Note Investing, Analyzing Liens, Managing Deeds, How To Scale Note Investing And The Shape Of The Market With Scott Carson From Investories - Real Estate, Investing And Mindset With John Hooper And Kyle Robertson

Welcome to Investories, a podcast about real stories, real estate and taking real action. Join hosts Jon Cooper and Kyle Robertson as they talk investing mindset and taking that first step. We all have a story. What's yours? The Investores Podcast.

Welcome to Investorees Podcast. I'm John Hooper and with me, my co host, Kyle.

What's up man? That was, that was very official. No booyahs, no, none of that stuff. No claps. Remember the clap? Oh yeah, I phased out different kind of clap. It was actually.

Well, we'll get onto that later.

Yeah, the listeners are like, what in.

The world are these guys talking about?

But you got a little surprise there toward the end of the podcast when you listen to this one, guys.

Yeah, so I'd say listen to the end first of all. Listen right up to the end first of all. Because there's an amazing offer within this podcast and it's not often you get an offer that makes you feel too stupid not to accept it. So I think it's well worth a listen. So Kyle, who have we got today?

Yes, we got Scott Carson on today and this was something I've been excited about for quite a while. So Scott is the note guy and he's got an amazing business built around investing in debt essentially. Just the real quick version of it is he will contact institutions which that which loan mortgages to buyers and he purchases non performing debt. And I'm not going to get super into it because I want you to listen to the podcast, but he gives a lot of really great ways or a lot of great advice on how to get started in doing this, how he has arranged his business around this particular model which really just takes all the. We typically talk about real estate investing here and all the methods of being a landlord and how to source deals and this, that and the other. And this is the other side. This is the other side of the book, which is the debt side of the book. And it's pretty neat to listen to everything he has to say he does have. He gives all of our listeners this incredible offer at the end of it, which everybody needs to take advantage of. I am going to take advantage of it and go through all these things because like I said, I was excited to hear about this. This is something I've never really studied up on before and I learned a ton from this episode.

Yeah. And I don't have much more to add, obviously. Give us a five star review, blah, blah, blah. Email us@investorizpodcastmail.com but without further ado, super excited to bring You, Scott Carson. Welcome to Investore. Scott Carson.

Hey, Scott, what is going on? John and Kyle, how's your Friday going today?

Good. I like the boost of energy you've, you've added to it. Actually, the coffee was just kicking in.

So the coffee, the coke, not the cocaine. But all right. There some people. Oh, we got an interview versus Coke. It's not the original coke recipe, but anyway, it's Friday right now. It's before a big holiday, obviously. Fourth of July is coming up here and it's been a good week, I'll tell you that. It's been a great week. It's a good Friday to wrap it up and I'm excited to be on here. I know we've had to reschedule a couple times, but just jacked up, man. I'm really looking forward to this podcast episode.

So Scott is a wealth of knowledge about notes and buying notes and all that good stuff. We're going to dive into that. He's the founder of we close notes, so check that out. And Scott, perhaps you can start with giving us a bit of background where you come from, all that good stuff. Sorry.

I'm one of. I was born in a dirt floor in a ramshackled shack. No, no, no. I'm Austin, Texas is home. But I got a degree in marketing and finance and started off as a banker. My professional career for the most part, besides a couple other jobs, I realized I didn't like him and I got into banking and was a mortgage banker with that. And then when everything hit the fan back in, well, right prior to 2008, for four years, I was able to kind of work with a guy and gal who taught creative financing, you know, owner financing, wraparound mortgages subject to. And they had also been a mortgage banker back in the day. So I really had like an apprenticeship while I was doing originating mortgages. We started a mortgage company and did that for four years and but at the same time, I was able to learn a lot of the creative financing techniques for real estate investors and started dabbling in investing myself. And then when everything hit the fan in 2008 here, I kind of sold my half of the mortgage company for a buck because that's about all it was worth. And then just basically instead of originating, I started contacting the banks, the mortgage companies, the hedge fund stuff like that that originate stuff to buy their debt. I basically became a debt investor. And what does that mean as a debt investor? I'm buying mortgages from banks, lending institutions, mortgage brokers, private investors like you and me, most of it's usually institutionally originated, you know, with a bank or a lender we'll buy some owner finance stuff but for the most part we're buying non performing notes first liens only from banks and institutions at a big discount because the borrower hasn't paid in like six to six months to six years in some cases. And you know, I just started dialing for dollars back in 2008, made 54 phone calls, got 53 no's and on the 54th phone call I got a yes. That led to a $5 million portfolio that we bought and brokered. And fast forward now, hard to believe 15 years later, roughly from when I started, bought over a billion dollars in distressed debt on residential commercial properties. And I've been educated the year once or twice and bought a lot of houses by buying the debt and controlling the debt without really ever owning the house and then working to modify the borrowers that were in it, either keeping them in it or working with them to leave the property in kind of a humane way versus foreclosure. We still have to foreclose a chunk of the time. But I buy debt. That's, that's all that I really focus on. And I will tell you right now, everybody's in the debt game. Everybody's in the debt game. If you've got a mortgage on your house, a car note, student loan debt, credit card debt. Kyle, if you owe John 100 bucks on an IOU written down on a piece of paper, you're in the note game. You're just on the wrong side of the payment stream. The payments going out versus payments coming in. And that's what I love teaching investors is this is a niche obviously within the niche of real estate investing. Most people don't when they think notes that they go under financing on terms or something like that. And that's a facet of note investing. But it's not like what we do where we're, you know, we go our sellers, people that send us leads and stuff like that are banks. We, we reached out directly to banks, lane institutions and they may send us a list of one, a list with one note to a thousand notes that we can cherry pick from. And so that's a little about me. I love what I do. You know, we've been teaching classes on it for about 12 years and helped a lot of, not only a lot of borrowers stay in their house, but also a lot of investors make a lot of money in the notes space as well too. And I'm excited about what's going to, what's going on in the markets and what's going to happen the next couple of years. So I'll show up and let you ask questions.

No, that's all right. And this is something that I was telling Scott before we started recording that I was excited to record this show because note investing is something I've always been interested in and never educated myself on. I'm just kind of a good old fashioned investor where I like to buy real estate assets, actual buildings themselves. The debt has always really intrigued me. So I'm curious about just the steps on how you do this. Obviously there's a lot of networking, there's a lot of, because contacting different banks. How do you even start in something like this and what exactly does it mean that you're buying the debt and how do you even make that kind of a thing happen?

