The Retiring Real Estate Investor: Note Investing with Scott Carson

Welcome to the Retiring Real Estate Investor Podcast where we will discuss how to defer taxes on the sale of your property, earning passive real estate income and everything you need to know to go from active investor to passive investor.

Join us as we interview passive investment.

Sponsors, explore the journey of other retiring real estate investors, and share our due diligence process we perform to select passive investments.

Investment advisory services provided by Insight Investment Advisors, llc, a registered investment advisor. This podcast is only intended for clients and interested investors residing in the states in which we are registered to provide investment advisory services or exempt from registration. Please contact us to determine if the firm provides investment advisory services in the state where you reside. All content on this podcast for informational purposes only and should not be considered investment advice. Material presented is believed to be reliable sources and no representations are made by our firm as to another party's informational accuracy or completeness. Insight Investment Advisors LLC and its representatives do not provide tax or legal advice. Nothing herein should be construed through to suck. Always consult with your tax advisor or attorney regarding your specific circumstances.

Hello and welcome to the Retiring Real Estate Investor Podcast. I'm your host, Brandon Bruckman. I'm excited to be joined by Scott Carlson today. The note Guy. That's what you're affectionately known as. That's why I found you on LinkedIn. The Note Guy.

That's exactly. It's not me doing that. It's actually students of mine. It's funny, back in 2010 I was kind of traveling and actually he was speaking in a lot of investment clubs back then and I went into one club in San Antonio and said, hey, you're that note guide on YouTube. One in Austin, same thing in like five minutes. And I was out in California and San Diego and LA and back to back nights. The same thing. Hey, you're that note guys. Like, well, I guess that's branding. If they tell you what they're going to call, you might as well run with it. You know what I mean?

Boy, that makes it easier, doesn't it?

It's like, hey, you're that asshole. You're that note guy. I'll take that. You know what I mean?

As long as they remember me, I'm. I'm good. We'll be okay.

Exactly.

So we're going to learn all about today. We're going to learn all about note investing. And I really want to get into that. This, these are the most exciting episodes for me because one, I want to learn. I want everyone listening to learn. But I'm also overtly curious about this area and I don't feel like I know enough. So I'm, I'm excited to, I'll be taking notes too and trying to learn a little bit. So Scott, maybe start, start the folks off with how are you coming at this space? Where did you come from? What got you introduced to note investing? Give us a little background.

Yeah, so I'm a previous financial advisor and banker with Bank One and JP Morgan Chase I guess you'd say would be my official grownup jobs back when I first started in that. And then I left the banking industry and got into loan origination. Started a mortgage company with a buddy of mine, traveled the country working with investors and for four years, from really 2004 to 2008, I had an apprenticeship with a guy by the name of Bob Leonetti and a lady named Jamie Kayla. They're partners and they were going around on the Ron LeGrand investing circuit, teaching creative financing, creative real, you know, creative real estate investing, subject to deals, wraparounds, all that good stuff. And owner financing. And that's what most people think about note investing is that's, oh, you're going to offer terms, owner finance, a property. And that's one little small aspect of note investing. Very, very small minute aspect of things. So I learned all this creative real estate, started investing on my own, doing deals the right way. And then in 2008, when everything hit the fan in the mortgage industry, I sold my half of the mortgage company for a buck and went out. Instead of going out trying to figure what to do, I started picking up the phone and calling banks and lenders and started saying, hey, what kind of naughty notes do you have on your books? What kind of borrowers do you want to get rid of? Because that's what I do. Basically. That's what my niche of note investing is, is I actually buy mortgage notes. I buy debt direct from banks, lenders, hedge funds, institutions all across the country. They send me their lists of bad borrowers who aren't paying usually. And we cherry picked it by buying the debt. And when you buy the debt, the note, you don't own the property. And that's one big clarification I want to make for investors out there is that they think, oh, I'm a bond and I own the property. So no, no, no, you just haven't became a lender and you have all the rights that a bank does to work with that bar or not work with that bar if they want, play ball with it. So that's what we do is when we buy this debt, we're buying it as a dramatic discount, usually 30, 40, 50% off of either value or what's owed. And we make our money by reaching back out to the bar, say, hey, you know what happened? Tell me your country western song. I'm not the previous lender. You've got a fresh start with me. If you want to stay, great, but you got to pay something. We got to figure something out that makes sense. And if, you know, pay you no, stay. We can either make it a friendly and let you kind of walk away with your head held high. We'll forgive you the debt, maybe sometimes we'll give you cash, but if you're not going to play ball with us, then we still have all the rights that the lender does. So then we'll throw it with our attorneys and let them battle it out in court to foreclose at that point. But that's, you know, that's kind of what we do. In the last 15 years, I've bought over a billion dollars in distressed debt, closed on thousands of deals, anywhere from a one off note for seven bucks, all the way up to million dollar asset, you know, or tapes of 100, 200, 300 assets at a time. So that's what I do. You know, our biggest goal is not to actually take the property back. I love your show. The retired real estate investor. So many folks are dealing with retiring, you'd want to create another job. So our biggest goal is to buy this debt and actually turn it into cash flow by keeping people in their houses if they can. So hopefully that answers a little bit my background there.

