Note Investing in the CRE Space: CRE Spotlight with Andrew Rosenberg featuring Scott Carson

All right.

Good morning, guys. We have a really fabulous guest on a subject most people don't know about within my network. Well, we're gonna have Scott Carson teach us about notes today. Scott, why don't you give everybody introduction to yourself first?

Yeah. Good morning, good afternoon, good evening, everybody. Depending on when you're listening to this. Just honored to be here, Andrew. Scott Carson out of Austin, Texas. I'm known across the country as the note guy. For the last 15 years, since the last recession we ran into, I've been focused on the niche of buying distressed debt, distressed mortgages, first liens on residential commercial properties. Been doing that all across the, all across the country, including in Hawaii as well, too. But I buy, I buy debt on a one off to a big bulk basis. I'm buying directly from the banks. And our biggest goal when we buy this debt is to really keep the borrowers in the property. And so for the last 15 years, we've bought over a billion dollars in distressed debt and absolutely love being the bank and working to keep people in their houses. As we, as I make the rain joke, we're making America great again, one distressed borrower at a time.

Scott, why don't you just explain for our audience just simply what is note investing? Just in case some people have misconceptions, they understand better what it is.

That's a great question. I'm glad you brought that up. Yeah. Because most people, as you and I were talking before we got started here, most people, when they think of note investing, they think of it's somebody selling a house on terms. You know, I'm going to own or finance a house and I'm a sell it on terms and I'm a collect payments. And that's one aspect of note investing. But it's a small aspect of note investing. There's a lot different aspects of buying a note. And when you're talking about buying debt, we're actually talking about buying a mortgage. We're talking about buying the debt. It's secured by property, by real estate, either residential commercial properties, or you may be buying the first mortgage, the senior mortgage, or in some cases there's a smaller percentage of people that buy junior liens, the second or third mortgage on a property. I don't necessarily recommend that. I like being in the first lien position because then you really hold all the keys to the doors. But when we talk about buying notes, we're buying that debt and we don't own the property when we buy the debt. You're literally, when you're buying a mortgage, especially a distressed mortgage, you're buying that debt at a discount, but the borrower still owes what they owe. You know, if they owe 150 grand and you bought that mortgage at 75 grand, well you just became the bank and you acquired that receivable, that IOU that mortgage at 50 cents on the dollar, the borrower still owes 150. And so the, the way that we make money as a note investor and make great returns and that's where the profitability side is in that negotiation with the borrower at that point, when we buy that mortgage, we then become the bank. We have the same rights to foreclose. We can modify it, work with the borrower. However, we want to actually have a lot more flexibility because now we're stepping in at a discount. But then our biggest goal is to reach out to the borrower and actually to keep them in their house. Most people think the banks want to take this real estate back. Banks, lenders don't want to own real estate because it's not as profitable as being in the, in the mortgage space. And so that's what we do. We work to get the borrowers back on track through modifications, trial payment plans. If they can't pay, they can't stay. But we can work out a way for them to walk away from the property or give them cash for keys to help them move out if we need to. And of course, if they don't want to play ball with us, then we, like I said, we have the same rights of the bank. We will kick the file to our attorneys in every state and then they'll start the foreclosure and legal process of taking the property back. But you don't. Some people think you've got to have millions and millions of dollars to be a note investor. And that used to be the case back year, you know, 20, 30 years ago during the RTC days and single loan scandal, stuff like that. But no, I mean we buy a lot of single notes. You know, we're able to cherry pick from banks and lending institutions and hedge funds and a lot of our students are getting started and if they got 35, 50 grand, they're able to pick up one or two notes. You can use your IRA. Using your self directed IRA is a great resource for funding deals or using other people's money to buy notes. So it's a, it's, it's a beautiful thing. You got a lot of options. I mean each state's a little bit different when you're buying A note because you need to know what the, the foreclosure time frames and what's going on the state. But it's a, it can be a very, very positive and also very profitable nature. For three reasons that I like about note investors a little bit different is we virtually have no marketing overhead when it comes to finding deals. A lot of investors are used to sending out letters or postcards or bandit signs or door knocking. You know, I've done that all of my investing career, been shot at a few times. I don't want to do that again, you know what I mean? We, but we get our deals direct from banks, direct from lenders. So a lender may have a list of notes that's non performing they want to sell. And so we get that list from them every month or once a quarter, you know, so it's an email blast which is, so it's you know, maybe anywhere from one note to a thousand notes, which is really great and we can cherry pick from there. So that's the great thing is it's, we see a lot of deal flow, especially right now with people struggling and default starting to increase a little bit. You know, we're starting to see a lot more distressed debt on the residential and the commercial side. Both two is we get bigger discounts. Most people are trying to get, you know, a property in there and the discounts that they were used to aren't there anymore. But well, we're not usually buying anything above 50, 60 cents on the dollar of value for the most part, sometimes even lesser than that, sometimes pennies on the dollar depending on how distressed the asset is. So we get bigger discounts and then our profit margins are pretty good because we don't have to worry about a lot of times if we're buying an occupied asset. Andrew we like that we actually want to keep people in the house so we oftentimes can get that non performing mortgage back on track and the bars start making payments. So now that asset is starting to cash flow and you know, without having to deal with, you know, evictions or toilets, tents and trash outs, we got somebody that wants to stay in the property, they want to take care of it and they just needed a helping hand out of a bad situation. And then our goal is to get it back on track for at least 12 months. And then once a mortgage is paid, paying on time again for 12 months, it's reclassified from non performing to re performing. And now if we bought that Note originally at $0.50 on the dollar, we could probably Turn around and sell it back to Wall street, back to other investors at somewhere between, oh, 85, 90 cents on the dollar. So it makes for a really good profit margin without having to do all the worry about rehabbing and evictions and then trying to resell it on the open market. So hopefully that wasn't too long winded of an answer.

