Turning Problem Properties Profitable with Scott Carson: Property Profits Podcast with Dave Dubeau

Well, hey there, everyone. This is Dave Dubeau, and welcome to this week's episode of the Property Profits real estate podcast. Scott, don't try to say that three times in a row too quickly. My special guest today is Scott Carson, who is also known as the note guy. And I won't let the cat out of the bag just yet. What that's all about. I'll let him tell us about that. But you're in for a real treat. This is something different. This is something that we haven't heard a lot about, especially as Canucks. So, Scott, great to have you on the call. How are you doing, man?

Dave, I'm honored to be here. And I'm originally from Minnesota, so I can speak with an accent if I need to.

Eh, I don't know a single Canadian that sounds like that.

I know exactly. I know exactly. I know exactly. I know exactly what you're talking. But we, I'm honored to be here. I mean, what's funny is we all. While I'm in the United States and we'll be talking about, especially here in the United States, I do have quite a few Canadian investors are investing in the States here and doing that via buying distressed debt, buying notes.

Awesome. Well, we'll jump into exactly what that means in just a second. But first of all, Scott, you've been doing the whole real estate game for a long time. I think it's been over 15 years. Just tell us what sparked the interest. How did you get started? What did you get started in?

So, like many people, I graduated from college in 2001 and we. I grew up in a small South Texas town where my dad owned a local hardware store. So I grew up being basically, I like to joke, slave labor out to do, fix and fix anything, you know what I mean? So growing up, going to college, graduated college, got married, and of course, like many people, we love watching that factual TV show, Flip this House. Right? You know, everything on there is just true and not facetious, you guys, so.

Don'T take that with a grain of salt.

Yeah, exactly. So. But we're like, oh, hey, we could do this. I can fix anything. Well, sure, we want pick up paint and carpet. That looks like fun. Sure, everybody can do this. So we went out, bought a couple properties here in Austin. I was making good money as a financial advisor. Wife at the time was a private school teacher was making six figures. We're like, hey, this would be great. Realtors, like, hey, you know, you can buy a couple of these. Not just ones. We bought three houses. Our Primary plus two, another six months and the only person that made any money on the deal was the realtor and the commission because like three months after we bought our second investment property, I got laid off. And then the market tanked here in Austin because of a little computer company that rhymes with hell called Dell, laid off a bunch of people. So our renters that were going to, you know, we're going to be the next landlords here, you know, we were, we owed more and we were trying to make six mortgage payments, three first mortgages, three second payments on a private school teacher salary. So I became a distressed borrower pretty quickly. Fortunate we were able to get rid of the two investment properties without having to pay anything via short sale and keep our primary residence. I went back to work about a year later after being laid off for roughly about nine months in the financial sector as a banker and started getting my assets out of a sling. And I had a buddy approach me who I'd worked with and he'd been laid off too, who started a mortgage company here with a couple investors and he was doing well, he needs some help. They were traveling the country and internationally speaking on creative financing and owner financing, wraparound mortgage, a whole variety of thing, and then fixing and flipping properties like, hey, this is really what I want to do. So July 4, 2004, I put my notes in the bank and like I said, been a full time real estate investor in mortgage industry since then.

Interesting, interesting. So you start out trying to do flips, flips didn't work out too well. Then he kind of morphed into this. So explain to us exactly, you know, because your main bread and butter now is buying distressed notes and mortgages, is that correct?

That's correct.

What is a distressed note or a mortgage?

Great, great point. So between 2004, 2008, I started doing other things and learned how to fix and flip property and other other things, wholesaling and things like that. But when everything hit the fan here in the United States in 2008, there's a lot of people that were A either upside down in their house where they owed more than what their property was worth, or B have been laid off through some sort of financial or health reason and they couldn't, they were behind their mortgage payment. So that's what a distressed debt or distressed note or mortgage is. It's a mortgage on a property where the borrower either owes more than what it's worth, so they're upside down, or the borrower is behind on making payments of some sort whether it's 30 days, 90 days a year, three years, nine years, I've even seen. So, you know, everybody out there is in the debt game or in the note game, whether you've got a car payment or a student loan or, you know, house payment or anything, credit cards, we're just all on the wrong side of the payments. For the most part, we're paying out versus paying coming in.

So, okay, so in a nutshell, how does your strategy work? Why the hell would you want to buy a note that's already on a property that's upside down?

Exactly.

Or buy a note on somebody who hasn't paid anything on their property for the last three months or three years or nine years?