Oh, oh, big time. And you inspired 16 questions. Here they come.

Bring them on.

I'm gonna let you get a drink first and then we're gonna fire away. Talk about origination a little bit. You're buying it from banks, maybe other private equity hedge funds. Talk about that process and sort of the marketplace. I imagine that that marketplace is competitive.

Yes and no. It can be if you're, if you're originating notes. Yeah, there's a lot of people that are creating notes and selling that stuff off. You have mortgage companies up like that. But the non performing side isn't nearly as competitive competitive as you think it would be. Especially, I mean, don't get me wrong, we're not going out and fighting JPMorgan Chase or Citibank for a $50 million portfolio. That's what they buy and that's what they sell in. So that's fine. We make our living and make our Big Bang by, I guess you could say, take a term from Jonah Hill from War Dogs. We live on the crumbs. All right? There's plenty of banks out there or lending institutions that have 1 to 10, 100 whatever notes that are on their portfolio that they need to get off their books. They can't for some reason work with a borrower. And for every bad loan on a bank or lending company's book, it really costs them 10 to 100 times that in fees collected. So they would rather get that note off their books, get, you know, 50, 60 cents of what's owed, then be able to take that money, go out and re, lend it out and recycle their money and let us take over that problem child and try to work it out, make it from there. But it's a smaller niche. I mean, especially when you compare it to like fix and flippers or wholesalers or landlords or. I mean, everybody's out there is looking for property. Well, with what we're doing, it's a smaller niche maybe. Really, truly 40, 50,000 people total across the United States. And not everybody is focused on the exact same asset class or type. So it narrows it down quite a bit. Non performing is a smaller niche within that aspect of things. And especially depending on where you're buying at, some people want to focus on one or two states their backyard and that's very narrowly focused. I buy, I mean, I'm in Austin, Texas, but I don't buy much stuff here in Texas. It's just expensive state because of fast foreclosure time frames. You know, we're the fastest in the country. So I buy, I find a bigger bang for my buck and I can leverage my money out because I'm buying in Ohio, Michigan, Indiana. I will buy also quite a bit. And as I say, God's waiting room. Florida, for those that want to retire someplace sunny. Georgia, you know, the Carolinas, you know, we do a mixture of judicial and non judicial states. Some are faster foreclosure, some can take up to a year. Um, the states you really want to avoid are like New York and New Jersey, which can take you two to three years to foreclose and then forever to evict.

So it's interesting here. There's, are there. So there's the crumbs. And that was a great analogy, the war dog analogy of, of the crumbs there. Go see that movie if you haven't and you'll understand what we're talking about. But even inside that, it sounds like there's niches in there too where you can continue to focus on. And this is I, I try to explain to you know, our investor class and our investors there's some pieces of natural economics here that occur and some of it is scale and it's this broad and please correct me and add this, there's this broad thing of scale where a bank like JP Morgan, I don't know how much assets it has on a balance sheet, but it's quite a few and laws and numbers say it's easier for them to offload this small stuff. That's a problem. It's not economical for them. But you and I look at it and go this is a tremendous return for me because I have different scale than they do. There's a, there's a way to create economics in that.

Correct, Exactly. And I'll give you a great example. Back about 10 years ago we were bombarded with HUD foreclosures. I don't know if you remember that there was a lot of people buying HUD foreclosures. Well then suddenly like almost overnight that the HUD foreclosure faucet turned off. And the reason it turned off is HUD said we're no longer going to be taking these to foreclosure. We're going to sell the debt off. It's actually easier us sell the, the portfolio, this non performing loan off to investors like me or in smaller pools to other people because we get our cash done, it's all done at once. And then us as investors, we have that flexibility based on knowing the markets and know what we're looking for to be able to go in and negotiate or work things out more effectively and turn what a bank is a non performing asset. Well, we bought it at 50 cents. We got a lot of flexibility to then go to the bar and say hey, we'll work with you. Now you know, maybe the other bank was willing to work with you, but let's get you back on track. And that's, you know, if you don't want to do that, that workout that sounds like a lot of work there. We don't do it myself. There's servicing companies, attorneys that help up with this. But a niche that has evolved from this non performing wave that we saw from 2007, 2008 through 14 and then it's starting to reappear with non performing stuff is people like me who have bought non performing notes, got them back on track and have them re performing for 12 months or greater and now we can sell that to other investors or people looking just for pure cash flow or pure passivity with their investments instead of having to be more active. So there's a couple. How do you go ahead.

