Note Investing And Preparing For Market Disruption In 2022 With Scott Carson From Colin Podcasts With Colin Murphy

With more than 1000 deals in multiple countries, including buy and hold, fix and flip, wholesaling, tax sales, loan notes, and much more, Colin is your trusted and straight talking source of ideas on how to accelerate your real estate journey in any economic cycle. Here is your host, Colin G. Murphy.

Hey everybody, how you doing? This is Colin Murphy. And welcome to Colin Podcasting about real estate show 42. Now, most people, I think most of our listeners certainly understand the world of rental properties, of house flips and other common real estate investments. But there's a little known niche that I haven't spoken about for a while that can also provide cash flow and profits without most of the headaches, and that is note investing. I've dabbled in note investing a little bit myself. And my guest today is Scott Carson from Austin, Texas. And now Scott's been an active real estate investor and entrepreneur since 2002 and he's focused on the niche of distressed mortgage investing and he's purchased half a billion dollars in distressed debt on residential and commercial property. So we had a really good chat. We don't make this super complicated. We make this very accessible. It is a very accessible niche. Scott's got a great story as well. We talk about how he started lending to investors during the 2004-2008 boom and his subsequent pivot to go from lending money to buying loans, so buying loans instead of selling loans afterwards and become a note investor. And we do a deep dive into a couple of his first few note investments. And there's just a lot of very similar parallels between flipping notes and flipping real estate or holding notes and holding real estate. They're kind of two sides of the same coin, to be honest with you. And you know, he's got a great story. Did a 3 year road trip around the US where he built a kind of a grassroots following about his blog on traveling and note investing, which is very, very interesting. And we just kind of dig into the pros and cons of real estate versus notes. We talked quite a while about his take on the massive changes he feels that are coming on real estate on the horizon. Once the moratoriums on foreclosures don't get extended anymore, once the forbearance and all the millions of mortgages doesn't get extended anymore, there's going to be some very serious consequences, you know, later this year and early next year, depending on what state you're living in and what you're involved in. And we just kind of finish off with some really good actionable tips on how to learn more about note investing both from an active point of view and also from a passive point of view. And it's some good stuff in here. And Scott's a cool guy and he knows what he's talking about. So without further ado, let's head on over and see what Scott Carson has to say. Scott Carson, how you doing, my friend? Welcome to the show.

Hey, Colin. I am honored to be here today and doing well in sunny Austin, Texas today.

I am glad it is sunny again in Austin, Texas, as it should be, and glad to see you looking well. And I love your background.

Thanks, man. Yeah, I mean, not everybody can live in God's waiting room, sunny Florida, like where you're at. But if I wasn't living in Austin, Texas, that'd be about where I'd be living. I love that area. I mean, San Diego would be nice, but I don't want to pay San Diego prices. You know what I mean?

That is true. San Diego beats Florida because they have no hurricanes there. They just maybe have an earthquake once every hundred years. So, you know, hopefully you don't. So are you originally from Austin, Texas? Where'd you grow up?

I grew up in South Texas, down by Corpus Christi, actually. A little small town. Dad owned a local hardware store for about a decade. And so I grew up in there's what, 56 people in my graduating class. So small, small high school. And then I was fortunate enough. I had an academic and athletic scholarship to play college football up outside of Dallas. So went there and played for two years and then took a year off to figure out what I wanted to do and got into business and started going the business route on entrepreneurship and business management. And then started, you know, did well with that. And a buddy of mine started a mortgage company back in 2004.

Okay.

I joined forces with him and kind of started doing originating notes on that side of the ball game. And lucky enough, for four years from 2004 to 2008, I had kind of a mentor who taught creative financing and owner financing, wraparound mortgages, selling debt. And I really learned that. And then when everything hit the fan in 2008, I kind of jumped from the origination side to the buying distressed debt. That's what I've done ever since.

That's fantastic. So was your family quite entrepreneurial originally? You mentioned your dad had a hardware store. Did you have grandparents and stuff that had businesses or were you doing side hustles, cutting mowing lawns or whatever at an early age?

Well, I think anybody, if you're young.

You want to make some money. As a young kid, you're always doing side hustle. So yeah, I did that in a small town.

My dad and mom are Entrepreneurial mindset.

My family is originally from Minnesota and.

So my family has always been some sort of entrepreneurship. Whether it's farming or opening stores or stuff like that. That's a big thing in my background is dairy in sorghum and corn farming. But my dad got tired of the cold and moved to Texas when I was young. So it's just always kind of been my blood. You know, I've worked for, sometimes done well at companies, but I always end up hitting that ceiling. And you get to the point where, you know, I think we all want to be our own boss of some sort. And so it didn't come easy doing stuff. I had a big fail early on, but, you know, licked my wounds and got back into. Took a job for a while and then got back into where I want to be. Entrepreneurial mindset. And it's, you know, it's been a fun. It's a fun journey. Ups and downs and roller coasters all the way.

It is, it's eventful being an entrepreneur.

I mean, people sometimes only see the good stuff to see my, you know, clocking off early some Friday afternoon. But that's after 10 years of busting my ass, you know what I mean? And in 10 years time, I might be digging my way out of a big hole somewhere because of mistakes I made. So it's ups and downs, a little bit of a roller coaster, but generally more rewarding. So it sounds like you, before you set up your own business, you mentioned you worked for. You're in the mortgage industry from 0408. Is that what you said?

Yeah, I was a buddy of mine.

Started a mortgage company with a couple of these investors that I kind of had an apprenticeship from.

And so for four years we were.

Doing, you know, investor loans, traveling the country, speaking at big real estate expos. We were the guys in the back of the room.

Gotta remember 2004 to 2008 was a.

Really good time in the mortgage industry.

