Understanding Note Investing with Scott Carson: Born for Greatness Podcast featuring Rebecca Matulonis

Foreign.

Welcome to the Born for Greatness podcast. I am so glad you have joined me today. And even better, I have Scott Carson from We Close Notes on the show today. Thank you, Scott, for joining me.

I'm honored to be here. Rebecca. It is always a pleasure and just here to give to your audience for the day.

Awesome. So tell us a little bit about yourself. What do you do?

So I'm known kind of across the country as the note guy. For the last 15, actually going on 16 years now, I've basically just focused on the niche of real estate investing. Basically focused on buying distressed debt, distressed mortgages, because I started doing all that back in 2007. That's what I've stayed with ever since with the, you know, the downturn, the upturn, and now kind of back on the downturn again. But, yeah, right. That's kind of what I do. I buy my distressed mortgages first liens only about, oh, 25 to 30 different states. Austin, Texas is at home. I enjoy traveling, long walks in the beach with Pinny Closet.

That's amazing.

You know, it's good to be a lean lord versus the landlord, I guess you could say.

Yeah. So how did. What got you into it?

Yeah, it's a good question. So I was started. I was a previous mortgage banker with JP Morgan Shakes and was doing that. And then a buddy of mine started a mortgage company with a couple investors that were traveling the country teaching creative financing and on the Ron LeGrand circuit, stuff like that. And he came to me and said, hey, I'm starting this mortgage company. I need some help. I was like, let's do it. So join them. And for basically about three and a half to four years, we. I travel the country at an event, you know, doing mortgages. But I also learned of real estate. And then when everything hit the fan until 2008, my mentors, Bob and this other guy, Aubrey, who made a ton of money during the RTC days back in the 80s, like, hey, Scott, you gotta take advantage of this opportunity. And I was like, okay, right place, right time. So I sold my half of the mortgage business for a buck because that's about all it was worth then in 2008 and just started dialing for dollars and calling bankers and getting tapes and lists sent to me. So that's kind of what I've done and how I got going.

That's awesome.

Yeah.

So for.

Go ahead, I just say it's been a very interesting ride the last 16 years. You know, we've bought hundreds of assets at a time. Or one asset at a time, over $1 billion in distressed debt.

Wow, that's crazy. So let's explain to you because I know some of my listeners don't have a real estate background. What exactly does that mean when you're buying, you know, a closed note or distressed debt?

Yeah, great question. I'm glad you bring it up. So basically if you are in debt of any sort, you have a car payment, a mortgage loan, you know, student loan debt, credit card, medical bills, you technically are in the debt space. You're just on the wrong side of the payment stream because you're paying out versus paying in. And what I focus on is we just buy and when we say a note that's any type of IOU receivable, we focus on the notes that are secured by residential and commercial real estate. So we're buying mortgages, just senior liens of first mortgage. And we actually prefer to buy what's called a non performing mortgage. This is where the borrower hasn't paid on their mortgage for six months to sometimes six years or longer. And banks and lenders will have this stuff on their books, you know, because they sell stuff off in bigger, bigger bundles and stuff like that to other smaller firms. And we often will get big lists sent to us, you know, 200, 300, 400, 500 assets at a time. And we get to cherry pick the stuff. And so these lenders and banks will send us stuff that as we, let's say it's the naughty borrowers haven't paid in a while, but they would rather sell that debt to us at a big discount because they don't, they don't want to deal with the foreclosure. They don't want to deal with having evicted bar or then rehabbing it because that's not how banks make their money. They make their money on the, on the spread and the velocity capital. And so we'll buy this debt at know, 50 cents on the dollar of the value of the property or less. And we make our money by then reaching out to the borrowers. The homeowner say, listen, hey, I know you've been through a financial hiccup or two, you know, got laid off, got divorced. What's your, what's your country western song that you're, you're singing here? Why you can't pay. So let's, you know, do you want to stay or do you want to go? If you want to stay, let's work out some sort of payment plan to get you back on track. If you can't make a payment plan, then let's look to liquidate the asset by either giving you some cash to walk away, having you signing over the property to us and forgiving you the debt, or if you won't play ball with us, then we, you know, since we've bought that mortgage note, we have all the same rights the bank does. Technically we become the lender and then we can foreclose and do whatever we want once we foreclose on it. So that's, that's a little bit of kind of what note investing I call it, it's a. The big short side of real estate investing. Watch that movie.

