Unlock Real Estate Profits Without Being a Landlord: The Power of Non-Performing Notes with Scott Carson: Vital Strategies Podcast

What if you could invest in real estate without actually owning property? Today, we're diving into a strategy that most people overlook. Buying non performing notes and turning distressed debt into a profitable asset. I'm your host, Patrick Lonergan, and on this episode of the Vital Strategies podcast, we're joined by Scott Carson, a real estate investor who's mastered the art of buying and managing mortgage debt across the United States. Scott will walk us through how he turns non performing loans into cash flow and what you need to know if you're looking to get started in this unique space. If you're looking for a way to build passive income and tap into a niche market with high return potential, this episode is for you. From the crucial debt service coverage ratio to how to find deals on LinkedIn and social media, Scott shares actionable tips on structuring deals and optimizing your returns. This is a strategy you can start implementing now. So tune in to learn how you can make your money work harder for you in a whole new way. Let's dive in. Mr. Scott Carson, I'm excited that you're joining us here today. You've been a real estate investor for over 20 years. You're currently spending a lot of your time building wealth in the buying notes game and I'm really looking forward to getting into that. So welcome to the podcast, Patrick.

As always, buddy, good to see you in Atlanta and fincon and always glad to be here. And I'm just here to serve you and your audience today.

Wonderful. Well, thank you for that. We've known each other for over a year. I've been on your podcast, we've connected at fincon and fincon's, where finance and media sort of meet and content creators sort of come together and learn what everybody else is doing, etc. So it's been fun to connect and just learn more about what you're doing. I think I'm impressed by all the different areas of your business. You've got both the content side that you do really well, just sharing your expertise with people and then you're actively doing it, which is fun. And fun fact. I live in Clinton, Iowa, small town in Iowa, right on the Mississippi. And we were talking about that and you're like, yeah, I've owned notes from property in Clinton.

So yeah, I bought, I've actually owned a couple notes. First liens on residential properties that we actually got the borrower who's not performing. We got them back on track for a period of time and then they refinanced us out and another one we, we had to go through the foreclosure route.

Yeah.

Because they wouldn't play ball. So. Yeah. Familiar with it. I mean it's not the biggest city but I like small cities. I think they're the bread and butter of America. Obviously we can look at the election results here and go down that, that rabbit hole too. But it's a, you know, we, I'm in Austin, Texas and you know Austin is a beautiful city. It's also the number one ranking city for people with the most amount of non mortgage debt lending report camera so it's an expensive city but it's a beautiful area. Love it here. But I buy in about 20 to 30 different states across the country at any given time. And like you said, I buy debt or I'm a note investor basically is what they call me. But more so I like to consider myself kind of like a mortgage banker instead of us originating notes and creating mortgages, which I've done that in the past, owned a mortgage company for years is when everything hit the fan in 2008 we got into the side of buying debt where we just flipped over from origination to I say de origination and banks and lenders started sending lists of their non performing mortgages where people hadn't paid on their mortgage in six months to six years longer in some cases. And we're able to actually buy that debt at a big discount. And you know, and then how we make money on that is one of two ways. One of either we work out some sort of payment plan modification forbearance agreement with the borrowers and that turns into cash flow and it also turns into an asset if we get them back on track for 12 months. If we buy it at 50, 12 months later we can sell it at 80, 85, 90 cents on the dollar and plan B, you know, and if they can't make payments, we'll try to work with them to liquidate the asset in a friendly way, friendly foreclosures. But we end up foreclosing about 30% of the time where we've got to go through the legal action, going through that foreclosure process because borrowers, that's our last resort. I mean it happens about 30% of the time but it's still something that happens. And of course we do that. We're selling the asset, the auction or taking the property back and cleaning up and selling it.

I love it. I've got so many questions about, about this and sort of the bring it on strategies. This is, this is wonder. But I'm generally curious before we get into those, you know, because we lived through the 2008, 9, 10 we'll call it, we were investing in real estate during that time and it was challenging because we had, we had, we were sort of in the buy and hold mode and we had properties that were on five year notes that were coming due and they were cash flowing assets. But the bank said, hey, the, the equity's not there, you've got to put more dollars into this. And it was like. So it soaked up all of our sort of free cash to keep those deals alive. And some of them we just worked with the banks to get sold and moved on to the next thing. But yeah, can you tell us a little bit about how you got started in investing in notes and why that came about?

Yeah, I mean I started a mortgage company with a buddy of mine and we were traveling the country doing investor loans, cash out, refi optional arms, things like that for the investors out there for the most part because we were hooked up with the Ron lagrange circuit basically back in the day. And so we were doing loans in 20 to 30 states with some banking relationships that would allow us to lend or underwrite notes and originate notes under, you know, World Savings and some other lenders out there back in the day. But for four years I kind of had an apprenticeship in that time frame of travel across the country and seeing all these real estate investors speak. I learned creative financing, owner financing, buying on terms, things like that. And our sponsoring broker had lived through the downturn savings loan crisis where he had gotten into the having to sell bad debt off his books. You know, people stopped paying. So we learned it and taught that in theory. Well, when everything hit the fan in 2008 on the origination side, just like that, I saw an opportunity instead of dealing with trying to reach, then I started calling banks and dialing for dollars to get their lists of non performing notes. And so I started, you know, making 50 to 60 phone calls a day. I'd get two or three banks to respond back. They would send me one note or a thousand notes. And I saw an opportunity here because I was getting stuff that was all across the country. I was like, oh my gosh. And it's not just residential most of it. At first Patrick was small balance, commercial stuff like small bound apartment complexes, 100 units, 200 units or less, you know. And so we saw an opportunity there and that's why it's kind of helped me develop my marketing side. I had to start marketing with videos and using my little flip cam to record my little breakdowns and sharing them on YouTube and socials to start sharing what a note is so that people understood it differently than hey, buying the real estate. And so that led to us raising some capital. We're buying, you know, apartment notes from Capital One, Banco Popular, Wells Fargo, Multifamily, just to name a few, US bank buying these notes at such a big discount that it gave us the flexibility to either flip them to somebody or to, you know, take them back, regentify them a little bit and then sell them off as reperforming with better fixed term rates or financing place. But you see that happening right now. A lot of apartment investors are struggling. History repeats itself because they were in, you know, three to five year loans, they, they didn't expect interest rates to double, triple on them. And now many people are getting those cash calls from the bank to bring in and write down their notes to get their DSER levels down below where they need to be. Or the banks are foreclosing because it's no longer written at 65, 70 cents a dollar, it's at 80, 90 because of cap rates being down where they're at.