Cause, yeah, you know, we did a lot of subprime, but we also did.

A lot of investor loans and a paper stuff.

But we were one of the few guys that were traveling.

We're doing loans in about 30 different.

States and, you know, making a lot of money speaking in front of audiences. We got hooked up with another fellow Floridian, Ron Legrand, out of Jacksonville, and he was traveling the country every other weekend and we became the preferred mortgage company that got to travel longer and work with his clients. So that was a definitely interesting time. I learned a lot, not only on the origination side, but I was at all these events sitting in the back of the room learning from real estate experts and entrepreneurs on how to do investing right versus the traditional retail model. And it added up to a lot of good stuff later on.

Yeah, must have been some good volumes. That's interesting that you're in the investor.

Kind of section from the start. I mean obviously a lot of regular mortgage folks made a ton of money just giving mortgages to all these first time homebuyers that kept trading up every year and a half. So what kinds of people were you dealing with? What kinds of deals were you doing? Because there was maybe more repeat business there.

Yeah, so a big aspect of our business was working with investors to cash out their investment properties, their rental properties that appreciated. Doing a lot of investor second homes, 60, 65% of LTV. We did also, we tapped in and did a lot with California homeowners and investors out there doing the dreaded pick a pay the negative AM loans where they had a 1% interest rate but their interest rate was really 5 or 6%. So they were adding principal to their balance every month. But a lot of investors like oh this is great because our property keeps going up. And I'm like, doesn't mean it's always going to go up. And if you've got four options, either a 1% interest rate or a full interest rate or 15 year mortgage or a 30 year mortgage, pick something that makes sense for you. But you know, if you keep deferring amortization to the back end, it's not gonna be a good thing for a lot of people. We talked to, I talked a lot of people out of those, like look, you just get a 30 year mortgage, it's better for your primary or 15. But we did a lot of those and those paid really well. We sometimes make four points in the back end and a point on origination.

So wow.

It was a, we made a lot of money doing those types of deals. But it was, you know, a lot of them. I still, I still talk with a lot of those clients, you know, here, 14, 15 years later.

Yeah.

Still keep in touch with them or still help advise them on different things that they're doing on their investments.

That's a crazy amount of commission. Just goes to show how crazy. I mean there's hard money lenders that would bite your arm off to get those. Never mind. Conventional.

Yeah, it's a different game these days. You're not seeing anybody making five points on a pickup pay. I mean, there was a bad day. I remember Black Monday, as I like to call it. Greenpoint Mortgage, which was a division of Capital One, it was a residential division, and I had six loans set to close on a Friday that would have brought in about over 100 grand in commissions to me alone. And I get a delay notice Friday afternoon. Hey, we're going to push all these to Monday. Like, okay, no big deal. Well, come Monday morning, they filed bankruptcy. And you talk about having to eat a lot of crow, calling listing agents and seller agents and the title company and then the, the people on both sides of that stuff. That was not a fun day. And that was kind of the music stopped in the mortgage industry almost overnight like that.

What was that like? Because I've spoken to investors who've lost.

Their shirts and I got a little burned back then as well. I mean, what was it like from your point of view and your company's point of view?

Well, I've been seeing this for a little while and when I'm like, when I'm getting mortgage companies that call me like, hey, give me all your declines. I'm like, okay. And then they're like, oh, we approve them, but at like a 12 and a half percent interest rate. And I'm like, oh. And you got investors like, oh, I'll take it. I'm like, oh, that doesn't make any. Fine.

Yeah, you're declining them at 4 or.

5% and they're approving them at 12%. It makes no sense.

Well, yeah, it was like 6% was normal back then, but then I'm like, oh, this can't be a good thing. And people were just really trying to like hogs at a trough on the origination side. And then certainly subprime basically went away and they just stopped. They had these big mortgage companies basically closed their doors overnight. There was a big company here in Austin, Texas called First Magnus that everybody went to lunch. They told everybody to go to lunch and when they came back the doors were locked and they couldn't get in because you had all these margin calls because you started having all these defaults happening. It's like what happened when New Century Mortgage did the same thing, Billion dollar margin call from their investors or buy back clause and they couldn't afford it, so they just shut their doors and filed bankruptcy and the founders walked away with millions of dollars. And then homeowners Were left struggling trying to figure out who bought their mortgage when it got sold off to New Century, got sold to Countrywide originally for like 20 cents on the dollar. Countrywide got bought back by bank of America for like 22 cents on the dollar. So it was interesting that time. It was a perfect time to jump from the origination side to buying distressed debt, I'll tell you that.

Y is that what you did? Was that just fortunate that you had three years of earning good money and.

Hopefully saving and investing some of it.

That you're able to pivot into where the opportunities were?

Yeah, I would say that, yeah, definitely. And I was always trying to soak it up and had been dabbling in the buying the distressed debt. But when everything hit the fan, you know, I sold my half of the mortgage company for a buck basically and walked. And then just instead of dialing for dollars, get loans done, I started dialing for dollars, talking to the banks and lenders I knew that had distressed debt and just starting to buy stuff, trying to get a list sent to me and wholesaling a deal here, make a grand, make another grand, another one for six grand. Or I flipped an apartment note for 35 grand on a eight unit in San Diego and flipped.

Can you just tell us about that?

Because it sounds, it's a difficult concept to understand. I mean people can understand putting an apartment under contract for 500,000 and assigning it for 550. That's kind of a concept you can understand easy enough. But how does it work where you're buying at a stressed note and then selling it on? Because it's not like you're actually paying them all that money upfront necessarily.