Yes, that's a good point. So what do you use as your criteria to pick the ones that you want to go with?

Great question here. I, I prefer to actually look at the occupancy of the, the property first. I don't like to deal with vacant assets because I don't really want to own the property back, even though it's important. My biggest bang for the buck is note investors. Is it actually keep people in their houses and get that non performing note back on track? Because if I bought it at 50 cents on the dollar and the guy had a 6% mortgage on it, well, if I can get them back on track just paying their existing payment, that's automatically like a 12% cash and cash returned to me without having to fix it up or rehab it or pay the taxes. And if I can bring them, have them bring a little bit extra to the table, then my yield starts really going up. And so I like looking at occupied assets because that gives me more exit strategies to keep the borrow in the property if I can. It also means that the property is in better shape because somebody's living in the property. You know, the air conditioner hasn't gone on vacation. You know, the copper goblins haven't showed up. You know, we don't have any indoor ice rinks, you know, like you might have up in Vermont if somebody stole the copper out of it, you know, so that's the thing. The second thing we look at obviously is the borrower. We do a little social sleuthing. We talk with the existing servicing companies and collect or collecting or trying to collect payments. How friendly has the borrower been? Have they submitted any hardship letters to try to modify stuff like that? Of course we look at the property itself, making sure it's in decent shape and value. I mean we're only going to be able to see exterior views of the property because we can't get into it a lot, but that still tells us the values and if we're buying it at a discount. So that if we do have to foreclose, there's plenty of equity above what we paid for the debt that we have the right to foreclose on to make our money that way. So that's kind of, you know, we want to make sure the numbers make sense. As far as that, of course that's front end due diligence and once if our bid is accepted, then we've got a whole back end of due diligence. So looking at the collateral files, making sure those are clean, that we have the right to foreclose, servicing is taken care of and also looking at the legal status, you know, as the previous lender file started for foreclosure process, how far along are they, you know, our taxes paid on the asset because a lot of times we may have to come in and pay the taxes to avoid a tax sale and losing the assets. So there's really three parts of it looking at the borrower, the property and of course the collateral files.

Right. Okay, so let's say I want to get into real estate investing. Never done it before. Let's just say would you recommend going this route or what would you say to a new real estate investor?

So that's a really great question. I'm glad you bring that up. So no investing. We have plenty of people that are brand new to real estate that get into it. It's, it's a different mindset, different philosophy than what a lot of people do. And when I think back to when I got started as a real estate investor, I thought it was all hgtv, flip this house.

Oh, wouldn't that be great?

Wouldn't that be great that, yeah, TV show where you know.

Exactly.