Yeah, sorry, I, I took you too far. I want to go back a little bit. So you're finding these banks. How are you determining they have what you want? Because I imagine you're not buying. Are you going through and buying loan by loan? I would imagine you're buying a book of, of those loans. How are you evaluating that?

Great question. We evaluate lenders on a couple ways. One, sometimes it's just the shotgun approach. Like we, I've got a database of asset managers and you're not going to walk into the local bank and just say hey, I want to buy notes. That's not the right person. Okay, they'll call us. Security. We got a crazy person out here. You know, because I used to be a banker and people are coming to Chase Banks. So I want to buy your notes. I'm like, we don't sell our nuts. Well, Chase does, but they're just going to sell them in such a big portfolio they're not going to deal with you anymore. But the banks have these internal departments called secondary marketing or special assets department. They're often in a different bank or building. But we just do two approaches. One, we do a monthly drip marketing campaign out to asset managers. Hey, what do you have on your books this month or this quarter that you're looking to get rid of? And it may be one note or it may be a thousand notes. Some banks sell every month, some sell just once a quarter, some sell once a year. Sometimes we get tapes in if they want to take them. Us to take it all. Sometimes we can and we'll kind of, if we've got to take a whole portfolio, we evaluate it kind of in three phases. The top 25% is usually what we want to, if we sell that stuff off, we want to make sure we make back most of our investment on that portfolio. We make the most amount of profit from the middle 50% and we may lose on the tail of the trade. The bottom 25% are just break even on that stuff. But most banks though will let you cherry pick. They'll let you take a look at a portfolio and do a carve out, you know, a one off note, you know, or you can do a mini bulk or you're, you know, like I'll give you an example. We got to tape in two weeks ago 422 notes from a servicing company. Made an offer on 65 of them, 35 of our bids were accepted. And out of that 35, we may end up just, you know, closing on half of those because we'll eliminate some of these during the due diligence process. So we'll look at the values of the property. The value matches up with what we thought initially. Great. If the condition is shittier than we thought it was, we may kill it. If the servicing notes show that the bar may be just a pain in the ass, because we'll be able to really see behind the curtain, see if that borrower has been friendly. If they're friendly, great. We'll take it. If they've been like pound sand, they'll drag stuff out. We may not want to do that, depending on the state that it's in. But then also looking and seeing, you know, what's the collateral look like. Some lenders are really good about keeping the loan files clean because that's really kind of what we're buying. This is what we're buying, this loan file, not the actual property, but this actually controls the property. So we'll look at that. Sure. Make sure everything's in there, that we have all the documents, the right to foreclose. We'll, you know, review. Review it with attorney and make sure we're not violating anything and. And then go from there. So it's, it's a little upfront due diligence on values and numbers. Running some formulas on the spreadsheets, or as they call it, the tapes, identifying what we want in the States, we want, locations we want. We kind of avoid very rural assets because it's harder to get people out there. But then we, then we make an offer, and then it's all about negotiating back and forth and going from there.

Gotcha. So there is, there's a ton of information here. You're not, you're not flying blind when you're buying one of these portfolios.

You're.

You're really sorting through, even down to who that borrower is and understanding their behavior. You're able to understand that in these notes. That's a ton of information.

Yeah, it's really three phase. You look at the property, you look at the collateral file, and it's the borrower. I mean, even, like looking at their social media. We had one, you know, we do a little social sleuthing or borrower stalking to see what's going on. I mean, you can see notes, like, if we get the collateral file scanned copy, we can see if the bar is like hey, I'd really like to stay. I'm trying to do modification. You know, we've gotten loan files where the borrower has applied for a loan modification four or five times and been rejected because the loan's been sold. But when I see something like that, I'm like, this is the borrower that wants to stay. I will buy this note today because I know based on what they tell us I can kind of calculate my quick ROI and when give you a bit of an idea on that. If we're going to, if it's going to be an occupied asset that we think will get reperforming, we want to shoot for at least a 12 to 15% cash and cash return based off on either. This is a pure reinstatement that's not including any extra they might bring to the table. If we know we're probably going to foreclose, we want to see somewhere around a 20 to 25% because we don't get into your access to these properties. So we know we're going to do a little bit upkeep. So we shoot for a higher roi knowing that we'll probably end up somewhere in mid teens or 20 if we have to foreclose and then sell the asset off.

