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Participant #1:
You know, I started off buying an eight unit apartment complex note deal in San Diego and flipped it for 35 grand and 24 hours. I bought a 21 unit note in Houston and flipped it for 50 grand a week later and bought a 300 unit from a bank of Popular in Indiana for a third of the cost we just provided and sold it twelve months later.
Participant #1:
Welcome everyone to the Prendamano Real Estate "PreReal" Podcast. So every episode, we like to talk about a section of the podcast where we are going to deliver some value. And I can assure you that this entire podcast is going to be absolutely jampacked with value. We're joined today by Scott Carson. He's the President and CEO of we closed Notes. He has a really interesting model, extremely successful in his own right. We're going to be talking today about defaulted notes and the acquisition of those notes, a subsection of the market that I am extraordinarily bullish in. But we'll get into that as we move along. So, Scott, how are we doing today? I'm doing wonderful, man. Honored to be here. I am loving you guys podcast. You're doing an awesome freaking job with it. And if you're listening to this guy's, make sure you hit the subscribe button for them. All right. Definitely. Well worth it. I appreciate that. And I enjoy your podcast as well. And I know you've been busy today because I listened to one that just dropped earlier today and you had said you were going from meeting to meeting. So it's been hectic for you. It's been a good day. I mean, I'm always glad to be too busy versus not busy enough. It's good to be busy, but sometimes, God, we like for you to close that window a little bit, but not too much. Not too much. Got to be careful what we ask for. That's right. All right. So I like to always give the audience a little bit of background, so if you can give us some history, where did you grow up? What were some of your influences when you were a kid? Where did you go to school? And then we'll jump right into how we ended up where we are today? Yeah. No, I'm actually a Yankee. I was born in Minnesota originally where I was Minnesota originally, but I grew up in. My parents moved to Corpus Christi, Texas, when I was a young kid in three or four. So I grew up down on Gulf of Mexico. We lived in Corpus and moved to a small town called Ingallside, like, 3500 people. And my dad owned a local hardware store there. And so I grew up if I got in trouble, he knew it before. I did a lot of times in the small town. Absolutely. But love growing up. Small town, huge work ethic. I've always had a really hard work ethic. Learned that from my parents, who are entrepreneurs have that entrepreneurial blood in me was successful and athletic enough. I had my first two years of school paid for. I had a football scholarship to a small Division two College out of Dallas. That was 20 plus years ago. It took a year off to figure out what the heck I want to do. Ended up studying business and mass communications and graduated from Southwest Texas State University. Now Texas State out of San Marcus, Texas the Bobcat. But anyway, I've always been the sales interested in entrepreneurship. I got into real estate because I was like, okay, I kind of like it. Who doesn't like those fictional TV shows like, Flip This House. You know what I mean? Absolutely. So my colleagues and I got married. We bought our first house. Our realtor is like, hey, you know, it's a good time to be investing. Should buy a couple of properties. This is back in 2002, we bought two investment properties. We're going to be landlords. And I was like, oh, I can fix everything because I grew up in a hardware store from the roof. But then I got laid off from my job as a financial advisor, and our two tenants got laid off from a computer company that rhymes with hell known as Dell. So I went from being successful to being a deadbeat borrower, as I was trying to make six mortgage payments three first 3 seconds on a private school teacher's salary. Wow. Yeah. So I empathize for those that can't make their mortgage payments through some sort of fashion, like a lot of people struggle with. Now, lucky for me, we got rid of the two investment properties we're able to modify a primary. I licked my wounds for about a year and learned the real estate investment the wrong way. The only person that made any money on those deals was a realtor who made the Commission. Yeah. And I got back into financing and marketing. I started working for JPMorgan Chase as a vice President for them and did really well as the number one banker in all of Texas. And two years later, I got a buddy of mine that I worked with previously as a financial adviser. He started a mortgage company here in Austin. He hooked up with an investor who's traveling the country, teaching creative financing, wraparound, mortgages owner financing, buying a note and sell the note off. And I said, this is what I want to do. So I said goodbye to my corporate job July 4, 2004, and started going to travel and roadshow, doing mortgages and listing to investors in back of the rooms at huge events and started learning real estate the right way. We're just doing a ton of mortgages between 2004 and 2008 because it was a peak and started dabbling in real estate. And then when everything hit the fan of the last recession in 2008, I left the mortgage company, sold my share for a buck because I thought all it was worth and then just started down for dollars and calling banks and mortgage companies to see about buying their debt because I had really a four year apprenticeship with these investors that were teaching creative financing. So that's all I focused on, really, the last twelve years is buying distressed debt on residential and commercial properties from a variety of banks and lending institutions across the country. And we bought over a billion dollars in debt for our own portfolio. And then I'm most proud of the fact that we've helped a lot of people not only stay in their home, but we also helped a lot of real estate investors learn this niche of real estate investing and do some amazing things for their own family and their future as well. So that's quite a remarkable story. And in a very short period of time to have a billion dollars in defaulted note sale purchases under your belt, it really is quite remarkable being as familiar with this side of the business as I am. But I think most of the audience won't be familiar with this side of the business. So I want to take a couple of minutes and just talk about what is a defaulted note. How does it happen? What happens when you purchase one? Let's give the absolute basics to the audience before we get into some of the more advanced stuff. So they understand exactly what it is that you're doing. Yeah. Let's talk the nitty gritty of the nuts and bolts as we like to say. So, a non performing note is a mortgage where the borrower has not made the payment in usually at least 90 days or longer. You could miss 30 days and get caught back up before all covet