Tapping Into The Tsunami Of Distressed Debt With Scott Carson From Wealth Watchers Podcast With Adam & Justin

Everybody makes money in an increasing market. It's when that market turns or you've got a pivot that you really find out who's, who really knows their numbers, who really did their due diligence on the deal, and who has plan B and plan C. You know, so many investors just have one exit strategy or one plan, and then when life throws a, you know, a monkey wrench in the machine, people flip out and they have losses because they weren't planning for things to change.

We know that building wealth comes from owning businesses and making investments. Yet why still do nearly half of businesses fail in the first five years? And why do others lose it all in their investments?

Welcome to the Wealth Watchers Podcast, your resource for building a massive net worth. We bring real stories from real people who are experts in business and investing, who will share secrets and actionable strategies to amassing wealth and achieving success. Brought to you by Happy Camper Capital. Now your hosts, Justin Hoggett and Adam Lendy.

Foreign.

Welcome back to the Wealth Watchers Podcast. I'm your host, Adam Lendy. With me is my co host, Justin Hoggett. Justin, how are you today?

Hey, Adam. Doing well, you know, some big news in the world of Happy Camper Capital from yesterday.

We've been busy, haven't we?

That's right.

We got deals coming.

Yep, yep. Big one in Florida. So we're excited about that. And to everyone listening, be on the lookout for a great opportunity.

Yeah, I'd say if you're not already on our investor list, make sure you jump over tohappy camper capital.com and just put in your info there so we can get those details out. We've got that and we got a couple more in the works with our team. They've been hard at work. So without further ado, love to bring in our guest today. We're bringing on the note guy, Scott Carson with weclose notes.com Scott, how are you?

I'm doing great, fellas. Congratulations. We're in Florida.

I love God's waiting room, Central Florida. So we're kind of, kind of near or Cala, Orlando in that area.

Very great. I think you're going to see a lot of deals down that neck of the woods here over the next 12 to 24 months. So kudos.

Yeah, it's a booming part of the country right now. Definitely. Well, Scott, you know, obviously we're interested to know a little bit more about what you do, but beforehand we'd like to know a little bit more about who you are. So can you Kind of bring us up to speed on, you know, the story of Scott and kind of how you got into doing what you're doing.

Yeah, I'm a wild and crazy guy. I love having fun and I think if for anybody's listening out there, if you can't have fun at what you're doing, you're doing something wrong. We don't want to be J O B just over broke. No offense, anybody out there working, you've got to pay bills and I get that. But hey, if you can do something fun, if do it, do it, do it, do it. And I love about real estate. I've been a, an active real estate investor for over 20 years now, which is surprising. But got started like many people, working a full time job as financial advisor, making good money. Bought our first house back in 2001 here in Austin, Texas. Hook them horns and you know, decided buying a couple more investment properties because we had great credit and back in that day, if you could fog a mirror, you could get a house. Well, the only, but the only person that made any money in those other investment properties was our Realtor, the commissions. Because right about that time, about a month after we bought those two, three other properties in 30 days, I got laid off. And then our biggest employer, which was basically given employment to our renters, laid them all off in a computer company that rhymes with hell, Dell. Okay, so I went from being great and we'd save some money, but I went to being a distressed borrower pretty quickly and did whatever I could do for a period about a year. Got back in finance, went into banking, was a top banker for JP Morgan Chase here in Austin, Texas and throughout the Lone Star State. And, but always still had that bug to go back in and do things right in the real estate side, luckily was able to get rid of those investment properties without foreclosures. But I think many investors get in their first deal, I think they know everything and they fall flat in their face. So I learned a lot from that experience. And fast forward a couple years. I was fortunate enough to, you know, start a mortgage company with a buddy of mine. Did a lot of great stuff traveling the country, working with investors across the country. But I had basically a four year apprenticeship with a guy and gal who were teaching owner financing, creative financing, note investing. And so it was really nice originating a lot of loans for investors, but also learning the creative side of real estate, the right side I think a lot of people don't know about. And so when everything hit the fan in 2008 I kind of said, okay, here's my half of the mortgage. Company sold it for a buck and then basically just started dialing for dollars and started calling banks to buy their distressed debt. And that's why I've been known as the note guy, because I love sharing what we do. It is a niche within a niche in real estate out there. I like to make the joke. We like working to make America great again. One defaulted borrower at a time. Lots of people struggling. But the last, looking back now 13 years has been such an emotional and a great roller coaster ride of ups and downs as the market's gone crazy. I will tell you right now I'm pretty excited about what the next few years hold. But, you know, I love having fun. I love working with borrowers who are in trouble. I love working with banks to move debt off their portfolio. And then I really love working with investors who want to tap into it, you know, into this niche without having to do a lot of the work, a lot of the rehabs, and really acquire a lot of wealth. So a little bit about me, anyway.

Yeah, you know, I think in the next couple years, I know we're likely to see a pivot in that. You know, I think a lot of people have gotten into real estate and have seen success even, even if by accident over the past 10 years. You know, just because we've been in such a booming market. You know, I think a lot of, a lot of deals haven't been underwritten well, but just by force they've done well.

So amen to that, man. I mean, that's. Everybody makes money in an increasing market. It's when that market turns or you've got a pivot that you really find out who's, who's really knows their numbers, who really did their due diligence on the deal and who has plan B and plan C. You know, so many investors just have one exit strategy or one plan, and then when life throws a, you know, a monkey wrench in the machine, people flip out and they have losses because they weren't planning for things to change. We all know, hey, change is constant no matter what type of market you're investing in or strategies or what the heck's going on. And you know, you can only control what you can control.

Yeah. Now today you work with distressed borrowers and you were one yourself at one point. You know, from that situation you were in, what was the takeaway for you personally? I mean, what have you done to protect yourself going forward?