What you said, which said earlier is very interesting. The goal here and it sounds like the best economics and the smoothest process is to get that note performing again.

It's our number one strategy and it's so opposite of what a lot of investors come to the table. Like I want to own the property, I want the cat, I want the turn it into a rental portfolio, I want to add in my portfolio and that, that's great. There are advantages to owning the real estate over the notes. And then note investing has advantages over the owner of the real estate tax. You know, we don't get a write off depreciation on a note deal but we do get a write off what we forgive in the debt aspect of things.

So okay.

But yeah, something you're the biggest bang for the buck and numbers don't lie is if you can buy a note and get a borrower back on track in the first 30 to 60 days and they start paying you monthly cash flow and you're making money because then you're paying your investor and we, we fund this with OPM and other people's money. So we're paying back our investors a flat return. But if you start looking at, you mean I can control a property, get cash flow, the values appreciating. I'm going to take advantage of that. I bought the debt at a discount. And so the value is going up on that note, every time they make a payment without having to do any toilets, tents and trash outs or any rehab or waiting around, it's, it's a. And that was one of the big mistakes I made early on, Brandon. When I got into note investing, I came from the real estate side. I was like, I got a foreclos clothes and everything. No, I did had no empathy but. And I still looked back, I was like, man, I left a lot of money on the table if I just modified it.

You know, it's, it's so interesting there that if we can make money and, and do some good at the same time, that, that is truly the win, win, win for everybody. Because we were talking, you're talking about keeping people in their homes. This is probably a, this is probably a mortgage that someone has, have gotten behind on. They've probably gotten little to no contact from the bank or the servicer at all. Right. And there's been no help to do that. Can you imagine the pressure that's on that particular person or their family? And then you come strolling in and say, hey, I actually want to make sure you stay. Let's find a way to do that. And that's the best, that's the best economics for you as well. That's a pretty good deal.

It's a great deal. I mean it's. And the great thing is we're, we're about able to help. I'd say somewhere around 65 to 70% of the borrowers and stuff that we buy where it's, they're occupied. If it's vacant, we know we're going to foreclose or deep loom. They've already walked away, but they're still staying in the house and they have the means to pay a payment that makes sense. You know, if some people like, oh, my mortgage payment's 1200 bucks, I can only pay 200. Well, like, we can't accept that, man. Come on. That just doesn't make any economic sense. Let's give you some cash to walk. You just don't. Honestly, let's get you out of this bad situation. Two years from now, if you pay everything on time, you'll be able to buy a new house at that point, you know, let's get you back out of this bad situation. But one of the great things is you look at is if you take an actual property of foreclosure, it just doesn't affect that borrower, it literally affects the neighbors, the street values, the zip code. It's really a negative impact on the, it's like a, you know, drop a ripple effect. You drop a stone and it ripples throughout the whole thing. But if we can keep a bar in a house and get it back up, it keeps the value of the property, keeps the value of the neighborhood actually maybe appreciates it some because of who knows, in 12 to 18 months maybe they can refinance out or now they can stay in their house or sell it off at full value versus losing the foreclosure auction in a lot of cases too.

Yeah, 100%. How long does that process usually take? So from you're going, from you, you've identified a note, you've gone through due diligence, you decide you wanted to buy these notes. What's that, what's that timeline from? I purchased this, I'm ready to start working on it. Towards working those out. I realize it varies, but what's sort of the average timeline on something like that?

