EP 424 – What If The Note World Ended

NCS 424 | Notes

NCS 424 | Notes

 

As much as we would like to live in a world of amazingness that comes with buying distressed debt and notes, it helps to remind ourselves to look to the other side and consider the opposite as well. Scott discusses what would happen if the market suddenly dried up and what he would do to invest if the note market came to an end and the world of distress debts are no more.

Listen to the podcast here:

What If The Note World Ended

I want to say thank you to everybody across the country that is tuned in to the Note Closers Show from the East Coast to the West Coast and everywhere in between, along with our audience in over 82 countries across the world. Thank you, from the bottom of my heart. What I wanted to discuss with this episode is something a little bit different. Somebody asked me this question via email. I thought it will make a great episode for the Note Closers Show. I’m heading to Orlando. We’re going to be there for a lunch and learn with my buddy, Tyler Sheff, at the Wyndham International Orlando Resort. We’re going to be there in Orlando for the fifth annual Podfest Multimedia Expo put on by Chris Krimitsos. We’re going to have a great time. I’m looking forward to hanging out with our extended podcast family and also some of our note family there in Central Florida.

The beautiful thing that I love to share with people obviously is the world of amazingness that comes with buying distressed notes. For this episode, I thought I’d talk about what would happen if the note market suddenly dried up? What would Scott do if there were no more distress debts out there or if it became illegal overnight to buy stuff? If Congress passed something that you had to have $1 million-bond or you had to have some weird regulation that made it impossible for investors to buy distressed debt. What would I do? What would Scott Carson do in the real estate industry? Many people don’t know that when I started back in 2002, as a real estate investor out of college, I screwed up royally. I bought a couple of investment properties and then I was going to be the landlord. I overpay for the properties.

I paid full value thinking than my rents would cover everything and that didn’t happen good. The market went a little bit a weird here in Austin. I became a distressed borrower trying to make six mortgage payments, three first and three seconds on my private school teacher salary. Fast forward a couple of years, I started learning real estate and investing, how to do some of the great things that a lot of people do to get creative about finding deals. I’m talking about chasing foreclosure lists. Some people are familiar with that where you’re buying that from Foreclosure.com. Here in Texas, we have something called the Roddy List. That’s in eleven or fifteen of the biggest counties, up and down I-35 from Dallas all the way down to San Antonio. It was a great list to buy.

I use that list to track down a lot of distressed debt, finding the banks, especially the smaller regional banks that were foreclosing on specific assets. I’m using those properties that were on the foreclosure list as my warm lead to calling the asset managers at the banks to say, “What else do you have on your books that you’re looking to get rid of?” Going back to my early days, I would probably do a little something like that. I would literally go back in, start pulling foreclosure lists and start recognizing the smaller institutions. If I couldn’t buy the debt, I get that. Let’s say Scott can’t buy the debt anymore. A law gets passed, a kneejerk reaction by Congress and a lot of private investors out there that are used to the note game can’t do that anymore. Weirder things have happened. Pass a law, you’ve got to be a federal charter bank that’s not going to buy debt.

Finding Subject 2 Deals

Weird things have happened. Here are some of the things that I used to do that I found deals that made a lot of sense to me. I’m not a big fan of chasing the foreclosure list because that’s the lowest hanging fruit out there. In some parts of the country, there are not that many foreclosures at all. It’s not easy to find and you’ve got to do some creative things that can help you. I would jump on the foreclosure list to see what banks are foreclosing on. I wouldn’t target the bigger banks. I will still look at the smaller banks that have stuff on their portfolio because then, I would probably start chasing the REO side of things, trying to see about buying those nonperforming assets once they foreclosed on and took the property back.

NCS 424 | Notes

Notes: The important thing about an option is once you get it, don’t hold on to it.

