to start paying on time for six to 12 months. It recounted cash. The loan is now a re performing loan. Alright. And that's kind of the second phase. And a lot of investors want to come in. They don't want to do the dirty work of reaching out to homeowner negotiations, trying to get on time. They would rather just invest some money and get a nice above average return on their money. So performing notes will often sell to investors somewhere between 8 and like 15% return on investment.

Okay. So I can be right now if I've got some money and I'm looking to get started, I could be either a distressed note buyer or a rehab note buyer. And I just pick whichever one depending on the amount of work that I want to do and the type of return that I want.

That's a, basically a lot of people that are coming to us, they're working full time jobs. You know, they may have 10 hours a week to put into it. But what they do is they like to focus on, okay, if I've got my cash, great. A lot of times I'll go into buying performing notes because if they're happy, like a 10 to 12% return on investment. A lot of people like me back in 2010, I didn't have a lot of capital because I was, I had houses and other things that were going south. So I went out and raised capital. But I was buying non performing debt because I got a much bigger discount. And the thing that I really love, besides just the discount, because we get assets a whole lot cheaper than people buying it as an REO or in the foreclosure market, things like that is the second thing is what we're getting lists sent to us on a quarterly basis or sometimes monthly basis from banks. We're not having to go out and do direct mail pieces, postcards, yellow letters, door docking, any of that stuff. We just send out email blasts to asset managers at banks and they'll send us their lists of distressed debt that they want to sell off. So that's the second thing that's really good. Better pricing, but also a lot of deals without doing. I have to do a lot of work. And then thirdly is we're seeing deals and properties six to 12 months before it ever hits the foreclosure auction, before it ever hits the mls. And so that's a really great thing is it's we're higher up the food chain or as I would say, higher up the, the river, closer to the source than being down at the very end.

So, okay, now buying distressed sounds a little messy to me. It sounds like it could be, there could be some major issues there. So I have a couple questions in regards to that. Number one is when you look at a loan that's distressed, do you analyze it and say, okay, do you have like some kind of ratio and say, I think there's a possibility I could help these people. And then some of them, it's like, there's no way these people are in big trouble. So there's a way to filter out that way. And then the second question is, what is the process for once you purchase a distress note to get people to get their note back in line?

