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16 min read

Rocket Your Dollar Ep. 35: Note Investing in a Down Market

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Scott Carson, President & CEO of We Close Notes discusses note investment strategy and the importance of flexibility and resilience in down markets.



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Thomas Young:

Welcome back everyone to Rocket Your Dollar. Today I’ve got Scott Carson with me. Scott is the owner and managing member of WeCloseNotes.com, an Austin based defaulted note buying company. He specializes in finding nonperforming notes on residential and commercial properties and purchasing these notes for their portfolio. He is also a nationally syndicated radio host of the popular podcast, The Note Closers Show, which has millions of listeners across 17 AM and FM radio stations and downloads in 130 countries. So I’ve got a pro on today which makes me a little bit nervous.


Scott Carson:

You’re doing a great job, Thomas.


Thomas Young:

Thank you for being here. I know it’s a little bit of a strange time. I’m recording this in shorts and a tee-shirt from home as we all are right now in this crazy time we’re going through, but we’ll hit on that a little bit later on. But Scott, first tell me a little bit about, apart from what I read, tell me a little bit about yourself and how you got into the notes business.


Scott Carson:

Yeah, no problem at all. So the note space is a pretty small niche compared to a lot of the other real estate investments out there. And like a lot of people, I got into traditional real estate investing back in 2002. Graduated from Southwest Texas State back in the day 2001, I bought a couple of rental properties and we bought our primary residence back when anybody could buy. I’d give credit, but we were buying, our two investment properties, 100% financing. We’re going to be the next landlord kings of Austin. And unfortunately, Austin went through a recession at that point. Dell Computers was through the employers with the two rental properties I had, laid off a bunch of people as they moved operations and shipped them up to Memphis. I walked into my office one day where I was making six figures and we all got directed to go to the conference room, which is never a good sign as they laid everybody off and closed our office here in Austin.

So I have made the joke that I was a distressed borrower at one point, me and my, well now ex-wife, were making six mortgage payments, three first, three seconds, on a private school teacher’s salary and trying to survive that way. And so I did whatever I could do for about two years to get my assets out of a sling. Saved our primary residence through Loan Mod and then also sold off the two investment properties just to cover costs. I mean, the only person that made any money on those deals was the realtor that sold me those properties. Fast forward a couple of years, I was back in banking and finance and a buddy of mine approached me and was starting a mortgage company with another real estate investor here in Austin with his spouse and they were traveling the country speaking on creative financing, owner financing, wraparound mortgages at big real estate investment conferences that were going on. Anywhere from 500 to 1,500 people.

And I was like, this is what I want to do. And so jumped ship from Chase Bank at the time and got into the mortgage business. And for four years had an apprenticeship where we were originating mortgages in 30 states for investors. But I was also learning the creative side of real estate investing from these two investors. And learned the nuts and bolts aspect of things. And for those four years were great. 2004 to 2008, I made a lot of money in the mortgage business. And then we all know what happened in 2008 when the music stopped, when the great recession kicked in. So, fortunately, I left the mortgage business. I sold my half of the company for a buck because that’s about all it was worth at that point. And started calling the banks and the lending institutions originating from trying to buy their distressed debt at that point down for dollars.

Like Will Smith in the Pursuit of Happiness, like The Wolf of Wall Street, just dialing. It was an interesting time here in Austin. I had a bunch of rental properties, I was going fix and flip. So there’s actually, I’d racked up some big properties that we were rehabbing down in Zilker Park, down in your neck of the woods here in Austin. And it was interesting because a lot of people sort of said, “You can’t do that. It won’t work. You’re a fix and flip for a renter.” That’s not the case. I was very fortunate that I just did not give a damn what people said and just stuck to the phones. 50 to 100 phone calls a day and that’s how I got into the mortgage business, the mortgage investment business by buying that stuff. I bought a couple of assets from Capital One, I bought a couple from Wells Fargo and kind of moved that route.

And 2010, I sold everything I had here in Austin, Texas except the dog and the truck. I got divorced and jumped in my truck and planned on driving around the country almost literally, it’s hard to believe 10 years ago, almost to this day, the way we’re recording is because April 1st, I was headed to Dallas to go on my first leg of this 30 city trip I was going to go to, to visit all the Major League Baseball parks. And along the way I had all these investment clubs reach out to me from seeing the blogs and the videos that I was doing.

And that 30-week trip turned into over three and a half years of nonstop travel, working with the banks, speaking in investment clubs, working with investors across the country. And it’s been an amazing roller coaster ride since then. 2014, I was the note educator of the year in our industry. I was runner up last year or the year before. And now I look back and we’ve helped thousands and thousands of real estate investors tap into the market of buying distressed mortgages and we’ll get into that why it’s a cool and very relevant strategy and helps keep a lot of Americans in their houses. We like to say, we’re trying to make America great again, one defaulted mortgage borrower at a time.


