Table of Contents - Turning Problem Properties Profitable with Scott Carson
Dave Debeau [00:00:08] Well, hey there, everyone, this is David Debeau, and welcome to this week's episode of the Property Profits Real Estate podcast. Scott, don't try to say that three times in a row too quickly. My special guest today is Scott Carson, who is also known as the note guy. And I won't let the cat out of the bag just yet. What that's all about is I'll let him tell us about that. But you're in for a real treat. This is something different. This is something that we haven't heard a lot about, especially as Knux. So it's got great to have you on the call. Are you doing, man?
Scott Carson [00:00:40] Dave, I'm honored to be here. And I'm originally from Minnesota so I can speak with an accent if I need to.
Dave Debeau [00:00:47] A single Canadian. That sounds like
Scott Carson [00:00:50] that. I know. Exactly. I know exactly. I don't like that, but I'm honored to be here. I mean, what's funny is we all well, I'm in the United States and we'll be talking about the United States. I do have quite a few Canadian investors are investing in the states here and doing that via buying distressed debt, buying notes.
Dave Debeau [00:01:07] So awesome. Well, we'll jump in exactly what that means in just a second. But first of all, Scott, you've been doing a whole real estate game for a long time. I think it's been over 15 years. Just tell us what sparked the interest. How did you get started? What did you get started?
Scott Carson [00:01:21] So like many people, I graduate from college in 2001. And we I grew up in a small south Texas town where my dad owns the local hardware store. So I grew up being basically slave labor out to do fix and fix anything. And I mean, so growing up, going to college, graduate college, got married. And of course, like many people, we love watching that factual TV show. Flip this house. Right. You know, it's just true and not.
Dave Debeau [00:01:50] And those statistics, you guys don't take that.
Scott Carson [00:01:53] Exactly. So but we're like, oh, hey, we could do this. I can fix anything. Sure. We won't pick out paint and carpet. Looks like I'm sure everybody can do this. So we went out, bought a couple of properties here in Austin. I was making good money as a financial adviser. Wife at the time was a private school teacher, was making six figures. We're like, hey, this be great realtors like, hey, you know, you can buy a couple of these, not just ones. We bought three houses, our primary plus two, another six months. And the only person that made any money in the deal was the realtor. And because like three months after we bought our second investment property, I got laid off and then the market tanked here in Austin because of a little computer company that rhymes with hell. Caldwell laid off a bunch of people. So our renters that were going to be the next landlords here we were. We owed more. And we were trying to make six mortgage payments, three first mortgages, three second payments on a primary school teacher salary. So I became a distressed borrower pretty quickly fortunate we were able to get rid of the two investment properties without having to pay anything but a short sale and keep our primary residence. I went back to work about a year later after being laid off roughly about nine months in the financial sector as a banker and started getting my assets out of a sling. And I had a buddy approached me who I'd worked with, and he'd been laid off, too, who started a mortgage company here with a couple of investors. And he was doing well and need some help, were traveling the country and internationally speaking on creative financing and owner financing around mortgage, the overriding thing, and then fixing and flipping properties like, hey, this is really what I want to do. So July 4th, the two thousand four, I put my numbers in the bank and like I said, being a full time real estate investor in mortgage interest since then.
Dave Debeau [00:03:41] Interesting. Interesting. So you started out trying to do flips. Flips didn't work out too well then it kind of morphed into this. So explain to us exactly because your main bread and butter now is. Buying distressed notes and mortgages, is that correct? So that's correct. What what is a distressed note or a mortgage?
Scott Carson [00:04:01] Great, great point. So between 2004, 2008, I started doing other things and learned how to fix and flip property and other other things, wholesaling and things like that. But when everything hit the fan here in the United States in 2008, there's a lot of people that were up either upside down on their house or they owed more than what the property was worth, or B, have been laid off through some sort of financial or health reason. And it could they were behind their mortgage. And so that's what a distressed debt or distressed note or mortgage is, that they mortgage on a property or the borrower either owes more than what it's worth, so they're upside down or the borrower is behind on making payments of some sort, whether it's 30 days, 90 days a year or three years, nine years I've even seen. So, you know, everybody out there is in the debt game or in the note game, whether you've got a car payment or a student loan or a house payment or any credit cards, we're just all on the wrong side of the payments. For the most part, we're paying out versus paying coming in.