Well, here's the thing. Wholesaling, real estate, wholesaling notes, you're just flipping paper, you're just flipping contracts regardless. But with buying debt, I'm approaching it from the bank side. So I'll give you a Great example. This 8 unit apartment complex in San Diego, it had an appraisal at roughly about 600 was the appraised value of it. The borrower owed 585. So there was a little bit of equity, but they hadn't paid in over a year. And the bank was willing to sell me the note. A non paying note, willing to sell the debt to me, the 558 debt, they willing to sell it to me at 375. So if I buy that, if I fund it 375, I don't get the apartment complex. I now become the bank and I had all the rights the bank does to foreclose, to modify it and go from there. So I put it under contract. If you're getting appraisal, looking at the payment history, having somebody drive by the property, getting some notes on how the borrower was working with the bank or not working with the bank. And I started marketing it via meetup groups and an email blaster too, and on LinkedIn back in the day. And I had an investor that I knew that understood notes, reached out to me and was willing to pay me 415 for that note. So I said, well, we can't.

And you were able to do this.

Just while it was under contract. You didn't actually have to do. Is there like a deposit you have to pay or were you just signing a contract to buy the note in three weeks and you had to scramble to find someone to.

Actually, I bought exactly. I put it under contract with Capital One in my entity name. I asked for 60 days to close on it. They gave me 45 and to fund down the purchase, basically do some due diligence and then wire funds in. It's not like a traditional going to a title company to close. And then once I wired in, and then they sent over the assignment docs to file up the county and show that I'm a new bank. If you ever bought a house, usually 30 days after you close, you get a letter in the mail saying that your mortgage has been sold right to somebody else.

Well, that's kind of the process.

So we put it on a contract. I found the investor to come in and pay the 415 to me. So I said, okay, I'm going to have you wired my escrow account. Here's the contract with the bank. Here's all the numbers. They were good with that. So they wired 415 to my escrow account, my attorney's office. I then wired 375 to at this point was Capital One, was the bank okay? And I told Capital One, said, hey, here's the 375. I need you to change the details of the contract from my entity to this new llc. And they were fine when they sent it, transferred everything over once the docs and the assignment documents were delivered to the investor, Matt Harder actually was his name. And we released. He released. He told my attorney, okay, you released at 35. So then I made 35. And Matt was happy because he now is the bank on this apartment complex. And it took him about eight months of working with the borrower and then finally going through legal to foreclose and him and. Him and his two buddies were the ones they put. They pulled their money together and after they foreclosed on it, they sold it. About eight months later, after they foreclosed on it, after getting leases back up, they sold it for about 550. And so, you know, it was a win for them because they took the property back and became an area. If they wanted to hold on to it, they could do what they want to. But they sold it at the foreclosure auction. And I did well on my side, make 35 grand in basically 30 days.

So, yeah, yeah, that's a sweet deal.

And that's an interesting way of looking at it. And I guess it's like real estate. You just need to be careful that.

I mean, back in those days, it.

Was a bit of a roller coaster. I mean, you might buy something for a note for 60 cents on the dollar, but if the property's worth 50 cents on the dollar, that's a pretty bad deal, you know.

Well, and that's. I'm glad you bring. That's why we always, always put eyes on the properties. And that's one of the big part of due diligence, is it? Yeah. If you can buy a note at 50 cents a dollar, it makes sense if the property value is worth a lot more, you know, it doesn't make sense for us to overpay for the actual property. So as a note investor, yes, we are evaluating the details of the note, but we're looking at the collateral, you know, looking at the actual. The property value to make sure we're buying at a point that makes sense. We're not really going above 60% of AS IS value. Not ARV. Like a lot of investors are going up. We're going, what's that property worth right now? And does that make sense for what we're paying? In some cases, if we make an offering and we find the value is a lot less than what the bank may suggest, then what we do is we fade our bid down. Like, oh, I can't fund on this. I'm not going to buy. I need to fade my bid down 20% because the appraisal came in 20% less. And that's a pretty normal process because these banks, I mean, they're dealing with hundreds, if not thousands of assets. They don't always know what's going on. And a lot of times they'll just evaluate based off of Zillow, which we know that's not accurate. And the fact that we'll provide proof like, okay, here's our external BPO and our number. Here's why we're justifying our fade, our reduced bid. And they're like, okay, happens all the time pretty easily in the note space. Whereas in your retail investing, you've got an option period or inspection period of seven days. And anything that happens outside seven days, it's kind of a pain in the ass to go back and forth with.

I mean, there are a lot of parallels in terms of the due diligence.

You have to do to underwrite the deal. I mean, I guess the buyers might be slightly different. I mean, how did you find the buyer? So you're able to get a note and you thought, there's enough equity in the deal to buy the note. How did you go about finding people to sell it to?

So I jumped online and I did a search for note investors, and that's what I did. I typed in note investor and I went on LinkedIn. I looked at. I did an email blast out to my database, you know, and just Marcus said, hey, I got a deal on an apartment complex in San Diego where you can buy the debt. I've been sharing videos of note deals that I'd done beforehand. So I started building a following online. I used meetup groups. I jumped in and posted a meetup groups. I mean, note investing may seem like it's brand new, but it's been around forever. You know, a lot of people, a lot of owner financing or stuff like that. But buying and selling debt's always been around, and it's a matter of marketing more than anything else. Like the email blasts videos. I really did a blitzkrieg after I signed contract in the first two weeks to really get the word out on what I was doing. And then there's about a week, week and a half of back and forth and negotiating. I originally wanted 425. I settled to take 10 grand less to get the deal done.

Yeah, that can happen. So how did things progress from there? Sounds like you got a couple of nice deals under your belt early on. You started with 5,000 here, 8,000 there. You scaled up to maybe 30,000 on that San Diego deal. How did the next few years go? I guess we're in the2010 to kind of 13 period now.