Yeah, and you just use an acronym there that I think every banker that goes to banking school is, learns and understand is that debt service coverage ratio, dser. It's, it's shocking how no matter where you go, if you bring a deal to a bank and the debt service coverage ratio isn't 1.2 or better, they're not looking at it, you know, like it's, you're automatically disqualified.

And so that's more important than your credit score, you know, it's more important, you know, than history in a lot of cases of your experience. I mean experience is just right up there. But you're 100% right if it, if it doesn't have that magical one. 125%.

Yep.

That's the first kind of the smell test, I guess you could say.

Yeah, I love it. Thank you for that context. I think that is really good. So you talked about two different options. Right. And the first one is let's get the loan performing again. Let's work with the borrower and make sure that, you know, whatever is going on in their lives. If we can sort of restructure this note, you know, add the payments onto the back end and sort of get this going. I've done a little bit of math. I went to a note seminar once and had my financial calculator and was able to do some of the math on the rates of return when you start getting a note to perform, especially when you bought it at a discount and they are off the charts. It's almost unbelievable how well you can invest your money when you get a note to perform well. So can you just talk us a little bit through the different thought process on how you go about doing that to get a note sort of cash flowing again?

Yeah, I mean, you, you it's. And it's a different model. If you're doing residential versus commercial, it's a little bit different. Residential. I tell everybody, start off there because it's pretty simple to figure out one, you know, what a mortgage rate is. And if, I'll give you an example. If we know we're going to buy, say the interest rate in a mortgage is say that 6% they owe 100 grand. If they're behind by six months, they may owe 105 to 110 somewhere in there, whatever. Well, if we know we're going to buy that at 50 grand, 50% of the as is value, the property and 50% of the balance of the note. I know if I can get that borrower back on track, just start making payments on time, it's basically a 12% cash and cash return. Right?

Right.

If I get them to bring two months to the table or three months of the back payments to the table or chunk of it now I'm looking at a 15, 18, 20% cash and cash return. And I'm in such a great spot where the only 50% of investment to the balance or value, whichever's less. If they don't play ball with me, then I have the right to foreclose because I'm literally becoming the lender. So I have all the rights to foreclose, offer a short sale, deed loom. I hold basically the purse strings by controlling that. And so that's the simplest form is, okay, what's the monthly payment going to be times 12? Divide that by what my purchase and acquisition costs are going to be. That's a pretty simple thing. I mean, people can get all excited about their financial calculators, but realistically, we're not holding mortgages 30 years. You know, that's one of the big things that people. Look, I don't want to have you tied up for 30 years. Well, okay, you're probably not going to be that way. And then the thing to think about is if I'm buying it at 50 and I get it back on track for 12 months now it's a reperforming asset. I could resell that note to Wall street, to lenders, banks at 80, 85 cents on the dollar. And now I got some, some three to four months on the front end, a year of payments, cash flow and this big lump sum of 30% or 25, 30% on the back end, that it becomes a phenomenal return. So we use, let's use the same numbers that we just said. So we bought it at 56%. So they're probably paying six grand a year and we'll just say interest, three grand in six months behind. So they owe 103. Well, if we buy that at 50 and they owe 103 and we get to pay six, you know, 12 months on time, that's six grand. And they brought three grand to the table. They're behind it, that's nine grand. So nine grand divided by $50,000. You don't have to be too smart to figure it out. That, that's a pretty good return, right? Yeah, that's an 18% cash and cash return just on that alone. Okay.

Yep.

Now if I now add, So I got the six, the nine grand in three grand on the front end, six months and then I turn around, sell this at. I bought it at 50, I sold at 85 cents on the dollar. So I got another 35,000. So 35 plus 9 grand of cash flow. Divide that by $50,000 investment. That's a 59 like cash and cash return. Yeah, it's stupid.

Yeah, it is stupid. And the beautiful thing about this is that rate of return is really good. The thing I love about that is it's relatively passive. And what I mean by that is I'm not having to go paint and remodel and do all that stuff. I'm just working with the seller over the phone, email, that type of thing.