Dave Debeau [00:04:59] So, OK, so in a nutshell, how does your strategy work? Why the hell would you want to buy a note that's already on a property that's upside down? Exactly. By Anota, on somebody who hasn't paid anything on their property for the last three months or three years or nine years.
Scott Carson [00:05:18] Great, great question, Dave. So the beautiful thing is that we as no buyers now as I've been doing this for over a decade, is that will we deal directly with banks and asset managers and mortgage companies that are originating stuff? And if a borrower starts falling behind on the mortgage, they're upside down. The bank will often sell that debt, sell that receivable a substantial discount. All right. Off of what's owed or off the value of the property. That's how we make our money is. I'll give you some basic numbers. Let's say a borrower owes one hundred twenty thousand dollars, one hundred thousand dollar house. They've been they've been behind by six months or greater. The back payments are going to be underwater or out of work. Well, depending on foreign default that mortgages are behind that borrowers, I can often come in and buy that debt at 50, 60, 40, 30, 20 cents on the dollar of what's owed or the value the property. So we make our money by buying that debt at a discount and then reaching back out to the homeowner to say, hey, hey, Dave, I know you're not paying your mortgage for 12 months and the bank wants you to bring all 12 months of your payments to the table and you can't afford that. Your house isn't worth one hundred one hundred twenty plus change. Can you start making your existing payment on time? And most people you have been out of work for a while can start making their existing payment. If they're not working again, they just can't come to the table with the extra overtime. Right. So we try to get them to start making payments, do a trial payment plans or a loan modification of some sort where we're either a reducing principal, reducing back payments, reducing the interest rate, being creative to really find a Win-Win scenario, because if we bought it at fifty thousand are about it. Fifty thousand, we've got a lot of flexibility. So if their interest rates at six percent on their mortgage and we bought it at 50 cents and they start making payments, that's like a 12 percent automatic return to us now. Now, our goal, I wish we could get everybody modified and performing on time. It doesn't always work that way, but about 60 percent of the time they pay on they start paying on time so that in 12 months, once we've gotten 12 months of payments, it's now considered a reperforming that we can sell that note, that mortgage back to Wall Street, to other hedge funds. Other banks will sometimes buy them or other investors at, say, 80, 85, 90 cents on the dollar because now they've got a 12 month payment stream. They're happy to take this. So now we bought it at 50. We sold it at eighty five. We make thirty five grand on that deal. Plus the twelve months of payments
Dave Debeau [00:07:51] are very, very interesting. Wow. OK, so yeah. So just make sure I understood that. So let's say the house is worth one hundred grand because of whatever they owe. One hundred and twenty on it isn't that difficult with penalties and property values going down a little bit. You buy that note from the motivated seller, which is the bank in this case, or the mortgage holder. You buy it for 50 grand. Now, I guess the question people would have is why the heck with the bank do that instead of just selling the property themselves?
Scott Carson [00:08:27] So the reason that the bank doesn't just sell the property is the bank's got to go through the legal process. They've got to foreclose. They've got to do all that, all that stuff in foreclosure. Time frames in the United States will vary. In Texas, where I'm at, we do everything really fast here. We can foreclose in like twenty one days, whereas in like New York, it can take two years to three years. And you've got to hire an attorney to talk to an attorney to have an attorney up there. OK, and so that's why they would rather sell that. To me and say, two weeks, let me take over that issue, they get 50 cents in the dollar, they can now take that 50 cent, 50 grand, go out and replicate it and leverage it 10 or 15 times the new loans and make those fees back versus trying to have to foreclose. Then they've got to list the property and fix it up. Banks are not in the business of owning real estate. They want to own mortgages. They want notes.