one in ten Americans is already 30 days later. Their mortgage. Is that right? That was right before Covet. Exactly. Think about that. All right. So when I started seeing this stuff, we're in for a hurt in 2020 and beyond. But anyway, so we buy very distressed stuff where somebody hasn't, like I said, it hasn't paid at least 90 days. Usually it's six months or longer. I mean, I looked at a portfolio yesterday where the bar hadn't made a payment in six years. In some cases. Wow. So a non performing note affects the bank in a very derogatory way. A lot of people think banks want the properties or the real estate. No, they want the notes because they leverage all that money dramatically. They will leverage every dollar that they have in deposits and saving somewhere between ten and 15 times or up to 50 times the bigger banks do. Yep. So they want that performing up because it keeps them rocking and rolling. And when a bar falls into default in some sort of fashion, job loss sickness pandemic like we see right now, that value on that mortgage on that note really starts to depreciate. And banks are often willing to sell that debt off at a big discount if you know who to talk to and you know what's going on. There's a lot of things we look into. We'll get into that in a second. But we'll buy that debt at a discount from the bank. The borrower still owes the amount owed on it. Right. So let's just give some examples. Say the borrower owes 100 grand, or they owe 110 grand in a house that's not worth 100 because they haven't paid in a few months. They haven't paid in six months. We might come in and offer, like, $0.50 of the value of the property for that note. So we might buy that note at 50 grand. The fact that I bought it at a discount, the bar. So now I have a lot of flexibility to work out with the borrower. And that's how what we do is our primary goal is actually to keep people in their properties. Right. And so we'll reach out to John and Susie Q and say, hey, what happened? I know you can't pay the year you're behind on now, but could you start paying something now and then? Ok. You can. Can you pay a little bit extra? Let's work something out here, because if you figure in it, let's just say that interest rate is 6% on that mortgage. Well, a normal mortgage payment would save $500 a month. $100,000 rough mortgage. Well, if I can get him to start paying out at 500 a month, 500 times twelve grand, divided by $50,000 investment. That's about a 14.8% cash and cash return to me roughly. Yes. If I can get them to pay a little bit extra, my money goes up. If at the end of twelve months of paying, I could, then it's now considered a reperforming note. I can now sell that note off back to the secondary market, back to funds back to IRA investors at like, 80. 85% of value. So now I made six grand in cash flow along the way, plus 35 difference between buying the note at 50 and selling it for 85. That's a $41,000 profit on a $50,000 investment over twelve months. Okay. So for the sake of the audience again, just to get them caught up here because we covered a lot there. So you go and you purchase a property. We'll stick with the example Scott had used. You pay $130,000, let's say, for the property. And let's say at the time the face value of the note was $120,000. Over the years you've been making payments, you got it down to $110,000. Now, that is the balance that's left on the note. That is not the total that you would be paying back to the bank if you made all the payments. Right. So there's a couple of different spreads here that you're dealing with. You have first, the Delta between what the face value of the note is and what Scott's team is purchasing it for, like Scott said they go in and they purchase this at 40 50, $0.60 on the dollar. Contrary to what the mainstream belief is, banks don't want to take your home back. Banks don't want to take real estate back. They are absolutely not in the business of owning their real estate. That's the last thing they want to do. So Scott comes in and he takes this note. He buys it for $50,000. There's a balance that is 100 or $110,000. And if you add the total payments in depending on how many years are left in that note, that may have a total par value of 100, 3040, hundred and 80, depending on how far out that note goes. So now Scott is in a position between that 50,000. And let's call it that $150,000. So you're actually working with people, and I really respect that because you don't see that too often. A lot of times people come in and we'll get into that whole approach also, but they don't look to work with the property owner. So you're getting the folks back on track. You're trying to get the notes to perform again. This way you can go back to the secondary market and say, hey, we're performing again. Now you're not using the 50. You're not using the 150 number, and you're saying there's $150,000 in payments left on this thing. I'll sell it to you for $120 or whatever that number is. Right. So that's the spread. Now, are you actually doing loan mods on these things? Are you actually modifying the mortgages? It depends. We don't do a loan mod for the first twelve months, because if you do a loan mod immediately taxable, it's a short term capital gains tax. So then you got to pay taxes. What you modify the loan for when you haven't received it. So we do trial payment plans. So we'll do a twelve month trial payment plan with a bar, and it may be below with their existing mortgage payment. It may have a stair step clause to get them back up. It may start with a lower interest rate and build it back up to a point. And we put some incentives in there. So like, hey, if you make payments for twelve months at twelve months, we'll reevaluate the property value and forgive 20 grand off because your house isn't worth 130. It's worth 110. Now. Well, forgive 20 grand. I wouldn't make it back anyway, or you got a 9.9% interest rate because you did a subprime loan. Okay, let's drop you down to 8% or 7%. So there's a lot of strategy involved in that. But we do modify a lot. We get a lot of people that fall through that twelve month period, and then we have permanent loan on them. And that's a beautiful day. I mean, it is a beautiful day when somebody gets that 1000 pound gorilla off their back worried about foreclosure because we're basically becoming the bank at that point. And so we're working with them. We're giving solutions. We show them like, hey, there are some other your city has some programs, or you say some programs go try to qualify for them, and that's what they create. A win win out. If they can't get back on track, then we go the route of okay, do we need to have somebody come in and assume the mortgage? You got a family member or somebody could come in or you don't want to stay in the property. Okay. Let's do a short sale or a deed in lieu, or if we have to. If you're not going to work with us, you're going to hide your hands. Then we go the legal route and foreclose. But if it's going to be a real trouble borrower, somebody's going to be paying the