Yeah, I mean, it was amazing. I mean, we were buying and flipping notes. We were taking some stuff down, either getting reperforming or going through the legal side to foreclose. 2010, it was a year after I'd been divorced, about two years after. So I did something a little bit unique. I wanted to get out because I was seeing all these deals come in, but I didn't always have a network of people to look at stuff, and I wanted to get out and travel. So I actually sold everything I owned in Austin, Texas. Sold everything in my house. Everything except my truck and my dog and some clothes, obviously.

Okay.

And planned this 30 week trip to travel across the country to see all, you know, visit all the major League baseball parks.

Oh, wow.

I kind of planned this out theoretically. Well, in a matter of a couple of weeks, I had a lot of real estate clubs reach out to me because they were seeing my blogs and my articles and they would ask me, hey, can we use your article or would you like to come speak to our members? I'm like, when do you want me to come speak?

That's very cool.

And the days that they wanted me to come speak lined up perfectly when I was supposed to be in that town to watch a baseball game. And I was like, okay, divine intervention. So that's what he did. Sold everything. Had a garage sale for two weeks, sold basically everything, jumped in the truck. And what I thought would be 30 weeks of traveling turned into three and a half years of basically nonstop travel, meeting with bankers, speaking domestically, internationally. It was just a fun time. And I built this really kind of, I guess you could say, a grassroots following investors across the country that when I would get a list in now, I could send that list to them, they could take a look at it, make offers to either buy it for themselves, or if I was buying something, they would be my eyes and ears to go out and take pictures and help me with the due diligence. From basically 2008 to recently, we've basically closed on over a half a billion dollars in distressed debt and taught a lot of investors how to buy notes as well, too. I make the joke. We're making America great again. One defaulted borrower at a time.

That's funny, but that's just amazing. Your story about building up the grassroots following on note buying, of all things, that's just really impress and a great way to. As a great way to overcome the difficult, kind of annoying personal situation you're in. You're just, okay, I'm just going to get out and travel for three years and make some good business while I'm at it and build a following, because how many people have the opportunity to realistically do that with ties to mortgages and kids and spouses and all the rest of it? So fantastic.

Yeah, you know, that's the way I looked at it. So I had an opportunity here. No kids, I wasn't married at the time. I said I could live pretty cheap on the road. I mean, I lived. It was a rock star. I mean, I spent a lot of time in Florida. I love Florida. I was at a point where I almost thought about moving to Florida. Buying so much stuff in there, in Tampa, all the way down the coast Bradenton, down to Naples and Fort Myers and Lehigh Acres. I mean, I love that neck of the woods. And then across Alligator Alley to Miami and Fort Lauderdale and up to West Palm Beach. I mean, I bought a lot of small unit apartment complexes by buying the debt or a lot of single family homes. I mean, condos were so cheap on Miami beach, you know, 100,000 mortgage for 5 grand and then just hold on to it for a period of time until either we foreclosed on it, you know, six to 18 months later, or. And ride the appreciation route back up. So just. I'm a big fan of the Sunshine State, I guess you could say.

Yeah, a lot of money has been made here in the last 10 years, and I've seen it. My first foray into Florida was back in 09.10 in the condo space, where I must have been, I don't know, the third guy in the trough. But I was still getting condos at 30 cents on the dollar from what they were two years prior and selling them to international investors at 40 cents on the dollar. And they were still getting a $90,000 condo in this beautiful community with tennis courts and fountains and a tenant paying 1,000 bucks a month. And everybody was happy. Right? Good times. What kind of stuff are you doing now? Because you're saying you're buying notes at whatever, 30, 40 cents on the dollar, maybe less. Presumably those kinds of margins have changed in the last three, four years. What's it like now?

Yeah, pricing's definitely changes. Values has climbed up and the default factor has dropped some. But we still buy a lot of. There's still default. So there's still people defaulting on their mortgage before COVID I mean, you look back, sure, you know, there was one.

One out of three more people, ironically, or more people.

Now there is definitely before COVID there was one out of every 10 was at least 30 days behind in their mortgage before COVID kicked in. So we were kind. I mean, we've built a good relationship with a lot of banks and lending institutions. So we're still buying one offs, we're still buying small tranches. We bought Two years ago we bought a big portfolio of contract for deeds in Ohio and Michigan and Indiana and we work those out. Right now we're looking at a lot of commercial deals. The market being like it is, it's a bit crazy out there. So we're looking at small balance, commercial stuff, sub 2 million in a lot of places. Still looking at residential notes.

And you try to get them performing again before you flip them or are you just trying to flip them straight away?

No, no, no. We've always tried to get them. Now we're trying to. When we buy a note it's always to try to get the borrower get reperforming. I'm not usually, I mean I'll wholesale some stuff off from time to time if I'm buying a tranche and there's stuff out that I don't want. But for the most part I'm buying from my own portfolio to get them back re performing. I mean that's the biggest thing is okay, what's the return going to be? It's got to be a good enough return for me if I'm going to buy this note and get them back on track. If they start paying on time and we keep them in the house, great. What's the return? It's got to be at least a double digit return for me on that. Because the goal is Colin, that if we buy a non performing note and get them re performing, I'll hold onto it for 12 months. And after 12 months then we'll evaluate that deal to see if we can't sell it on the secondary market back to banks, back to Wall street because we bought it say at 50 cents on the dollar now, which we're still seeing deals like that. I can now after 12 months of payments and have a little bit of skin in the game for the borrower on the front end. I can now sell it at 80, 85, 90 cents of UPB unpaid principal balance of what's owed back to Wall Street. And that's a pretty good price, that's a pretty good margin. 35% plus payments in a 12 to 18 month period. So that's what we do buy, get them reperforming and then evaluate what's Wall street going to pay for it or other investors. We sell a lot of deals off to IRA investors who are looking for an above average return in their retirement accounts.