Dave Debeau [00:09:17] I think what a lot of people don't understand and correct me if I'm wrong, because you come from that industry is the bank didn't actually loan them one hundred thousand dollars in the first place. The bank probably only has 10 grand or five grand of their own money in the deal. And the rest is government money. Is that more or less right?
Scott Carson [00:09:38] That's a big chunk. There's off special. You're doing Fannie Mae and Freddie Mac. Yeah, there's a lot of government money back behind it or they've got 80 percent and there's government insurance there to come in and cover twenty two point twenty five percent in case the borrower does default for every hundred thousand dollars in loan. That's non-performing. That cost the bank basically fees on a million bucks because the way they leveraged it, the way they're making interest rate, I mean, for every dollar that's in the bank in twenty fifteen sorry, 2010, when it was the worst, banks were leveraged like 15 to one. So for every dollar they had lent out like 15 times. What do you think that number has gotten better? Gotten worse, Dave.
Dave Debeau [00:10:18] Think it's probably even worse.
Scott Carson [00:10:20] It's like 50 to one. Oh, my God. Yeah, that's it's too big to fail. All right.
Dave Debeau [00:10:26] We have we heard that
Scott Carson [00:10:27] before you came into that. Exactly. So that's basically what I did. We buy the debt at discount. We buy from a variety of different banks, regional banks, their lending usually in different. I do buy from some of the bigger banks, too, but our goal is to buy that note and then really get it reperforming. That's our biggest goal. And we do forclose about 30, 40 percent of the time where we've got to take the property back and go through the legal process or offer up money to the borrower for them to walk away,
Dave Debeau [00:10:55] to incentivize them to walk. They know they're going to get kicked out sooner or later. So you pay them to leave.
Scott Carson [00:11:01] Exactly. Exactly. You know, and so we have that happen some. But we did take some property back. Our goal then is to sell the property listed with an agent or keep it as a rental. Some people like to then take the property back, then owner finance it out to somebody else. It create their own paper. That's fine. We like to keep keep the reperforming notes for a while and then sell them off. And then, as I like to say, double down one bill becomes to two, becomes four and and go from there.
Dave Debeau [00:11:28] Nice, nice, nice, very cool. Well good job on explaining the big picture how that works. Even a dummy like me understands. It's so awesome. Awesome. Awesome. Awesome. So Scott. You're in Texas, things happen fast there, are you doing? Are you buying most of your notes in Texas or are you across the country? And how do you how do you find these things?
Scott Carson [00:11:48] So that's a good thing. I'm buying about 30 different states now. I love Texas, but we can foreclose so quickly here that the banks know that and they want more for their debt here. Same thing like California is very attractive. They want more. So I'm buying a lot. And like we call it, the Rust Belt states, Ohio, Michigan, Indiana, by a lot down the Carolinas. I bought a lot in Florida about 10 years ago. And that market's rebound strong. So by a little bit, but mostly in the areas where there's deals.
Dave Debeau [00:12:18] And how are you finding these deals are how are they advertise or is there is like a tax lien or attacks the sale? Right.
Scott Carson [00:12:27] If you don't have those, we don't have like a multiple listing service for distressed debt. So what we do is we target directly to banks. And so there are specific departments inside of each bank that handles this. And if people don't get anything else from this podcast episode, the names of those departments are very specific. Of the special asset managers is one title. The secondary marketing managers, the chief credit risk officers. Those are often the majority of the departments are named one of those three. And so we reach out to the special asset managers right away via email, phone call, jumping on LinkedIn and doing a search for them. Using like Lean Guide is another website you can use or like the pro dot com is a software that a buddy of mine put together. It kind of targets these banks. So we reach out to these internal departments and these bankers have all their whole portfolios that we'll often get emails directly from these asset managers monthly, quarterly just depends on what they're selling. That'll have ten hundreds, sometimes thousands of defaulted mortgages that we can cherry pick from. So one of things I love so much, Dave, is I don't have to do a lot of the old traditional way of marketing, trying to find deals, no postcards, no letters, no
Dave Debeau [00:13:43] standard signs that that's not very, very cool. That is that is super interesting. Now, Scott, are you talked about people investing? Doesn't really matter where you are as long as you understand how to market for this before we start recording. You said you've got some you've got some Canadian students or clients that are doing this. So it is possible to do it from overseas, from out of the country. Very, very briefly, kind of how does that work?