Yeah, that's a great question. Those are very, very common questions. Glad you asked that. So with, let's, let's compare it with real estate investing. With traditional real estate, you're going out to the MLS or you're mailing out postcards or door knocking or yellow letters, trying to find somebody who's distressed, who wants to walk away from their house, right. Or wants to sell their house or something like that. But well, we don't deal with the consumer on the front end. We don't deal with that at all. We are just basically going direct to the internal departments, the banks and the internal departments that handle the debt sales or the mortgage sales are different. Now if you're listening to this podcast, please don't go into your local bank and knock on door, say, I want to buy some notes. I heard a podcast, this guy, Scott Carson told me I could buy your notes and the banks will laugh at you and kick you out. As an ex banker for JPMorgan Chase, I didn't even know that banks sold notes. They don't teach you that there. The bank. So banks are constantly moving paper portfolios. If you've ever gone out and bought a house and put a mortgage on it, probably 30 days after you close, you got a letter in the mail that your mortgage was sold from one company to another company, right? Oh, hey, you're now making mortgage payments to ABC bank or bank of America, because we bought it from ABC bank, whatever. Well, we do that as well. We're just a little smaller basis than like bank of America. So. So we reach out to these departments, the banks and like the big banks, they go they'll have what's called a secondary marketing department or a secondary marketing manager. Pretty decent sized banks will have, regional banks may have something called the chief credit risk officer that you may have a REIT who has a special assets manager or secondary marketing manager. I don't remember what I said first. And then you have a, like REITs, insurance companies will have a person that handles the mortgage trading called the whole loan sales department, whole loan trading desk. And mortgages are being constantly bought and sold. And yes, a lot of them are wrapped up into like securities that are traded on Wall street and that's great. We don't buy from like bank of America, Chase, Wells Fargo, Citibank because they all want like a big $50 million portfolio and that's not really a big discount for us. So that leaves us like still thousands of investors or mortgage companies, banks out there. So we reach out to these departments. You can use LinkedIn, if you type in those titles, you pull people up that have those job titles on LinkedIn with all these different lending institutions. And that's when we would reach out to say, hey, are you the right person that handles your note sales for like Quicken Loans is somebody who we buy from big company out of, you know, Cleveland. And every quarter they send us a list after we've made the right contact, filled out a non disclosure agreement with them. They will send us every month, every quarter a list of their non performing notes where somebody hasn't paid in a while. We don't have to buy them all, we can cherry pick or pick one or two and go from there. So well, there's a due diligence aspect of it. And when you're buying a note, you're not just doing due diligence on the property, you're doing due diligence on the borrower. And then also the collateral file, the loan documents that was originated. We prefer to buy notes, like I said, that are non performing where the borrower hasn't paid in a while and usually where they're upside down, where they owe more than the property's worth. Like if the house is worth 100, they may owe 110, 120. And the reason we like to buy stuff that's upside down is the borrower isn't going to fight you that much. You know, there's no equity, they're upside down. Yes, they may have some pride of ownership looking for a while, but they don't. They owe more than the property's worth. It's not a lot for them to hold on to. So we'll buy that debt somewhere around like 50 cents on the dollar of the value of the properties. We might pick up that note for 50 grand. Now, the borrower still owes their 110. And their lack, you know, the last year they haven't paid let me owe 120 as their payoff on our goal. Since we bought it at such a big discount, that gives us a lot of flexibility to reach out to the bar and say, hey, what happened, man? You know, what country western song have you gone through? You know, you go through the big D, don't mean Dallas. You know, you get laid off from work to Covid kick in. You know, I mean, whatever it might be, you know, were you just depressed, your dog, like, whatever people. I've heard all sorts of crazy stories. You know, somebody's had like 12 grandmothers pass away. Like, that's physically impossible. But every month, I mean, but anyway, so we evaluate what's going on with the note and the property, make sure the values there. And then we look at the collateral. Then we make an offer. And then once we buy that note, then we hand it over to our servicing company, which is. Which is they're the. They're licensed in a lot of states for debt collection. And then they'll do the borrower outreach. And let's just throw some numbers out there, Just make it kind of simple. For right now, let's say borrowers, you know, they have a house that they, you know, owe 110 on. Let's say their mortgage payment is $600 a month. Let's just put it that. Keep it simple math. Well, if we bought the note at 50 cents on the dollar of value of the house, that house is worth 100. But they owe 110. Well, if we can get them to start making payments on time, you just take 600 bucks times 12 is 7200. Okay, 7200 divided by a $50,000 investment, what's that come to? That's about a 14% cash and cash return right there. All right. Now, if we can get them to bring extra to the table to get caught back up, that's an even higher return. We usually like to have them bring at least three to four months to the table. So in the first year, they may have brought, you know, the 12 months of payments plus four months. So that's 16 times 600 is 9,600 bucks, I think is what my math is right off the top of my head. And I may be a little bit. But that's still about a 20% cash and cash return just to keep them in the house. Now if we keep them in the house, we're not fixing the property up. You know, they're usually paying taxes and insurance. It's, you know, we don't have to maintain it. They're doing a lot of the work. We're getting great cash flow off this. And then our goal is at the end of 12 months of on time payments, guys, is that now it's not considered a non performing note anymore. It's considered a performing note after 12 months of on time payments. So we could turn around and sell this note for 85, 90 cents of the dollar back to Wall street, back to other investors. So now we bought it at 50, we got four months up front from the borrower, 12 months of on time payments, maybe a little bit extra each month. And then we sold the note for 85,000 12 months later. So we brought in 35 plus basically 9,600 is 44, basically 4,500 bucks on a $50,000 investment. That's a pretty good ROI.

That's solid. Yeah, absolutely.