rear. We can see that stuff by talking with the previous bank and the servicing company. Sure. And if it's going to be a troll borrow, then we would try to offload it to somebody who's more local who doesn't mind dealing with borrowers that want to be a bit more of a problem. So that was one of my questions. Is it sounds like you're legit servicing these loans far beyond what I had even anticipated. So you're really getting in the weeds here. You're working with these folks, what percentage of the portfolio? And maybe you can't answer this because maybe it's by type of note. But what percentage of the notes that you're buying? Would you say go the full boat route where you have to go ahead and you have to foreclose? It comes down to kind of two things. A lot of real estate investors get in this space. They go after vacant properties because they want to add that real estate to the portfolio. So if you have a vacant property, almost 90% of them are going to go to the foreclosure route. Wow. Because the borrowers already walked away, they don't answer their mail. It might be 75, 25, 75% foreclosure 25% where you can get a deed in lieu or cash for keys or cash for consent. If there's a mortgage behind you where you can give consent with on the occupied side, national average is about 40%, because if it's occupied, you'll get probably two out of five that will modify and work with you. One will just sign the property and we'll walk away. The rest of you have to foreclose. We're really good about doing our due diligence and really diving deep into the property history. The servicing notes, the collateral file. We'll do some social media sleuthing or Facebook stocking on the borrower. And so we've got about a 70% success rate and get the bar get back re performing back on track. So how large of an operation do you have? You'd be surprised. Note investing is a very vendor driven space, so I have a servicing company that's out of New Jersey or they were out of New Jersey. They just moved to Reno. But Madison Management. I have a full time employee who used to work for Madison Management. She handles my portfolio, so she handles talking with the borrowers she's licensed to do that. She locks and deals with our attorney. So she's a full time employee that works for me. That handles that. But a lot of times, if people start off, they'll just have the servicing company handle that borrow route. Richard, which is the best thing. You should not be talking to borrowers if you're not used to doing that because they'll ask for an inch and you'll give them an inch, but they'll try to take a mile like anything else. Can you explain to the audience the servicing company? What exactly do they do in the process? That's a great question. Glad you brought that up. So servicing company when you're dealing with debt. Okay. There's often licenses that you have to have at the state level or the national level to collect debt, especially on the residential side. There is there's something called the Consumer Finance Protection Bureau? Okay. Or the Fair Debt Collections at FDCA. So this basically means you can't show up to somebody's house with a bat and threaten them to get them out of the house or threaten violence. You can't call them at midnight, threatening them. You got to follow through specific laws. The servicing companies, they will handle the borrower outreach. They'll handle the documents. They'll be licensed often in the state so that you don't have to get licensed, except in a few different situations of States. But they're handling that borrow outreach. If you become seven days late on a mortgage, I think you've always had the phone start ringing off the hook, and that's what they do. They're the ones that are calling. They're the ones mailing out the letters that you've got to be compliant in, like, 40 different ways with licensing, so that it's uniform across the board. So they're doing that for anywhere. For a performing note might be $$20 to $25 a month for performing, and then a non performing note will cost you, like, $90 to $95 a month. Okay. So I would assume that in this instance, Madison is licensed in multiple States, and they've got the ability. Okay. So you have so many questions. My gosh, when you're targeting a portfolio, are you staying away from certain geographic? What I'm inferring is legislatively. There are certain protections. New York, for example, is a very difficult state. If you have a troubled borrower and they file bankruptcy, I've done a number of defaulted note sales, and I think the fastest we've ever gotten through the process with the bankruptcy is two years and change minimum. So are you factoring that in when you're looking at portfolio? Yeah, definitely. So if I'm going to buy something in New York, it is going to take two to three years to foreclose. I'm going to have higher attorney fees in New York, you got to hire an attorney to talk to an attorney to have an attorney, right? Yes, you do, especially in New York City. But I bought a lot of debt, like in Rochester and Niagara Falls and other areas of their cheap property that I could pick up for a nickel that rent for $800. If I had to take the property back, or I can get the borrow back reinstate. The longer the foreclosure timeframe, the bigger the discount you get because the bank or the lender realizes that you're going to have to take over that problem child and kind of hold its hand through the process. Now, bankruptcy actually works in our favor a lot of time. If somebody files Chapter 13, it turns into a loan model for roughly five years for us. If it's a chapter seven, then we go through the liquidation part to take the property back as long. So, yeah, definitely that's part of the due diligence. We look at it. We don't buy in Kentucky. Kentucky wants you to have a million dollar bond there if you're buying notes. And it doesn't make any sense. New Jersey is another long state that if you're buying a non owner occupied or vacant property in New Jersey, they have the accelerated foreclosure process for vacant properties there in New Jersey, which is a good thing I would avoid. Chicago and Crook County takes a long time to foreclose there. Plus, if you're an out of state investor, they will almost always side with a local borrower or tenants and give them chance after chance. It's very corrupt city. So anything outside of Cook County or shy rack. Okay, but those are probably the four biggest areas that we probably don't buy a lot in because of that. That's not me. I said I don't buy portfolios. I end up stuff with New York and other things I do that we work it out. We'll often go to the borrowers and offer them, especially in those longer foreclosure States like, hey, we'll give you some cash to walk. If it's going to cost me ten grand for attorney fees, I might as well give you ten grand now and get you out of the property and save me two years. Right. So for those who are wondering, well, why would anyone cooperate with Scott and his team? What's the benefit of us doing that? So if you pursue a foreclosure and Scott's