That's the beautiful thing is that you're not dealing with toilets tams and trash jets now. You don't own the property. That's one of the big mistakes. A lot of people that come in from the real estate space, oh, I'm on the property now. I bought the note. No, no, you don't own it. You're the lender. Okay. If there's this equity above, let's say the house is worth 150. Well, you're not getting entitled to the full value. You're only owed the legal balance, the payoff 100 and 304. So you have to think of a little bit different like that we don't work in after repair values we're working as is values. Okay. But the great thing about it though too is no toilets in trash outs. And like you said, there are servicing companies that will handle that collection process, that technical virtual door knocking, hey, you know, pay you, no stay, you know, kind of aspect for you on a residential note. It may be if it's, if it's non performing, 90 bucks a month. If it's a, if you get re performing or it's a performing night, you buy maybe 25, 30 cents on a month. And that's a small price to pay to have somebody following up, sending out statements, making sure their statements are Dodd Frank compliant, and then being your go between your filter so you're not the one listening to the sob stories on the phone.

Yeah, okay, I love that. So then the next thing that I also think is beautiful is I think one of the first rules of banking is collateral. Collateral, Collateral, right? Like, you know, make sure there's enough collateral so this, this asset has value, right? It was appraised at one point in time and there was a loan given and you're buying it 50% on the dollar based on the loan value. And so I would say in most cases you're probably sitting on a healthy amount of equity in the property if you have to go foreclose. So, so can you walk us through? Let's say you just can't get the deal done, right? The guy gal, whoever's in the property that owns it, life's just dealing them a bad hand and they can't make the payments. Can you talk us through what happens next on the foreclosure side and how.

Do you maximize if they don't have a payment plan, they can't afford it, they've gotten divorced, whatever. If it's financially unfeasible. There are things that we do before foreclosures. Like we'll say, all right, do you have somebody can take over payments? We'll allow you to, you know, kind of assume it, let somebody take it over subject to financing. Can we do a short sale? Can we sell it and we take a loss off the legal balance, but we're not taking a loss as far as, so if like they owed 105 and the house maybe is only worth 95, well, let's sell it at 90. It's still a good day for us. You know, a cash for Keys, like, hey, let's give you some money to walk. It's going to cost us five grand to foreclose in the state. We'll give you 2,500 to get the heck out of Dodge and leave the property in good condition. Provided that we can do that. And there's no like second liens or other things like that. If there are liens on the property, a second mortgage or something like that, or the bar just hides his head in the sand or wants to play hardball. We foreclose and every state's a little bit different on that foreclosure time frame. Here in Texas, you know, Lone Star State, we are the fastest. We got fast highways, fast foreclosures and fast executions, you know what I mean? Not that we're dying to foreclose, but we can do it in basically 21 days. The first, yesterday, the first Tuesday of the month, there was basically 3,800 residential properties that went to foreclosure auction and then roughly about 500, 565 or commercial properties that went to the foreclosure auction. We can do it, do it faster than fast. In some states like Florida, God's waiting room, it's a little bit longer process. About a year we'll buy there. We bought a lot in Florida because we get usually a bigger discount. New York is three years of foreclose. I don't buy there. It's not lender friendly. New Jersey can take you two years if it's occupied. It's not really lender friendly. We avoid like Oregon and Washington, same things. They're not lender friendly and take a little while to foreclose and then, and then communist California, I just don't buy there because it's overly priced. It's a dragged out process. And for what I can buy one asset in, in LA, I can buy a block in St. Louis, if that makes sense.

Sure, absolutely. Absolutely. Yeah. And I was, that was going to be a question I was going to ask you about, you know, the different jurisdictions, you, the different states are going to have different laws on, on foreclosing because you know, when we lived in the Twin Cities we were involved in some foreclosures like trying to buy them and there was this like six month redemption period. So it's a one year, it's a.

One year redemption in Minneapolis, in Minnesota actually. And okay, so Minneapolis or Minnesota has a one year redemption period on an owner occupant. And for those that don't know what that is, it means if we foreclose, I mean we can take control of the asset but we can't literally sell the property. The state has given the borrowers a year to come back and Us off or owed and an interest rate on top of what we invested. Now could I turn around and do a month to month rent? Could I do an Airbnb? I could, but the bank or the state law is not going to give you credit for any real repairs that you make to the property. And so that's one, one issue there. Now. Same thing. Alabama has a one year redemption period. So it's same thing. If you're going to buy there, you got to expect that. Can you go to the borrowers and give them money to release the redemption rights? Yeah, but you're still going to have to wait a year to try to sell it just so the title is clear on it.

Yeah.

Now you can buy a contract for deed is a little bit different mortgage product that you do. But you know, investment properties is at least gonna be six months as well, two there for you. But that's, but that's the beautiful thing if you understand the note business, Patrick, there are opportunities everywhere across the country. You know, maybe I'm not buying in Minneapolis St. Paul, but maybe I'm buying in Rochester or Stuartville there outside the Twin Cities because they're a little more friendlier than some of these, you know, rent controlled properties in Minneapolis and St. Paul. You know what I mean?

Yeah, yeah. And I think there's also, you bring up a good point too. There's also an opportunity when everybody else is running away going, oh, I can't buy notes there that now, now the price comes down and I might be able to buy it for even cheaper. And I understand that the things I need to navigate to execute on my deal, but I could get a fantastic deal because everybody else is running away from those opportunities.

Yeah. And that's the thing, that's how we make our money. We take on problem children. That's the way problem borrowers. And that's the number one question I get from people too. It's like, well, if you're going to foreclose, why wouldn't the bank just go and foreclose themselves? Because they understand the time value of money. If they can get 50 cents on the dollar of what they're owed right now for them to go out and leverage it, they may have a deficiency in deposits and all this other stuff. They would rather get 50 cents on the dollar now instead of it taking a year or two years to try to work it out with a homeowner when they could lend that out. And you know, banks leverage your money 50 to 1 a lot of times to do that. Now in states like New York, New Jersey, you can get a bigger discount because they are difficult. But you've got to be prepared for those difficulties along the way.