So great question. On the front side, it's about 30 to 45 days from the time that we look at a tape to probably the time that we're closing. And then it varies a little bit. Servicing companies when they're reaching out to bars and that's what you have to have a licensed servicer in that state. Unless you want to be a licensed service and you don't want to jump through the hoops and pay the fees for that. So we're paying servicing company anywhere from like 25 bucks a month up to 90 bucks a month for a non performing one. So usually what will happen is you start to reach out immediately to make right party contact with the borrowers and that you try to do that within the first 30 days. I speed it up a little bit. You know, most service, the most loan files and things aren't going to transfer for at least two weeks because you got to give the borrower time. There's a goodbye letter that goes out and a hello letter, hey thanks for not paying me, now you got to pay these guys kind of thing. We speed that up a little bit. We actually, a week after we fund, we actually send our own letter out, say hey, we're now your new lender. You know, let's, let's, let's get you in here. And a lot of times that speeds things up because if you got people that want to stay, they'll immediately reach out. I really do want to stay. Great, let's, let's get this modified. Let's put some terms in place even before servicing is transferred in 30 days. So that, that's kind of a nice thing. Of course, you know, we've had bars that we started the foreclosure process and they came to the table. I'll give you a great example. Just this is a deal that just happened the other day. One of my students in Arkansas and he's looking at this. We came across this note. On it was a double wide mobile home on 17 acres of wooded land. And outside of Little Rock, the Property's worth about 100 grand. The guy owes 86,000 on it. Hadn't paid in about three years. Why the bank hadn't started the foreclosure process, don't know. But I think it had to do a little bit of COVID and they just fell behind on the paperwork. So foreclosure is supposed to happen. Keith closed on this first. Sorry. Last week of December paid 56,000 for this deal. He's like, I'm in a good situation. Five foreclose and sell at the auction. I'll sell it at 86. That's what sold. I'll make 30 grand. If I take it back, I'm happy. I got an asset that's worth 100,000 and I'm in at 56 cents on the dollar. Didn't expect the bar to kit. Well, two days before auction, the borrower calls the attorney. Bar calls the service to say, hey, I really want to keep this. I can bring 25 grand to the table to reinstate the loan. Would you allow me to do that? And Keith's like, hell yeah, I don't, I don't want another job. Sure. So borrower borrowed money from friends and family, whatever wire 25 grand on the table. Keith's $56,000 investment. Just got 25 grand this month in the first 30 days. Which is great. Doesn't always happen. But now going forward, he'll now collect a monthly payment of I think 780 or 860 bucks a month, which is. That's a dang good little return for him on that money. And he used his self directed IRA to fund the deal too. So it's all tax rate growth.

I wanted to ask you about. That's a great story. I wanted to ask you about that. You alluded to it earlier is how should we think about this from a tax perspective? It sounds like if you can push this through a so solo 401k or something where you're self managing, you know A tax free type of account like that, it sounds like that's the best method.

Oh, always. I mean, if you can get away without having to pay Uncle Sam and tax free growth, Heck yeah. It's the great thing, the way the notes work. It's two cases if you're. I'll give you a great example. One of the things that you have to be careful of is if you modify a loan, you buy a non performing note and let's say the borrower owes 100, you bought it for 50 and you modify the loan to 90. Okay. If you do an immediate, in less than a year, Uncle Sam wants to tax you in the full 90. Even though you haven't received that, you have to send in a, have a third party. I won't say appraiser, but evaluation company come back and say, no, no, it's not worth nine, it's only worth 50 plus what they've paid. If you do a trial payment plan for 12 months, that means you're basically say, hey, if you make 12 months of payments, then after 12 months I'll modify. That's okay. They'll treat that as a long term capital gain at that point. Okay. But anything that happens in less a year, it's a short term capital gain.

Gotcha. Gotcha. I should preface this with. I don't know if you are, Scott, but I'm certainly not a cpa. So discuss this with your tax professional.

Yes.

About how this, how this works. But understand this isn't the same thing as owning the real estate. Right. There isn't depreciation, all this, all these wonderful other tax law and codes that we can follow to do this. However, based on your story, I mean, there's, there's opportunity for. You won't mind paying the tax if you're making a bunch of money. Well, exact ways for you to mitigate.

Exactly. And you always talk. I mean that's a great thing. We run everything through our attorneys, our servicing companies. You definitely want to have an accountant or bookkeeper understands the ability to write off debt. I mean, if we forgive 30 grand, we can send it, you know, we can 1099 that borrower for the forgiveness. And here, here's a little trick. I'm gonna tell you this right now. For those that own real estate, most people don't know about this, but instead of chasing your deadbeat borrowers who haven't paid rent, and then you evict them and then try to go after it for deficiency judgment. Screw the judgment, just send them a 1099. For what? They didn't pay any repairs in the property. It becomes an immediate write off and then they gotta pay taxes on that money.

There you go. Just made that process a heck of a lot easier.

And especially with me at the end of the year now, it's like people are like oh my gosh, I got it. Oh what? You know. Yeah, you're never gonna get collect from these people.

That's fine.