Thomas Young:

That’s fantastic. And it seems like it was a journey, not all over the place, but it seems like you touched a ton of areas of the real estate game, right? I mean you did everything from fix and flips, to having rentals, to buying notes now. And tell me a little bit about how you got into the education game sort of why you went that route.


Scott Carson:

That’s a good question. So I was sitting here doing deals all across the country from Austin, Texas. And this is before Facebook was big. I mean, LinkedIn was out, Myspace was still big at the time, if you have an idea, it gives everybody a chance to think about that. And I just was sharing what I was doing is a way to find and raise capital, because everybody didn’t understand notes. So I had to explain. I would spend three hours on the phone calling banks that were recorded on my Blackberry, CrackBerry, and then upload it. And would just share me failing or share me journaling what was going on as a way to keep track of what I was doing. And I had a couple of big short-sale conferences reach out to me and asked me to come in and speak. And they flew me out and said, “Hey, we want you to speak on what you’re doing on the note side of things.”

And I was like, okay, great. And so I get there, I’m talking about the note business and how it kind of works, discussing some things because most people didn’t know about it. And I had people bombard me as soon as I got off the stage, especially the one in Orlando, it was a big short-sell conference. People were like, “Do you have a class?” I’m like, “Yeah, I got a class. Sure, I got a class.” When is it? We’re still finalizing a date, but give me your business card. So that’s how it kind of came about as people just came to me and said, “Hey, can you teach us what you’re doing?” I’m like, “Okay, sure.” So we started teaching and first-class we had 25 people. Second class, I had three. And we started teaching workshops across the country as investment clubs would ask me to come out and speak to their clubs during their monthly meeting.

We started doing webinars and conference calls once a week, every Monday night called, Note Night In America. We still do them to this day. Where we’d get anywhere from 200 to 700 people on a call and just talking about some aspect of things because educating has a couple of opportunities with it. It helps you, A, find investors, people that either want to buy the assets now that they understand how to do this deal. Or B, they want to maybe, they see the work that takes into it, they don’t want to do it. They’d rather write a check to invest with you. It’s great.

Or C, it also can turn in another income stream for people that want to learn something and learn more about it for their portfolio versus actually getting into it and pulling the trigger. So it’s kind of those three aspects of it. It helps us move a lot more assets when we buy assets. It also leads to other speaking opportunities as we’re kind of an expert in our field and we’ve really, I think we’re the 50,000-megawatt blow torch when it comes to marketing in our niche. Nobody does a better job than we do, I’d say when it comes to marketing the note business.


Thomas Young:

Yeah, that’s fantastic. And I’ve had other guests on the show that they have these fantastic investment opportunities, be it oil and gas, real estate, whatever it is they’re working on, syndicators. And they end up in the education space because I mean, there’s such a lack of general knowledge about a lot of these asset classes. And one of the things at Rocket Dollar obviously that we preach is that these are good investment opportunities that you should be able to take advantage of, but the education is just not there sort of in the broad sense.

And so a lot of really good syndicators and investors become educators because to get over that gap in order from this is cool, this makes a lot of money too. I’m going to write you a check. I mean there’s some big chasm right there that has to be filled and you end up being an educator, which it’s a fantastic thing because, I mean, I’m sure you learn from other people that you’re educating different things and it sort of gets that flywheel going, which is fantastic.


Scott Carson:

It does. The big caveat is you still have to be doing it. You can’t just be an educator. And that’s the pitfall that a lot of people fall into is they just become educators and they’re recycling the same stuff that they did two years, three years, four years ago. You can’t do that. We’ve all seen educators that they do one deal and now they want to teach a class and be an expert in it, and you can’t do that. And unfortunately, we have seen some of that happen in our space. People like, “I can’t find a deal, I’m not going to mark it, but I’m going to teach other people how to do it.” And it’s like, no matter what you’re in, oil and gas, fix and flips, mobile home, self-storage, apartments, talking to people that are doing it and doing it regularly is one of the most important things you can do.

I mean the note space is like a country Western song with every deal. Sometimes it’s good, bad and ugly, and you need to know how to do it. Anybody can make money in an increasing market. It’s those that make it through downtime, a recession, a downturn in the market that come through that, those are the people that you want to deal with. You need to deal with people that have been through one or two market ups and downs to understand what to do and how to pivot when something happens. Like what’s going on right now. There’s a lot of pivoting going on and a lot of things that people need to kind of look at with their marketing and what they’re focused on to make things happen because a lot of people like to get in when the market’s at its peak and that’s the worst time to be getting in.