team takes it the distance, they can actually end up with a default judgment against the borrower. So now at this point, the borrower has lost the asset. They have probably a busted bankruptcy on their books. They have a foreclosure on their books, and now they have a default judgment for the difference between the note and what the asset actually was worth. Right. What Scott's doing actually does create a pathway for folks that a conventional bank probably is not. Well, definitely is not going to make as fluid and as easy and it can save you a lot of heartache and a lot of pain down the road. That's correct. And on the commercial side, yeah, you got to default. A lot of States will have just a one action suit, basically, that if it's a residential owner financing, you foreclose and take the property, that's your one action and you can't go after them for the default. Is that right? Yeah. Some States will only allow one action state, like Texas is a one action state. You foreclose, you take the property, that's your one action, even if it's sold at the auction for 30 grand less, you got the property, that's your one action as I can do. Florida is also a one action state, and it varies across the board out there. But yeah, I mean, other States, though. Yeah. You go after them. If they got a rental portfolio that's in the same entity of the same name, we could slap that judgment on all those properties that were really well, we got a lot up here. Unfortunately, that's the result, because in New York, where I do most of my business and I've sold quite a bit of defaulted notes up here, and that's the result on the commercial side is that you end up with a default judgment, which is another set of court battles. And it's not as simple as you would think. So, Scott, what percentage of your portfolio do you end up keeping after the fact? Let's say things have been worked out, and you've got a servicer who's working like one on one. I'm thinking about multifamily, right. I'm thinking about commercial assets where there's no substitute for boots on the ground, who is handling that for you? And how much who's backfilling vacant apartments? And is that part of your model, or are you strictly it's not. So here's the big thing I've always found. And I was very fortunate that some great mentors along the way that always told me, sticking your Lane. If your Lane is working, sticking your Lane. The only States I want to take property back in and keep it in a rental portfolio. Aspect of it is Texas, because I'm here and I know the major markets here. I've got people I trust and then Florida. God's waiting room. You know what I mean? New York, South. You know what I mean? I thought you'd like that. And that's because I have great teams there. It's all about teams. If you try to start taking things down, willynilly and turning a property and Lansing Mission into a rental, and you're looking at something in Cape Coral, Florida, and you're in New York, and you got another deal and you end up chasing these outliers that don't make it happen. So our biggest goal is to buy non performing, get it re performing. If it becomes an AO, we take back, we look to dump that thing to somebody else recoup our investment, and then we have the double or triple down approach. So if we bought it at $0.30, we'll get our money back and then go buy two more assets and go buy two more assets. Banks are the biggest companies because they focus on cash flow and loans, not fix and flip, not property. Nothing wrong with that. I've been there, done that, bought a lot of rentals here in Texas and stuff like that over the years. But if it's a big commercial property, then I hire a professional property manager to take that down because we're going to see and I know you agree with me on this. We are going to see a huge amount of smaller commercial notes that are going to hit the market and be the biggest blood bath right now. That's the biggest opportunity out there right now in the dead space is dealing with banks that have the small balance, 5 million or less commercial stuff, because that's what's clogging their books. And with everything that's happened here in the last couple of years, your banks have financed the bigger portion of that. Over 60% of the distressed commercial properties are financed by banks, compared to twelve years ago where it was Wall Street financing. Most of that stuff. And those borrowers don't have the government bailouts. They're not getting the delay to six months, and you can really come in and pick up some commercial property cheap with tenants in place and work to keep them in there and keep that business going as possible. So a lot of opportunity there. There was a lot of opportunity. After 2008, we did some work through a company called Recka down in the Carolinas. The name was Odell Barnes, who was buying massive, massive crunches of notes. And Recka was one of these servicing companies that were selling the notes. And that was an interesting run. But I think right now this is going to be the largest opportunity that I'll ever see in my career, very diligently on putting together an offering to start with. It's probably going to be a $20 million raise. And then we want to go after some of these notes. We're uniquely positioned because we've got the commercial background here and we have Capex Funding, which is a commercial lending arm, and we know the values. We know the assets. We've got a really good handle on that. So I just want to explain to the audience because this is something that anybody really can do, right. And I want them to understand intimately what is about to happen or what is happening with the banks. So Scott had mentioned earlier that the banks take deposits and then they tenxit or 20 X or 50 X, which means the money that you're putting in the bank. The bank is then leveraging that money and that's your cash that they're paying you a fraction of percent on. They're then using that leverage to borrow money. And they're forecasting based on a myriad of different metrics that they go through in underwriting and based on all sorts of wonderful models, they make determinations if you're worthy of credit or not. Right. So now, if you can imagine, the banks have tightened up a lot of restrictions. It's a very different world than it was during the subprime crisis. And banks have while many of them have gotten more aggressive over the last couple of years, it's not anything like it was back in 20, 03, 45, 67. So the bank has now gone out, and they're providing debt to what appear to be very stable borrowers in very stable markets with solid equity. Along comes a global pandemic. So many shoes have dropped now out of the bank's favor and out of the landlord's favor that the banks who were solvent and liquid because they were collecting the debt service and they are replenishing their deposits and they're staying above that threshold. Right. So a bank has to remain liquid and they have to have a certain percent against what they've lent out at all times to be in compliance with their