Good question. So yes, there is a lot of due diligence when we get these different lists. And there are some areas that I don't like to buy and I don't buy in New York or New Jersey just because it takes forever to foreclose there. I don't buy in Chicago or Crook county, like I like to say, called Cook County. It just takes forever to foreclose there because every state's a little bit different. Like Pennsylvania, where you're at, is about a year to foreclose. Well, here in Texas it's like 30 days to foreclose. So when I look at a list of notes coming, I look at the states and that helps me determine now if I'm buying in Pennsylvania, I'm gonna get a bigger discount because it takes longer to foreclose than I would here in Texas. With a fast foreclosure, I'm pay probably 70 cents on the dollar for non performing stuff here in Texas, whereas I'm probably going to pay 40 cents in Pennsylvania. So I'm able to, the longer the foreclosure timeframe, I'm able to help me get a bigger discount as well. Now a thing as well that we look at with due diligence is we're checking taxes. That's a big thing. Hey, making sure taxes haven't wiped out with a tax foreclosure, are they current? Are they making payments on their taxes? With us being the bank, the county record and even the utility departments will give us a lot of information that they wouldn't give some stranger calling in. But since we're the bank, often calling the local gas or the electric or the water, we'll call and say, hey, can you tell us if the borrower is on time? You know, have they been late? Is the power on, water on? If water's off, it's probably vacant for the most part. And I don't like vacant assets because if a house, if somebody's moved on, it's been vacant for a year or two, I can guarantee that the copper goblins have showed up and the air conditioner is walked off. All right, so we send realtors out to look at these assets. You know, we're pulling comps, doing a lot of work, checking the payment streams. We're calling the servicing companies or the servicing company sellers providing servicing notes. So we see if the borrower has corresponded with, with the previous owner that we're buying the note from, or the previous bank, seeing that they've been aggressive or they've been trying to work out. We also get copies of the collateral files, the loan files and all the notes. So like if somebody's trying to do a loan modification, Casey. And they've sent the documents in, I'll often get copies of that electronic that I can read through and I can see, oh, hey, this homeowner has been trying to do a loan model. Okay, that's great. Or they've been trying to do a short sale, you know, or they tell the bank to go f off. That'll help us determine what's going on. And we'll make our bids to the banks. You know, they give us pricing guidelines, roughly, we'll make some bids to that. They'll come back either accept or counter, or we'll Counter. The counter. But once we get an approved offering, something we like. And we're also doing some social sleuthing, or as other people say, Facebook, stalking our borrowers too. Stories where you were buying a note in Orlando and the lady posted on her Facebook profile, hmm, do I make my mortgage payment or to go to Disney World this summer. You know, I had another guy who was a bar, and he was going through a bit of a transition. You know, he was gonna pay for his implants before he was gonna pay for his mortgage payment. You know, so we do a lot of that sleuthing. We're checking things, you know, we're. We're always looking, driving the properties as well. I mean, I don't jump on a plane and I can't look at probably. I own 400 plus assets across the country. So we send realtors. And part of the reason I actually started teaching in 2010 was helped build a network across the country that I could pick up the phone and call people to drive by as well, too. So a lot of due diligence goes into it. And then once we wire the money and close on the deal, then it's kind of the process that kind of is. The second question you asked is, you know, the servicing, if it's with a servicer, say like Ocwen Loan Servicing, who are buying. And there was a pre Servicer, Well, r will transfer that from that servicer over to our servicer, which is in New Jersey, a company called Madison Management. And then Madison will send out letters. Ocwen will send out letters saying, hey, thanks for not paying us. Now you cannot pay Scott Carson via Madison. Madison will say, hey, thanks for not paying Ocwen, but now you do have to pay us. Okay. Our servicers are trying to reach the borrowers, trying through something called right party contact. You know, that's phone calls, letters. They'll send out door knockers to talk as well. If we can't do that, we'll hire a skip tracing service to try to track down where the borrower's working. Oftentimes we'll know that ahead of time. But once we can't really contact the borrower before we own the note, we can just do a lot of due diligence. So, you know, we'll send out people or call their work or send out people to work just to try to communicate with a homeowner trying to come to sort of some sort of situation. Now, I'm not the one on the phones where the borrowers, our attorneys are our servicers. Are. And then they report back to me on a weekly, bi weekly basis saying, hey, here's we've reached out to these borrowers. Here's what borrower A would like to do. Here's the situation. Do you want to keep them? You want to let them go? And the great thing too, Casey, is we got really kind of 10 ways that we can come to kind of an exit strategy. Foreclosure is one of those. That's my least favorite, but it still happens about 30 to 40% of the time. People just don't open their email and don't want to work with you. The second thing is we'll often offer up like cash for keys. Hey, you can't make a payment, you're not sticking to your agreement. Let's give you some cash just to walk away to avoid foreclosure. And that's kind of called a deed in lieu of foreclosure. That happens about 20, 30% of the time. And then there's a whole lot of different modifications, trial payments. We'll let people have their family come in and assume the mortgage through, you know, a father or children or niece, nephew, whatever that works out. We'll often approve a short sale if they're trying to sell the property, we'll approve a short sale. A lot of times that's pretty. It's a lot faster to do with what we do versus a traditional short sale. It can take nine months. And then sometimes we'll get paid off or we'll negotiate a short payoff where they'll just come to cash and pay us off, either cashing out their 401k or going and getting a loan. So those are kind of the nine strategies. The 10 strategies, like I talked about beforehand, hey, if we can get it re performing, then we'll sell it off and bring in the cash.

Well, what I like about this is there's a lot of options, right? There's a lot of options out there, a lot of ways to make some money on this. I think one of the things just for me thinking about it, I'm always thinking about different investments. I'm just wondering. It seems kind of intimidating to get started. It seems like you got to educate. There's a lot of information you got to know. You got to know where to find these notes. You got to assemble a team to start working on these distress notes. So that's kind of like, okay, the returns might be nice, but it's probably a little more than what I can get into.