So I. Here's the first thing, whenever you've been in a bad position, where you're basically shaking the couch cushions for change to put gas in your car to get somewhere, you empathize with people that are struggling. There's been a lot of people obviously across the country struggling. And when we get in a list of notes direct from banks, and that's where we get our deals from, is direct from, from institutions. When I'm looking at a list of spread, you know, notes, a spreadsheet, a tape of them, as we call it, I, I like to look at beyond the store, beyond the numbers. Hey, what happened with that borrower? What's this? What's the country western song? You know, did they lose their job? They get divorced, Their mama, you know, grandma got run over by a reindeer, whatever it might be, their dog died, you know, they got sick, whatever it might be, there's always a story. Most people don't get into getting a mortgage or buying a house to suddenly fall flat in their face six months later or less and stop paying. Most people are good people. So that's the thing that I, I empathize like. Listen, I've been in your shoes. I understand what's going on. Let's create a win win scenario here. Yes. Your previous bank didn't want to work with you. They're not willing to modify the loan or, or work with you. I'm willing to work with you. So let's solve an issue. Let's make it a win win right now, and let's get you back on the right track. Let's turn your nightmare back into a dream. That makes sense. Yeah.

Can you go through the process of getting those notes? You know, you said looking at the tape, what kind of connections must you have? How does this process work for you?

So if I tell you, I gotta kill you.

All right, I'll take it.

So what's so unique about note investors and most people think of note investing, they think of owner financing. That's what most people think, oh, I'm gonna owner finance a house. And that's what note investing is. That's not always the case. If you've ever watched the Big Short, one of my favorite movies out there, that's kind of what I do. I am, I'm the guy in the back of the room jamming out in his shorts, listen to rock music and looking at spreadsheet after spreadsheet. So what we do is we contact banks. And banks have an internal department that handles looking at their portfolio of loans, performing or non performing. And banks are highly regulated. If they have so much in default, they've got to start moving stuff off their books because a defaulted loan costs cost that bank or lending institution 10 times the loan amount and fees over the lifetime. So we reach out to these departments and they go by a couple different names depending on the size of the institution. So if it's a really large bank, they may be called the special assets department. Okay. You know, they may go by secondary marketing department, where these asset managers at these banks are looking at loans. Okay, what do I need to move off to the secondary market? I need to get it off our book so we can sell it at 60 cents on the dollar. Get that 60 cents in and then turn around and, you know, flip our money, get the velocity of capital rocking and rolling again. So. Or they may go by whole loan trading desk. We have a lot of big insurance or REITs that have portfolios of debt on their books. Then you also deal with, like, smaller banks. They may go by the chief credit risk officer as well. So we will search for those types of departments, whether we're dialing for dollars, calling banks and calling the corporate office, or we'll jump on like LinkedIn and do a search for those job titles at different banks and reach out to them. It's a matter of just, hey, what do you have on your books? You know, what do you have that you're moving this month or this quarter or this year? You know, and not every bank will have something, you know, bank of America, Chase, Citi, Wells Fargo, while they do have a lot of distressed debt, they're not going to sell anything off below like a $50 million portfolio. And often it's not priced at a point that makes sense. But that still means there's a ton of other lending institutions, lenders out there, mortgage bankers that have stuff on their books that they'd be glad to sell. They just, you know, got to figure you basically do your due diligence on the asset to make sure that it makes sense for you. And it's just a negotiation process, but it's all about follow up more than anything else. I tell people it's a marketing play. Instead of dropping thousands of flyers or postcards or stuff like that, it's a digital side of what things. We do email blasts, we do drip marketing campaigns, LinkedIn contacts, and then follow up with phone calls. So it's much more. It's kind of a nice thing because you can do this business from anywhere. And the marketing overhead is substantially less than what most real estate investors are used to seeing and dealing with. Does that make sense, guys?

It does, yeah. So your marketing overhead's lower, but how much? I guess if you were to say getting your first one, I mean obviously you were talking 60 cents on the dollar for the note. You know, what does that look like? How does somebody actually tangibly put that.

In as far as figuring out value or bid?

Yeah, exactly. And then of course, like, you know, I guess if somebody really wanted to be aggressive with this, like how do they source the capital for that?

Oh, let's, it's like you guys, we source capital from private investors and it's all about the deal. You know, some people use their own Capital, other IRAs and stuff like that and buy performing notes, you know, or buy a performing note that was once a non performing note. That, that's what, that's what kind of our, our goal is. We buy non performing at, at 50, 60 cents on the dollar or less. Our goal is to get it borrowed back on track and have them start making payments on time again for a period of 12 to 24 months. And then after that time will look to sell that note back to the market, back to banks, back to REITs it somewhere between 85 and 90 cents on the dollar. So we had a lot of investors that buy onesie twosies. Yes, banks will sell you notes, just not the big five or six. But plenty of other institutions out there will sell one off deals all day long, whether it's residential or commercial. So raising capital is all about marketing the deal. Like anything else, our podcast is a great way to raise capital just like you guys did. Love that. Right off the bat, let's talk about what we're offering before we bring a guest on. That's the smartest thing. I mean, so many real estate investors that have a podcast never talk about their own stuff. It's ridiculous. You know. Yeah, people that listen to podcasts listen 86 of the time. Why wouldn't you? But we market online for capital, we market IRA investors locally and we jump on the county records of where we're buying notes at and we target them directly. That's the only direct mail that we do is out to IRA investors. But if you're looking to get started, you know, you're going to have some marketing startups, CRM, you know, a cell phone, hopefully you've got a cell phone these days and, and Internet and then it's a mark. It's just a matter of kind of dialing for dollars and reaching out on a regular basis. Where and Looking at truly, if you're going to start this off part time doing those things after hours, you know, like Gary Vee likes to say, the 7pm to 2am shift the side hustle and just kind of systemizing it out. It's not a course. Notes are not a get rich quick at all. It's a get rich wealthy over time. And that's what I love about your Wealth Watchers podcast because you really focus on that. You know, Notes is not about buying an asset and controlling the asset for the most part. When you're buying the note, you're really buying the payment stream to build cash flow long term. And we actually make the most amount of money biggest return on investment and revert in return on time by working with a bar to keep them in the house. Like I said, holding it for cash flow, getting some skin in the game on the front end monthly payments and then selling on the back if we want to or just holding on to it for a while. And you know, we'll have borrowers that will pay us off or they'll sell the property. We get paid in full or if they owe more on the property than what it's worth, oftentimes they'll do a short sale and we'll prove that short sale. But we're still making a good chunk of money because we bought the note at such a big discount. So yeah, we, a lot of people like doing onesie Tuesdays here and there with their own funds. That's totally fine if you're wanting to go big. Yeah. You got to raise capital and all comes down to market at that point. So hopefully that was a roundabout way of answering your questions. Al.