And we’ve seen that happen a lot with the multifamily markets these days, it’s overpriced and everybody’s trying to be an apartment syndicator. Those deals aren’t as sweet as they used to be two years, three years, four years ago. And so, we get a lot of investors that come over from that side that want to get into the note space or tired landlords that don’t want to deal with toilets, tenants and trash outs. They’d rather have the cashflow of the re-performing notes that we talk about and teach. So you got to be careful that what you’re doing and making sure it’s relevant in today’s market versus just getting bought up in a sales pitch. So, that’s my advice to everybody. The study, do your due diligence, make sure that the person’s walking the walk versus just talking the talk.


Thomas Young:

Yeah, that’s great advice because I mean, even if you’re driving down the street, you hear these pitches about where they’ll give you, you know, you get free lunch and learn how to make millions of dollars in real estate. And that’s just not realistic.


Scott Carson:

No, it’s a heavy sales pitch.


Thomas Young:

Making money is realistic, but it’s just ... the selling from the stage part of it is a big thing in the real estate world. And there are tons of not legitimate educators, but it’s a pretty easy due diligence. Just find someone that’s doing it, right? I mean, it’s pretty simple. Make sure they have a track record of doing it before they even start teaching it. And then I like to think that if they’re so good at it, the education side of it is not their main business, otherwise they’re probably not very good at the investment side. Because some of these things make a lot of money if you do them right. But, talking about where we’re at today, what are you guys thinking about for the rest of 2020? And it’s April 1st right now as we record. Tell me about what you’re seeing in the real estate world. We can talk specifically about Texas or bigger in general, but tell me sort of what you’re thinking.


Scott Carson:

So we’ve been capped out for a while. I mean every bear market is supposed to be seven, eight years for the most part, or the average we usually see is seven, eight years before recession kicks in some sort before the market corrects itself. And we were three to four years beyond that. So I think a couple of things are going to happen. I don’t think we’re going to see as dramatic a drop in the market when it comes to real estate and housing as we did 12 years ago. And we are going to see a dip. Now, what’s going to happen the most, it’s not going to be anything immediate that we are going to be able to dive into. I mean, you’re not going to be able to call banks and start buying debt at 30 cents on the dollar or five cents on the dollar like we did 12 years ago.

With everything that’s going on, with some of the things that are kicking in with the CARES Act and the President and other governors are doing, with them delaying foreclosures, 60, 90 days, delaying evictions across the board. For the most part, it’s going to be probably six months before you start seeing any of that start to have an immediate impact. I mean, you’d probably see a dip in some sale prices. I know that when I’ve looked at some of the MLS and talked to some of the different, my investor friends across the country if you’re looking at the market, there’s been quite a dramatic amount of price reductions on listed properties. And we were already seeing that in the higher-priced half-million-dollar homes or higher, that market was soft enough anyways. But, who’s going to be impacted the most by this, and we all know this, is going to be your blue-collar, first time home buyers, the entry-level homes.

That’s where you can see the most amount of impact, for the most part. It’s the have not’s that are being impacted. You look at the service industry, tourism industry, people that have been furloughed, laid off. I mean, if they say that we’re going to see a 32% ratio for unemployment, housing is going to be hit hardest. People can’t afford things, but like what just happened 12 years ago, we expect probably the governor to step in and bail the banks out, delay things for a while so that it makes it six to 12 months before we see any type of immediate impact where we can dive into that, buy the assets at a cheaper price, increase the number of foreclosures or defaults across the board. Here are some scary numbers and I don’t mean to be a fear monger. These numbers already existed well before we get this little catchy flu.

One in 10 Americans is already a month behind in their mortgage payment. 10% of Americans were already a month behind in their mortgage payment. That’s scary. And then you add in the number of defaults that people are on, student loans, auto debt, medical bills, credit card debts at an all-time high, 85% of Americans are one missed paycheck away from being in a tight bind and you’ve got the perfect storm for a huge market reset. A lot of defaults happen across the board, but it’s still too early to tell exactly how long it’s going to shake out. It’s going to be different on a state-by-state basis as well too. Now, Texas, and we love Texas. Texas is a great state for lenders. It’s pretty decent property values, but we also have the fastest foreclosures in the country. 21 days for the most part versus a state like let’s just talk about New York.

New York’s going to be the epicenter for a lot of this stuff. It can take you 18 months to two years to foreclose there. And now if it gets delayed six months before you can do anything, you may be an investor that a bank or a note investor that has to wait two-plus years to foreclose there if somebody doesn’t pay. So, that’s the thing that you have to keep in mind is there’s opportunity. You just need to make sure you have cash and expect to, if you can, one of the things that make us different in the note space is you’re going to have to be flexible in what your strategy is. If you’re going to be buying debt or mortgages or even the landlord business, you need to touch base with your borrowers or your tenants to see what’s going on. If you’re in a note space and a mortgage space investor, hey, be flexible.