Right? Yeah. And I've got some friends that own banks and there's also like, you know, fdic, the regulators coming to look and those non performing assets sitting on their books are just not, they don't like those and so they want to move those along as quickly as possible so they can get back to good graces with, you know, FDIC and make sure they're, you know, compliant there.

Yeah, every bank's got to have a reserve amount and for every loan they have in default or non performing, they've got to have a big chunk of reserves. Well that if they have money sitting on the sides that they can't lend out, that causes their profitability to go down dramatically. And we've seen that with some bank failings in the past. We've seen that actually kind of right now they call it unrealized losses. And this goes back to banks had all this cash sitting in a few years back, so they invested it in like bonds at like 2%. Well now that rates are up, those bonds are really performing at a negative return. You know, so they're losing money, hemorrhaging money that they can't lend out. They're not making any money on that. It's costing money. It's stock a same thing on a loan. A $100,000 loan on average. We figured out some numbers from talking with some of the Mortgage bankers association and FDIC. A $100,000 loan cost that bank about a million dollars in profitability to think about, like 10 to 1.

Yeah, think about that.

It's crazy.

It is crazy. Geez. Incredible. So I guess the next question in my mind is somebody's like, okay, this sounds really interesting. I want to go buy notes and you mentioned earlier, you know, just dialing for dollars. So I'm just looking at all the things that I feel like I need to learn. I need to learn the laws in the jurisdiction. I need to figure out who to call, what to say. So can you talk through a little bit? We've talked the jurisdiction side but like how do I, how do I go about finding some of these deals?

Yeah, so let's, we didn't cover licenses a little bit. That's. Let me bring that back to that too. Some states require to have a mortgage broker's license, especially in the residential commercial, no license is required except basically being a licensed debt collector and that, you know, if you hang, especially on residential notes, if you hang have a license service or it's licensed that state to collect, you're fine. All right. Some states will have want you to be pay an extra fee with. A state like Illinois wants you to pay 750 bucks to be a licensed debt collector. Georgia is kind of picky. They want you to be a licensed mortgage broker to buy notes or use your self directed ira. And that's the legit. But that's the thing. There's a lot of most of the states, you know, 30 of the states out there. If you just have a licensed servicer, you're covered most of the time. The, the thing that we, where we get our deals from, and this is always the number one thing, is you're not going to go down to your local bank and knock on the door, you know, bank of Clinton, Iowa, hey, I want to buy your notes. They're going to like no, you know, unless it's a small like one off branch, you might have a little success. But they're going to be too strict on their underwriting. They can't sell it at a big discount because they're so small. So we leverage some tools to find asset managers. And the banks have banks, lenders, insurance companies, REITs. They all have a couple different titles that these note sellers or the individuals responsible for note selling have at these institutions. And we just leverage LinkedIn. You can go over to LinkedIn and type in special asset manager and that will pull up a list of people that have those job titles. Now it might be special assets or asset managers you have to look at filter through. But special asset managers, secondary marketing manager. Another big one is whole loan trader, Whole loan trading department, chief credit risk officer. When you start getting down to some of the smaller regional banks, Those are the four job titles that we look at on LinkedIn and that's what we've done for years is drip market to those on LinkedIn. Hey, what do you have on your books that you're looking to get rid of this quarter? We're buying for our own portfolio. That's one of the most important things you can say. They don't want to deal with wholesalers or joker brokers. Yeah, I say, hey, you're buying for your own portfolio. Like magical words. An asset manager. Okay. And it's just a matter of follow up, you know, like I'll give you an example. When I got started years ago, we were buying stuff from Capital One or Capital One's commercial branch was Greenpoint Mortgage. Well that Company went out of business, but we bought a couple million dollars in notes from Capital One. Well, the asset manager moved on. Her name was Amy. And a couple people changed jobs. They weren't selling lots of stuff. Well, I got, I'm tracking now the new asset manager at Capital One. And I get a hold of the guy named Todd LinkedIn. I followed up with him, left voice messages, found his email address and he's like, oh, we have a list. I'm like, well, I used to be on that list of buyers. It's like, oh, okay. Well, he asked me some questions, what we're buying. And I'm out with buying. I'm like, listen, we can raise 25, 30 million relatively easy. We've bought a lot of stuff individually, but I dropped it. We used to buy from Amy back in the day. He's like, oh, never mind, we'll send you the NDA to fill out and then it comes back. Then they're sending over what's called a tape, which is basically an Excel spreadsheets that they'll send it out that has all their assets on it that you can then cherry pick and go from there. So it's, it's just follow up with dripmarking, like anything else. We will, we will also leverage like big mortgage banking, you know, the NBA Mortgage Bankers association, regional meetings, their big servicing conferences. And look for people that have job titles, special asset managers or secondary marketing. And it's just going up to those people and saying, hey, what do you have that you're looking to get rid of? Every bank has something bad, doesn't mean necessarily going to sell. You're not going to buy from bank of America, Chase, Citi or Wells Fargo. But there's plenty of other lenders out there that have stuff they're looking to get rid of.

I love that. So one thing I want to you said that really gets my attention is the dollar figure you threw out, you know, 25, $30 million. So can you talk us through? Like, are you, I know you've done thousands of deals, right? I know you've got mastermind group of people that are like, Scott, you know, help us figure out how to, how to do all this. So how are you putting together 25 or $30 million to go buy notes? Or is that just part of the sort of script and then you get the list and you just cherry pick the deals you want? Yeah. Can you talk us through that?