Still file that. You still get a judgment put again. But 10.99 for the, the lost income. Man.

Yeah, I think this is the time of year than last month where, where folks are looking at some of those numbers and going, oh, I've got, I got some work to do.

Yeah.

On some of these tax bills for sure. This is, this is awesome. What am I not asking about? About? No, buying that. It should be.

So you're not. Let's talk about how do you find or how do you buy these deals? Because that's probably a better thing. How do you fund these things? You're not going to go to the bank and get a loan to buy a note. Now if you've got a business line of credit or line of credit. Yeah. You can borrow against your line of credit for sure.

I'm scratching this off my to do list. Don't walk to the banker on the corner. Don't ask them if I can borrow to buy their notes. Gotcha. Okay, what should I do?

Well, here's the thing. It's, it's we. If you've got capital, you got your own cash, your own IRA funds. That's great. I always tell people like don't use your own money because there's no return on investment. That beats infinite. Right. So if you're using other people's money and we use about 95 of the funds that we use come from like IRA accounts, self directed IRA solo, 401k, stuff like that. That's a great way to give somebody a decent return. 6 to 8% on their money passively and you're out making usually double that return without having to use your own funds and holding it for cash flow. Most people think oh a note, I gotta be into it for 30, 40, 50 years. No, no, no, no. We usually structure our deals to be roughly three years because it'll take us if it's a performing note, it's gonna take us at least 12 months of on time payments to get that note back. Considered re performing. And then we've got options. We can keep holding it for cash flow or turn around and sell it to Wall Street. If we bought it at 50, sell it at 85, 90 cents the dollar, cash out, our investors pocket the capital or go back and go double down now take the money and profits, buy two or three notes with what we do with one. But using other people's money is the best way. Any type of real estate investing. It's great that you've got your own funds, but honestly everybody uses other people's money, including like Warren Buffett. So make sure you leverage it in IRAs is one of the easiest asset classes for self directed IRA companies out there to use.

Two questions I didn't ask you about notes that I remembered. Now that you're telling me that bring it on. What does the current environment look like? I would imagine that pre Covid, let's say and Covid maybe there probably was a little bit less supply in the marketplace. It's harder for, I think it's probably hard for people to default on or get in trouble on their mortgage when it's, you know, 3%, you would think so.

Am I guessing wrong? So yes and no. We had a little bit less inventory prior to Covid because values are increasing. People would just sell their house in a lot of cases if those that could, I mean if you're gonna lay in your mortgage, you're not gonna refinance that. No mortgage company is going to refinance you out if you've got one later, more than one late in 24 months. But we, you gotta realize we're not just looking at the stuff that's been originated in the last year, two years. We're looking at the 80 million mortgages across the country that are at any given time. We're seeing anywhere from 2 to 3 to 4% of that in total defaults in non performance. So we're looking at stuff, I mean I look at stuff that people haven't paid in six years, which is stupid. And I'm like why didn't you do something? Well, we just got busy doing other things, you know, or this portfolio is the really the tail end of the trade. We, we focus on the bigger assets. We don't want to focus on the 50, $60,000, you know what I mean? So yes, during COVID it actually got very interesting because you know, banks weren't selling hardly anything because they didn't have to, you know, like they're just going to kick the can down the road for 12, 24, 36 months. But like I said, we just changed our strategy. Instead of, okay, instead of targeting banks, we Started targeting other investors and there's a lot of investors out there that had stuff that they, when they needed to cash out or they had worked the loan and got it reperforming, they're willing to sell off performing loan at a double digit return. So we just tweaked our business model a bit on how we originated deals. But yeah, we have started to see the last six months of, of last year we started seeing increase of product. It's always interesting when the banks start calling me and asking me what we're buying or hey, can you make us an offer on this? I'm like well that hasn't happened in a long time, you know and that happened before, you know, at least on a foreclosure tick up and stuff. Was expecting they knew that they'd have to do something. So yeah, we've seen more, more inventory the last 90 days that we have seen in quite some time. But that we're always constantly buying and selling and going from there.

Does it matter to you economic condition then when you're buying or selling? So could I think about this as sort of a contrarian play? If we are expecting a recession, note investing is probably a good idea. Is that a fair thing for me to say?