It was. Yeah. What's the, what's the average hold period for you on these notes?

We always like to say 12 to 36 months. So. And part of it is also dependent on what's going on with the borrower. I know you guys are probably a little bit younger than me, but you probably are familiar with those choose your own adventure books.

Yes.

You know what I mean. You read a chapter page, get on which decision do I want to make? It's kind of that way in note investing. Unless of course you buying a performing note and the borrower is just paying on time. If you're buying a non performing note, it can kind of go one or two different ways and then it goes from there if it's occupied. Guess what, you've got a lot of exit strategies of getting the borrower back on track or them deeding the property over to you short sale or having somebody come and take over payments or foreclose. If it's vacant, you're probably not going to have the bar come back to the table and move into the house. So it's more of a liquidation exit strategy of Dean Lu cash or keys or foreclose. And depending on what state it's in, it can run anywhere quickly. Like Texas here, you know, we're the fastest in the country when it comes to foreclosures, highways and executions. 21 days. You can foreclose here in Texas. Now in New York, the Empire State, it can take up to three years to foreclose. That's not a good place to buy. So I don't buy New York, New Jersey, I'll look at Illinois a little bit longer. But I don't buy in Cook or as I say, Crook county because it takes forever to foreclose. If you're not, you know, if you're not living in the state, you're not a state investor. They're going to give every chance and every second third opportunity to the borrower who's living there. So 12 to 36 months is what we look at as we talk about. Usually it's faster than that. Obviously with COVID and the foreclosure moratoriums that's delayed things 12 months if you're looking to foreclose because of things. But we still have plenty of people that we bought the debt from or previously that were paying on time and we just worked with those that had a bit of a hiccup to keep them in the house and then just either delayed, you know, did a forbearance agreement, delayed the payments for a little while or just put that whatever the late on, put it on the face Mountain loan and extended by another three to six months.

How many are you doing a year would you say?

How many deals do we do in a year?

Yeah.

Oh, it is varied. Anywhere from 50 to 785 in a year. Wow.

It's a wide range and so.

Well, the beautiful thing about note investing is it's not me doing all the work. Obviously it's a very vendor driven business. You know, we have a servicing company who's handling the borrower outreach, you know, mailing out the statements, following up with a can. Collecting payments is one of the most important things because it's different. It's not like collecting rent. If you're collecting on debt, you need to often have a debt collector's license or your servicer needs to be a licensed debt collector in the state that that loan is in, it's not too bad. But servicers, they'll handle the workout. The borrower outreach. A lot of times if you've got to foreclose, you put it with an attorney and let them handle it. And then you're just kind of fielding phone calls and emails between parties a lot of times and going from there. And so you guys, are you big Broncos fans, Big Denver Broncos fans?

Yeah, I'd say so.

You'd say so. Okay, so you're not the, you're not the Teddy Bridgewater out there, okay, getting hit. You're more the owner. The Boland family up there directing, you know, they're, you know, the owners aren't sitting there swinging, you know, flipping hot dogs and Miller lights to the stands. They're up there just directing the traffic. And that's kind of how we are as a note investor is. Yeah, look, you can get involved, you can do the negotiations of the bar, get on the phone if you want to, but it's not your best interest because oftentimes borrowers will ask for them. Ask for an inch and they'll take a mile. You know, we as people often have really great hearts and want to help people, but borrowers, especially deadbeat borrowers, will use that against you. You know, I had one borrower, when I looked at the notes, she had eight grandmothers had passed away over the last six years. Wow.

How's that happen?

Physically impossible. Now, she may have been married four or five times. That's the pot. But, you know, people will use stories, stuff like that. And that's. Those are the minority, I guess you could say numbers when it comes to stuff, most people want to stay in their house. You know, they can't pay, they don't stay. And those that do pay, they will work out a way to kind of help them keep that dream alive or retain ownership. But, you know, thing is, it's a vendor driven business. It's we, you guys still have to do a lot of due diligence on the front end, you know, the value of the property. You're not getting interior access to a property because somebody's living it most of the time. So we show you how to identify emotional equity. You know, if there's toys in the yard, the lawn is mowed, or if the taxes are paid, or one of the great things that we have happen for us that helps us in due diligence versus most investors since we're the bank, oftentimes county records, you know, utility departments Give us a lot more information. Cause we're the bank. Like, I'm calling. Hey, I'm the bank on 123 Main Street. I'm calling to find out if the power's on or their balance to make sure you guys get paid when we foreclose. And so. Oh, so you're the bank. Okay. Yeah, they. They're on a payment plan or they've been up to date or it's been off for six months. That gives us a lot of information to be able to tell what kind of condition the property is. I don't usually chase vacant assets because if there's a vacant asset, it's been vacant for longer than six months, it's going to need some work, rehab, replacement. You know, the air conditioner may have gone on vacation on a walkabout. You know, the copper goblins showed up and took off. You know, that kind of stuff happens. So that makes any sense?