Yes. I'll give you a great. So here's, here's one of the most magical things that most people don't realize. And we're talking commercial. Banks will finance your commercial note purchases. A lot of times they don't necessarily want to lose the loan. I mean they want the bad loan, but they don't want to lose that relationship. They want to kind of keep it. So a lot of times, if you speak the language, a lot of times banks may be willing to carry the purchase of that note at 80% of whatever the sales price comes to. So then you only got to come with 10 to 20% down, sometimes none. It just depends on the situation with the bank. If they don't want to handle the management side or what, how big a problem child. That's a pretty simple thing to do. That then you bring in, then you're raising capital for repairs or legal aspect of that stuff. Yeah, yeah, that's a, that's a nice, nice feature there as well. Now on the residential side, you're almost always going to need cash, you know, whether you're buying a one off note for 50 or a couple million dollars in notes, that's the big thing. People think you need to have three to five million dollars to buy in bulk these days. That's not the case on residential. You can often cherry pick lists all day long, you know, for what you want. They just want, basically they want you to pass a smell test. You know, they don't want somebody come say oh, I got $20 million a week to buy everything. That sounds like a joker broker, you know what I mean? I've had plenty of people say, but listen, you know, we've closed plenty of deals. Here's where we've closed some from or here's the type of deals we're looking for and we've got some money, it's better. You know, they would much rather you say hey I only got a million versus come out and say I got 250 million. You know, what are they gonna believe? They can, they can, you know, there's certain things that you are gonna shoot you in the foot right. On the conversation, you know what I mean?

Right, right. Yeah, absolutely. And if you got 250 million, you know, you may be working through other channels.

Yeah, you would be calling you, you wouldn't be the guy calling if you had $250 million is what I always tell people.

Yep, yeah, absolutely. No, that's, that's fantastic. I appreciate that, that clarity there. And also to piggyback on something you said, you know, if we just add a zero to your example earlier, right. Instead of $100,000 note, we've got a million dollar note and it's paying 6%. But now when I apply leverage to that purchase, you know what happens to my rate of return? Is it like my calculator starts smoking? Because it, it gets.

Well, if you're using leverage and you're using other people's money, I mean, like when we go back to that previous example, you're making an 18 return, you're using your own money, that's great. But if you bring in somebody and giving somebody an 8% return, you're technically making an infinite rate of return.

Right.

You know what I mean?

Yeah.

And that's what banks, I mean, that's the whole philosophy of banks. Is that a, guess what, they take your money and they give you a half percent for savings and certificate of disappointments and things like that, and they're out there making 5%. That's not a, you know, that's not a 4% difference. That's a 450% difference on return. So if it pays to be the bank, I always call it the sexy side of real estate.

Absolutely. You know, fancy term arbitrage. Right. Like if I can borrow money at x percent and turn around and you know, earn 3.4x of what I'm borrowing it at, it's like that, that, that's a no brainer. Tremendous wealth is made. Yeah, yeah.

And here's the thing is people always ask, well, how do we raise our capital? We work with a lot of private investors. We do, and that's part of the podcast, as part of our online social aspect of it. We've got the number one podcast, number one YouTube channel in the industry. So people start looking at. We network with a lot of self directed IRA investors, we partner up with some funds we've gotten actually some big funds that reached out recently who are looking for a deal and they can't find it. But they see us talking about what we're sharing and so they're like, hey, we'll fund the deal or partner with you on it. We don't see anybody else out sharing this kind of stuff. So it makes us stand out from the crowd. And that's what I say is like, people think about great big deals and that's great. The biggest deal I bought was 308 single notes at one given time and another 60 two weeks later at the same time. That's a lot of work in servicing those things, getting those things boarded. It was a six month process.

Yep.

You don't need to do that. There's Plenty of times. Like, I'll give you a great example. I just on a call with my buddy Phil, who's a guy out of Canada. He's a Canadian investor up there. He invested in the United States. He had about 400 grand of his own money here in the States. Well, we, we put 200 grand of it working. He bought 12 notes, and it's like his first 60 days now. They're not huge. I'm not. He's not gonna retire around those things. But it's still kicking off about a 22% cash and cash return to him after servicing costs. He's in at 60 cents of the balance owed and then at 50 cents on the dollar of as is value. And so he's. He's pretty happy in a pretty safe, secure spot is if the borrowers don't pay, they don't stay, and he ends up realizing a bigger, bigger profit margin.

Yeah, I love that. And I think the thing Einstein once said, the eighth wonder of the world is compound interest. And I wish I could remember his quote exactly, but it was like something about the fact that people, those that understand that go earn it, and those that don't understand it, pay it. And the fact that you're compounding at 22%. It's like our money is doubling every four years, you know, or less. It's. It's pretty tremendous if we're. We're getting the compound there. So that's. That's amazing. I.

You know, that's. That's a great quote. Einstein is, you know, you said it. Create a compound interest of the eighth wonder of the world. He who understands it earns it. He who doesn't, pays it, as you said. Yeah, but they don't know if he actually said it.

Yeah.

Misquoted.

Maybe we should just attribute it to Scott Carson. We'll be like Scott Carson's quote.