charter. Right. Yeah. Now pandemic hits. Not only has there been a massive amount of jobs that have been lost, portfolios are starting to slip, cash is becoming more tight. People are being laid off. Legislatively people are moving with the intent further and further to protect the everyday. Joe. Right. And what's happened is there's a massive amount of people here in New York City in particular that went out and bought that building or them and their partner went out and bought two buildings or three buildings. And they're in that mid market exactly where you said two, three, four, $5 million asset. And they had solid debt service coverage ratios, which means against the amount that their payment is, they're getting that plus a percentage 125-105-1752 .0 whatever it is, it felt like a solid, really safe investment. Right, Scott? Yes. And now that this has hit and it's starting to really I believe we've seen the tippy tippy tippy tippy. Right. So what's going to happen now is the banks, in an effort to remain in compliance, are going to have no choice but to start unloading this debt. That's correct. There's a couple of things that I'm glad you brought it up is commercial banks and banks are lending on the stuff. They're not lending. It like 95 or like we used the residential side. They're lending like mid 60s, maybe 70%, and that 70% is based off of like you said, the debt coverage ratio, the market values their cap rates. Okay. And how cap rate is figured as you take a look at what's coming in as far as income and expenses. And you figured by a multiplier. Well, if you no longer have tenants, paying, your income is being reduced. Right. That reduces your income and reduces the value of the property. So now the bank is no longer at. Let's just say $70. They're now financed at 80 or 85 compared to market value. So you might even have somebody who's paying their debt. That the banks like, listen, you now we needed to get you down below 70. You need to bring 10% cash, 20% cash to the table to restabilize this loan. And people just don't have that. You'll see not only non performing, but you'll see some really pretty assets performing wise that the banks will offload because they need that cash and the cash deposits. And there's a service that we use called Bower Financial. And they are third party ranking industry, a rating company that evaluates banks and credit unions. And every quarter a bank has to file their quarterly report with the FDIC, and they'll disclose all this information, what they have in deposits, what do they have in loans? How much of their portfolio is in 30 to 89 days late, how much of it is beyond 90 day lights? And then they'll split it up between residential and commercial and multi family and stuff like that. So we buy this report every quarter from Bauer Financial, and it shows us down like one bank went from being a five star to a four and a half star, or they went to a three and a half star, or they went from having $50 billion in 30 to 89 days. Now that number is escalated. Plus, they're 90 plus days escalated dramatically. So we'd like to track banks that have at least five branches because those they start being a little more flexible and lenient in their lending platforms because they got to bring these deposits in. There are 1784 banks across the country that have five or more branches. If you add up what they had last quarter, they had $85 billion in loans that were 90 days or later this quarter, that number increased from $85 to $130,000,000,000. Wow. Okay. And so everybody's talking about, hey, it's a great market. We're not going to see anything bad happened. I'm sorry. We are. Ladies and gentlemen, you can't help but see that. And yes, there are record people buying houses and stuff like that. We've never been in such a big thing between the haves and the have nots right now. You know what I mean? You're agreeing with me. You know exactly what I'm talking about. It's going to be this wave that hits this next year. If you're looking for, like, foreclosures, you may have to wait 24 months because guys like James and me and a gummy buy these portfolios and then try to keep the bars in the house or in the property by modifying taking over operations on some of these commercial assets. Banks are often sometimes willing, especially when you get on assets that are a million or more in value. They may even carry the paper on the paper to keep it on their portfolio as well, too, for you which is crazy, but I've seen it done. If somebody comes in with the management background or even the team, you may not need to have any experience, but if you've got a qualified team, oh, hey, you're going to manage this. The bar is going to walk away, and you're going to take this over. Okay, let's keep it on the books. We'll just a couple of buttons, and we'll move that loan over. You bring 10% down on what we're selling the note for, and we'll carry the 90% that way again, because the banks want to grab that 10%. They need that liquidity. Exactly. The service team. Yeah, that process to take it from that point to actually owning the asset, which is the last thing in the world the bank wants to do is a very long, painful, expensive process it's frowned upon. Right. There's a civic obligation that became more and more prevalent after 2008. How did you scale so quickly? I think in my notes, I have you're online with 2700 banks and institutions. It is remarkable. How do you get on the list of, hey, consider us when you're going to be disposing of a portfolio. So back in 2008, I left the mortgage. I just started dialing for dollars. I mean, I would pick up. It was like something like Jordan Belfour out of the local Wall Street, making 50 to 100 phone calls like Will Smith From The Pursuit of Happiness. I've been that financial advice. So I was not afraid to take no for an answer. Every now I got, I knew I was closer to a yes, and so I just started dialing for dollars. Not every bank has something, but you make that connection. And I just with a phone call. And then I would follow up with an email, a capital one. What's in your wallet? Okay. It took me 70 phone calls over a three week period to finally get the right person in the right Department. They are in New York State. Actually, that would send me their list of commercial notes that they would sell. I can't tell you how many times I got transferred to Pakistan or India and a guy. Hello. My name is Steve. No, it's not. But thank you. You're the right person. And finally, when I did, I just signed an NDA. They sent me over a 33 page PDF that had everything they had below $1 million on a commercial side balance. And so it's so much on there. It was in six point font. James, it was so small. I'd take a magnifying glass to read the list, but they were like, buy something. And that's one thing I want to put out there, because a lot of these banks aren't going to require you to have 5 million or 10 million to buy something. They're going to be like, hey, just pick something and take something off our hands. It's good to have the cash. You can do