 

That would be my source, reaching out directly to the bank asset managers. That’s going to be a hard thing to do because most of the banks have their own realtors that are handling the resale and stuff. What do I do? I would try to target any of the ugly properties. I would target a couple of things as well. I would be looking at the foreclosure list and see about targeting for potential houses with equity. This is an important thing. Houses with equity that I could take over in subject-to deals. What’s a subject-to deal? That’s where you take over payments. The mortgage stays in the borrower’s name. They’re either distressed in one form or fashion. They either have lost their job, they want to move.

They’ve had deceased borrower, they’re going through a divorce. They need somebody to step in and take over the mortgage. Usually, there are arrearages that are owed. I would look at the numbers and see, is there any equity? Do you definitely want to buy notes that have got equity unless it’s got a really low interest rate, you could turn it around and wrap it where the traditional mortgage payment, a little higher interest rate would cover the underlying mortgage. You could rent the property out and make a difference between the arbitrage. We had Quincy Long on, talking about how you arbitrage to other people’s funds, paying them 8% and made a way above 8% on a deal. It’s similar to that. You’ve got a mortgage, let’s say it’s $1,000 a month, you want to make sure and not take something over that would only rent for $900 a month. You want to make sure and take something probably that rent for $1,500 a month or several hundred dollars above what the existing mortgage payment is, so it makes sense for you to do it.

You’d also want to have a licensed service. You would probably take that on. You’re making sure that the underlying mortgage gets paid out of the proceeds coming in. If you’re not in Texas, I will try to do a lease option that way. I try to get the borrower to put some down payment and an option to buy that property at a future date. Usually, 24 months out would be great. I would necessarily do it twelve months or less because of the fact you’ve got to probably get a little time to buy that mortgage down. Get a little bit different between the unpaid balance, what the value is and hopefully late appreciation kick in if the market is growing so that you’re building a little bit equity cushion in between there. Hopefully, that makes sense for everybody. Another thing that I would focus on, I would look at the subject-to deals where maybe the borrowers want to walk or maybe something I could take over, where there is some equity and the equity thing is a nice aspect of things.

If I could come in and take it over, then I get either owner finance it and do a wraparound mortgage if they allow that. I would basically turn around and try to sell the property off and make the difference of splits. Where would I find these types of assets? The foreclosure list is one thing. You’d probably have to bring some capital in, have an investment partner come in and fund a second lien or mezzanine level for short-term to buy you some time to do that. I only throw that out there because I’ve done a few of those in our day of taking stuff over and working through those. It’s a harder play to deal with a borrower because the borrower usually wants you to buy the property and it’s not saying it won’t happen. A lot of people are using subject-tos for years. It’s a great thing actually, it comes in handy on the commercial side of being able to take over loans. They were famous for it.

Residential Property

Let’s move back here to the residential side because that’s where most people are looking at. Here are a couple of things that I would do. I would look at the path of progress. What does that mean? I would pull up a map. I would go to the city zoning departments and find out where the permits are being pulled and looking to see the path of progress. Which way is it moving? Is it moving out to the highway, out of town? Is it moving circulators and moving one general direction? What I would do is I would go at least a mile out of town, and I would start talking to the borrowers or property owners in those areas and see if they willing to let me put an option on the property for a price. It’s a $100 option fee and makes it a five-year option. Why would somebody do that? The fact is, tell me what you’re looking for, I’ll give you a full price in what you’re looking for, just give me the option to have five years to take this down.

What’s going to happen in five years? I know it’s a little bit of a longer extended play but in some cases, you’re going to obviously have the path of progress moving on. What’s going to happen with a path of progress? New buildings are going to be built up. Things are going to be re-zoned. Property values are usually going to go up in the path of progress. I’m hoping that in that five-year period, the property values have escalated well beyond what I have the option on it and then I get to turn around and then sell that option off to somebody to take the property down and make the difference. If it was worth $100,000, somebody was willing to give me $100,000 on for the house, put an option on it, take that at five years and they signed off. I’m only out of $100 in five years and grew to one $120, $130. I turned around, exercise my option to buy and sell that property. I am making the $20,000 to $30,000 split between what I’m selling the property for the option.