I'm not that. I'm not that smart. I'll tell you that right now. I'm not that smart. Yeah, but, but that's the thing is, is, you know, we focused on this one niche. This is all we focused on since really 2008. For the most part, we've been doing wrong. We'll. We'll take property back and we have some fix and flips. We've done that. We've gotten some stuff that we sell off. I don't want rentals. I don't want to be a landlord. Yep, that's another job. I am looking at a. We got a portfolio of multifamily Notes in some smaller stuff recently from a hedge fund. It's and there's nine properties in Beaumont. It's a total of 166 units that could be a decent property. They were all owned by individual. Now I could technically own it and reduce cost by having one management company but the bank's already foreclosed on it. It's now a foreclosure and the seller is like I need to get off my books. What kind of, you know, is going to give me if I decide to pull the trigger on it? Below market financing on this for a period of time. So it could be a good way to leverage some of that stuff. And I'm trying to negotiate him to finance the whole purchase.

That's great. And so one question I have is how much diligence do you do ahead of time? When I hear you say I bought 300 notes. Right. It's hard to get your hands around what those 300 assets all. If you're trying to get a market value of all those properties and understand the situation. That sounds like a lot of work on the front end. Yeah. Before we even pull the trigger. And how do you make that a process efficient?

So on something like that there are third party companies that will do like they will go out and do drive bys, they'll pull tight. So I paid $45,000 to a company to do my valuation to drive by the property, take photos, to evaluate the collateral files. This is technically what we're buying right here. It gives me the power to foreclose. And so that was a 90, 90 day process for a bigger portfolio like that. Now if I'm buying a one off note, I'm not going to take 90 days. It might be a week in a residential to two weeks on that commercial. It depends on how fast people get you the stuff. Because you're going to not only do a property valuation and we know it's different commercial versus residential. Residential is pretty freaking easy. Just pull, do an external bpo, a broker price opinion and pull comps. Look at the value of the property and you know, have somebody put eyes and ears on making sure it's still there, not washed away or anything. If it's in western North Carolina or just, you know, just stilts on the beach in Fort Myers after a hurricane. You're going to look at the title report to see what kind of liens are on the property, make sure the taxes are paid, make sure the taxes haven't wiped out the lien. Making sure that you're in the first lien position that all the, every time that the note has been sold that there's an assignment and chain of title of ownership. That note there, you're gonna actually evaluate the borrower too. You know what's going on with them if they're, you know, if it's a residential note pretty easy to find. We do, we call it social sleuthing. You know what I mean? Check out social media. We've had people, Facebook, LinkedIn. I mean we've found all sorts of things. Like one time we had a borrower in Orlando. We were buying a note and she's like well do I pay? No. She was in Jacksonville, Florida. She's like do I pay my mortgage this month or do I take my kids to Disney? And she literally said this on Facebook.

Yeah.

So we printed the screen. So when we bought the note and she's like I don't have the money. I said well how was Disney? She's like what do you mean? I said, you just said on Facebook you took your kid to distance. And she was like, got all quiet. I was like, yeah, you're not. This is that come to Jesus. Meaning you really shouldn't be in the house. So that's the kind of decision decisions you're making. You know at that point I was like Obama's not going to save you back then. You've got to do something. We need to talk about liquidation of the ass at that point and we all find out where people, you know, like we had a professor in Columbia, North Carolina. We found out that he'd broken his leg and been out of work for a while. Like okay, we can work with that person. We were looking at a note in California and doing some research and found out that the, the borrower's son committed suicide and that at the time and that's what caused them to be non performing. I was like we don't maybe don't want to get into that. I don't want to have to foreclose on somebody like that. Yeah, so you pull these things together. You know there are third party vendors that will go out and drive by the property. They'll pull numbers for you, they'll tie into the title companies or title to pull title stuff. That's pretty easily done. Like I just ordered three BPOs on three different properties. It's going to cost about an external broker Price opinion is about 85, 90 bucks a piece. Title report. I'm not pulling a full title report back to the origination. I'm only doing A two owner report because it's been around for a while and we only buy usually banknotes. So the title's clear. Than like if it was owner financed, that would be like 100 bucks. So you know you're gonna spend 2 to 300 bucks in upfront due diligence per asset.

Great.

And if I'm gonna buy in an area, like if I'm buying a bunch of Florida, well, I might then jump on the plane and might drive around to take a look at it. If I'm buying a portfolio, it's worth my time to know the, the assets a little bit, but usually we delegate somebody else to do it. I mean, in all the thousands of deals, I've probably driven by less than 5% of the actual assets myself.

Yep, yep. Cool. That's fantastic. So next thing I want to touch on is, is we've talked about a. We're in the niche of buying notes. Right. But I think we can. You've already identified a few additional niches inside of there. Right. Commercial, residential. Do you have like something that you just salivate over? When I see this type of deal come through, I am excited because I, I'm. We, we're good at that. We know we can make money in that arena. We like working with that type of owner that's in default. Is there, is there something that comes to mind in, in that arena?

Yeah, it totally does. Oh, it's changed over the years. Obviously one of the biggest mistakes I made early on was I was just gonna. I foreclosed on everything my first two years and I should have modified. So here's how my buy box has changed. I am, I get really excited when I see an owner occupied property where the borrower is less than two years behind. Okay. They have a little bit of equity or they have no equity because they become a lot easier to work with if they have negative equity where they're upside down, they owe more. They are so glad to have somebody give them an opportunity to stay in their house. Right. And work with them.

Yeah.