more when you have stuff in bulk and you can be flexible because then you can say yes to good deals and no to skinny ones. But that's how I started. Oh, you got something? Let me look at what you have. I'll buy it one off deal. But that relationship with Capital One. I started off buying an eight unit apartment complex note deal in San Diego and flipped it for 35 grand in 24 hours. I bought a 21 unit note in Houston and flipped it for 50 grand a week later and bought a 300 unit from a Banco Popular in Indiana for a third of the cost, rejentified it and sold it twelve months later. You just got to be flexible to see where the deals are. That when it comes down, I just make a list. I follow up with them. I mean, there's been bankers and they've been getting my email every month, the first and third Tuesday of the month for six years. And when they finally have something they're like, oh, I'm looking for the green email. Let me call Scott. I got something for you to take a look at. Or I've got something from a peer of mine at another bank that you need to take a look at. So does that model still apply today, someone that wants to get in and do this. Can you still use that method? I mean, can you still ground and pound and just try and get to the right contacts? You have to because banks are so sensitive about what comes in digitally to them leverage, we still pull lists. We'll still dial for dollars. Now, you're not going to call the customer service number. You got to know who you're calling. This is a key point. You're not walking into Wells Fargo, so I want to buy your notes. They're going to escort you out because they're going to say we don't sell. But the bank's internal departments go by usually one of four names. The biggest banks, the biggest institutions. They have what's called a special assets Department, special assets. And you can jump on LinkedIn and type in special assets PNC and find you the right people to reach out to midsized. Banks will usually be called secondary marketing, not marketing, secondary marketing. All right. You also will see chief credit risk officer is often for smaller banks, 20 banks or let's say you have a chief credit risk officer who's looking at their portfolio and then the big institutions like the big lenders that aren't FDIC banks. But they're still originating a lot of stuff. They'll often have a Department called the whole loan trading desk. And so we'll do that. I'll pull up a list of banks who have struggled this quarter. We'll call their main office. We don't call customer service. We try to call their main office, and then we're using LinkedIn to try to find a name that we can drop if we don't we're not connected with them and say, hey, is Steve available or Matt Smith or Matt Key, whoever it might be. And that's just a matter of dollar for dollar. If you make 50 phone calls, you may talk to 15 to 20 people. You probably get four of them to send you an NDA and nondisclosure agreement, and you'll often get a list from them off of that one out of four. I still do this on a regular basis, and I do this publicly. You might crack up about. But one Wednesday a month, I literally do a Zoom call for 5 hours for people to watch me make dollar for dollar and ground and pound, and they hear the conversations and the back and forth and the callbacks as they call back. Because these days bankers are calling you back in a good time. They're not calling you back, like, oh, we don't have that much, but right now we know we're going to have something and we need to make sure I got your connection. So when I get the okay from the guys upstairs that we can call you and move the stuff. So are you still buying one off deals, or are you only buying packages at this point? It depends on the source. So we buy usually in bulk, mini bulk to larger bulk 175, 200 assets is some of the bigger trades we do. But like, I got this deal today come across from a fund out of Florida. It's a kick coral note. The borrows roughly about 330. The house is worth 403. The fund wants 180 for it, and I'm like, I can take it by it at 180. Maybe it's already got a judgment in place so that they're just waiting for the foreclosure to open back up. So the Max I could have my listing or my bid at the auction would be the 330 that they owe anything above that would go to the auction. So I'll buy it at 180 and list it for 252 60. The auction make my 70 80 grand and let somebody else take it over and then deal with the evictions and stuff like that. Or if it doesn't sell, I'll take the property back, evict the borrower and then sell it at 430 when I'm only into it for, like, $190 to $200. So you're referencing the auction. So you're buying these assets, and then how are you disposing of the notes so quickly? So usually we're buying well, it depends on where this one. All the legal work has already been done in Florida. It's basically been just delayed because of COVID. Now if we buy the note and then we reach out to the borrowers a lot of times and they won't work with us in the first 90 days. Then we'll start marketing it to other people. Other note investors. There's some platforms, like Paperstack, dot com or Loan MLS in these individual websites that you can list individual assets for. I've been teaching this for ten years, so I've got a good database of people all across the country that I'll email. Hey, I got something in your backyard, something that you're looking for. If you want to take this over, go ahead and take it over. Wow. So when you're making the purchase from the bank, what does that process look like again, just to give the audience a deeper understanding. It's not like they're giving you a contract in four months to close. Right. So can you walk them through with that process? I totally can. If you're buying a one off note, a bank will usually give you 30 days to close. Whether it's a one off, if it's a bigger asset, they may give you 60. I've even been able to negotiate 90 days on a portfolio. Wow. I negotiate one where it's 90 days for due diligence. And then we had a six month period after we closed to swap out assets. Yeah, it was a unique deal a few years back, but it was a lot of their low bottom hanging stuff. They didn't know if they had all the hard collateral files. So that's what you're buying. So when we look at it, when we talk to a banker and they send us a spreadsheet or they call it a tape. And we'll have all this information. It's like 40 columns of borrowers, name, address, FICO scores. All the information about the mortgage last time, like, right party contact was made. Last payment made. They may give us the last twelve to 24 months of payment stream as well. So we will look at the note, see if it's performing or not performing. We'll look at the value of the property because we want to make sure that we're buying the note at a good investment to value the property, especially if they're way upside down. We make sure that number would make sense. We'll then look at also, like I said, we'll stock a little bit in the bar. Look at what they're doing on social