Yeah, absolutely. Yeah. Do you, for the due diligence, do you talk to each owner borrower?

Unfortunately. That's a really good question. I'm glad you bring it up. No, you're not allowed to. If you don't actually own the note, you can't call the borrower and say, hey, do you want to do a loan mod? Which would make sense. Which would be great if we could. But that's actually a violation of fair debt collecting practices. You can actually have a $50,000 fine because you really don't own the note yet. So that doesn't mean you can't other ways of doing it. Things like, one of the things that we like to do is if there's a number we come across and doing due diligence, we'll call that number and just. We won't say anything about buying the note loan. It's like, my favorite thing is ask, hey, John Smith. Or is this the John Smith that graduated from Ingleside high school in 1995? Yeah, that's my high school. Of course they're going to say no, but I know it's John Smith. I know it's a working number, which is just as good. Now, I can give that information to my servicer or attorney. Like, hey, this is a working number. Yes, they're living at this house. We verified that it's them. You know, you can always still call and check verification of unemployment. Because when we are buying the notes, we get a collateral file, usually a PDF, and you guys can see this is about an inch thick. This is actually about an average size of one. But we we look at that as well. So we'll see, you know, what their loan application was, what they did before him when they took out the loan, any other assets they have, you will see who their employer is because the servicing company that's currently handling it will get their notes as well. So we can see if the borrower has been friendly or been just an ass. Tell them a pound sign or not answer if somebody's trying to do a loan mod or a short sale. We'll see, you know, scanned copies of the short sale file, you know, the hardship letters. So that gives us a lot of insight into the borrower's mindset, what the borrowers have been looking for. Like I bought a note where the borrower had been trying to do a loan mod for four years and their loan file was the biggest I've ever seen it. When I actually got it shipped to me after we bought it was in one banker's box by itself. Okay, whoa. Usually we'll fit 20 to 30 in a banker's box. But this lady had been trying to do loan mod. So she had all her documents scanned and shipped in and hardship letter and lived in the house for 18 years. I'm like, screw this, I'm just gonna pick up the phone and negotiate with this lady right now, give her what she wants. Because what she wants makes great sense for what we paid for the note. This is a no brainer. Let's get this thing done and negotiated and you know, slam dunk deal. You know, I wish they were all like that. We're successful about 60 to 70% of the time actually getting the borrowers on the phone once we buy a note and getting some sort of extra strategy. Rock and roll.

Now the ones that you buy, you know, I guess what's the foreclosure rate on those after you bought the note?

Great question. When I first started off, it was probably around 50, 60 cents on the dollar. I mean 50, at least 50% of the time I was foreclosing. I made a mistake early on. We started doing this because I come from the fix and flip side. I was like, oh, you're deadbeat borrower. You know, you don't need to live in the house. I'm going to foreclose. Because that was, I wanted to own the real estate. Suddenly I had enough get kicked in the head of foreclosures, being delayed and drug out and having to pay out attorney fees and then repair costs. I started looking back like this borrower wanted to do a loan model. If they, if I don't loan model initially, I would have had all this cash flow rolling in for 12 to 24 months so that at 12 months their property appreciated back up. I wouldn't have had to foreclose. I sell it at that point on the secondary market. I would have made more money with less work and less headaches. So that's why we're pretty, pretty diligent. If I, if it's in a foreclosure state or if I know I'm at the foreclose, I'm, you know, I'll do it like I got a deal right now down in, in, in South Florida, the borrower owes over a million bucks. Okay. Hadn't paid in five years. We bought this note from a fund and when we bought the note, the house was worth about 750. We closed on it a year ago and we paid 441 for it. Okay, well, the house has appreciated to 950 now over the last 12 months. He now owes like 1.2, 1.3 foreclosures in January. So now we've just been writing out the foreclosure, paying the servicing costs and the insurance. But when we are opening bids, the auction is gonna be like 900, you know, 900, 950. So we will cash out somewhere around 400 to $500,000 on that deal. It's been worth writing it. Our investors been fine with it because we told him, hey, this is going to take at least probably 12 months. You know, he's going to make 10 to 12% of his money. He's happy because it was sitting in an IRA making nothing, and we're going to come out smelling pretty good, even though it's taking a little bit longer than expected.

I could see your investors being happy. If you're doubling their money in 12 months, that's pretty darn good.

Well, we're not double, I mean, we're not doubling their money in 12 months. They're getting a 12, you know, 10 to 12% return a lot of times.

Sure.

And that's the big thing I think a lot of investors screw up is they get too big a return to their investors. And one of the things that we've done better now is really seeing, hey, how active is the investor, what's their money making them? If their money sitting in a savings account or an IRA making zero, I wouldn't necessarily give somebody 12% for them not doing anything. They, they really need to deserve something like 4 to 6%. Because if you're still doing the work and you give them a 4 to 6%, they're not doing anything. It's still a really good deal for them. They wouldn't, most people won't be able to go out and get that themselves in the market. And so that's, that's one thing that's changed over the few years. Instead of going to 10 to 12%, we've gotten much better at kind of reducing interest rates that we're paying out. It's still a good deal to most people. It's just that we're dealing with less, less real estate investors. Hungry sharks like you and me, guys, you know what I mean? To those that like, well, I'm not, you know, I want to get involved, but I'm not doing this. Well, let's do this. And it turns out to be a win, win across the board, you know what I mean?