Great, great question, Dave. So the beautiful thing is that we, as note buyers now, because I've been doing this for over a decade, is that we deal directly with banks and asset managers and mortgage companies that are originating stuff. And if a borrower starts falling behind on their mortgage or they're upside down, the bank will often sell that debt. So sell that receivable at a substantial discount off of what's owed or off the value of the property. And that's how we make our money is. I'll give you some basic numbers. Let's say A borrower owes $120,000 on their $100,000 house. Okay? They've been behind by six months or greater. The back payments are making it be underwater or they're out of work. Well, depending on how far in default that mortgage is or behind that borrower is, I can often come in and buy that debt at 50, 60, 40, 30, 20 cents on the dollar of what's owed or the value of the property. So we make our money by buying that debt at a discount and then reaching back out to the homeowner, say, hey, hey, Dave, I know you have not paid in your mortgage for 12 months. I know the bank wants you to bring all 12 months of your payment to the table, and you can't afford that, and your house is only worth 100, you owe 120 plus change. Can you start making your existing payment on time? And most people, you know, if they've been out of work for a while, can start making their existing payment. If they're back working again, they just can't come to the table with the extra overjoys. Right? So we try to get them to start making payments through trial payment plans or a loan modification of some sort where we're either a reducing principal, you know, reducing back payments, reducing the interest Rate being creative to really find a win win scenario. Because if we bought it at 50,000 in our scenario, bought it 50,000, we got a lot of flexibility. So if their interest rate's at 6% on their mortgage and we bought it at 50 cents and they start making payments, that's like a 12% automatic return to us. Yeah. Now our goal, you know, I wish we could get everybody modified and performing on time. It doesn't always work that way. But about 60% of the time they pay on time, they start paying on time. So that in 12 months, once we've gotten 12 months of payments, it's now considered a re performing note. Dave, we could sell that note, that mortgage, back to Wall street to other hedge funds. Other banks will sometimes buy them or other investors at say 80, 85 and 90 cents on the dollar. Because now they've got a 12 month payment stream, they're happy to take this. So now we bought it at 50, we sold it 85, we made 35 grand on that deal, plus the 12 months of payments.

Aha. Very, very interesting.

Wow.

Okay. So, yeah, so just make sure I understood that. So let's say the house is worth 100 grand because of whatever they owe 120 on it, which isn't that difficult with penalties and interest, property values going down a little bit. You buy that note from the motivated seller, which is the bank in this case, or the mortgage holder, you buy it for 50 grand. Now, I guess the question people would have is why the heck would the bank do that instead of just selling the property themselves?

So the reason that the bank doesn't just sell the property is the bank's got to go through the legal process, they've got to foreclose, they've got to do all that, you know, all that stuff and foreclosure. Timeframes in the United States will vary. In Texas, where I'm at, we do everything really fast. Here we can foreclose in like 21 days, whereas in like New York it can take two years to three years. And you gotta hire an attorney to talk to an attorney, to have an attorney up there.

Okay, Right.

And so that's why they would rather sell that note to me and say two weeks, let me take over that issue. They get 50 cents in the dollar. They can now take that 50 cent, that 50 grand, go out and replicate it and leverage it 10 or 15 times in new loans and make those fees back versus trying to have to foreclose. Then they've got to list the property and fix it up. Banks are not in the business of owning real estate. They want to own mortgages, they want to own notes.

I think what a lot of people don't understand, and correct me if I'm wrong, because you come from that industry, is the bank didn't actually loan them $100,000 in the first place. The bank probably only has 10 grand or 5 grand of their own money in the deal, and the rest is government money. Is that more or less right?

That's a big chunk. There's off. Especially if you're doing Fannie Mae and Freddie Mae. Yeah, there's a lot of government money back behind it. Or they've got. They lent 80% and there's government insurance there to come in and cover that 20, 25% in case the borrower does default. For every hundred thousand dollars in loan that's not performing, that costs the bank basically fees on a million bucks. Because the way they leverage it, way they're making interest rate, I mean, for every dollar that's in the bank in 2015, sorry, 2010, when it was the worst, banks were leveraged at like 15 to 1. So for every dollar in they had it lent out like 15 times. Wow. Do you think that numbers gotten better or gotten worse, Dave?

I think it's probably gotten worse.

It's like 50 to 1 now.

Oh, my God.

Yeah, it's too big to fail. All right.

We heard that before.

Amen to that. Exactly. So that's basically what I do. We buy the debt at discount. We buy from a variety of different banks, regional banks that are lending usually in different places. I do buy from some of the bigger banks too, but our goal is to buy that note and then really get it re performing. That's our biggest goal. Now. We do foreclose about 30, 40% of the time, where we've got to take the property back and go through the legal process or offer up, you know, money to the borrower for them to walk away.

Yeah, incentivize them to walk. They know they're gonna get kicked out sooner or later. So you pay them to leave.

Exactly, exactly. You know, and so, you know, we have that happen some, but so we do take some property back. Our goal then is to sell the property, list it with an agent, or keep it as a rent. Some people like to then, you know, take the property back, then owner finance it out to somebody else and create their own paper. That's fine me. We like to keep the reperforming notes for a while and then sell them off and Then as I like to say, double down. One deal becomes two, two becomes four and go from there.

Nice, nice, nice. Very cool. Well, good job on explaining the big picture, how that works. Even a dummy like me understands it. So awesome, awesome, awesome, awesome. So, Scott, you're in Texas. Things happen fast there. Are you doing, are you buying most of your notes in Texas or are you across the country? And how do you find these things?