You know what I mean? And so there's some costs or carrying costs, servicing costs each month. If it's a non performing up, may cost you 90 bucks a month for the first three months until they get back on time and it's 20 bucks a month. If they won't play ball with us, they tell us to pound sand, then we, we kick it to our attorney and our, the different attorneys in different states will start the foreclosure process. That could cost a thousand bucks here in Texas or like five grand or more in Florida, you know, and then, then if we foreclose, great, we, we sell at the auction, say, okay, it's worth the 100. Let's list 85,000 as our opening bid because they owe 110 and if it sells at auction, great, we got our 85 on a $50,000 investment in six months, you know, or if the borrower wants to work with us, but they can't, you know, they don't want to face foreclosure and they're willing to walk away. We may give them cash for keys to walk. You know, hey, here's two grand for you to walk. I know that you're upside down, you're behind by eight grand. I mean, if you can't, if you can't start making your payments, you can't afford it. Let's just let you walk away from this thing without a foreclosure you know, clogging up your credit for seven years.

And then for the property to you at that point. So they just go ahead, sorry.

Yeah, no, it's a deed in lieu. A deed in lieu of foreclosure. If there's a second lien, like a second mortgage, they would do a consent to judgment and then we would use that to wipe out the second. But yeah, we get people that deed the property, which is. I got one right now that we're working on in outside of Houston, borrows 220 houses worth about 230 was. He was deceased. The state took it over. We bought the note for. At this 109.

Oh my goodness, that's great.

It needs, it needs to be cleaned out. But the estate is signing it over as we speak. Actually, our mobile notary is meeting the folks to sign it over because they don't want to take it back to fix up the place. They don't have the money to fix it up. They don't want to keep the property because they live in New York state, not Texas, where their, their dad used to live. And so, yeah, we'll sell that. You know, we'll, we'll clean it up a little bit. You know, five grand for a clean out, roughly. And you know, you know, just to kind of get ready and just list on the MLS for 200, 210 and call it quits. You know, that's a great thing. But I like cash flow. I like actually keeping people in their houses because the cash flow is, is what's king these days. You know what I mean?

Yeah, absolutely. And so as far as the offers are concerned, because you said you make offer to a bank, is this just the same as in any real estate transaction where you can approach this bank, this person at the bank, and say, okay, well, we know this person owes 100,000 bucks, but I'm willing to give you 50,000 bucks for this right now. Is that as simple as the negotiation goes, or is there more to it than that?

There's more to it. You've got to make sure you're talking to the right department. You just can't walk up to the bank. It's got to be the right internal department of the bank, like one of those four making sure that they're willing to sell. So one of the things that we. A lot of people come to me, hey, Scott, I see this one house. Can I buy the note in this one house? I said, probably not. You don't know what's going on. How that mortgage is structured or what's going on with the bank. So what we do a lot of times is that when we get listed foreclosures, like in the county, I'll just scan the list. The, you know, the banks that are foreclosing, get rid of the bigger banks and I'll target the smaller regional banks and then we'll use that property that's going to foreclosure kind of as a hot lead. Hey, are you willing to, we're interested in buying this note that you're taking a foreclosure in a month or two. You know, are you interested in selling this note? No, we're already all the way. We're just going to go ahead and sell at the auction. Okay. Would you mind, you know, those sending me the rest of your portfolio and they're like, oh yeah, sure, here's, here's the rest of our portfolio that we would be willing to sell. And so we're buying in about 30 different states. So that's, that's, it's a little bit different. A lot of people are very, you know, backyard focused. They focus on one or two markets. Well, you know, the world is our oyster, basically, I guess you could say. I mean, we buy, you know, I buy a lot in God's waiting room of Florida, you know, I buy a lot in Michigan and Ohio as well. Indiana, I'm not a big fan of Crook County Chicago because it just takes forever to foreclose there. But you know, we buy in both judicial and non judicial states and the longer the foreclosure time frame, the bigger the discount you'll get. And I don't buy in New York or New Jersey because it takes forever to foreclose in those states. But for the most part we're buying stuff in states that take, you know, about a year to foreclose if that's the worst case scenario for us or less.

So you talked about what you look for. Is there anything you look for to avoid any kind of hard and fast rules of.

Yeah, great question. Get out. Very good question. Yeah, so I don't like, I don't like rural properties. That's one thing if it's out in the boonies, you know what I mean? Unless it's got some land on it. And then I might look at it for, for our own personal stuff or other things. Or we might flip that to somebody who's a local investor who's looking for land. But for the most part I want something in the city. I'm usually looking at Houses that are over a thousand square foot. Anything smaller than that, usually too small. You know, I want to make sure. If it's vacant, I got to make sure and put eyes on it. For the most part, it's occupied. I don't really. So I'll do. Drive by, have a realtor do a drive by bpo. But if it's vacant, I want to peek into it because I really prefer occupied properties. If it's a vacant property, it's probably going to need some work. It may have been vandalized. It's the middle of summer, so the air conditioner may have gotten tired and taken a walk about, you know what I mean, walked off on its own. You know, if it's in a cold state, you want to make sure that you don't have an indoor, you know, ice rink with water bursting or stuff like that. So those are some things I look at. So I prefer occupied assets because it just gives us a lot more exit strategies to get the borrower back on track for payments and deed and lose or modifications. We need to do that. But that's. That's probably the biggest thing is I just look at. I'm usually looking at assets that are 50 grand or more higher. And that doesn't mean we haven't bought smaller assets like before, because we have. I mean, we bought a lot in Michigan, a lot of contract for deeds which are very similar. But for the most part, I avoid the, you know, New York, New Jersey, Chicago. Not a big fan unless you live there. And then I prefer, you know, occupied assets for the most part. If it's vacant, that's okay. I just got to make sure it's in pretty decent shape or in good condition because I don't. I don't like doing heavy rehabs. It's just, it's not worth when you're trying to. If it was just here in Austin or here in Texas and Florida, my two favorite states, right. I would buy. I buy vacant there all the time. But in other areas, you don't want to be doing a rehab job a thousand 1500 miles from where you're located. You know what I mean? Especially today's work.

Yeah, definitely. We've been there and done that. It's not a whole lot of fun. That. A little bit of oversight. Even though I don't want to be in there swinging hammers, I'd at least like to see what's going on once in a while and have a team that I trust well enough to take care of it. So it's such an important, I'd imagine, you know, owning owner, doing this type of business in 30 different states. You'd have to build 30 different teams locally if you're going to be involved in the rehab process. And that just sounds like a nightmare in general.