Yeah. Now, when you go to sell these on the back end, obviously, you know, you're, what does that process look like? Who do you approach? How do you find, you know, people to buy these notes from you?

Good question. Oh, I love that question. Investors. So when we, if we have an investor who funded the deal, the first person we'll talk to is them. Hey, do you want to buy this note? Do you want to keep the cash flow going? You know, if you want to, cash is out, you know, so we bought it at 50, hey, cash is out at 85, because we'll sell it back to them for what we would sell in the open market and they still keep their money involved and still get a really great return on investment. If we don't, then we look to sell it. We've got some real estate investment trusts that are looking for performing notes at at least an 8% yield. If you bought a non performing note, let's say at a 4% interest rate and you paid 50 cents on the dollar for it, you get it re performing. After 12 months, you can sell it at 85, 90 cents on the dollar and make a, a great return to that REIT who's got really cheap money, you know what I mean? We also deal with individual IRA investors. There's investors like me that got money sitting in my IRA account. Let me go buy some performing notes. You know, there's, if you can't get it re performing, you can always sell the note. Often as you get closer to foreclosure, to other local investors who don't mind taking on the, I won't say the headache, but taking on the problem, having to foreclose and then evict at that point. But it's just like other people. There's investors, there's REITs, there's some banks that are looking for performing paper, you know, that will buy all day long and at a decent yield as well too. And it becomes a real win win because you bought it so cheap you got some. That's why all that. There's kind of 3 profit margins for, for notes. You get some money on the front end from the borrower, you never do something for free cash flow along the way and then you get a big payday in the very end. Whether it's selling a note or if you getting cashed out by the borrower or if you have to foreclose your foreclosing and get the big check.

Are there any tax savings or incentives with all this?

There is. So when you're, there's a couple of things that people screw up on. If your deals are going longer than 12 months, it becomes a long term capital gains thing. Right? You can write off this debt that you forgive. 1099 the borrower, hey, I'm going to forgive 20 grand, I'm going to write that off. Send a 1099 of that bar every year. There is one kind of crazy thing that happens if you buy a note and you do a modification, do a permanent modification within 12 months. The IRS wants to tax you for the full amount of what you modified, even though you may not collect the payments. So what we do is instead of doing a modification, we do a trial payment plan for 12 months. 12 months in a day. So that after 12 months it becomes a short term cap. I mean it's a long term capital gain versus short term capital gain. So let's, let's give you some numbers for those that are visual. Let's say we buy a property where the borrower owes 120,000 on a house that's worth 100. We buy it at 50 grand. Well, if we were to go to get the bar on the phone, they want to do a loan mod and we modified it to 100, we forgave them 20. Well now the IRS wants to tax us at the 400,000 even though we haven't collected a dime yet. And to avoid that, you'd have to have a third party come in and evaluate the note for you and say, hey, it's only worth 50. So this is why we do a trial payment plan for 12 months. Then we're only being taxed on. What they pay to us is basically income. And that's a then after 12 months we sell it off or do a mod at that point. Then it's longer term capital gain and makes much more sense IRS wise. So there's, you know, there's that we don't have the, you know, we don't have the write offs that people have for like depreciation because we don't really own the assets, the property. You know, our cost segregation being able to, you know, narrow things down when you're buying the debt. But when you, what's great is often if you want to take property back, especially in commercial, small balance commercial, we see a lot of this, you're buying it out, sometimes you can actually end up taking the property back. Now you've got all those advantages but you are into the asset now for a lot cheaper than retail or what most investors are buying real estate.

That makes sense right now. How many properties would you say you foreclose on and actually take over? Because you said you started out trying to do that method.

But yeah, so it's, it's less. It's probably about 25% of what we buy. I mean some pools are lower than that, some are higher. It just depends on the situation. If you, if we're buying assets that are usually greater than 200 grand, we'll probably have a higher percentage of foreclosures in that marketplace because borrowers are more educated, they've usually got savings, they get more income. So they, they understand dragging things out, filing bankruptcy, delaying things, which is actually a good thing in our neck of woods, but dragging things out, anything below 200,000, especially a hundred thousand less properties, which we still see a lot of, not just in Austin. We may not see them in Austin, but we're buying in about 30 different states is people are much more flexible when it comes to hey, let's just give you cash to walk. They don't have the extra money to go hire an attorney to, you know, file bankruptcy or delay things, they're not going to fight you as much. And so that's the thing. 5,000 of them to walk is a, that's a several months of income and can be a real win win across the board. You get at the higher price point, it makes less sense to modify because the interest rates are usually lower. It doesn't make a lot of sense long term for those usually those are going to be straight foreclosure if it's over $250,000. Below 250 we'll look at modification. But above that, if we're going to Buy that asset, it's probably going to be a foreclosure.

Got it. Now in the beginning of the conversation you mentioned something about being excited for the next two to three years. So tell us where you think we're heading and why are you excited?