Oh, nice.

Okay, that's a big thing. If we buy something with a lower interest rate we'll try to. And if we get a reperformance a sub 10% ROI IRA. There are a lot of IRA registers out there making nothing. They've got 50 grand or 100 grand in their accounts just sitting there. That notes are a great tool, great vehicle for them to build some wealth inside of it.

I agree. One thing I'm curious about because it happened to me as a fix and flipper. I fixed and flipped a couple of hundred houses in Tampa in the last five years and I was. One of my big regrets is just not keeping more of them. I just like yourself. I was dealing with a lot of investors. They would buy them as quickly as me and my business partners could buy them and fix them up. And I was buying stuff so cheap back then. I mean compared to what I'd have to pay now. I mean I'm annoyed at not holding onto more of them. Have you ever regretted the same thing? Not holding onto more of those notes.

And not having those? Who doesn't? I mean it's hard to turn down a nice chunk, you know, a comma check, you know, a check with a couple, you know, comma in there, comma check, you know what I mean? And put 20 grand in for not doing much work versus okay, do I have to rehab it and seeing that longer play. Cause we never know what history is going to do. There's some deals I've got ones that sticks to my mind is a two bedroom, two bath waterfront condo on Miami beach. That's just gorgeous, you know, thousand square foot. You know when I looked at this note I could pick it up at 70 grand. It was worth maybe 115 at the time. Like oh, I can't go above 70%. Just can't go well now. That condo is now worth like $500,000. And I'm like oh, should just held onto it. But I think we learn the most. I think back to the investors that taught me note investing and how they lived through the RTC days, the Resolution Trust corporations with the savings and loan scandal back in the 80s and they'd made a lot of money like we did. This time around they moved a lot of property. Well this second time around, 10, 12 years ago, they held onto a lot more because they learned from their previous mistakes or the previous thing. I think this time around in 2021, we of us that live through that are going to obviously buy a lot more to hold because we know that if we real estate's going to go up, it's going to rebound. I think we are due for a correction in the market these days because I don't think everything will keep going up. I think we're going to hold on to realize that real estate just keeps it's an asset that there's limited amount that you can hold onto it. And we're a little wiser now for our wear and not such playboyish lifestyles where we got to go out and pop bottles and have a lot of fun. It's worth to hold onto it and build long term wealth for us.

So that's your plan. You made some nice income during the last run up because you're basically selling everything that you could get your hands on for a profit. And now you're saying the next time the market goes down you're going to buy to hold and try and keep a lot more.

Yeah, I've got something we've held onto for a couple of years now that are bringing in income on a monthly basis, which is nice and same thing. We're looking now like it's okay, let's look to hold this for a while. You know, let's look to hold and keep onto it and go that route. I mean, you know, most people think when they buy a mortgage they're oh, I'm going to invest in a mortgage, I'm going to be tied to it for 30 years. And that's not, that's really the case. Most people are buying or selling in seven, eight or nine years. So that's the way we look at it. The deal is like, okay, you know, make sure it's profitable from day one. But okay, let's try to expect to. If we can hold onto this for seven or eight years and it's a win win for the borrowers and for us that's a pretty good cash flow. And then at that point then we're either getting cashed out and then as I like to say, doubling down, taking the profits from one buy two or three more.

Okay. And so are you able to outline briefly first, Scott, like the pros and cons of buying real estate notes versus buying physical real estate? Because most people understand I'd like to own a million dollars of real estate and a lot of people don't think I'd like to own a million dollars of debt. Are you able to talk us through some of the pros and cons of that?

Well, here's the three biggest things that I love about note investing. First thing is that you're seeing deals six to 12 months before your retail buyers. A lot of people are chasing foreclosures. We don't chase those because most of the time we're selling at the foreclosure auction. So we're seeing deals, like I said, six to 12 months ahead of your traditional investors. You're fixing flippers because we're dealing direct to the banks. That's the second thing that we like so much is that we're direct to the banks. We're not having to do a lot of direct mail marketing. Actually do almost zero. When we get a lead, it's not from a borrower who's got one, maybe two properties. When we deal with a bank, we get lists of tens, hundreds of notes that we can cherry pick from. So that's the nice thing. Once we have a connection with a bank, they're sending us stuff every month, every quarter. And then the third thing that we like the most is the profit size. Since we're buying at 50, 60 cents of as is value, we're getting deals usually a lot, lot cheaper than your traditional fix and flippers. There are people trying to fight the foreclosure auctions for a deal.

So that's the thing.

Profits are higher. We've got multiple strategies, honestly on that too. Direct to the source. We're not dropping thousands of dollars each month on direct mail. It's basically phone calls and emails with asset managers. And the third thing is we're just seeing stuff like people are like, oh, yeah, there's going to be this REO stuff at the end of 2021. That's great. If you want to wait till then to do deals, that's great. We're doing deals now. I mean, we're literally seeing banks and lending institutions are sending us deals to take a look at now on both residential commercial notes that by the time six or 12 months rolls away, we'll already have that asset regentrified or back on a performing status that the end buyers and investors will never see.

Yeah, I guess one of the main things I'm jealous about as a guy who's involved in the nuts and bolts of real estate is that you don't need to deal with repairs, you don't need to deal with tenants, you don't need to deal with property, property managers or roofs or landscaping or burst pipes. Or you're just like, I'm a lender, give me my money or I'm taking the house.

In a lot of cases, the one thing that obviously put a bit of a monkey wrench in our system is whether the government this last year basically suspending foreclosures and evictions. I mean, that hurts both landlords and note investors.

Well, that is true. That is very true.