If they've got equity, you know, I may pay a little bit more because there's that equity on the deal and you start getting above like half a million dollar value. Houses, those borrowers are harder to work with. You're not going to cash flow as much. So basically single family homes from 100 to 400,000 or the borrower has zero to negative equity, owner occupied and some pride of ownership. When we're doing it by pride of ownership, they've got the landscaping, they Get a flag in the air, kids toys, those kind of things. In my preferred states, I get excited about. Okay, yeah. It doesn't mean we haven't bought the million dollar note before and dealt with a two year foreclosure process. We have one thing that's very interesting right now when we look at residential notes is we go back to Covid. You know, I got a tape in yesterday that had about 85 notes on it. And I'm looking back at these, these people have been now defaulted for four or five years. And the thing you gotta think about is that there was every, every chance was given to borrowers that get out of jail to get back on track with COVID You know what I mean? And so we look at if they were paying and they defaulted during COVID Okay, let's, what's going on? But they were non paying before COVID and continue to non pay that person. We're gonna, we're gonna foreclose on them pretty relatively quickly. And we like states that have a 12 month or less foreclosure process. So that's both judicial and non judicial states out there on, on the multifamily side. Man. Man. It is a asset by asset. You have to feel like you're Sherlock Holmes doing your due diligence on each asset because each asset is so unique on rents. And if they're above market or below market or what kind of capital improvements have done, are there any new capital expenditures? You know, that's, that's the big thing. If it's got an HOA with it, that's another thing. If it's, you know, you're buying condos, you got to make sure that, you know, like in what's going on in Florida right now, the special assessments are killing people. Six figure special assessments. That's a, that's a no, no. And then of course, insurance costs affects things. I mean, I used to be big on buying a lot of stuff in Florida, but not so much more. It just can't get insured. And if you can, it's, it's three, four times what it used to be. And that's not a smart thing.

Yeah, yeah. And it's interesting, insurance in general. You know, I think it started in California and Florida. Texas is seeing it, you know, Colorado with, we were talking to one of our insurance brokers. We. And they're like, you know, and I'm like, why Colorado? You know, and they're like, well fires, you know, fires are wiping things out. And it's like, geez, okay, and it just seems like it's spreading all over the country. It just, the costs are going up.

Yeah, I mean, and that's the thing too. One big rule is I don't ever buy a note that I don't want to end up owning the property. You know, it doesn't mean I would live in the property in some cases, but I wouldn't mind owning it, you know, so this gets, you know, I always tell people like, look, start, Ohio's great, Michigan is great, Indiana, Iowa is great. These are relative. I mean, Ohio is a judicial state. Take about nine months to foreclose. But there's still a lot of growth going on there in Ohio, you know, so really that, that's, you know, the Midwest aspect of the country is really where I think the biggest bang for the buck is and really the most affordability and where we see that rents compared to cost of living is still a good investment for us. If we have to rent it, if we take it back, I don't want to, but that's actually makes sense for us because that's one number that people are looking at. You know, a mortgage is always going to be cheaper most of the time than what market rent is. We see that changing a little bit across the country. We haven't seen that in 15 years, but we started to see that more so now. And look at like, listen, if you want to get in a house, it's cheaper for you to stay put versus going out and renting a place that's put together.

Yep, I love it. So I'm going to expand out a little bit. So we talk about niche, you know, have you ever considered other types of, you know, notes? Like I come to you and I've got, you know, a piece of real estate that I run my business out of. I own it free and clear and I need some operating capital. And Scott, I want you to loan me, you know, quarter million dollars on my million dollar property so I can keep operating my business. Is that anything you've looked at, thought about, do anybody, do people approach you on things like that?

Yeah, I get those, I get those requests from people sometimes. You know, hey, can we, can we create a note? I'm like, listen, I'm not in the origination side. I just don't do that. That's not my, my cup of tea. I found my niche in the either buying existing notes that are performing that are attached by real estate. I don't want business notes, I don't want receivables and don't be Wrong. There's those niches out there. Heck, there's credit card debt, there's medical debt you could buy.

Yeah.

Car loan debts. In a tough place right now, there's so many defaults out there. I've, I found my niche and even like, you know, most people think about note investing, they think about owner financing. Oh, I'm an owner. Finance the property, we'll buy some of those notes. But what I have found is I would rather market to sources that are going to feed me on a regular basis. And this is one thing that isn't really taught. I'm only one of three people in the country that teaches a non performing side of buying from banknotes. Most people say, oh, you can't buy, you're too small, you know that you need $5 million to buy from a bank. That's not the case. Okay, yeah, but the thing is, is if I'm buying an owner finance note from a seller of a property, they probably have one note. I got to go out and keep marketing for it. Whereas if I make the contact at a bank like Capital One or oh, who do we else get? The ABC bank or PNC bank, something like that, they're going to have notes available every month, every quarter that I can call to and get that listed to me. You know, like Rocket Mortgage out of Detroit and Cleveland. They send me a list once a quarter of their stuff that they're selling. I cherry pick it, you know, I make offers on a bunch of stuff. I get probably about 5 to 10% of my bids accepted. That's a sizable chunk to get accepted from them because the profit margins are going to be pretty sizable in a lot of cases.

Yeah.

And returns are gonna be good.

I love that. And it's repeatable, you know, you don't have to go like go find the next, you know, guy that wants to borrow money that's running his business out of his, you know.

And that's the thing, we don't do any direct mail marketing. That's the big thing people don't realize. I mean, I take that back, let me rephrase that. We don't do direct mail marketing for lead gen. It's LinkedIn, it's actually down for dollars or drip marketing to asset manager emails. We do dump some direct mail to marketing to IRA investors across the country to raise capital and stuff like that. But for the most part, you know, we're getting more lists sent to us at bigger discounts. That's cleaner paper coming from the bank than somebody who decided to Own or finance it in the back of their truck. You know what I mean?