So I'm excited for the doom and gloom. Now I think anybody we've seen, and you guys have been in Colorado have seen huge growth, a lot of increase in value. I don't think the values can stay climbing. And we've already started to see a dip. You start looking at days on market and listings. Days on market really starting to increase, especially in that secondary price range. Whether you're like we see that in Dallas, we've seen that in other places at 400 to 500 or that second tier price point for, for people to get in is starting to really drag out. Phoenix is a great example. Higher end homes are really dragging out listed on the MLS longer. So you're seeing a dip, kind of the turn of that stuff. And when you look at unemployment still being pretty high in different cases and forbearance is failing in a lot of cases, it leads to a lot of opportunity that we're going to see a lot of defaulted distressed debt, we will see more foreclosures, but I don't think we're going to see the REO wave that we saw back in 2008, 9 and 10, because most of this debt, these defaulted mortgages are going to get gobbled up by REITs or investors like me buying the debt and then working it out. And you will see foreclosures. We've already started to see an increase across the country. Different states that are opening up their foreclosure auctions. You've seen increase in filings and defaults. You'll see an increase in filings and bankruptcies as well because we've seen an increase in divorces. So that's kind of the natural trend. Seeing the, the financial hiccups causing people to foreclose. Another indicator that I look at, it kind of takes me back. I call it the, the garage sale indicator. When you see a spike in garage sale listings in your Sunday papers or your newspapers, it's usually from somebody who now has been laid off and they can't enjoy their toys. They've got to sell off the toys they've bought in the last 12 to 24 months to pay for the mortgage. And actually those are pretty hot deals if you're looking for subject to deals chasing garage sales for those out there. But we're just seeing too much stuff with the downfall it's, and with us having the connections like we talked about earlier with email blasts and things we connect with asset managers get a lot of, we've started to see an increase in banks and asset managers reaching back out to us and saying hey, we don't have anything now but we'll have the fourth quarter or Q1, whereas we hadn't seen it in the last, you know, 12 months prior to. So if that makes sense.

Yeah, well I think that that brings up a good point. Just your excitement about that obviously where we're going because you know that that's what sets good investors apart. We're the ones who look for these opportunities as they arise rather than sit on our hands. That's what, how most people miss out on these, you know, once in a decade or once every 20 year opportunities. So you know, I don't disagree. I think we're, you know, we've been on such a strong growth trajectory in most major markets in the country that it's, it's just not sustainable. It's, it's, I think it's overgrown. I mean I, I'm not sure if it's going to go down or if it's going to plateau but you know, I, I, we're certainly due up for a correction.

Well and it'll come down to a lot what's going on in individual markets. I don't think San Francisco is going to take a hit. Right. They're still going to be stupid expensive. It's going to be the other areas around San Francisco, out in the Valley and other things like that that are going to be hit the hardest because you're already seeing that where homes are unaffordable in areas and people are still moving to them like Austin. I mean we should call it California east. Okay. Because we have people moving out of California. They're cashing out. They're coming into Austin with a 900 to a million dollar housing budget and they see that three times the size of houses that they had out there but for half price. And so you're seeing Property sell at 50 to 100 grand above list price because it's a deal to them but it's overpriced to us. So some of those markets like, you know, I don't think Austin be hit that bad but it'll be other areas like San Antonio a bit harder. Dallas will be hit harder, Houston will be hit. I mean Houston's always hitting because of hurricanes and all the other stuff going over there. But you need to know your local markets for the most part. Like we talked about where you guys are in Central Florida. I think Orlando still hasn't recovered in a lot of cases. You know, they're still not hiring everybody back full time. You look at the hotel industry and the service industry that's still struggling across, across the entire United States. And Orlando is one of those big epicenters for hotels and conventions that's still not back strong. And if we have another lockdown, hey, guess what? It's craps all over again for everybody.

Yeah, well, it's funny you mentioned that too. I'm curious. I don't know enough about the hotel industry. But what I do know is at least where we are, they have been building hotels like mad for the past 10 years. And so what that's going to look like for that market if they take a huge hit, I don't know.

I think you're, I think you're okay in actual the major cities where there's major sporting, you know, major sporting events, as long as they're still allowing fans. You know, you looked in San Diego, San Diego, number two in the hotel kind of demographics across the country and you've got the Del Coronado down there, one of the biggest and nicest hotels that's been in default for four years. Okay. New York City, huge hotel market and many you've seen like a 30, 40% default right there in New York City we saw a note. So last year, 124 million dollar mortgage on a, on a 1300 room hotel sell for roughly less than 25 cents on the dollar.

Wow.

So it's, it's not the primary market so much. In a lot of cases you're gonna see a lot more difficulty in secondary markets that, where people aren't traveling and you're not staying an hour from the park. Stuff like that. Those are what's struggle the most. I mean during the COVID when you were, we were, I was making a couple trips, we saw it. We stayed in a hotel that had been shut down for four months because of everything. It's hard to, it's hard to get back even you know, back to full speed when you're still trying to catch up from behind and you're still not at full, full power. Travel's not back to where it used to be for vacations or things like that. So.

Yeah. Now Scott, is there any difference in investing in commercial notes vs residential notes?

Total different ball game. Total different ball game. Every. And I always tell people like look, single family homes, condos, duplexes, triplexes, fourplexes. Pretty easy to figure out values on residential property. When you dive into commercial, it's all about the cap rates, it's all about the cash flow. And so if you're like people come I want to buy note on an apartment complex. So does everybody and their dog. Okay, the banks know this. The banks apartment debt is the most overpriced, you know, mortgage stuff that we see. I think it's also one of the most overpriced asset classes out there. Student housing though, in areas across the country might be some opportunity. Self storage may be an opportunity as well. Small mixed use, small strip malls, big box stores. It all comes down to knowing what you can do with that asset though. That's the most important thing. It really comes down to on commercial location, location, location, what's going on with that asset, what's going on in the five miles surrounding that asset and really figuring out truly what can you do with that asset if it's non performing and what's the upside to it. So it's a whole different ballgame. I tell people if you're going to dive into commercial notes, pick an asset class and stick to it and learn everything about that asset class and that'll help you in buying the debt. But it's a total different ball camera. We've bought a ton of commercial deals. That's actually what we started off as buying apartment debt back in 2008 from Capital One and Greenpoint Mortgage and Wells Fargo commercial originally back in the day and buying stuff for like 50 cents on the dollar. I wish it was the case in commercial notes these days like that. But it's all about knowing what's going on with that individual asset and what's going on with the community when it comes to commercial.