So we've run into that gamut where we've had people ask for forbearance agreements and even if we didn't, the counties and you know, and local judges aren't foreclosing. So it's a matter of kind of we've been lucky. We had quite a few still pay, but we've had a chunk though that didn't pay. So we're just waiting for that to happen so we can go and start that legal process. And some things that if we look at what happened 12 years ago, there's some states out there that I really expect the hardest hit states with the most amount of troubles, Florida being one of those, I wouldn't be surprised if you see your attorney general or the governor come in and basically suspend foreclosures for another year, letting people get back on track.

I mean they may as well be suspended. There's so few of them. I mean, I'm in Hillsborough county, which is a big county. There's I don't know, about a million and a half people living here. And tomorrow there is one property up for foreclosure, one, a single property and it's got a messy mortgage history. I don't even know if I'm going to bid on it. One single property. Normally there's about 40, you know, so even though they're not technically suspended, you can still buy housing, foreclosures. I bought maybe six in the last four months. But it's very slim pickings out there, I have to tell you.

Well, you see that whereas I'm looking at a list of 175 first liens in about 20 different states that I'm looking to pick up at well below 70% of value. Paper still getting sold. And the idea of these 175 is a they're all occupied, they're all owner occupied. So our goal is to immediately go in and try to offer up forbearance and loan modifications to them. This is a private fund that owns it out of. They're out of Oregon actually. But they've got stuff all across the country and we expect to get a chunk of them back re performing as people are going back to work by even incentivizing to either reduce their interest rates or reduce what they're owed or for every payment they make, we'll forgive a back payment. That's the way to get back up.

It sounds very labor intensive. I mean, do you literally have a bunch of people in an office who are dealing with these people or do you outsource that to a specialist company?

Yeah, it's outsourced. I mean I look at spreadsheets and once we break down the due diligence with our forms and our formulas and stuff like that and values, we turn the service unit over to a third party servicer. We use mass and management, formerly out of New Jersey, now out of Reno. But they've got the team of collections, they're licensed in these different states to collect. So once we buy the debt and then the servicing is transferred from the seller's servicing company to our servicing company, Madison will already know which route I want to go. I was like, okay, on these 30, here's the program for these. On these 30, there's a program for these. On these, here's what we're willing to offer as plan B, C and D. And if they won't play by that ball, then we're glad to afford it to legal or offer up cash or key. So we put systems in place so that the servicing company as they're reaching, you know, reaching out with phone calls and letters and emails, it all happens. So then all I have to do is basically once every week or two I'll jump on a call with my asset manager over there and say okay, where are we at on these assets? Where are we at in these? And then just go that marrier out. We'll do a little bit of borrower outreach. I've got a full time person that works remotely for me who does a lot of one on one phone calls with borrowers trying to negotiate individually. And you know, it's not, it can seem like a lot of it. There are a lot of moving parts to it, but that's why it's such a vendor driven business. You know, if you're fixing a home, you're going to have a plumber and electrician. And so we put in tile and carpet, all these different vendors that come in to do it and you got to schedule around those. The beautiful thing is we have similar vendors but it's a, it's like recording documents to transfer the ownership or you know, servicing company that's having the heavy lifting or our attorneys, if we have to take it the legal route, it's all done third party and it's just a matter of, I'm more like, I guess you say is a general manager pointing people in the right direction what they need to do.

Yeah, I love it. I know that that's, that's where you want to be. That's very interesting. And again, it's funny the parallels that are there with real estate. I'm the same. I'm just talking to project managers and private lenders and electricians and realtors, and I rarely go to the house for anything or have any involvement with the people or even sign any of the paperwork most of the time. But it's interesting. I love what you're doing, and I certainly love 175deals at 70 cents on the dollar. That's nirvana.

Yeah, there's one thing, too. We had the states. We had this huge snowstorm come through, and I stormed in 25 states. I don't worry about broken pipes. I'm the bank. I have insurance for that. If something happens, the owner's take it. If little Timmy flushes his rubber ducky down the toilet, the bank doesn't get a phone call from the tenant to come unclog the toilet on a Saturday. Nobody calls the banks. On the weekends, nobody calls the banks to fix something, you know, and so that's a nice thing. I mean, I've done this business not only being here, but traveling abroad and communicating via email or text message back and forth with our team. And we've bought assets while traveling, we've bought assets while being home. It's really a business that you don't have to be location focused. I mean, I can do this business anywhere. I mean, I don't buy much stuff in Texas just because it's a faster foreclosure state and everything's really overpriced here for the most part. But I'll buy all across the country without me seeing it. But we always put eyes and ears on it with somebody that's local.

That's brilliant. Yeah, I love it. So tell me, let's dig in a little deeper into your take on how the real estate and mortgage markets are going to be, you know, kind of post Covid, let's say. What do you see? Because obviously we're postponing everything now for the last, like, year. And it looks like we're going to be postponing things at least another, I don't know, six months. I mean, what's going to be the consequence of all that, in your opinion? Because at the minute, inventory is super low, margins are tight, prices are surging. What's going to happen afterwards?