Scott Carson [00:14:12] So it's like buying anything else recently we've got students in Israel that are buying a lot here in the United States. People from Australia, Spain, London, Canada is just a short little Air Canada flight across the border if you needed to. But the thing is, with the Internet and the help of the Internet, you can jump on real True.com. You can jump on meetup groups and find people there that can drive by the properties and take photos for you. You can pull comments, you know, and I've got some issues that have just set up. Entities here in the United States are paying taxes and stuff like that here to the government to do that. And they're buying through their LLC here locally to control real estate, whether it's a they like the debt or they're adding to the portfolio as either rentals or else if they're keeping. So, you know, it's a different it's a different model than what most people are used to because you don't actually own the property. You own the debt. So you've got to think like a bankers mindset. We see a lot of fixing and flippers or landlords that try to get in this business and they're running the numbers based on that that pass around. That's not the case. Keep in mind, foreclosure time frames, you're often not going to be able to see inside the property because it's occupied. So you can't do a lot of kind of, I guess you say emotional equity, due diligence. What's what's the car look like? Are they keeping the property up to date? Other toys in the yard? How long have they lived there? The beautiful game is when we're buying from banks and other hedge funds. They have third party servicers that are handling the collections, the borrower. So I'm not the one on the phone with, you know, Ma Ma Smith in Columbus trying to negotiate with her. We've got to tell that is that but we get those types of notes from the seller so we can see that, hey, the borrower was really nice and tried to do something or the borrower told the servicer to go off, you know what I mean? So that helps us with a lot of due diligence, which obviously we're checking taxes and polling days on market. And, you know, if a borrower files bankruptcy that works in our favor, we can go to Pasir dot gov, which is a government website to see what's going on, the bankruptcy filing and really get a lot of due diligence that we do.
Dave Debeau [00:16:10] It's it's amazing to my friend. Well, unfortunately, we're running low on time here. So, Scott, I'm sure we're going to create a lot of curiosity around this whole thing. So people want to find out more about you and about the whole note thing. What should they do?
Scott Carson [00:16:25] Really easy. Just go to my website. We closed notes, dotcom, we closed notes, dotcoms. The website got all sorts of great information, a thousand plus videos on YouTube about this in our podcast. I'd love to give your audience a free book with every possible awesome.
Dave Debeau [00:16:40] How can they get that?
Scott Carson [00:16:41] They have different trained programs. But if you go to note, blueprint's dotcom slash free book note blueprint's dotcom slash free ebook, it'll be my 33 page book that I wrote to help give people a good knowledge base of how kind of what buying is and how to get started with it.
Dave Debeau [00:16:58] Scott, it's been a lot of fun. Nice to meet you, virtually, my friend, and I'll have you again on the podcast in the future.
Scott Carson [00:17:04] Honored to be here today. Hey, guys, go out. Do do Dave a favor. He didn't ask me to go in, hit subscribe on iTunes and leave a five star rating for Dave. He's doing an amazing job. Come on, people. Where else are you getting this great type of quality stuff? Do it now.
Dave Debeau [00:17:21] Got. All right, everybody. See you next week. Well, thanks very much for checking out the property profits podcast. And you think what we're doing here, please head on over to iTunes, subscribe read us and leave us to review. Very, very much appreciated. And if you're looking to create a regular flow of inbound investor inquiries about your real estate deals, then I invite you to attend one of my upcoming live online demonstrations. And you can check that out at Investor Attraction Demo Dotcom Ticker.