Well, exactly, exactly. I mean, we leverage a lot of real estate clubs. I mean, we've got a network of students or other people across the country that we can, we partner with and things. But you know, if I don't have to re. If I don't have to rehab a property, I'm happy. I mean, if I can get far back on track and just think about it. I mean, a lot of people have, you know, you look back 15 years ago, there's always been defaults and foreclosures of people behind their mortgage. And then Covid kicked in and the government helped some people, but they just basically kicked the can down the road. If you can stop a foreclosure from happening in a neighborhood, it's not only affecting that borrower, it's also affecting the neighbors. It also affects the neighborhood and the city too, because it depreciates the market. I mean, a foreclosure on a street will reduce the value by 10, 20, 30 grand of every house around it. And that's the beautiful thing is when we buy the note that defaulted distressed borrower, distressed house may never ever show up on the MLS. I mean, when we buy the debt, we're six to 12 months ahead of investors that are fixing flippers or landlords trying to buy that deal themselves. So that's one of the great things I love about notes is we see stuff way ahead of everybody else. Bigger discounts and then a lot more exit strategy, which leads to a lot of higher returns for us.

Now you talked a little bit ago about a second position note and so oftentimes you'll get somebody that's got multiple loans on a property.

Right.

So first and a second. I can see that the second might be a problem once in a while in some of these scenarios. Is that accurate and how do you deal with buying or do you even buy properties? I know you said you buy first position notes, but what if it had a second position on it? Is that disqualifying for you?

Not always. Not all at all. It depends on the value of the property. Now it also depends what I'm paying for that first one. Now if they're underwater, and that second is basically over encumbered, where there's not any equity or any value to it, we'll offer the second 1500 bucks to go away because if I foreclose they're not going to get anything. You know what I mean? Now if it's a like an 8020 and a house is worth 100 and the second 20, you know, I still buy that, that first at a big discount, probably at 50 grand I'd probably pay because I think just of value and I couldn't take, I couldn't accept the deed at that point. My job would be then to go ahead and foreclose and I'd want to make sure that my payoff was if I got paid in full on my payoff, that's still going to be a good ROI to me for the most part. But there's a lot of people that have been bought seconds over the last couple. You know, it used to be a lot bigger market before the recession, you know, 15 years ago because a lot of seconds were created. The last 10 years we haven't seen many second mortgages originated just because they just haven't. And as values have increased over time, those that did have seconds on the seconds were fully paid off. So it wasn't too big a discount. There was a second. But most of the time we're buying first liens and there's, there'll be maybe judgments or medical bills or something, you know, mechanics lien behind our first. I mean we're pulling title to make sure we know what we're buying and that we have the right to foreclose.

So can you explain just briefly for the listeners what a deed in lieu of foreclosure actually is?

So let's say Kyle, you are behind on your mortgage, you owe 110 on $100,000 house and you can't, you're out of work, you're trying to move out of the house, you know, wife divorced you so you can't afford the mortgage payment. Not working. And so instead of us foreclosing, you know, and I and our team reaches out to you and say, hey, what's going on? Can you start making an existing payment? No. Can we modify the loan? Well, the only thing I can afford is dollar a month. Well that doesn't make sense for what we're doing. So let's do a deed and lie. Let's just let you walk. Let's take this nightmare off your shoulders and in 24 months you can go buy another house because that'll be 24 months of no mortgage latents. And so basically it's literally a deed. You're basically the Borrowers are deeding the property back to the bank. And that's what we do. We send you out, send out a deed. You're basically signing it, notarizing it, deeding it back to us. We then file a release of lien so that debt is expired. Once we accept that deed in lieu, really the debt is expired, but we still have to go file a deed, file a release of lien anyway so it's not showing up on your credit. We're really supposed to send a 1099 for any debt forgiveness, but we rarely do that. We don't want you to be taxed. If you're willing to work with us and save us from having to foreclose and do this in a month versus taking a year, we're not going to file a 1099 for the debt forgiveness and make you pay taxes on that. Now if we do have to foreclose and you're paying the ass, you sure as hell bet we're going to send a 1099 for whatever we don't get back. But then that's the thing is a deed loan just shows and we don't report it as a deed loan. We just report as a release of lien on credit. So the borrower's credit's no longer taking a hit with mortgage lates. And like I said, 24 months, their credit will be back up if they do the right things to go back out and buy a new house and get another mortgage. But if we have to foreclose, that foreclosure is going to haunt them and they won't be able to get a traditional mortgage for at least seven years. So that's why we try to edge. I mean, we're actually half the time educating borrowers and their options that are available to them. You know, hey, do you want to do this? Do you want to do that? I mean, we've done some deals too. Like I bought a house. I bought a note on a house in Jacksonville. It was part of a portfolio deal. The borrower owed like 45,000 was a little old lady on a wheelchair on Social Security house. You know, it wasn't worth much. I mean, so what we did is like, listen, can you pay the taxes? She's like, yes, I can pay the taxes. I said, okay, what we'll do, you live in there as long as you want, just pay the taxes. When you die, when you pass away, the house will come back to us. We'll go ahead and sign a deedaloo and just keep it in escrow with an attorney. So when it happens we just can say upon death. This is an active thing. And so we did that and she looked in there for two and a half years. Of course the value went up on the property, which is fine. But we kept her in her house. She loved another lady we did in Cleveland. It was worth 16 grand. This house. She had like 30 grand. I paid a grand for it. I just gave her back her house. I was like, listen, you got four kids, Merry Christmas, all right, you can stay in your house. I don't want your house. I'd rather take the write off of 1000 bucks and a loss in that and do some good for somebody versus the, you know, the three grand was a costume to foreclose and the rehab and it wasn't the greatest neighborhoods. Like I said, it was part of a bulk deal that we bought. She's like, oh my God. Really? Like, yeah, just make sure you pay your taxes, otherwise you're going to lose it to the county.

So you actually took a place that was encumbered by debt, which is part of a portfolio, picked out this house which cost you about 1000 bucks for this one in particular. And knowing that you were going to make money on the rest the of portfolio, you did the good citizen thing and gave her back her house completely unencumbered and just told her to pay the taxes.

Wow. Yeah.

That's incredible. I mean, good for you, man. I mean that's, that's putting a human back in real estate investing right there. I mean that's amazing.