So hopefully you've got four hours for this episode. But it's pretty simple. Look, real estate keeps going up. We see that. Yay. If you're a property owner, you're excited about it. But here's what's going to happen. The minute that they finally decide to stop extending foreclosures. And as long as we continue to have high unemployment rates. Now, it may not be everywhere in the country, but there's going to be pockets, especially where you have cities, where the major industries are tourism, hospitality. What's being hit hard all across the country is that first time home buying range, usually 200, $300,000 or below. That's where we see the most amount of defaults. I won't say foreclosures yet because to have a foreclosure you got to have a proceeding to go to. And most of the states are still delaying foreclosures. But the minute that stops, you're going to see a wave of foreclosures, a wave of evictions. Every place is going to see a spike. It's guaranteed from Miami beach to Manhattan beach, from Florida to California, you're going to see a spike in foreclosure. Now what's going to happen, what's going to happen with this is honestly a big chunk of this stuff is never going to make it to retail investors because there are funds and a lot of deep pockets on Wall street that haven't been buying for the last two, three years. They've seen this coming, they knew this was happening. And you look at the number of non prime lenders, there was a year and a half ago, I did a study on all the amount of subprime lenders. I'm sorry they call them non prime now, but there were a lot of lenders out there still doing 100% financing at 500 FICO scores. Okay. And so that's not a recipe for success. When you look at that FHA loans that have a high, high default rate right now, originating last year around 14%. Maybe it's a little bit higher, maybe a little lesser, but that's first time home buyers. You're gonna have a lot of first month defaults already having first month defaults or first year defaults when they're buying new homes and their taxes are based on the land, not the land. Plus improvements, those have been delayed as well. So if you can identify markets that have not recovered where they're still hitting high unemployment, those are gonna be the ones that pop up first. Plus the non judicial states, Texas, Georgia, Missouri, North Carolina, some of those states, the faster foreclosure states, that's where the hit's going to be hit. First states like Florida, they have like a 9 to 12 month foreclosure timeframe it'll be into 2022 before you see a lot of wave of foreclosures because the court system is going to get clogged up again. Even though they do most of the stuff online there in Florida, it's going to drag.

It's even clogged up now because most people are working remotely. Even though they're processing a quarter of the foreclosures, it's still slow because they're moving paperwork to all these people's houses. It's nuts.

Exactly. And so that's why this, that's when you have that increase, you're going to have a default. You have a lot of investors are going to gobble up stuff there.

I'm sure you just have a lot of inventory, just houses for sale. I mean they don't necessarily need to get foreclosed on because a lot of people have got equity after 10 years of price increases. Right. So they might not be able to service their mortgage because they don't have any income.

Exactly.

The value of their house still might be higher than a mortgage. So they can sell their house and go rent somewhere. So there might be just a surge of listings on the MLS which is the opposite of where we're at now.

Well, and then that'll be a surge. But then once you start seeing some foreclosures, foreclosure definitely you'll agree to. This affects the houses around it. When you have a bit of a spike in foreclosures, it does depreciate the values around there and that'll fall into where people could maybe sell their house and break even now then you'll have people that. Then you'll see a spike in fizbos as people trying to sell themselves. I think seeing that and being an investor, I think that's a great opportunity for people to come in and take over properties subject to and do need a wraparound or taking over something low interest rate loan and then turning to a rental and holding onto it for the market to rebound in 12 to 24 months. As a residential side commercial sites a whole different ball game Commercial already seen a big distress especially your hotels are roughly about the paper on Hotels. About 20 to 30 cents of what it, you know, what it's owed on it right now.

Wow. Yeah.

College housing is taking a big, big hit because you have your university still not letting kids back. And so that's a big thing to see. Apartments are always going to peak out high and I think the need for affordable housing, you know, is going to be the biggest thing. So we've been dealing with some investors are taking hotels and converting them to apartments and plan to hold on to them for 24 months like that before they revert them back to hotels. I think the need for small. I think that one of the biggest things you're going to see is a big burst in the tiny home community as people are getting rid. It's like what happened 12 years ago. You had a garage sale economy. All these people had. They cashed out their equity in their houses, they went, bought toys and they got laid off. Well, then they had to sell the toys to pay for the mortgage. Again, I think you're going to see that a lot against people downsize and get rid of their stuff and try to consolidate to make it through it. Especially if they're an unskilled profession and they don't have a lot of online skills or the industry that they're in is struggling.

Yeah, I agree.

I think this year will continue to be kind of the same way. It is a bit nutty. And late this year, early next year, I think we're going to see a whole other ballgame.

But who knows? I mean.

The Fed and the White House have got a lot of firepower.

To kick the can down the road.

Longer if they want. So I wouldn't, you know, you want to still proceed carefully. Don't want to be predicting the crash too early either, because you can lose your shirt that way too.

Well, that's the thing is we've seen people that are getting really excited to do a deal. Like, listen, if the deal, if it's a skinny deal, don't do it. Just wait. Patience is a virtue in this market. And if you can be patient and wait a little bit, make sure you do some due diligence and then be ready to act when things do hit the fan. What we saw last time around is a lot of people overpaid for stuff because they came into the note space not knowing the ins and outs of it and overpaid for assets based on property value. And you can't do that. So if you're going to be in the debt space, learn how it's different. Learn that there's a big difference. We don't use arv, we use as is. Values is one of the biggest things. And realizing just because you're buying the note does not mean you're going to end up with a property. If the bar comes back and can reinstate, that's actually the biggest bang for the buck in the note. Space is getting people reinstating versus taking the property back, having to pay legal fees, having to pay rehab fees and then trying to sell it retail wise. I don't like doing that. I got tired of dealing with contractors and rehab recruits a long time ago.

So how do people, what's your advice.

For people that do want to learn more about notes? Do you have any books, websites, actionable tips, courses, whatever? What's a good way to get started on.

Yeah, I mean there's a, there's a lot of great information online. I mean YouTube. I mean we've got a couple thousand videos at our YouTube channel, WeCloseNotes TV. We've got the podcast and help close your show which is a great resource. You know, if anybody's interested, I've got a 73 page book that we like to give away. I don't know if you can see it on here or not, but drafting there, the green screen here. But basically how to buy real estate for 40% off a grade. If you're interested, drop me a message and I'll send you a copy of that for free. And then another thing I'd like to do too is that we've got a one day kind of a teaser class that we call note weekend which we teach the third Saturday of every month. It's going to be 49. Anybody that reaches out to me and says you heard this podcast, we will comp you in for free for that to learn the kind of the nuts and bolts of note investing for you.