I make five grand a month, but I'm buying a million dollar house and I only need a thousand dollar budget to, you know, do 100 grand worth of work. It would be amazing. The first and most important thing about new investors or new real estate investors is you got to get educated. This is a different mindset because you're, when you buy the debt, you don't, you don't own the house, you control the house, but you're only entitled to what is owed to the bank. So we, we've had people get in that didn't understand what they were doing. And I'm like you, you know, they're over bidding for these notes thinking they're buying the house. Like you don't own the house, you're overpaying for this debt. You're only, if you have to foreclose, you're only going to get what you're owed at the auction. If it goes to auction, anything equity above that goes to the homeowner. So you have to kind of put on a different hat. Is thinking like a banker versus a fix and flipper. But I will tell you this, that the pen is much mightier than the hammer when it comes to real estate investing. There are kind of three advantages that are different than your fix and flippers or your landlords. What I, what I like about note investing, first and foremost is, is one of the biggest things that stops a lot of new investors is the cost to market. You know, a lot of people are spending a lot of money on direct mail, bandit signs, you know, door knocking, all that good stuff. We, we don't spend money on direct mail. How we target is we target banks, lending institutions, specific departments. And so they're inside of those institutions, they have specific job titles. So we, we leverage LinkedIn and spend a lot of time marketing on LinkedIn to find deals. We also call banks or we'll drip market out to asset managers at banks. And once we get into the right department of the bank, that bank becomes a lead that feeds us on a monthly or quarterly basis without any mail, you know, marketing costs. So that's really nice. It's also great the fact that we're getting multiple deals. You know, it might be just one note this month, maybe it's five notes next month, maybe it's a thousand notes. I mean, you just never know what a bank has in this portfolio. Although you can kind of find out by looking at the FDIC reports that the bank will file quarterly. They'll tell you they have to disclose how much of their portfolio is distressed. You know, where the bars haven't paid 90 days, how much is in that late phase of bars being 30 to 89 days late, how much of their portfolio is default? That's residential. How much is their commercial portfolios in default? So it gives you kind of a cheat sheet to target some of these asset managers. But, you know, folks think that they're just going to walk into their local Chase or Wells Fargo and say, hey, I want to buy your notes. It doesn't work that way. Bank of America, Chase City. That's great. I mean, we've bought from some of those, but they want you to write a large check, you know, $50 million or greater in a lot of cases. And that's Just the pricing on it just doesn't make sense. But that still leaves. There's a ton of banks, lending institutions, mortgage companies out there, even hedge funds that have bought portfolios of note that they, you know, they buy in bulk. They don't want, necessarily want everything. And if you're a local investor in an area that does have a lot of distressed defaults, you know, there's a lot of opportunity for you to come in, you know, buy that note and work it out and get the bar back on track for cash flow, or if they won't play ball, then foreclose and then keep the asset or sell the asset off, whatever you want to do. So it's just, it's a different mindset when you're getting started. Just got to know it's different. Got to know that it's a different philosophy. I mean, it's just like, you can't apply land investing to, like, multifamily investing. You can't apply, like storage to fix and flipping. You got to know your niche.

That is so true. And I think it's important to kind of get a niche, especially when you're first getting started, and not try to have your, you know, play your hand at everything because everything is so specific and different. And I mean, I've done real estate for 10 years, and I just got into, you know, land investing a year ago, and it's just. It's so different. So it really is. It is interesting how everything can be just kind of its own thing.

So, yeah, the biggest fallacy that we see out there, and it just drives you bonkers around for a decade. You know, this is a lot of real estate investors, branding. They're going to their local real estate club, and that's a great place to start, get started networking. But the idea that I'm going to add another tool to my tool belt by alerting this other niche or this other strategy, others, I'm like, look, a jack of all trades is a master of none. We know that for sure. And don't go spending money on classes and class and classes. If A, it doesn't work in your market or markets, B, you don't have the time to dedicate to what it is. Because any type of niche, you've got to develop time, you've got to market, and you got to give time for your marketing to work. We have so many investors. They, they go from one thing to another thing to another thing. They never give their marketing. Or first of all, most people don't market. They just think they're going to do something. I'm a, I'm an apartment investor. Just give me an apartment. Like it doesn't work that way. No, you got, you got to focus maybe one, two niches. That's it. You want to make sure that those niches work really well, close to each other. Like, like we do a lot with, you know, notes and another thing that we do a little bit of is, is subject to deals because we're getting these lists in from banks. Yeah, we know, like if we can't buy that note, well, we'll try to approach the baller and see if we can't take over the note subject too. But I'm not out there, you know, doing a lot of fix and flips. You know, I'm not going out there and wholesaling a lot. I'm not. You know, we stick to our niche and that's what we've done the last 15 years and it's also made us successful is that we, we stick in that one lane, one or two lanes. Is it like, you know, and you'd be a whole lot happier versus chasing every shiny objects out there.