Yeah, you're spot on with that. And you know, we talk about it all the time, just I mean obviously with what we do, buying commercial real estate, you know, so little of it is the actual real estate itself and so much of it is its ability to make money. So if you don't know how to underwrite a business, you know, you probably have no business being there.

So let me give you a little crystal ball here. Okay. So when I started back in 2008, I was flooded with different list from banks and commercial deals. We started looking commercial. It was a lot of smaller balance apartment complexes, like 20 to 50, up to 200. We started seeing a trend on this stuff because when we will look into it and we get down to it, who is the underlying lender? It was, it was some of the big, big nationwide apartment gurus, okay, who were overpaying for assets. They had money burned a hole in their pockets but they weren't managed properly. And some of those names are still around today, which I kind of chuckled. So when I, when I see people closing on deals and it seems like it's overpriced, like I'll give you a great example. I think, I hate to say this but I think Grant Cardone, he's raising billions of dollars and he's going out over. I think he's overpaying for multi family deals based because the numbers just don't seem to work in a lot of cases. Those markets, if the market turns south on that, he's going to be owning a lot of money. Those deals are going to be upside down. Now yes, they can still cash flow for a period of time, but you gotta, gotta look at those underwriting things. If you're overpaying for assets, you can do well as long as the market's going up, but the market turns and goes south, there's gonna be a lot of. You have to pay the piper at some point.

Yeah, definitely. So Scott, if somebody wants to get into doing what you do, what's the best place to get started?

Well, you know, it's always good to learn as much as you can. And we've got the podcast, the note closure show. Podcast is a great kind of way to tap into a lot of stuff. There's, you gotta get trained. It's a different total mindset of due diligence, you know, and acronyms. Like people get all excited about arv. Well, ARV doesn't exist in the note space because we're not rehabbing the property, we're not taking the property back a lot of times. So you gotta know the differences. You gotta think like a banker. It's a little bit different than a fix and flipper or a landlord. So you gotta get some training. You know, we've teach classes. You know, we've got a one day class that we teach every third Saturday of the month. It's called Note Weekend. You know, if they use the code wealth on it will give your students a free pass to. It's usually 49 bucks but they get a free password. They use the code wealth@noteweekend.com and then just, you know, you learn more by taking action than anything else. There are websites out there where you can start looking at assets and start breaking them down and Doing your due diligence. I mean we've got a thousand plus videos on YouTube as far as deals and training and stuff like two for you to take a look at it. But that's, that's the biggest. Start learning, start spending some time in it, start evaluating some deals and don't be afraid to ask questions. In this industry there's no dumb questions. And the only stupid question is the question that doesn't get asked because it ends up costing you.

That's right. Can you tell us a little bit more about your podcast and what's its focus?

So it's the Note Closer show. It is the 60,000 megawatt blowtorch in the note industry. We've got syndicated on 17AMM from radio channels across the country. 60 million listeners on the radio network. We've got 1.1, 1.2 million downloads. I just recorded episode 689 today. I believe something like that, it just, you know, it's all about notes. Half the time it's me teaching subject on a niche subject and the other half is bringing on vendors or other people in the industry to help share what's going on and their value or talking about case studies. So that's, you know, that's really. A lot of people like listen to that. I mean we were doing them every day, Monday through Friday, so we got so many episodes up now we do them a couple days a week because it's just, that's a lot to, to record and get out. But that would be a good place to start. We've got another podcast called Note Night in America. It's been a, a webinar we do for 11 years straight now. Every Monday night that's another podcast. And then we've also got another one called Note Camp, which is kind of a special event that we do every year. It's our mid year conference with 30, 40 speakers and we have that as a podcast as well. So lots of opportunities to learn and get your feet wet and go from there.

Excellent.

Yeah. Well, as hosts of a two time a week podcast, we can appreciate how much work you must have put into an everyday podcast. That's no small undertaking.

Well, luckily I wasn't doing the editing myself. I recorded and just shipped it off to a third party. Delegation is one way to get wealth. Everybody delegate what you don't want to do, you know.

Yeah, you're speaking our language on that. It's, you know, the who, not the how. Right.

Amen. Exactly. That's so important.

Yep. Well, awesome, Scott. Thank you so much for sharing and also thank you so much, obviously, for giving our listeners a special on your note weekend. So that's certainly something we'll share in the. In the show notes afterwards. But before we let you go, would like to run you through our wealth watchers brain pick. So with that, I'll turn the mic over to Justin.

Bring it on. Bring it. I hope they don't walk away screaming.

All right, Scott, we got five questions for you. First one is what is your superpower or unique natural ability?

I would say my unique abilities always kind of have a positive mindset, but just work ethic, you know, it's not the. Being a note investor is not easy. Nobody ever said it was easy out there, but be sticking with it. Continuing to market, continue to show up every day, no matter what life throws at you, I think would be my superpower. People always tell me that you can't outwork Sky. He's hardest working guy in the industry because I'm always finding ways to market, always find ways to overcome obstacles. So that would probably be my superpower.

Awesome. If you were to go back three to five years, what might you have done differently that you wish you could have?

Ooh, that's a good question. I probably would have structured things a little bit differently on a couple deals. I probably spent a little bit more time on putting a fund together than doing individual deals. You know, that would probably be what I would do different. If I look back three to five years, the market's changed quite a bit since 2008. Three to five years ago, still plenty of deals out there, but just knowing what's going on in the market and just tweaking some things would be my biggest thing. I would change three to five years ago.

Okay, and what about in the next three to five years? Where are you headed?