Oh cool. And what's the link to get into that?

Then they go to noteweekend.com and let's say use the code Colin C O L I N. That should discount down to zero form.

So note weekend.com all one word and then Colin is the. Okay, the discount word. So okay, so just kind of final question I think Scott or second last question. So you know, just because like my real estate is my full time job, Note investing is your full time job. You're doing millions of dollars of stuff. And just as a lot of people have real estate as a kind of a side hustle, they might own a couple of rentals, they might want to buy another one next year and they enjoy that. In addition to a W2 job, what kinds of stuff can people do to be in the note business as a kind of a side hustle where they don't want to do it full time or they don't have hundreds of thousands of dollars, what options are there?

So that's, I'm so Glad you brought that up because I always tell people if you've got a job that you're working at, note investing can be something you do five, ten hours a week as a side hustle. You don't have to buy portfolios. 175 notes. We get a lot of people that start off part time. They buy one to two notes a month, once a quarter. It all depends on what your goals are. So yeah, there's a lot of ways you can use leverage, LinkedIn or contact asset managers off hours to start having lists sent to you. There are some websites out there that list notes for sale that you can pick up. But as a part time, that's where most of our investors start off as part time. And one of the big things is we teach you how to raise capital too. Is there so much private money sitting out there, especially in IRA accounts when you look at like 60, I think the last number I heard from somebody is roughly about 60% of money in IRA accounts is either in that they've lent money out on notes or they've bought notes with their IRA accounts. That comes from Quest Trust Company. So a lot of opportunity out there for raised capital. You don't need half a million. Heck, we had a lot. A lot of people could start off with like 50 grand buying one or two notes to get their feet wet and go from there. Wow.

And so what kind of return can people get doing it passively where they might not have the skills to be or the resources to have all these secondary companies turning them into performing if they just want to give money to someone. As a passive note investor, what kind of returns are available?

There are different funds out there that could get 6 to 8% return on their money. On a very passive aspect of things. You could buy performing notes. There's a lot of people like myself that have bought non performing, turned them back into performing that you could pick up at 8 to 12% return, which is pretty good. And there are servicing companies like Madison Manage it, that'll handle one off deals all day long for clients. So those same vendors that the big boys are using, there are other vendors out there that work with smaller investors like you and me and individual part time people all the time.

All right. Yeah, that's it. I love it. I think there's enough ingredients there for people to get started if they want. So how can people get in touch with you, Scott, and find out a bit more about what you're up to.

And how you teach people?

Yeah, easiest way is just to go to weclosenotes.com, that's our main website. Or check out the podcast, the Note Closer Show. We're excited. We're have Colin on in here in a couple days, I believe, talking about the Tampa market because it's one of our favorite markets out there. So, yeah, the Note Closer show podcast anywhere that you listen to podcasts. And then I want to ask you guys that are listening here, do Colin a favor, man. He does a great job with this podcast and as podcasters, we love it. We absolutely love it when our listeners go on over, hit that subscribe button and then leave him a five star review. We love seeing it, love hearing the feedback. He did not pay me for this endorsement because I love him. He's doing a great job. So go do that.

Thank you, buddy.

I really appreciate that. That is very kind of you and this has been a lot of fun. Scott, buddy, I look forward to chatting to you again soon. And thanks for, for sharing all that wisdom on note investing, man.

Honored to be here and just absolutely great. I love what you're doing, man. Keep it up.

Thank you, sir. You take care, Scott. There you go, folks. That was Scott Carson on Colin podcasting about real estate show 42. I hope you got some actionable real estate information and tips out of that show and if you are inspired to go and research a little bit about note investing, I think that would be great. It is a very interesting niche. It is not as complicated as you might think. I think literally if you spend a few hours, five hours, 10 hours, whatever you might want to do, you can pretty much get your head around it and learn how to do it and dip your toe in it and dabble in it. And it is interesting. And you can get pretty safe 8% returns, 10% returns. I'm getting a couple of thousand a month on note investing returns. It's proper, what you call it, mailbox money, where I'm not worrying about anything. I'm not worrying about tenants or maintenance or anything. Just the money's coming in every month and the principal is due on a certain date and it's pretty cool and it's worth investigating a bit more. And I think it's worth paying attention to Scott's take on the real estate market because I do think we are going to see some changes next year, early 2022. I mean, I could be wrong on the exact timings. It might be Q4, Q1, Q3, Q4, who knows? But you can't simply pause payments on millions and possibly tens of millions of mortgages and millions of foreclosures without an overreaction on the other side. It doesn't just go smoothly, in my opinion. So there are going to be some amazing opportunities from that. And also you have to make sure that you're protected from any downsides coming from that. But look, if you're a landlord sitting in some real estate that's cash flowing well and you've got a pretty good mortgage on that 75, 80% mortgage, nothing really you need to worry about. Keep doing what you're doing. No need to panic, sell anything. I'm not saying that at all, but there's just a lot of stuff that you can talk about and a lot of stuff you can strategize about regarding the opportunities that are going to be coming down the pike. If you want to talk to me about them, just go to the website ColinInvestments.com C-O L I N Investments.com I'm always available for answering emails and I do leave a few slots every week just to have 1520 minute chats with people about their real estate journeys. And look, that's pretty much it from me for now. I really enjoyed that conversation. It's been about 30 shows since I've spoken to an expert note investor Dave Van horn in Show 11 was the last one. That episode is certainly worth checking out as well. But that's it from me today, guys. Be back very soon with show 43, but until then, this is your friend Colin G. Murphy signing out. All right.

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