If you’ve got borrowers that are late and can’t pay, talk with them. Hey, where are you working? Let’s figure out, let’s have some flexibility. Do we need to defer payments for 90 days again? Do we need to allow you to make bi-monthly payments and work that out? I mean, that’s one of the things that we’ve done. We’ve sent letters out to our borrowers. We even say, “Listen, hey, if you’ve been impacted by this, please let us know immediately. If you need a 60-day delay immediately, we’ll be glad to do that.” But, we’re also incentivizing, saying, “Listen, if you can pay your monthly payments, we’ll give you credit for an extra month.” So buy one, get one free, basically find an aspect of things. So it’s a little early to tell.

I mean, a lot of people are like, “It’s going to be a downfall. I mean, it’s just going to run in deals everywhere.” I’m still a little hesitant about going that route. Will there be an opportunity? Yes. But, it’s going to be different to see what happens in each state because each state’s different. Whether it’s judicial foreclosure, which is a longer period, or non-judicial. It’s going to be interesting to see what happens. It’s like what happened 12 years ago. You get all these foreclosures, the markets deplete. Courts weren’t ready for this stuff.

That’s why you had states like Florida that had an 18 month foreclosure time that took forever. Illinois was almost two years. They weren’t prepared for this. The banks weren’t prepared either, so I think the banks are a little more prepared because they’ve gone through that aspect of things now, but there are also a lot more flexible and I’m sure they’re eyeing and talking with the government about, hey if this does go on longer than expected, more than 60 days, they’re expecting to get some sort of bailout or so some sort of relief. I mean we’ve already started to see that with some of the different things that are coming out, but still too early to tell on where these final numbers going to be at with sickness, and defaults and foreclosures.


Thomas Young:

Yeah. And I think that right now, I mean, where we stand is everybody’s sort of hunkered down just trying to get through it. And then I like what you said about a lot of time, I mean we see these investments and notes and multifamily or whatever, and just remember that people are living in these places and flexibility and just communication is key. I mean, I’m a firm believer that we’ll bounce back from this and rents will be paid and people will be fine. And if it does get hard, it’s better to have someone in there that you’re working with that you know, that you know is doing their best to get whatever they can to pay half the rent or a third of their rent or whatever they can, basically whatever they can afford. And that’s going to at very least build some real goodwill with your tenants. And that is valuable. It’s better to have someone paying half than an empty unit, right?


Scott Carson:

Well, that’s important too. Any time you have empty properties, that’s not a good sign. I mean, something is better than nothing. But, vacant properties have a tendency, if it does get extreme, vacant properties have a higher hit rate of being vandalized. When people get desperate, they do desperate things. Stripping the copper, stealing the AC, going in and vandalizing things, ripping things out and you don’t want that. So it’s better to have somebody living in the property, keeping up the properties the best they can, versus it being vacant and just sitting there for an extended time.

Because nobody’s going anywhere for a while. And I have a tendency to think that we’ve done, who knows where it’s at, but we’ve got a 90-day issue that we’ve got a year-long problem around with layoffs and jobs. I tell you this if you can work, and you’ve been laid off, there are jobs available, but it may not be the ideal job. Nobody likes going in at midnight and stocking grocery stores or driving for Uber, stuff like that. But a lot of times you’re going to need to do that. Hey, it can be a bandaid and something coming in is a whole lot better than nothing, for the most part.


Thomas Young:

Right. And I was watching, I think it was a Dave Ramsey video about the same thing, but it’s just ... it’s a hard time and sometimes you got to do things that are outside of the norm for you or outside of the norm for your family. But at the end of the day, I mean, it’s about ... right now we’re kind of in survival mode. And we’ll be fine and we’ll get through it the way we always do. But like you said earlier about your investment piece, just it’s like it requires flexibility. And when this is all said and done, we can resume life as normal and start doing all the things that we do. But until then it’s going to take a little bit of flexibility and some resilience.


Scott Carson:

Yep. That’s the truth. That’s the truth, man.


Thomas Young:

Well, Scott, I want to thank you for being here today, man. I enjoyed learning from you and I’m going to put a bunch of the links to your resources in the show notes so that anybody listening, you can visit weclosenotes.com, but we’ll give you some different links to learn from Scott. And at the very least, with all of us at home, it’s a great time to learn about different investment theories and assets and different niches so that when we do come out of this, you’re more educated and maybe you can pull the trigger on a couple of deals that you haven’t done before. So it’s a great time to stay home and learn some new stuff, and Scott’s a great resource to do that. So, thank you again, Scott.


Scott Carson:

Yeah, no problem. And I’ve got a free, 73-page book if they’d like to learn more about the note business. They can just go to noteblueprint.com/freebook and they’ll download my 73-page book on how to buy real estate at 40% off and how to dip your toes into the note business.


Thomas Young:

Fantastic. And I’ll put that link in the show notes as well for anybody that wants that. I know I’ll go get it right now and start reading.


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