That's a really Good question. I mean it's a really great comment. A lot of people feel that that's part of the reason I started teaching workshops on this. And it's literally you could not given the best three questions that people ask all the time. So like what we do with our workshops and this is we spend one full day in showing you how to find assets. There's so many asset managers out there or hedge funds that have stuff. There's literally, you could literally spend like 30 minutes and I can show you how to pull like 3,000 asset managers in 30 minutes. You have their contact information, their email addresses to reach out to as well. So that's one of the big things that we teach people. Don't go after like the big five or 10. There's plenty of smaller regional banks that are playing stuff. And as far as teammates, this is a vendor driven industry. So like you're gonna have a servicing company that's gonna get paid on the loans. You know, that's pretty easy to find. Madison Management, there's a bunch of others out there. SN Servicing, fci, a whole variety of services that are there to help protect your assets. Attorneys, there's plenty of real estate and foreclosure attorneys to help you out with that. So that's a great thing. There's insurance out there, there's vendors that will cover your assets too in case something goes wrong. You get a vindictive bar or something like that. And like I said before, the servicing company and the attorneys are going to work on your behalf. So they're going to do most of the bar outreach to make sure they're good. Although some of my students, they like to make phone calls or they'll go knock on the doors themselves. I'm not a big fan of that. I think you should delegate the time, especially if you're working full time, you just don't have the resources for that. But there's also, you know, there's collateral review companies that will help you walk you through and look at the collateral. Our big title company, we use Pro Title usa, they'll pull the title reports for you, see what's as far as liens on there. Then they'll walk you through what's on there and tell you what's good, what's bad about it. And then ultimately there's a lot of training out there. We've got roughly about a thousand different videos on every little different niches of what's going on, different solutions and things out there. So it can be intimidating. That's why we started calling our workshop Note Buying for Dummies. That's trying to help. It helped me perfectly when I was buying years ago. I mean, luckily enough I had apprenticeship for a couple years while I was running a mortgage company for an investor. He was teaching a lot of the creative financing, the owner financing, the wraparound strategies, and then also the distressed debt side of things. And so it's such a great niche. I mean, I can do this business from anywhere, whether I'm here in Austin right now or if I was in the Bahamas a few weeks ago, or like last summer I was over in Spain for a couple weeks on a European vacation and I was negotiating back and forth via Facebook messenger with my servicer and my attorney as they were modifying some of my borrowers. I mean, we get some really great stories. I mean, that's what really makes it worth is helping somebody stay in their house and they get back on the right path to home ownership. Of course, we do have the stories of people just calling, calling up and leaving messages, cussing us out. Like, listen, we offered you different strategies along the way to help you keep in the house. I don't run a charity. You lied to me or you told us you were going to do something, you didn't follow through with it. I can't help you if you're not willing to help yourself.

Well, Scott, this has been really informative because before talking to you, I did not know anything about this. I didn't even know that this revenue source existed. So I personally am really thankful that I could talk to you today because now I know a lot more. I still got a lot to learn. And so that is where I'm going to ask, can you tell us a little bit about how to get in contact with you? Where can they find you? Where can they find more information about the services you provide and just more information in general about how to take advantage of this potential cash flow strategy.

You know, that's. That's a good question. So, yeah, really easy. You just go to our website, we close notes.comweclosenotes.com very simple to find. We've got our podcast on there that we do also called the Note Closer Show. We've just done episode 420 with our podcast as well. So it's rock and roll along. That's where a lot of people kind of get their feet wet because we do a lot of interviews with investors and vendors and then I cover different niches in the industry, their case studies or specific nuggets each day to Help people on their way. They got understanding it. I will tell you this, it's not quite as intimidating as most people think. What people don't realize is like I said the very beginning, we're all in the cash flow business. It's just that we're paying cash out versus getting cash in. The biggest thing that a lot of people get confused is they start thinking of it as like a fix and flipper. Well, we're not in a fix and flip business. We're more of a banking mentality. So I'm really kind of teaching you how to have that banking mentality. But if you go to weclosenotes.com, you'll find plenty of stuff there. And I'd love anybody that's interested and show it's interested. We do a quarterly workshop. You know, it's a three day online workshop through zoom, like we're recording here now. I would love to camp comp anybody in to my699 workshop for free that listens to the show.

Oh, well, that's cool. How would they contact you with that? Would they just mention the name of the cashflow hacking podcast?

Yep. Just go to Scott at we close notes.com, say hey, Casey sent me and I'll be glad to comping our next one or send you the replays of this after. Like we have the next one I think comes out. Our next workshop is just after Valentine's on Valentine's weekend in February. Next one will be in May. But yeah, anybody that's interested, we host them all the time. We give the replays to people as well to watch so they get a good. Because I make most of my money off the note business, not the education side. My goal is to help educate and I have a big goal that I set last year to help create and educate 10,000 note investors in five years. We did our share in 2018 with it being 2019 and beyond. We really want to try to hit our goals. I'd love to anybody interested in cash flow? The note business is really where you want to be. You want to end up being the bank.

All right, I agree. That's really good. Well, thanks a lot for coming on the show, Scott. Really appreciated having you been an honor man. Awesome. All right, well, that's it for today's episode. Go and visit Scott's website. We close notes.com and if you like the show, please leave a review on Apple Podcasts. We really appreciate it. Thank you.

You have been listening to the cash flow hacking podcast. Thank you. I hope that you will take some action steps on the information that you've learned in today's episode. It is critical that you don't just learn, but that you actually do something about the information you learned. Go back and listen again and write down what you're going to do about what you learned today. It just might change your life. If this podcast was beneficial to you, please go to itunes and search Cash Flow Hacking Podcast and leave a review. Also, if you want more financial tips and wisdom and you want to interact with me directly, you can always follow me on Twitter. Just search for Casey Stubbs thank you for listening to the Cash Flow Hacking Podcast.

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