It's a very fair thing to say because most people get especially a lot of investors, they're more speculators, they buy something and they're looking to sell it in six months because they fixed it up and they don't. Maybe not one hold. If you're speculating, hoping just on appreciation that's that's okay, but that's. I don't think we're gonna see a lot of appreciation and there's some markets that are still doing well. But here's the thing. I don't mind the asset if it the, the value of the property drops 10, 20, 30% because I'm usually below 60% so I'm still sitting in the spot. I'll write it out, I'll hold that note for 24, 36 months until it value comes back up and, and be okay and just write it out and just know that hey, we're going to modify, we'll keep this. If they're not going to play ball, we'll foreclose and we'll sell it or we'll just turn around and add it, you know. You know, add it to a rental portfolio if we want to. I don't really like to do that because that creates a lot of jobs. But then just keeping, keeping the stuff around For a little while. You know, maybe we have to do it for a temporary or turn into a short term rental or find like an executive housing. You know, we've done that before where it was 90 to 120 day short term rentals in a lot of cases.

Yeah. If you're going to work out, if you're going to work out the loans anyways and that's the, the primary strategy that you're pursuing. Does the value of the whole matter that much? I mean, how many people that are not performing on the note are thinking about strategic defaults? Yeah, many.

Not. Yeah, some. Some are. I mean, some aren't. It all depends on the individual investor strategy and where they're buying. Like I wouldn't, you got, you got to know what's going on in state because some states can take longer to foreclose. So that, that has a big action and then your days on market definitely determines kind of strategy. Anything longer than six months of days on market was kind of, we put a kibosh on buying that, that portfolio or we reduce our bid on the front end side to make it more worthwhile. If we don't, we're going to end up holding on it, especially if it's going to be a, an active foreclosure that we know the borrower's not playing ball, the foreclosure's already started and going that route, you know what I mean?

Gotcha. Lots of opportunity here.

There is. I mean, that's the great thing. I mean if you're, here's the thing everybody, there's more opportunity now in a, you know, a bear market than in a bull market. In a lot of cases, especially if you're looking for distressed assets, there's, there's a lot of people out there hurting. I make the joke here. We, we don't be afraid to see if we see ourselves in a garage sale economy. You know, back to 2007, 2008, you had garage sales, estate sales. People were selling off all the toys that they bought when they refinanced out their loan. But we're starting to see an uptick in garage sales, flea market listings and stuff like that. If people are trying to survive to pay for the month that's left over at the end of their paycheck. You know, with things even more expensive, people are eating out less and that means you have more of the service industry struggling because they're not making as much tips. It's, it's all interchangeable. Interest rates, you know, drop down a little bit there for you, but that doesn't mean people aren't struggling to get by.

Yeah, it's an interesting, interesting aspect, I think, I think a lot of investors that, that we follow or a lot of folks are waiting for this wave of distressed assets that I keep explaining to people. I don't know when that's coming because you, me and everyone around this table are sitting here waiting for distressed assets like it's, it's chicken and egg kind of thing going on here where there aren't distressed assets. If there's enough dry powder there for people to, to take them down, they don't exist. Well, ever in your spot there, there's always some distress.

Yeah.

And it's just a matter of finding and working it out.

Well, that's the thing too, as I say, is that we see deals, 6 to 12 months of your traditional property investors. So why you keep waiting for that REO portfolio, 70% of what would have been REOs has probably got gobbled up by note investors and worked out so it never ends up at the REO market or distressing. I mean, you can just look across the country. Yeah, foreclosures might be up a little bit, but they're nowhere near what they were beforehand. I don't think we'll have near the, the, the detriment, the destruction that we saw like back in 2010 where we had, we peaked at 15 million homeowners underwater. I don't think we're going to see that. We'll probably get 7 to 8 million is what I'm expecting. But that's still you. If you're waiting for REOs or foreclosures, you're probably not going to see a lot of them unless you've got an inside track and you know, you know, we see them. If we want to turn into a foreclosure, we can because we foreclose. Otherwise we'll just keep it and hold it for cash flow and then sell the note off at a premium later on.

Don't sit around waiting for this stuff. It may not be coming. May not be coming. It's sort of my, our cautionary, cautionary tale here. Find a different way to find a different way to generate some income. And this could be a great option.

Subject to investing is another strategy that's really good. You know, dealing with distressed bars. You can take over that mortgage. That's a great strategy. Lease options in states outside of Texas or wraparounds. I mean, that's the, those are the things that we, we target. I mean, If I get a list, I'll give you another funny here. When we get a list in from a bank, if I whatever I can't buy, we immediately send a letter out trying to do a 72 deal to the borrowers.

Well, ah, okay, excellent. So you got to be more creative in this environment. You can't, you can't sit at your desk all day waiting for, waiting for magic opportunity to be dropped on. It's not going to happen.