Let me share a story with you. This, and this might get you guys tearing up here a little bit. So we see, I mean when we buy, I mean like I've bought anyone from a one off note for seven bucks all the way up to 250 assets at once, you know what I mean? And there's a lot of work and due diligence goes into evaluating these things. And sometimes it's an all in bid. The seller for the fund wants you to buy all of it. So you got to take the good, the bad and the downright, the fertilizer shit. Okay, so we bought this. What? We bought this portfolio and we were looking through the collateral files that showed up and it was this property in Illinois, south Illinois. Borrowed 60 on was worth maybe 35. Looking at it, her and her husband lived in the house for 18 years and raised three daughters in the house. And when we got the collateral file, the loan docs, it came with all this like this big banker's box. And I thought, like, 12 other loan files. And it turned out it was all, like, her correspondence with the different lenders. Because this mortgage had been sold four times in, like, four years. She'd been trying to do a loan mod. Hardship letters, you know, bank statements, tax returns. Been sent in, like, four times. I'm reading this hardship letter. Husband William, had a heart attack four years ago, and he was out of work for, like, two years. The two lenders. The first two lenders had. They wanted them to bring everything to the table. And they're like, I can't afford that. Their mortgage rate was, like, 450amonth. Okay? But with them being out of work and everything, they couldn't afford that. Well, it gets kicked down and sold off. Well, I buy. I end up buying this note for, like, 12 grand is what my cost basically was. Value's 35. So I bought 33 cents on the dollar. They owed 60. So I basically bought it for. Was that 20 cents of what was owed, okay? So I see those letters, and I'm like, let's just. Let's just do something good with this. So I start calculating. If she can start making her payment at 450amonth, that's pretty good. I'll have, like, a 70% return my first year. So I pick up the phone, and I actually negotiate this. Usually it's my servicing company. I pick up the phone, it rang, and this lady answers the phone. I go, hello, is this Mrs. Drummond? She's like, yes, it is. I said, my name is Scott Carson. I'm with Inverse Asset Fund. We are now your lender. We bought your mortgage a couple of weeks ago. She got like, oh, yeah. Like, whoa, what's wrong? She's like, I've just been trying to do loan mod, and every time we think we're going to get somewhere, the mortgage sold. I have to start all over again. I got to go pull. I was like, whoa. I said, tony, it's a good day today. I'm looking at your docs. I don't want you to send me anything else. Let's just. Let's talk here. I said, first of all, how's your husband doing? She's like, oh, my God, he's good. He's got back to work. He's working now for a couple months. That's awesome. So, okay. I said, could you start making your existing payments monthly? She's like, yes, we could do that. We just couldn't come up with four years of back payments. I was like, I gotcha. I got you okay, good. Could you bring five grand to the table? Not the full, like nine grand that you owe back payments, but could you bring up five? She's like, no, we couldn't do that. I said, well, what could you bring? She goes, well, we just got our tax returns. I could bring 2,500 to the table. I was like, that's great, awesome. Could you pay a little bit extra each month to get caught back up? She's like, yeah, I could probably pay $200 extra a month. I said, so? So, okay, so instead of 450, you're paying 650 and you bring $2,500. I tell you what, this is what I'm going to do for you. I go, sheila, if you will go meet my attorney in the next couple days and bring a $2,500 cashier's check, like you said, bring that to you, we will basically allow you to start making your payments. The 450amonth plus the 200 extra. And I'll tell you what, if you make your payments on time for 12 months, what I will do at 12 months is we'll revalue the asset, the property, if it's still only worth 35, 36,000, I'll forgive every dollar above the value of the property and I'll drop your interest rate from the seven and a half percentage that to zero. So every dollar you spend, every dime you pay goes towards principal. So if you do this, you'll have your house paid off in 72 months instead of 33 years. Does that sound okay to you? And she's like, what? I'm like, no, I'm serious. This is not like incredible. It's incredible. It's so incredible. So she's like, yes, yes, yes. I was like, okay, great. So sure enough, her and her husband showed up at 9 o' clock, two days later at my lawyer's office there they had the cashier's check and the loan doc. The trial payment plan that we put together for 12 months form was there. So let's add some. They brought 2,500 plus. They paid 650amonth for 12 months. 650 times 12 is what, 14 grand? Something like that? No, no, no. 650 times 12 is 7200. It's like 9 grand plus 2500. Basically. They brought out 12,000 to the table roughly in a year. Well, I paid 12 grand for this. I made almost 100% return on my note in my first year. Okay. And then she paid 450amonth for the next six years and paid off. But her and her husband both were in tears, crying at the closing of my attorney's office. And then about four months later, Christmas came around. And every time she was gonna be like a day late, she was like calling. I was like, no, no, you ain't told her to call me. It's okay. You've got seven day grace period. Thank you. Payment. You're good. So Christmas comes around. I get a Christmas card from South Maloia, Illinois. I'm like, who's this? I open it up, it's a family photo of them, William, Sheila, the three girls, and their new granddaughter. And they had named their granddaughter Carson after me. Oh, wow. Yeah, because we, you know, they raised these three daughters in there and they put a lot. It was the biggest of house. But, you know, we do a lot of good for a lot of folks if we can. I mean, that's a great story. I mean, I cry every time I think about it. It chills. But most people want to stay in their house. Most people want to work. You know, they want a job, they want the dream. It's a small minority of folks out there that try to take it, you know, take an inch and take a mile, but they don't pay and they're kicking the can down. I mean, we deal with the best of people, we deal with the worst of people and what we do and that's, that's why we always kind of have an arm length transaction. We let most of the heavy lifting be done with servicers or attorneys. But, you know, it's a fun day when you do something like that, when you can make money and you can help people at the same time. It's a good day for that.

So, Scott, I think that's awesome. I love those stories. And we talk a lot about community and a lot about connecting with people. And it's a people business rather than a asset or building business. That's super cool. One of the questions I'm going to take in a slightly different direction, but in terms of risk, so we've talked about a lot of upside. What are the risks to this strategy?