Yeah, absolutely. I love it. So Scott, you said some interesting things. You know there's the tease of owning rental property, right? Like the tenants, toilets, turnover, trash, you know, probably come up with a few more teas and people, I just think about our listener, they don't have the time and energy for that. The average landlord lasts three years before they get out. They're like, like screw this. I don't, what I didn't realize was like this was equivalent to owning another small business. And I've already got one, I don't need another one. And so if, if an entrepreneur is interested in getting started in node investing, either, you know, going out and finding some of these opportunities or investing alongside you, what are the, what are the initial steps they should take to, to learn about this?

So initial you got to learn, that's one of the big things. You know, if you, you pick up the phone and give me a phone call or book a time on my schedule, going to ask you what are your goals, Read long term stuff. If you're wanting to be passive, what type of returns are you looking for? Now? If you're looking for a 15% agree return, that's not a passive return. 8 to 12 is a passive return. But there's plenty of opportunities for you to get into some performing notes that either you're holding and a servicing company is working it for you and you're just collecting the cash flow monthly or quarterly into your IRA account or your checking account. That's a great place to kind of buy non performing. There's more work involved with that. You got to understand that. I won't say it's a full time job, but we got a lot of investors that are spending five to ten hours a week working on their non performer. You know, it's a lot of, hey, kick this to the service or this is what I want. Make an offering, start doing some due diligence and make some offers on that. You can do that for folks you know they've got some money, that's a big thing. How much are you looking to put to work? If you've got 250k or more, we can talk about partnering up on a deal or putting some money to work for you. That way if you've got less than that, it may be just a passive, hey, you're lending money to us and we're giving an 8 to 10% return on your money for 12 to 24 months. You know, there's a couple different ways that we do it, but it's all, you know, it's not for everybody. First thing I'm going to tell you is like, hey, you need to get educated. Sign up for our three day class. You understand the nuts and bolts. That was one of the biggest things that people taught me along the way, all my mentors is never invest in something that you don't know. You gotta do a deeper dive into it to understand it fully so you understand the risks associated with it. This is not, I mean you can make some good money, but this is note investing is not a get rich quick. Yes, the returns are good, but you've also got to understand I may go through 10 different deals before I find the deal that I want that doesn't give me that 20% return.

Yeah.

And so there's some patience involved with that.

Fantastic. So what is the best way for people to connect to Scott Carson? And you know this, the whole universe of of note buying and investing.

Sure. Real easy. If you go to weclosenotes.com that's my main website, that's the mothership. You'll find our podcast or classes there. That's the first place I go. We've got, you know, we have the WeClosenotes TV is our YouTube channel with about 2500 videos. And then of course we have the podcast, the the Note Closer show out there with 920 episodes. I think I've got recorded on it now.

Yeah.

If you'd like to, you can always book a call directly with my on my calendar@talkwithscottcarson.com.

Great. I love it. And we'll make sure we have all of that information in the show notes. So if people want to check out those links, they'll be available. We'll also send out an email if you're on our email list with, with all that information as well. So Scott, this has been wonderful. Are there any last things that we didn't talk about when it comes to investing in notes that we should have mentioned before we wrap up?

So here's the great thing, everybody that's listening to this call, you're already in the note business. You've got a mortgage, a car loan, student loan debt, credit card debt, or you own your cousin Bubba five grand down the street. You're in the debt space. You're just on the wrong side of the payment stream. Let's get you instead of paying, let's get you receiving. And it's not that difficult. It's been around for years. No, you don't need millions to do this. You can get started with small amounts and figure this out and really turbocharge your IRA retirement accounts in a lot of different ways. And so it's not difficult. If I can do it, a caveman can do it.

Scott, you're a humble guy. I've heard you say a couple times like, I'm not that sharp. But to get to the level of success that you're at, it doesn't happen by accident. Accident. So I appreciate that.

You're doing an amazing job here. If you're listening to this right now, everybody make sure you, you punch that subscribe button and make sure you go over and leave a five star review for Patrick. He is doing an amazing job. As fellows podcasters, we love to see comments from our, our tribe out there. So do that to give Patrick a little boost.

Wonderful. Thank you so much, Scott. I appreciate you just sharing your, your wisdom with here us here today. And so we'll have to do this again sometime in the future. Sounds good. Next year at Vincon for sure. All right.

Oh yeah, we'll have to do it before then. Take care, buddy. Thanks.

Very good. Bye. That's a wrap for today's episode of the Vital Strategies podcast. I hope you gained some valuable insights on how to leverage non performing notes to build passive income and diversify your investment portfolio. A huge thank you to Scott Carson for sharing his expertise with us. As we're getting our year end tax strategies implemented for our clients, we wanted to give you the tools you need to save big money on taxes this year. To access the resources that can help you create a tax Strategy, head over vitalstrategies.com cornerstones. If you're one of the first 100 people to register, we'll give you free access to the tools that our clients have paid tens of thousands of dollars for us to implement. These tools are designed to help you pay less tax, build more wealth, and live a great Life. Again, that's VitalStrategies.com Remember, your dollars are better off in your hands than in the government bureaucracy. Thank you for listening and for being a vital entrepreneur. You're vital because you're the backbone of our economy, creating opportunities for your employees and driving growth. You're vital to your family, fostering abundance in all aspects of life. And you're vital to me because you strive to build wealth, make an impact through your business and live a great life. Until next time, I'm Patrick Lonergan and thank you for listening to the Vital Strategies podcast.