Yeah.

Got to get out here and make a strategy happen. Your strategy is based on, your strategy is almost agnostic to economic conditions. If there's, there's more inventory, great. You could probably be maybe your choosier. There's less then, then you find a different strategy that kind of makes sense. But it's always, it's always seems like it's active. That's a really good thing.

And the nice thing about note investing is I'm buying in about 20 states. So like most people like to do it in like their backyard and that's okay in some cases. If you're in Ohio, Michigan, Indiana. Yeah, you're gonna see plenty of stuff up that neck of the woods. But if you're an area that has no inventory, you can't really wait for the best deal in your neck of the woods. You got to get outside of it and the tool of Google and vendors to help you with values and property inspections. You don't have to do it all yourselves. So if I'd have been just waiting to invest in Austin, Texas, I'd gone bankrupt a long time ago.

That would have been pretty tough over the last few years.

Exactly. To do that and to do that.

In Austin for sure. Where can, where can folks find you? Scott, for those that are not watching, Scott is literally wearing his podcast on his head and on his shirt. Is that the best place for people to start to kind of track you down?

Yeah, we can go, you can go to the mothership. The, our website, we close notes.com hosts, our podcast, talks about the different training stuff that we do out there. But yeah, we've got the, the number one podcast, number one YouTube channel for note investors out there. Seven over 730 episodes, over a million downloads. And just really, we really try to crank out almost a daily episode teaching some niche, some aspect of not messing. You're not going to learn everything about note investing on one day or three day workshop. We have those. But it's a, it's a constant thing. It's the market's constantly moving, so we spend a lot of time focused on, hey, how do you tweak it? How do you approach this market or how do you approach this strategy as things change out there? But yeah, check it out. But I, if you're listening to this or watching this, make sure you, you reach over and hit that subscribe button. You know, Brandon is doing an amazing job here on the retiring real estate investor. Hit that subscribe button and then we love to hear from you as podcasters. So make sure you leave a five star review. He's kicking ass and taking names and we want to hear it.

Forget asking for people, do things for me. Thank you. Scottish.

Better. You're welcome.

We'll get better, we'll get better, we'll get better. We got some ways to go. Scott, thank you so much. This has been awesome. I've learned a lot. I will not go to my bank. Or maybe I will and we'll record that and watch them yell at me. That could be fun. We could put that on. We put that in your show.

Here's one thing, if you have a smaller bank, you know, it's got more than five branches, it might be worth going and knocking on the door, hey, do you got any non notes? I mean, where's home for you right now? Where's home for you, Brandon?

I'm, I'm calling you from Milwaukee area. I'm an area called Pewaukee. I know that there's a bank around the corner. Waukesha State Bank. Yeah, yeah. I mean there's only about five or six branches that they have, so hey, that could be kind of fun. Maybe we'll record that.

You know, you might be, but here's the thing too. If you got anybody looking for commercial deals, a lot of banks will sell a one off commercial note. It's, it's more valuable to do that versus a residential, if you like commercial, we buy commercial notes. And if it is a commercial note with usually over a million dollar balance or value, the bank might just finance that non performing note sale for you.

Oh, I'm excited. Guess what's on my way to my, my son. Picking him up from school. Waukesha State Bank.

There you go.

I got a little time.

You got a little time. Call them up and hey, do you have a tape? You know who here handles your special assets? You walk in there, be like, huh, okay.

Oh man. If I, if I have a, if I have a million dollar commercial mortgage note next week, we're gonna have to talk about that.

I'll be back on. We can do the negotiations here. On the podcast.

Yeah, let's do it. We'll do it live. We'll go through it live.

I had to tell you a funny story before. I was on it doing a podcast one time, and one of these big HUD trades had gone through a couple years ago, and I actually said, I'm going to find out. So I called the. The hedge fund in New York and left a message, and I'm recording a podcast. In the middle of the podcast, they call back. So I'm literally talking with a trader on this, like, $26 million fund. And they're like, oh, yeah, we expect to do this and that and this and that. And I'm like, oh, that's interesting. You know, you got any one offs? Like, we won't have any one offs for 12 months till we get beyond. Well, give me a phone call. I'll take your. Your crumbs and go from there. So you never know what you'll find, man.

You never do. You never do. This has been awesome, Scott. Thank you so much.

Thanks, man. Thanks for having me. It's been an honor, bud.

Awesome. Thanks, everyone, for listening. And listen to Scott. Like, like, subscribe. Please leave a review. We love all that. Until next time, everybody. Thank you so much.