That's a very good question. It's a different mentality than buying a piece of property. You're buying the debt. And so the risk that we see a lot of investors make is they come in from a traditional fix and flip mindset. Oh, I'm gonna, I'm gonna, you know, buy this at 70 cents of the dollar. I'm gonna put this Much rehab into it. And my ARV is gonna be worth this? Well, ARV doesn't exist in the note space. It's all as is value. And so that's a different way of calculating. You gotta figure things out that you may never end up taking the property back. The second thing that you have to look at is you have to know that you're buying a note at the property. So there's different, you know, like some people chase equity deals like, oh, they only owe 200, the house is worth 400, I'm going to get all that equity. Not as a banker. The banker's only entitled to what's owed in their lien. So a lot of funds, when they're selling off a note that there's a lot of equity, they're going to try to sell it at 80, 90 cents on the dollar of what's owed. So, so in that same numbers, a $200,000 mortgage on a $400,000 property, that's at 50%. I don't like those deals because if I gotta pay 90 cents on the dollar, that means I'm paying 180 for only $200,000 in debt. If I have to take it to foreclosure, my highest bid can be 200. Anything that gets like if it goes at 300, I don't get that extra hundred, that 100 goes to the borrower, not to me. And people don't realize it. So that's a big mistake. A lot of people make is they overpay for a note, thinking that they're gonna get the price property. That's not the case. Third thing is you always got to make sure taxes are paid. Taxes are one few things that can wipe us out in the first lien position. Some people don't pay attention to that. There are times I'll buy a note and if they're only a year or two years behind their mortgage around their taxes, I'll let it ride till the third year until I've either worked it out or modified it. But there are some cases where people have bought portfolios and didn't do anything with them and they sat there for three years, four years or five years, which is just mind boggling. Like somebody would spend $5 million in a portfolio and then not really try to work it out and they end up losing over half it to tax foreclosures or, you know, somebody doing a quiet title action to wipe out that first lien because they didn't show up to prove that they were at the right to foreclose. So those are a couple of things. Of course, you want to always make sure that when you're buying the note, you're looking at the collateral, that everything is in the collateral file. All the original loan, the deed, the deed of trust, all that stuff is in there. If they don't have the original loan, it's okay. You can use what's called a lost note affidavit, you know, and that will suffice. It's not going to stop you from foreclosure like a lot of people used to talk about with mers. MERS is not an issue with what we do. With a lot of the crazy modifications the last two years, you know, you got to really read the loan docs to see what it is. We had an investor was all excited to buy a note and we looked at the loan docs and they made their normal payment for 12 months based on the loan modification. But from month 13 to month 36, they only had to pay once in a month. Like that doesn't make any sense. Do not buy this note. Do not buy this. You know, this is not going to be a good deal. Whoever wrote this must have been best friends to the person who was owed it. You know, the banker must have known the buddy. But that's the thing. Looking, knowing, knowing what's going on, knowing the foreclosure time frame. Some people buy notes and they just don't spend time. I mean it's really, you need to have a vendor like the servicing company, they think they can do this all. If you're jack of all trades, you're a master of none. Specifically in the note business, you really need to learn to delegate to attorneys and servicing companies and third party vendors. Most of the time, I mean, I mean I don't talk to most borrowers. I mean there'll be times I'll jump on the horn and something like that every once in a while. But for the most part it's a, it's a like I'll get a spreadsheet in, we'll make our offers, be a spreadsheet. When the offer's accepted, we'll have 30 days for due diligence. So we really check title, we're checking the collateral. Send a realtor out to look at the property pool and values, have a bit of an idea on the true value of the house. Most of the time we don't get to see inside if it's occupied. See, we kind of assume most of the time it's occupied, it's Gonna be pretty good shape for the most part. I mean, we're not, you know, paint and carpet and probably new appliances most of the time. But that's, there's, there's just different things that each state's a little bit different. Foreclosure time frame. You got to know what's going on with the foreclosure time frame and go from there. But that's. So we're buying the debt. We were able to talk to the attorneys, they've already started it. And find out where they're at and going from there. The only thing is that we're not allowed to reach out to the borrower until we actually own the note. So. But the great thing is we get to look at the servicing company notes. We can see if the borrower's called in on a regular basis or they've been friendly or called him to, you know, hung up, told him to go F off or whatever like that. We know if the bars would be a bit aggressive. And another thing is too, with social media these days, people will tell you exactly what the hell they're doing. We had one borrower who was going through a transition. He didn't make his mortgage payment for a year because he had, he had to pay for his breast implants. He was a drag queen.

Okay, makes sense.

Yeah, yeah. Not, you know, I guess, shake the money makers instead of living in the money. We had another lady who posted on her Facebook profile, oh, should I pay my mortgage or go to Disney World? We're going to Disney World. I'm like, you better learn to stay there because you ain't getting to stay in your house. When we foreclose, you know, we put insurance on the property. Some people get scared of, oh, is the borrower going to go like pour concrete down the drain or torch the house on fire? Yeah, they might do that. But that's why we pay for insurance. They do that. Great. Yay, we get paid, you know. Yeah. A much faster aspect.

So as far as. Let's talk about the perfect scenarios, something that you're actually looking for for our listeners. So how long does it usually take from note purchase until your foreclosure? I mean, I know that it's different from state to state. I know you were talking about how, you know, like the New Yorks and New Jerseys and Chicago's, they take forever to do that. But in a perfect scenario, what is the time frame for something like this?

So six months or less to foreclose because you basically, if you're. We're going to buy a note where they're at least 90 days or later, usually six months or later because that's when we start seeing bigger discounts for the banks. So I've been paid six months and I can see here in Texas it's 21 days from the time that we file to the foreclosure auction. Now if they file bankruptcy, that'll delay it, you know, 90 days. And then if it's a BK chapter 13 that's usually turns into a payment plan of some sort. You know, it's five year payment plan and we, if it makes sense, great, we'll accept that. If it doesn't make sense, we'll just, you know, know decline it and it'll be discharged and we'll finish the foreclosure. So usually it's you know, on average, I would say this on Average is about nine to 12 months on average. Unless you're buying exclusively in Texas and Georgia which are the two fastest states, most part, you know, anything. And then that'll vary from like, you know, like 2500 to 5 grand to foreclose.

And I have a follow up question on that. So holding costs for you. Now we think about holding costs in real estate investing of things like, you know, our mortgage and all the utilities that you got to pay and blah blah, blah. Typical holding costs. What are holding costs like on something like this? Because I know you said you had attorney fees and you had, you know, what, what an insurance and all those types of things. What are you typically looking at?