Oh, so true. Now are you still like holding classes and, and teaching people?

Yeah, we teach. You know, we have our, our classes. We have a one day class that we teach every third Saturday of the month and you know, it's called note weekends. It's basically about six hours of me just kind of going through the cliff notes version how to find fun and flip these things, you know, like I said, it's the third Saturday every month. I would love to give that to your audience members for free. It's usually 99 bucks they want to go to. Noteweekend.com Type in the code. Let's just say Becca. B, E, C C A. Yeah, there we go. Get the class for free. If they can't attend live, they'll get the replays and the manual. And that's a, that's a 99 value for them if they're interested. Noteweekend.com Special code. Becca. It's still going to ask you to fill out a credit card, make sure you're a real person, but there's no charge going on to that.

Oh, awesome. Thank you so much. That is great. That is so cool. I will actually attend as well because it's always good to, to learn even if you're, you know, not going to necessarily go forward with it. Now. Knowledge is power. So.

Well, you know, here's one thing that we see a lot of and that's why I was so excited when you we were talking and being on here is we see a lot of land notes. We see performing and non performing notes online.

Interesting all the time.

And every state's a little bit different on the foreclosure process like Texas. I mean, heck, you can snap your fingers and foreclose in 21 days here. But if you're buying in, you know, New York, New Jersey, that can take you two to three years. So there's places it's better to buy dead end versus others. But you know, we see stuff that you know, can be a pretty decent yield for the performing stuff and even the non performing stuff is a great way to maybe get into some land deals that you can get at a bigger discount than buying normally.

Wow, that's awesome. Do you buy notes in all 50 states or do you try to stick to one area?

Good, good question. I don't buy in all 50. Like I said, I do buy in about 25 to 30. I don't. The big, big red flags where I don't buy is like New York State takes three years to foreclose. It is not a landlord or lender friendly state. So I don't buy anything there unless I have to buy it in like a bulk package. New Jersey takes about two years. I don't buy there. Not very friendly. The other big red flag area would be Chicago, like Cook County. I, I call it Crook county because it's corrupt. Now if you live there, okay, great. Expect it to take 12 months to foreclose, which is okay. But if you don't live there, you will, you will lose a lot of money on delays and delays and delays. And so I've been there, done that, got the scars, the T shirts and the bullet wounds to do that. But you know, I buy, you know, I buy in Texas, which is a great place. But since Texas is such a fast foreclosure state, it's often very overpriced, a little higher than normal. But I do buy buy a lot up in the Midwest, like Ohio, Michigan, Indiana, I love God's waiting room. Florida, I buy a lot there even though it takes a year to foreclose because I can still get a good discount. The Carolinas, you know, Kansas, Missouri, don't buy a lot in the West Coast. A lot of people, a lot of banks will really believe that stuff is almost as high as gold. So I don't want to pay anything in the 90s if I can't buy something in the 50s to 60% of value. I'm not really interested. It's not really an investment at that point.

Yeah, that's true. So that's a good like rule of thumb, like no more than 60. Is that kind of your.

Yeah, that's, yeah, exactly. I, you know, with taxes owed, if there's taxes owed on there, you know, 60, 65%, provided that it's a, you know, this is me buying one note, if it was a good looking asset and it's in a, it takes less than six months to foreclose, I might go up to 60, 65 cents on the dollar. If it's in a longer foreclosure state, longer than six months, I'm going to, even if it's the best acts, best asset, I'm not going to go really above 60 for it. Be at 55. Because if I've got to hold it for a while, I've got money costs, I've got holding costs, legal costs, stuff like that, then I still have to probably do a little bit of work. If we foreclose, but we'll know usually within 90 days which way the bar is going to go from the time that we buy because we're really harping the first 90 days, trying to get the bar back on track to modify, reinstatement and if they won't play ball with us, then we'll kick it to the attorneys and go from there. But what's great is even with COVID and everything being crazy, most people want to stay in their homes, most people want to come and really do something. So we've been fortunate enough that, you know, we look at all the stuff that we bought that we knew we might have a chance to get, get reperform. It was occupied. We had about a 65, 70% success rate in keeping people in their houses.