media. I mean, we've had, like, one borrower who Blatantly said online, am I going to pay my mortgage and go to Disney this year or this month? I'm like, okay, we know that's not going to be a loan mod. Okay. We had another guy out of New York who was going through a transition. He was using his mortgage payment money to pay for his breast implants. Okay. We found another guy who was self employed. He broke his leg, and we said, okay, I don't mind working with that guy. If he broke his leg, gets back on track. We'll work with him. So there's that. Then we dive into the collateral. The loan documents. That's an aspect of things is the full loan file there. What is the notes from the borrower to the bank? Have they been friendly? We bought files that were anywhere from very thin with just a few loan documents all the way to being like two foot tall where the bar had been trying to do in London for four years. And so their loan had been sold four times. And so they had the hardship letters in there, the tax return. So we learn a lot about that borrower and that property by diamond collateral. The one thing we don't get the people that come from the fix and flip side. We don't get to go into the houses. Somebody's usually living in it, right? You can't get an internal BBO. You don't have the properties in good condition or bad condition. You can tell a lot about a bar and internal condition of the property by looking next year. What kind of car they drive? Is the lawnmower or the kids? Is a grass cut in the backyard, or is it Jumanji? Also, most people don't realize this, but we will call the actual utility departments and being the bank, they will release more information to us versus just being some random investor who doesn't have a vested interest. The power companies, the gas companies, they'll often tell us, oh, yeah, that borrows on time. Or we've got three termination notices or they're on a payment plan to pay their utilities. Or they were in here the other day and got in a fight in the office. So we get a lot of internal information. And then when we make an offer, the bank accepts. It. Great. They may counter back and we'll go back and forth. And once we finalize, that great. Then we'll have usually another period of time for due diligence to finalize, we'll pull title reports and pay for external BPO. And then we'll go to close. And when we're wiring the money into the bank, there's not like a traditional closing of the title company most times. So we wire the funds and then usually they will overnight what's called the assignment of mortgages showing the transfer of that mortgage that you would record at the county clerk or the recorders officer ownership. It usually takes about two weeks to a month for servicing to transfer. Their bank was only using Wells Fargo just as a servicer. And we're using Madison. The banks have got to give the bars at least two weeks to let them know that things have changed. The bar gets a letter saying, hey, it's a good buy letter. Hey, thank you for not paying ABC bank. Now you got to pay Scott Carson Bank. We'll send out our own Hello letter as well and say, hey, we bought your mortgage. We're not a bank. We see that you're behind. Let's talk. Let's try to create something. If you want to stay in the house, please let us know we're glad to work with you in some sort of fashion. And then it's kind of off and running. And that relationship is getting built a lot of times borrowers want somebody just to talk to we've seen lenders or servicing companies that try to do everything automated. And some people, especially, I just said a little bit more seasoned in life can't hit the buttons right on a phone. And so there's even some deals that we target where we know that this one is being serviced by the server scene is being horrible. And so we'll target those assets knowing that, hey, they've got somebody they can talk to immediately, that we can get back on the right track. And that saves us a lot of money in legal costs where we don't have to foreclose on them. Now, we can actually get them off and running. I think everyone can relate to the frustration of just not being able to get someone on the damn phone. Amen to that. Yeah. There's such a lack of personalization. It used to be, particularly in the banking world. It used to be the neighborhood bank. And I'm not talking about in the 50s I'm talking about when I first got in the business 20 years ago, you knew all the faces. You had a relationship with the folks at the bank. You did by right by them. They did right by you. Now, like you said, you pick up the phone, you're talking to someone in Pakistan, someone in Ohio, someone anywhere but in Staten Island. If it's a Staten Island related asset, right. And there's something to be said for that. So just to be clear here, folks, what Scott's doing is as he's going through this process and he closes on the transaction. He's not getting the asset. He's just getting the paper, right. So he's only buying the note. So when he's buying this note, although he's doing a title report and he's taking a peek behind the curtain to see what's there, he's buying the note. And in many instances, there can be other liens and other issues that have surfaced around the property. So can you walk the audience through that? How does that work? How are those liens treated? How do you insure the property? I'm sure you're doing forced insurance, right. Can you talk them through what that looks like? Yeah. Great questions. I'm glad you brought that up. So, yeah, we do a title report to see what other liens are outstanding, whether it's a common thing is an O and E report, an owner and encumbrances report, because we don't need to pull a full title report back to when the property was created, because since we buy directly from banks 99.9% of the time, that title was still good because we're buying the existing loan. So we do need to see what kind of nuisance liens if the bar went and got a second mortgage. So if there is a big, like, second mortgage or a big thing that won't affect us if we're modifying the loan and working with the borrower, okay, those junior loans, it will stay in space if we modify or get them back on track the borrower's responsible for those still. Okay, but if we go the legal route, then if there is a big second lien and other lean on that, then we do have to go through using the full legal route to foreclose to wipe those all out. Okay. Now, in some cases, if the bar is willing to work with us and there's a second lien on our property, we'll do what's called a consent to judgment, and that's basically a legal proceeding where the borrower agrees to our judgment. We're not going after them for that. But it helps us expedite the foreclosure process to wipe out the second lien and anything else that might be clogging up title. Now, I don't buy a lot of junior liens. I like to be in the first lien position where the only thing that could screw with me would be God or taxes. Okay, so you always have to double check taxes, make sure the taxes are getting either paid