Oh, that's wonderful. That's wonderful. Because, you know, I was just at an REI meetup the other day and when I asked just a few people out of curiosity, most of them either had no idea what Node Investing was or solely thought it was, you know, like D class properties, only single family, you know, in, in immediate distress. And it's like, no guys, it's a little wider. It's a little wider than that.

Yeah, you're 100, right? Most people think it is. Oh, it's just completely trashed out assets. And don't get me wrong, we see that share of ugly stuff that's been sitting around, but we also see really great, beautiful assets that somebody hasn't paid in a while, you know, and every state's a little bit different foreclosure wise. So like I'm working on a deal in Florida right now that's taking a year and a half to take the property back and get the tenant, you know, the borrowers out of it through eviction. Because Florida is a year long foreclosure process. But, but here in tech, I got another one in Texas, we were able to foreclose in, in 30 days because the borrower had moved on and didn't want anything to do with the property anymore. So it just, it varies. It's not just a, an old, a crotchy old man who doesn't want to do any rentals or rehabs anymore.

Yeah, that's actually been suggested to me because, you know, I'm getting older and crotchety. Think the crotchety faster than the older. But you know, football and you know, I looked at the guy and I was like, geez, I don't know anything about Node Investing. And then oddly enough, you know, we, we stumble upon each other. I'm like, this is great. We'll get Scott on and kind of educate up our audience. Most of my audience is targeted towards LP investors. You know, people that are used to investing in multifamily, you know, storage, the various different things and syndications where they really, they want to be somewhat active. They like research and they want to ask a lot of questions. They know what they're doing, but they don't Want to, you know, they don't want to be running a single family portfolio. For instance. If someone like that is interested in investing, is that, is that, is this a meaningful thing where they can go and call a guy like you and learn more and say, hey Scott, I really just want to cut a check and be in a fund and what kind of returns could I look at? Now these are people that are spoiled. They're used to getting their depreciation on multifamily assets and then in the last three years they've been really spoiled because they've been getting, you know, these great irrs that are obviously disappearing, you know, very fast. If you could talk on that, that would be, that would be a great thing for me.