Wow, that's really good. That's really good. Awesome. So since everybody is talking about now like get rid of your nine to five and you know, work for yourself kind of thing, what is your, what is your take on that and is this viable for, for somebody to eventually do, you know, instead of a 9 to 5.

So I'm glad you brought that up because I don't think it's being talked about enough. You have, and this is a individual decision for everybody. You can't just make a broad decision based on what somebody told you. If you don't have money to pay bills, never quit your job to do something as an entrepreneurial basis. Start off on a part time side hustle. We tell our students all the time like, listen, if you want to go full time, you can, but let's build a plan and use your existing job to help you build a Runway off to being an entrepreneur if you want to do that. But many of our students are doing this five to ten hours a week. Although we have, you know, we've got quite a few folks that have been doing this for 12 months and they, they've been able to replace their income and make more because they're full time note investing. And it's just everybody's different. You've got a market, you know, with anything. You know, this is not the easiest thing, but the easiest thing in the world. Everybody would do it. But that's what I love about it is it's, we're a much smaller niche out there, investing wise. And you're fixing flippers, your wholesalers, your landlords. But we're also a lot closer to deal flow. We're getting deal sent to us on a regular basis from banks and lenders. We're also getting bigger discounts which leads to bigger ROIs. You just got to understand it's different than something we're not. We don't have the sexy Hutv show talking about it.

So true. But unfortunately it's not as glamorous as the TV shows make it seem, that's for sure.

Yeah, but that's okay. I mean here's, here's the thing. If you like to make money and you like to help people, this is a great niche. We love keeping people in their houses. We love, you know, working to solve a problem. There's been many, many, many times I could tell you the number of stories where we bought a note on a property. The note had been sold four or five times and the borrowers have been trying to stay in the house, trying to modify. You know, they had something bad happened, they got sick or illness, death in the family. And we buy this note at a discount. And literally within the first like week we're on the phone with a bar and they're like crying on the phone because we're able to keep them their house. And we're like, you know, can you start making existing payment? Because a lot of these companies or firms that buy these big books, they just get somebody on, you know, making a phone call who's making 20 bucks an hour. They don't understand that there's a human element. And like we just, I'll give you a great example. We just bought a note where the bar been trying to modify for three years and the existing, the Previous two banks wouldn't modify it, but then they sold the note to me at 50 cents on the dollar and I modified her immediately. And I'm getting a great yield. They could have kept, kept a great return if they would have just played ball with a ball over. And she's been on time and even brought some money to the table. I'm like, you know, this is a great little yield on this, you know, and we're doing some good. I don't ever have to foreclose. Hopefully, you know, if she refinances out in 24 months, we'll be, we'll get a full payoff, you know. You know, it's just, it's, it's. Yeah, it's just interesting that the lack of empathy. A lot of lenders or employees have it.

I love that you said that because I think that is so true. And I think, you know, people, when they think of lenders, they think of these big mean people who don't care about you and they just want money. And you're kind of getting the best of both worlds in this because yes, you are making a profit, but, but you're helping somebody at the same time. And I just think that is, that is so huge and what a great way to, to look at it. And if you are going to get involved in investing of any kind, why not do something that, that you can help somebody out at the same time? So that's amazing.

Thanks. I mean, we, we do have our fair share of bars that don't want help that try to, oh, I'm sure drag it out. I've got, we got one deal that's we're into for coming on like 18 months, you know.

Oh, wow.

That they just played games and played games. Well, finally the Pied Piper is getting paid and we're getting ready to, you know, but most of the time, like I said, most people want to try to work it out. If they can't. Sometimes you have to have a come to Jesus meeting and say, listen, you can't really afford this. Let's give you some cash to walk away, you know, and if you work on your credit in 24 months, you can go get back into this dream. But this dream has become a nightmare to you. We don't want that. Let's, let's make this a win win. And I can either be your best friend in night in shining armor. If you don't want to play ball though, you're not going to like dealing with me or my attorneys. You know, I don't I don't run a charity. I donate to them. But we do love to help people if we can.