So that's a good thing. I'm buying about 30 different states now. I love Texas, but we can foreclose so quickly here that the banks know that and they want more for their debt here, same thing like California is very attractive. They want more. So I'm buying a lot of like we call it the rust belt states. Ohio, Michigan, Indiana. I'm buying a lot down the Carolinas. I bought a lot in Florida about 10 years ago and that market's rebounded strong. So I'm still buying a little bit, but mostly in the areas where there's deals.

And how are you finding these deals or how are they advertised or.

Great question.

There is no like a tax lien or a tax deed sale, right? It's.

Yeah, we don't have those. We don't have like a multiple listing service for distressed debt. So what we do is we target directly to banks. And so there are specific departments inside of each bank that handles this. And if people don't get anything else from this podcast episode, the names of those departments are very specific. You have the special asset managers is one title, the secondary marketing managers, the chief credit risk officers, those are often majority of the departments are named one of those three. And so we reach out to these special asset managers right away via email, phone call, jumping on LinkedIn and doing a search for them using like Lane Guide is another website you can use. Or like distresspro.com is a software that a buddy of mine put together. It kind of targets these banks. So we reach out to these internal apartments and these bankers have all their whole portfolio of that. So we'll often get emails directly from these asset managers monthly, quarterly, just depends on what they're selling. That'll have, you know, ten hundred, sometimes thousands of defaulted mortgages that we can cherry pick from. So one of the things I love so much, Dave, is I don't have to do a lot of the old traditional way of marketing trying to find deals. No postcards, no let yell letters, no bandit signs.

Bandit signs, none of that stuff. Very, very cool. That is super interesting. Now, Scott. So you've talked about people investing it doesn't really matter where you are as long as you understand how to market for this. Before we start recording, you said you've got some Canadian students or clients that are doing this. So it is possible to do it from overseas, from out of the country, very, very briefly, kind of. How does that work?

So it's like buying anything else remotely. We've got students in Israel that are buying a lot here in the United States, people from Australia, Spain, London. Canada is just a short little, you know, Air Canada flight across the border if you needed to.

Yeah, yeah, yeah.

But the thing is, with the Internet and the help of the Internet, you can jump on realtor.com you can jump on meetup groups and find people there. They can drive by the properties and take photos for you. You can pull comps, you know, and I've got some of our students that have just set up entities here in the United States, are paying taxes and stuff like that here to the government to do that. And they're buying through their, their LLCs here locally to control real estate, whether it's a they like the debt or they're adding to their portfolio as either rentals or REOs that they're keeping. So, you know, it's a different model than what most people are used to because you don't actually own the property, you own the debt. The debt. So you've got to think like a banker's mindset. We see a lot of fix and flippers or landlords that try to get this business and they're running the numbers based on that pass ground. That's not the case. You have to keep in mind foreclosure timeframes. You're often not going to be able to see inside the property because it's occupied. So you do a lot of kind of, I guess you say emotional equity, due diligence, you know, what's the car look like? Are they keeping the property up to date? Are there toys in the yard? How long have they lived there? The beautiful thing, Dave, is when we're buying from banks and other hedge funds, they have third party servicers that are handling the collections. The borrower outreach. I'm not the one on the phone with Ma Smith in Columbus trying to negotiate with her. We've got a team that does that, but we get those types of notes from the seller. So we can see that, hey, the borrower was really nice and tried to do something or the borrower told the servicer to go F off, you know what I mean? So that helps us with a Lot of due diligence. Obviously we're checking taxes and pulling days on market and you know, if a borrower files bankruptcy, that works in our favor. We can go to pacer.gov which is a government website to see what's going on the bankruptcy filing and really get a lot of due diligence that way too.

No, it's amazing. Awesome, my friend. Well, unfortunately we're running low on time here. So Scott, I'm sure we're going to create a lot of curiosity around this whole thing. So if people want to find out more about you and about the whole note thing, what should they do?

Really easy, just go to my website, weclosenotes.com weclosenotes.com is the website. Got all sorts of great information. 1000 plus videos on YouTube about this in our podcast. I'd love to give your audience a free book. Would that be possible?

Sure, that'd be awesome. How can they get that?

We have different training programs but if you go to noteblueprint noteblueprint.com free ebook. It'll be my 73 page book that I wrote to help give people a good knowledge base of how kind of what note buying is and how to get started with it.

Awesome, Scott, it's been a lot of fun. Nice to meet you virtually my friend and hope to have you again on the podcast in the future.

Honored to be here, Dave. Hey guys, go out, do Dave a favor. He didn't ask me to do this. Go and hit subscribe on itunes and leave a five star rating for Dave. He's doing an amazing job. Come on people. Where else are you getting this great type of quality stuff? Do it now.

Awesome, Scott. All right everybody, see you next week.

Take care.

Well, thanks very much for checking out the property profits podcast and you like what we're doing here, please head on over to itunes. Subscribe rate us and leave us a review. Be very, very much appreciated. And if you're looking to create a regular flow of income, inbound investor inquiries about your real estate deals, then I invite you to attend one of my upcoming live online demonstrations. And you can check that out@investorattraction demo.com take care.