Yeah, that's, I'm glad you brought that up because we do get a lot of people that have been part of syndications or are trying to buy an apartment complex into the note space because they're able to pick up multiple doors at a reduced price. Now you don't necessarily have to be, you know, non performing. Does take some workouts. It takes working with a servicing company, an attorney to help with the borrower outreach and stuff like that. You're not, you know, I'm not going out and knocking on doors and trying to collect. I'm not doing that kind of stuff. It's all professional based. And if you got a non performing note, you're paying a servicer somewhere between like, you know, 75 to 95 bucks a month to work in that bar outreach. And then if you had to kick it to an attorney to foreclose, that's going to cost you from a thousand to several thousand bucks depending on the state. So a lot of people that like that passivity without having to create another job for them. I highly recommend performing notes. You can buy performing notes at a decent Yield, you know, 6 to 8%. It's usually newly original, especially with the interest rates increasing. It's a great time to be buying that stuff. If you like a little higher return, you can buy re performing notes from investors like me and others who have bought non performing performing stuff and got it re performing it's with a third party servicer, the borrowers on automatic payments and you may be able to pick something up at, you know, high single digits to mid teens as a decent ROI without having to do any work, just kind of buying that cash flow and still buying at a discount. So if something does go wrong, you still have to have the interim to foreclose and take the property back and sell it off. But yeah, if you're, you're interested in doing something a little bigger, we, you know, we work with a lot of investors out there who want to, hey, they like learning the nuts and bolts, but they don't necessarily want to make the sausage, you know what I mean? And so, yeah, we, we deal with investors all across the country, professionals, like, okay, I want to put a little money in here. I want to get a decent return. And you know, we've, we've got some different options for folks. If, if folks are looking to put, you know, a little bit of money with us, we'll give them somewhere around a 6 to 8% steady return, you know, without having to do any work. If they want to put a little bit more, you want to get a little higher return. You know, if someone wants to put a little bit of a higher amount, like 250 or more with us, then we'll structure an individual deal or portfolio. We can buy with them and then go split these on the deal and then you have a pretty good double digit return on that and have it structured a little bit differently with it through our attorneys and our funds. But yeah, I encourage, the most important thing is if, no matter what you're going to invest in, you got to learn that asset class because it's different. We don't get depreciation as a note investor. That's one big thing that we don't get. Now the beautiful thing is we're buying things a whole lot cheaper. Okay. So if you, you know, and your returns are often a lot higher. So if you got to pay some tax, you pay some taxes. But the great thing that is not tracked. There's no mls, there's no reporting of what I pay for a note. Okay. So If I buy $150,000 note and I pay 75,000 for it, and the borrower, I foreclose and sell the house for a hundred at the auction, that's still 50 grand that I didn't collect on. Right. That I can 1099 and write off my, my profits. I can 1099 to the borrower. All right? So even we modify or reduce things, we get a lot of write offs that way by reducing our profitability. Yeah. So you just need a different, you know, you need a bookkeeper. CPA understands that. Right. Like we're getting ready to send out a lot of 1099s, you know, or was it 1099ks or whatever they are, or eyes. I, I don't know, I'm not a, I'm not an accountant or a bookkeeper. I let those people handle that for myself. But you know, that's, that's a, it's a very, very strong bargaining chip we use when we're dealing with distressed borrowers. Like listen, you've got a portfolio of property here and you're, you're using the cash you're not paying, you're using this one property as an atm, you're not paying the bank. I'm the bank. You got to pay me. If I foreclose on this thing and you're not going to work with me, I'm going to slap a judgment against all your properties for the amount that is owed. So it makes better sense for you to either get back on track or just deed the property over to me and go your merry way. We're letting you walk from the debt, you know what I mean? We're not going to do like a lot of banks have done before and charge you a 0% interest loan or come back with you. No, no, just give me. If you're going to work with us, we'll be your best friend. We'll be your knight in shining armor. But if you're not going to play ball with us and continue to tell us to go pound sand or hide your head, you know, you're not going to like me because we have the same rights as the bank and the bank always wins. You know what I mean?

What percentage of your investors are self directed IRA or self directed 401k people?

You know, that's a really good question off the top of my head because we've got a mixture. A lot of folks love the fact that they use their self directed IRA because it's tax free or tax deferred growth obviously. And you can put a note in an ira. I would probably say somewhere around, oh man, it's hard to say. Probably around 75% of our investors have used their IRAs at some point. They may have other funds, they may have other savings, you know, retirement account, stuff like that. But yeah, most of them are using, I mean to buy a note, it's, you know, a piece of property. You've got to move your retirement into a self directed custodian like Quest Directly Trust or Madison Trust. But you know, we had a lot of people that, yeah, they're, they're using their IRA. You know, they start off with 50 grand to buy a note or fund a couple deals and then they're off and rocking and then, then they're raising their own capital from investors out there and making, and making a infinite return because they're not using their own money.

That's wonderful. How many students do you have, Scott?