Yeah, no, that makes complete sense. And that's, that's awesome. Now do you do all of the like, contacts or do you have people who work for you? How does that work?

Great. Yeah, that's another question people get, you know, like, Scott, if you're buying in like 25 to 30 states, you must have this huge team and. No, we've, we're a lean, mean, note buying machine. Okay, love it. So we, the note business is very heavily driven by vendors. You know, that's one thing that I think a lot of other investors that get into and think they got to rehab the property, they got be out there, you know, slinging paint and putting fixtures up and. No, no, I hate doing that. I had to do that in the house Houston just recently. I'm like, no, no, no, never mind. I don't want to do that.

Right.

We rely heavily on servicing companies and in most states you've got to have be their license or be a debt collector. And if you're not licensed, then you just need to hire a licensed servicer. And they're the ones that are doing the borrower outreach. Most of the time there's one calling the bars. They're the one, you know, if the bar won't play ball, then we're kicking it to the attorney. But when we buy a note, we tell our servicing company, say, hey, this is plan A, plan B, plan C. Here's what we're willing to do for this borrower. And they, you know, we buy usually two weeks after we, we close on funding that deal. Somebody's on the phone, somebody's trying to make right party contact with a bar and then we go from there. But no, it's not me, not me doing it. I mean, when I first started off, yeah, some, some people want to make those phone calls. I'm like, no, no, you're violating cfpb Consumer Finance Protection Bureau laws if you're not licensed to do that in that state. It doesn't, doesn't take a lot of license. You, you don't need license yourself. But that's why you pay, you know, 25 to 90 bucks a month to a servicer to do that for you.

Okay, well that's really good to know. That's awesome. People can be prepared as to kind of what they have to have lined up in order to get started investing.

So yeah, I mean a lot of people. Another question. We get a lot of times do they have to have a lot of money because they think, oh, I gotta have 5 million bucks or 2 million bucks to do this? Surprisingly, no. A lot of lenders, a lot of banks out there will sell you one off stuff. You know, a lot of. I always tell folks if you've got 50 grand, you can usually pick up a non performing note in Ohio, Michigan, Indiana. That could be a really good ROI for you for your retirement account or checking account or savings. You got the idea here is two is that you have to realize if you don't have any money, you don't have any retirement saved. Stuff like that. That's okay. There is billions of dollars in private capital out there. There's a lot of IRA investors that are making 0% on their money, just waiting for somebody to pick up the phone and give them a phone call, say, hey, I got a deal. You want to make above average return, your money's making zero or negative. How about we put you in at 6, 7 or 8% for a short period of time of 24 to 36 months. And that makes people think, well, okay, I can actually do some stuff right. People think they can hear mortgage or I'm going to be into this deal for 30 years. No, no, no, that's not the case.

Oh, that's awesome. Well, great. I mean, this has been so informative and I hope that people get excited about it because it's, it's very neat, it's very cool what you're doing. And like you said, it's a, it's a niche. You don't hear about it that often. So now is the time. So please everyone, take advantage of Scott's awesome offer and take the class. I will for sure.

Definitely. Once again, it's noteweekend.com use the code Becca BCCA. That'll get you in for free. But also, you know, we as podcasters love to hear from our audience. So if you're listening to this and enjoy all the goodness that Rebecca is delivering on a regular basis here with her podcast, make sure you hit that subscribe button and make sure you leave a five star review for it because we love hearing from you out there. Help us out there. She does a great job. She's kicking ass taking names, so make sure you help her kick a little ass today.

Awesome. Well, thank you for joining me, Scott and I look forward to chatting with you again at some point.

Sounds good. Honored to be here. Thanks, Rebecca.