Yeah, you're going to pay if it's a non performing note, you're going to pay somewhere around 90 bucks a month for a servicing company to service it. If the borrower is not paying insurance, you're going to get forced place insurance on the property. So you know, you can, that's you know, property insurance on it. What we end up doing is roughly budgeting around. If it's in a non judicial state, $2500 for foreclosure and servicing. If it's a judicial state, 3500 to 5000 for holding, servicing and foreclosure costs. Now that's not including any repairs. That's just basically the holding costs. And those numbers are kind of, we, we use those numbers as our numbers to offer foreclosure cash for keys too. So if it's in a faster foreclosure state we'll say well give me two grand to walk away because it's in buses, like three grand. And if we can get the property back in 30 days versus 90 days. It's a velocity of capital, you know what I mean? So that's the thing that we kind of budget in there. You're going to have, you've got due diligence costs in the front end. You know, it's going to cost you about 300 bucks for a broker price opinion and title update, not a full title policy. Remember, we're buying the note. The title policy is still in place from when the note was originated. So we're not buying new title insurance, we're just taking over, stepping in that bank's shoes. So there's gonna be some recording costs, documents like what? Transfers and ownership is not a deed for a mortgage, it's a assignment of mortgage. So we have to go file the assignment of the county clerk, you know, stuff like that. You want to look at taxes, the taxes are paid, great. If they're not paid, you got to figure that in into your holding cost to pay. What else do we do? We look at, I mean, you're gonna have some marketing costs just like anything else. Your CRM, you're gonna pull BPOs and O&Es on properties that you end up canceling because something pops back up that kills the deal. Either the value's too low or it's got some. The document's not there. Yeah, we always make sure we look at the collateral file before we ever close because you know, we can clear up a lot of things prior to closing. But if you end up wiring money and you're missing a loan file, there's usually a 30 to 45 day window where the seller's got has the time to get you the collateral documents, but they don't. Then you ask for a refund on that specific asset and transfer the asset back to them. So, but it's not, not crazy. I mean, you got, if you're buying non performing notes, you got to realize it's probably going to be a while before they get performing. So that's how you structure your funding. You know, I don't know if that's one of your next questions, but how, how you fund these deals? It's all opm, other people's money. I mean, if you got lines of credit, great, you can use those. But we're using IRA money. I mean we're in the process of getting a fund finished up here, but we're using IRA money. We use one investor per one note. You know, give them a 6 to 10% cash and cash return that's either paid quarterly or annually. We never do monthly. It's just too big a pain in the ass. We do it quarterly or wait till the deal's done and then we disclose it's going, hey, this, we think this is going to be a 12 month deal because it's in a faster foreclosure state or it's going to be a 24 month deal because it is in a nine month foreclosure state. If we get them reperforming, boom, then that's 12 months on top of that before we could sell it off on the market. So we kind of have an idea. We know it's either going to be usually one of three strategy, some sort of modification, reinstatement, some sort of turning the property over friendly or offering, you know, let them do a short sale. We do that quite a bit of time to be from short sales or it's a legal aspect of a drawn out foreclosure. Like I got one deal right now and down in Miami area, it's at 14 months. You know, borrower, we drag, they drag out the foreclosure. We get the foreclosure auction. They filed bankruptcy the day of the auction. That's been kicked out now because it, they didn't, you know, it didn't make any sense. So now we're set for a true foreclosure auctions part due here in next 90 days. But we bought the note so cheap at less than 50 cents on the dollar. And our investor that funded the deal, he's making 12% on his money. He's happy, he's like, I don't care, let it ride. The value of that Property's gone from 800,000, we bought it to almost a million now. It's gone up in value too. So that's okay if it drags out a little bit because that means depreciation has gone up and if they owe more than the property's worth. Yeah, okay. That means we get a bigger payday at the foreclosure auction. That makes sense. So I hope that answered your question for that kind of a holy cross buy stuff. It did. No, that was great.

And you read my mind. On the whole, on the, how do you pay for these? That was going to be my next one. So that's, that's super interesting stuff. I didn't even realize that you could so talk about the fund a little bit. Talk about your business and exactly what this is and how do people invest with you?

So we, I mean we're buying notes on a regular basis, you know, and like I said, maybe anywhere from one note individually to a portfolio of a hundred. It just depends on what's going on. So we've got a fund, basically we're giving a 6% pref on the funds and then doing a total. It's a 50, 50 split of profits in the back end. And that 6%, it comes out of that 50 on the front end. So working with investors, they've got 50 grand or more, they're interested. You know, for 50 grand, we usually pick up one or two deals and get them into that to start off with. They want to do that when the fund's approved. That'll get them one or two shares in the fund and that will be time their money up for roughly three years with a annual renewable after that. Most people think note investing, they think, oh my God, I'm tying my money up to 30 years on a mortgage. Right? But that's not the case. It's most of our deals are about 24 months less for the most part. So if you're interested, you can drop me an email, we can talk about it and go from there. But you know, here's the thing. I always say there's a lot of debt out there. There's a whole, I mean, there's 80 to 80, somewhere between 80 to 84 million mortgages out there active right now. And we're at about a three, three and a half percent default rate. That number is going to go up. So that means they're roughly somewhere between 3 and 4 million homes. Borrowers that are in default. Think about that. That's a lot of default there. You know, in some of the areas you have people that values the houses going, like here in Austin, it's going crazy. People can just sell their houses. We're not going to buy a lot of stuff here in Austin. We're not buying a lot of stuff in San, San Francisco, California, even if it is distressed. The banks don't want to sell stuff at a discount there. It's just stupid. So the nice thing is for what you would buy for one property in la, you could buy like the whole block in Kansas City. I'd rather buy a block. You know what I mean?

I like that, Scott. That makes a lot of sense. I think one of the kind of burning questions and probably at the start of this was, and I know you've covered it from a funding perspective, how does someone get first of all educated and then started and what kind of, what kind of resources would they need to get going on this?