I've been teaching Note investing since 2010, so I've been teaching this niche for 13 years. I've got thousands of students that we've helped out there. You know, I'm, I'm very, very proud of the fact that we've got, a lot of our students are out there and they, they teach other people or they also, or if you, if you were to do a who's who in the non performing note space, they probably fall from the Scott Carson tree for a big part of them, which we're pretty, pretty. I'm a big believer if you give people the tools and actually show them how to do it, those that want to do it will go do it. And that's kind of my approach is I don't, I'm not a, I'm not one of these guys that likes to blow smoke or hey, sign up for this little thing and you can learn this. But you got to pay me this huge exorbitant, you know, $50,000 and then I'm still going to control things. I'm the, I'm the guy that shows you exactly how to go find the deals, what to say to the banks, what, what not to say, how to evaluate these things, how to raise capital. I mean, it's a, it's pretty simple business but a lot of people like it to make it complicated. And you know, you're just, you know, some people tell you that banks won't sell you notes and yeah, you're not going to call bank of America, Chase, City of Wells Fargo, they're not going to deal with you individually. There's still thousands of lending institutions. There are also websites that you as an investor could go at and look at notes right now and make offers on. And there's, you know, you got to realize when a recession's going in, lenders are keeping an eye out. Lenders need to move stuff because they have to get that non performing stuff off their books because if they have too much of it, the, you know, Justice Department will step in and stop them from lending and they don't want that. That's how banks make money, is lending. I mean, you've seen hundreds of thousands of people get laid off, you know, mortgage companies shutting their doors, stuff like that. But they still got to keep that lending process going. So the more distressed stuff they have, the more they're Looking to move it off. I mean, you know, we got a lot of phone calls back in 2008, 9 and 10 when we got the word out and that what we were doing, buying and then the phone stopped ringing. It was all me making, you know, me and my team making outbound phone calls or drip marketing. Well, the last six months it's been interesting to see emails and phone calls coming in from banks and lenders asking us what we're buying or can we make an offering and make a bid and go from there. So it tells you it's a lot of opportunity. And I'm not trying to sound like I'm excited about what the next three years. I'm just damn jacked up there. Andrew. It's going to be a good, good time to be in a note invest the next three to five years.

Yeah, I've been making the, I hate making predictions but I've been making the predictions that you know, the zenith for multi family kind of came and went and in my opinion the risk adjusted reward was, was going to be better in debt in the, the, the, the next, you know, coming years. So, you know, this is a space that I'm very excited and interested about. Scott, how do people get a hold of you? And then I wanted to make sure you get your plug in for your one day educational thing because you know, a lot of my viewers, I would really recommend them, you know, going to that after talk before the show.

Yeah, I mean the easy way to get a hold of me is you can go to the website. We close notes.com we close notes.com and you'll see our different class schedule on there. And then we also have the podcast, the Note Closer show podcast that's been around for about six years, over 730 episodes and just it's a wealth of knowledge there with guests and vendors and me teaching stuff. But yeah, I'm glad you brought that up. You know, one of my things, Andrew's doing such an amazing job with this podcast and I got to say two things. First of all, if you're listening to this, make sure you hit the subscribe button and make sure you leave Andrew a five star review. We as podcasters love to hear that and he's kicking ass and doing a great job with this podcast. So make sure you do that. That's the first thing. Now second thing, if you do want to learn more about notes, go to, you can go to this website, noteweekend.com I teach a one day class every third Saturday of the month and it's usually 99 bucks and it's my students call it the Cliff Notes version of don't invest. And I show you how to find fun and flip in roughly about five hours. Not a pitch fest. It's literally just kind of a dip your toe in the water a little bit more. But if you go to noteweekend.com and type in the code Andrew, it'll I'll give you the class for free. And if you can't make it live, don't worry, we'll send you the replays and you know, you can start learning, dive into the deep end note investing and see if it's something for you. But that's like noteweeknd.com special code, Andrew. Make it all caps and it'll give you the class for free.

That is outstanding, Scott. Really, thank you so much. Well, how I have to catch up with you because I definitely want to attend that class and get caught up with you again. Thanks.

Can I add one thing real fast there for you? You know you mentioned about a lot of apartment investors. We were talking about this prior handling that and you said the zenith for apart investment you think is passed. And I think you're accurate. I think we all know that multifamily has been the most expensive asset class out there and people overpaying. There's a lot. There's this wave of people that bought multifamily property over the last three, five, six, seven years with the idea that they were going to refinance out. Well, we know that exit strategy has gone the way to the dodo bird because interest rates have gone through the roof compared what they thought. So there's a lot of performing or mature loans that are starting to hit that non performing market. So this is one thing we actually track is the distressed commercial side of things. And while an apartment might be overpriced, one of the things that we get is when we see these lists, we actually approach the bank on a distressed apartment, say hey, can we buy that note from you at $0.70 on the $65. Imagine cutting in another 35 to 40% profit margin when you buy the debt and then either modify the loan or take the property over because the borrowers can't get refinanced out. Now you just built yourself another 25, 30% profit margin on an asset class without having to foreclose and your numbers will start to look really good. At that point your cap rate will go through the roof. So something a little bug there if you want to know. Note investing that's one great facet to learn about how you can take over these commercial assets.

That's wonderful. So I think this is really going to be a helpful episode for a lot of my LP investor audience. Thanks again.

Thank you, bud. Have a great day. And once again, thanks for having me.

Thank you, Scott.