So we're pretty excited about some things taking place. Not wishing doom and gloom on everybody, but next three, five years, we're pretty excited about the opportunities that are coming down the pipeline right now. We've got a fund that we're creating and we're working on through as well that should be ready by the first year. That's. We're really excited to see the second round. I won't say it's the big short, but it could be the big short part too. All right. And making sure to buy. I bought a lot back. You know, that's my biggest regret that I didn't buy more early on in 2008, 9 and 10 during the downturn when things could Be picked up for pennies on the dollar. So that's my biggest thing, is to buy more. Buy as much as I can here the next three to five years.

Excellent. Good advice. And what is your favorite book on business or money?

So I would say it's. Golly, there's so many good ones. The one I probably talk about the most is Think and Grow Rich Outwitting the Devil. You know, people are familiar with Think Grow Rich by Napoleon Hill and Think Grow Rich out when the Devil was also written by him back in 1938. But it wasn't published till about 10 years ago. And it's a convert. If you don't, you've never read the book. It's a conversation that Napoleon Hill is having basically with the devil asking the devil how he's successful in keeping people down or not achieving their full, you know, full array success. And he talks in the book. The devil says, well, I, I have. I cause people to drift. They get away from their focus. We, you know, keep them sidetracked with shiny objects or squirrel syndromes. People trying to do too many things versus focus on their one lane. And so that's the biggest thing I think so many entrepreneurs and this, we see this in the real estate industry, especially rias. And no, I love rias, but Rias, you go there. Oh, here, learn a new tool for your tool belt, A new tool for your tool belt. A new class, a new workshop, a tool for your tool belt. And investors get so confused trying to put all their tools to work. They don't focus on one thing or they go from one strategy to another. Oh, that wholesaling doesn't work. Let me go to doing a fix and flip. Oh, that doesn't work. Let me go to, you know, being a landlord. Oh, that didn't work. Well, it didn't work cause you didn't give it enough time and you didn't stay in your lane long enough for it. So that's the number one book, I think it's. Everybody should read it. Think and Grow Rich. I weigh the devil. Sharon Lecter, who's the co author of Rich Dad, Poor dad, which I know you guys are big fans of, she got the manuscript from the Napoleon Hill foundation and basically didn't rewrite it. She just added excerpts to the end of each chapter. What she what. And how she thought Napoleon Hill would react in today's market. So well worth it. There's an audiobook about it. I think they got a movie trying to come out with body suit. But thinking Grow Rich Outweighing the devil.

I haven't even heard of that variation yet. Yeah.

Oh, you gotta go buy it now. Trust me, you will thank me. You will be like, oh, my God. This is. It's. It's literally as life changing and think and grow rich. Think about it. Seriously.

So excellent. And last one. What has been your biggest aha moment?

Biggest aha moment. I'm gonna give a big shout out to a mentor of mine, Greg Reed, who's author, he's also an author of a thing and grow Rich three feet from gold. And Greg's been a mentor for years. He taught me the. The three bucket principle. And we as entrepreneurs, we have people that kind of fit into three buckets. You have one bucket of people that like and love you. They're your biggest cheerleaders. They support you, they love you. You know, that's a great bucket. On the opposite side of the spectrum, you have a bucket of all the people that are just haters, the trolls, the people that aren't happy. They don't like it because of your age, your sex, your race, what you look like, how you dress, what your breath smells like, whatever. They don't care. They're just upset at life because that. And so, unfortunately, we as entrepreneurs try to make everybody happy. And if we send an email out or a marketing piece and somebody comes back and says something negative, we take that one negative comment as gold compared to the other hundreds and other people, other positive comments that people make. So Greg told me that, look, if you want to be really happy as an entrepreneur, quit worrying about what everybody thinks. Focus on the bucket that the people love. You forget about the people on the second bucket on the opposite side and focus on that middle bucket, the people that don't know you that are on the fence. If you focus on those two buckets, you'll be much happier. You'll find success a whole lot better off. And eventually, over time, the bucket of the ugly folks will either they'll disappear and fade off because they realize they can't affect you, or they'll start to. Oh, they'll. You'll convert them like, oh, he is diligent, or she is diligent. Let me. You know, and they'll come back, oh, I remember when you started off and you're like, yeah, I remember when you're ugly on Facebook or you're saying something nasty about me. So that's the. That's the biggest aha moment I'd say in the last eight years is, you know, I like having fun and who doesn't like people that love you? But you know what? You're not gonna be everybody's cup of tea. You're not gonna. Everybody's not gonna like you. Some people are just having bad lives versus bad days. And so just go out, be yourself, embrace you being you individually versus trying to copy yourself and you'll feel a lot better off and find success and happiness a whole lot sooner.

All right. I love it. Thank you, Scott.

Yeah, Scott, thank you so much for sharing today. And in addition to noteweekend.com and of course using the promo code wealth you gave us, is there any other way people can reach out to you or anything else they could access that you've got to share?

Yeah, it's easy. Go to our website. We close notes.com, that's our main website. We close notes.com youm'll find our classes, our podcasts, other trainings that we do on there, a wealth of information, our vendors that we use. Pretty easy. I do want to give a big shout out. Thank you guys for having me on. But guys, if you're listening to the wealth of Watchers podcast, do these guys a huge favor. We as podcasters love to hear from our audience. So click on that subscribe button and going on over, hit that five star review, leave them a review we'd love to hear about. These guys are kicking ass and taking names and adding commas to your bottom line with what they're doing on Wealth Watcher. So go out there, leave them, share with them. They love to hear from you and go out and do it. They didn't pay me to do that, but I think the checks in the mail anyway.

Scott, well, we're grateful for that plug. Thank you so much for coming on today. Pleasure is all ours for the great conversation.

Same here guys. Thanks for having me.

This has been another episode of the Wealth Watchers podcast. I'm your host Adam Lendy from my co host Justin Hoggett and I thank you for for listening.

All right, thanks guys. And until next time, this has been.

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