Well, first of all, if you've got something burning, you might want to go check that out by doctor. All right? There's appointments and stuff like that. No, I'm just joking. How do you get. How do you get educated? Yeah, it's a total different game than your fix and flip and your flip this house. You know those fictional TV shows on, on hgtv, they don't really exist. You know what I mean? You know, we've been. I learned this from an investor who taught it who's a mortgage broker and had to sell his own portfolio off years ago. So it's kind of where I learned it. And then I went out and applied it myself and started buying onesie Tuesday so people understand performing paper. Buy a performing note, it pays. I get that. But the non performing stuff, there's a lot of parts of. That's why we started teaching classes back in 2010, and that's why we started the podcast back a few years ago. I've got a Monday night webinar I do every Monday night for the most part. The holiday called Night in America we've been doing for 11 years now. And it's always a bit of content when like last week we talked about financial fears. A year before that we talked about raising capital. Before that we talked about putting a pitch to get Deck together. And then the no Closer show is my podcast is about half of me teaching, the other half interviews. You can find all this stuff@weclosenotes.com we have a class that we teach every third Saturday of the month called Note Weekend and I would love to give it to your audience for free if they're interested. It's kind of a cliff note. Stick your toe in the water one day class. It's a good, good starting point. It's about six hours of me teaching and about another eight hours of videos being cool with that. But it's noteweekend.com it's normally 99 bucks. Let's do something funny. If you use a code rash R A S H rash or if you guys have a different code you'd like for us to use.

I'm not sure I like the, the way this podcast is going for our branding, but I think that's a very generous offer. If you're, if you're listening to this.

Noteweekin.Com it'll ask you to put your information in. It'll take you to checkout page and they see up the right hand corner, put in the code rash all caps. It'll give you the class for free. It's still gonna ask you to put your credit card down to make sure that you're a real person. If you have a problem with that, then email me@scottclosenotes.com and mention the word rash and I'll send you the link itself.

Thank you. Scott. That's incredible.

Oh man, that gets me.

That's like pulled right out of here. It's a second. I mean I was thinking what should we do? Hooper or John and Kyle? Or Kyle and John. And then you said Rash settled on Rash. Rash, yes. Great.

That's a super generous offer. So we totally appreciate that. And if you're listening to this, that is the ointment to your real estate woe.

I love it. Well, I do say note best is a cure for your investing illness because just think about that. I mean everybody's really nervous about interest rates have gone up, you know what I mean? Repair costs, materials is sky high. Gas is an all time high. You know, stuff like it's gotten really expensive for people to look at some things. And when you have interest rates go up, what happens? Well, like the hard money lend, the LTVs go down with the lend on. And we all know that fixing flippers and landlords and folks looking for REOs have been battling out like you know, you know, mad max at the foreclosure auctions for with scraps and part of that is they just not seeing the REOs because note investors or note investing companies are buying that debt up way before it gets there. So a lot of people, we get a lot of landlords that come over to the note game because it's, they don't want to deal with toilets, tents and trash outs. They'd rather deal with the debt side. We get a lot of fix and flippers who come over and they, they buy debt with first idea is that they're going to find more real estate and they will. But they're like, oh my God, I got this cash flow and my ROI is much better now versus me having to try to sweat this all out and show up remotely for my contractors or wait for the AC to show up like a cable guy somewhere between 11am and 11 at night, who knows, you know what I mean? So we get a lot of multifamily guys coming into space too because multifamily is way overpriced and they can still buy 18 doors at one time. You know what I mean? So it's an interesting play. I mean I predicted I'm not going to sound like I'm not. But when the COVID kicked in and they started doing this 12 month, another 12 month, I was like, it's the Pied Piper. The Piper's got to get paid at some point. And yes, market values keep going up, but we know that can't keep doing it. That's squeezing out your middle class. And then, of course, your first time home buyers have been struggling. So it's like over the last 24, 36 months, the number one product type that's been default is FHA. Those are your first time homebuyers that are struggling. They're like a 14% default rate. I mean, it's five times the national average. You know, VA loans were running at like 8% default rate. I mean, those are the hardest working people out here and stuff like that. That's sad. And so, you know, people can sell their house, but they don't want to sell their house. They worked hard to get into a property. They want to try to stay in it as best they can. But with layoffs and again, more expensive, there's a lot of people hurting. So, yeah, we're already seeing. I'm. I'll tell you, when my phone rings and my email is being responded to much faster from bankers and asset managers asking what I'm buying, I get really excited. And that's why I was so excited. We started off because I know, like, Fourth of July, everybody kind of bankers, they kind of work up to 4th of July because it's the end, basically the end of the second quarter. And now we're moving to the third quarter and the fourth quarter of the year. They're like, oh, my God, now they start moving stuff off their books now. It's like, whoo, I got my workout in. I'm ready to. I'm ready to pound some stuff here in the next six months, you know.

Well, that's awesome, man. And Scott, we appreciate your time coming on here and explaining this, and I feel like we could probably sit here and talk for two more hours and I've got like 15 more questions written down here, but we are kind of running out of time here, and we want to be respectful of yours. So if you could just. I mean, you've already kind of touched on it, but let's give one more recap on how people can get in touch with you. We're going to put all that stuff in the show notes anyways, but go ahead and let everybody know how they can get in contact.

Yeah, it's really easy. You can go to. We close notes Dot com. That's our main mothership channel with our classes, our podcast, our webinars. You know, we're here to help out anybody we can for you. If you have, if anyone wants to just book a call with me. Pick my brain for 30 minutes. You can do that by going to talkwithscottcarson.com that'll take you directly to my calendar. That's talk with Scott Carson dot com. Love to, love to pick my brain, ask questions. Totally fine to do that. And like I said, my offer is my one day class the third weekend of the month. Third Saturday of the month. Noteweekend.com normally 99 bucks if you use the code. What's the code again, John?

It's rash.

Rash R A S H is the code that'll get you into the class for free. If you don't make it to the upcoming one, you can always book the next one as well.

Scott, thank you so much for your time today. It's another one of those shows, Carl, right, where we're just absorbing so much information and this, hey, if you got a lot out of it, give us a review and a big thumbs up on the five star review. That would be great. And all of Scott's links, all of his notes are in the show notes. So please just go in and use them and go and connect with Scott because it's an incredible space to be in. So Scott, thank you so much for your time.

I'm so honored to be here. Yeah, do that. Guys, if you're out there listening, hit that. Subscribe. We got five review for these guys. They're kicking ass, taking names and we need them to be able to compare those ointments for John here with that rash.

John, thank you so much, man.

Thanks, guys.

And we'll be back next week.

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