by the bar or in a lot of cases, we'll pay the taxes to avoid a tax foreclosure or tax sale. All right. But we'll offer a second lien, like, usually $1,500. You can either get one $500. That's what's going to cost you a foreclosure or get zero and wait six months for us to foreclose. Either way, how do you want to play this? And you're wiping that second lien straight away. Especially they're over encumbered. Then there's no equity. Therefore, now if there is equity, then we just take you to foreclosure and we'll just go to the foreclosure. I'll get paid off in full and let them get $0.05 on the dollar. But you still got to double check that. You need a real estate attorney who's understanding foreclosures. You got to have an attorney that's licensed in the state you're foreclosing in. You mentioned something earlier about servicing company. Our servicing company is licensed in 30 States. They are not licensed in all 50 because they're not servicing loans in all 50. Okay, but that's important thing. There are some servicing companies out there that are only licensed in ten States, but they're servicing in 30 States. So you got to be very careful about that if you're going to use a servicing company. Hey, make sure that they're licensed in the state that you're going to be buying notes in. Yeah, I'm sorry. You just triggered a thought for me. Can you talk the audience through how you're dealing with the gain? Right. So is this a 1031 Abol occurrence? Is this short term capital gains? Is this ordinary income? So that's a great question. Unfortunately, in the note game, you can't do a 1031 exchange into another note, but there is a way around it. You could do a tax deferred sales trust. Okay. And basically set up if you're selling a property like, I get people that have 1031 exchange, they want to buy a portfolio like, no, it's not going to work there because it's not an asset client sell your property on a tax effort, sales trust. So it's like your owner financing and then the money you get from that, then you can use that money to go buy a portfolio of notes. Okay. Now when I'm selling a note, yes. If something happens, if I foreclose less than a year yet short term capital gains tax on that deal. If it's longer than twelve months, then it's a long term capital gains tax. Okay. Our investors that are investing with us, and we're sending them K One reports on an annual basis, depending on how they're either set up on either a flat percentage rate they're lending to US 6% to 10% or on some of our bigger deals or individual investors there on venture split. We're splitting the profits 50 50. So this is a lot of information, and I really appreciate you being as candid as you've been here. Kind of giving the playbook again. I think that this is the single biggest opportunity that I'll ever see in my career. I think that there's a lot of opportunity for folks out there that are interested in learning more. Scott Offline, you had made a very generous offer, which we're really appreciative of. Can you walk through the audience, the offer you had made and what you're going to extend to the listeners? Yeah. I mean, you're not going to learn the no business has a lot of moving parts, just like any bit of real estate. Okay. And I've had the good fortune to have some really great mentors that help walk me through and do things. So I teach kind of like I call it a different toe in the Water class monthly. It's a one day class. We call it Note Weekend because we'll live stream it live via Zoom on Saturday and then the replays are out by Sunday if you miss it. So it's a one day course, nine to five with yours truly going through, as they say, the Cliff Notes version of Note Investing. It's normally $49. But if you're listening to this and you use the code Casa C-A-S-A. We'll comp you into the class for free, and you'll get not only with the class, the replace that class. You'll also get a 34 page manual with a lot of forms and contracts, FAQs, and over another 10 hours of video training as we talk with vendors and other people that work in the note industry. So you have a good grasp. So it's really about roughly about 24 plus hours of training that we're going to comp in for. You guys being a loyal listener here Prendamano Real Estate "PreReal" in the PreReal podcast, and literally for free. So no weekend com when they ask for discount code type in Casa not case sensitive. And we'll copy the class for free. And you can attend the third Saturday, whether it's this coming one in November, the one in December or next year sometime. It's up to you. That's really amazing. I can guarantee you I'll be there. I'm going to try and make myself available to be there this coming Saturday. Well, it would be the 21st in this month, right? So I think I can do that. So I'm going to attend. This has been super helpful and very informative. I can't thank you enough for the opportunity to just sit and chat with you today and then to extend that generous offer to the listeners. How do folks find you and follow you? I know you've got, like, 33,000 followers on Facebook and you've got 120,000 views or 160,000 views on YouTube. You've got a lot of content out there. I'm a listener now, and I've subscribed. How does the audience find you? And how do we jump on the Scott Carson train, if you will. It's easy. Just go to our mothership on our website. Basically, weclosenotes com. That's our main website. Weclose Notes plural. Weclosenotes. Com and you can see the different podcasts. We have a different training. Like you said, it'll connect you to our YouTube channel, which is, I think we've got 1300 videos on there now. And check out the Note Closer Show podcast that we just recorded episode 640 today, and we surpassed the 1 million download Mark in our four year. So pretty tired. This was great. If you have any assets up this way, don't forget your local friendly realtor here. I already got you down on the hot list, man. Already got you down on that. There for you. You said New York. I was like, oh, yeah. Let's put that in place. There. Definitely. That's the biggest thing. There's opportunities. I mean, I got started my first deal. I flipped a note for one. $500. I wholesaled it. I bought a POS property in Detroit for $500 on a debit card from Wells Fargo Financial, and I called the local investor. Hey, I got a house. Would you give me $59 for the scrap? And he said, yes. Biggest trade. We bought a couple of million dollar assets. Like we said, we bought some hotels. We bought some apartment complexes in the day. The commercial market is about to be on sale. If you know where to go and you can really beat everybody else out there six to twelve months ahead of the traditional investor. God bless you. You've built an unbelievable outfit here. Best of luck, we will be in touch. So thank you so much for the time today. Thank you. Thanks for having me being an honor. And everybody make sure you hit that subscribe button and leave them a five star review as well. All right, do it for him. We love it. I appreciate you. Everybody. Stay safe.