The important thing about an option is if once you get it, don’t hold on to it. You need to file it at the county, so it becomes on titles. If the person then decides to sell the house to somebody else, your option shows up, and it blocks the sale out from underneath you. I know a lot of people who put in an option the property, but they never went in and recorded it. They had that sold out from underneath them. They got to go to court trying to get to things. The reason you want to put an option on and record it, spend the $30 to record at the county, it goes on the title that will clog up if the borrower or the property owners tried to sell it out from under you. Once they’ve agreed to that option, file it and wait. That’s a great play to do. You may want to do it on raw land. You may do it on farmland with the options outside because those values are going to increase. If you can wait around three to five years, you’re going to have some options that explode.

Options

I’ve got a friend, Greg Reid. If you’ve ever watched TV and heard of the Scorpion, he’s one of the smartest men in the world. He predicted that in another five to ten years, a lot of people would agree to this, Uber is going to take over and cause a lot of damage not only in the trucking industry with automated cars and automated vehicles. Once you have automated cars, it’s going to take away the need for us to have cars, which is going to eliminate a lot of the jobs for maintenance, gas, things like that, along with taxi cabs and also the middle-class is using Uber to survive. What does that mean long-term? That means there’s going to be a bigger divide between the wealthy and the poor. You’re also going to have a lot of places looking to recycle traditional gas-powered cars. What the Scorpion is saying is that he’s looking outside of town buying property and turn those into car recycling centers, which is a little bit different play.

It’s the same facet of realizing that five years from now property values outside of town are going to be a lot more valuable than they are. I look at Austin, Texas where we’re at and the economic development boards are looking at the city. You can see the size of the city by looking on that. They predict that in the next ten years, the center part of Austin is going to be twenty miles west of where we’re at. That means there’s a lot of growth going places. We’ve already seen that happening in Austin, Texas. You’ve seen that in a lot of areas around the country. Keep that in mind. If you want to look at some of the options, maybe you’re looking at some lands taking place, put an option on it and see if they’d be interested, if the homeowners and the property owners will be willing to give you a price. What happens if it doesn’t? The five years come and you don’t close. You’re only out of $100. You can release the option and move on if it doesn’t work out that way. It’s a cool little play to look at where the market’s going.

Look where your cities are going and identify the opportunities as things get reclassified or rezoned from residential to commercial or vice versa. That’s one of the plays that I would do, and I would probably return a little bit more capital and make money a little bit faster. I would not spend my time chasing out foreclosures. I wouldn’t be mass mailing yellow letters out to zip codes or postcards like that. I don’t think that’s a smart play, especially when you’re in such a competitive market, you’ve got to do things a little bit differently to find deals out. You can’t do the same play that everybody’s out there making things happen. What would I do? First thing is I would go down to the city or cities that I’m investing in and meet with the code enforcement team, the zoning team. The code enforcement team is the better one. These are the individuals that are driving around your city and looking at properties, make sure that they’re up, like code enforcement.

NCS 424 | Notes

Notes: Just because you’re upside down does not necessarily mean it’s a death sentence for the property.

 

They’re making sure everything is up to the par that you don’t have trash or you don’t have a couch sitting in your front yard or that your property is maintained. While these are a big pain for some investors, they’re a great way to find distressed properties, either vacant properties or properties where the property owners may not be able to maintain. A lot of times those properties are starting to get fines. If you can track down the borrowers, whether they’re out of state owners, maybe they’re elderly that have moved out of the property, moved in a home, moved with other family or people that have moved out of the city, you may be able to find a great deal. You either takeover subject-to or it may have some equity that built in because they probably have not maintained the property for a few years. If you’re able to come in and do some light rehab, fix the zoning issues, you may be able to get those fines removed and have quite a bit of equity on an asset that you can sell off and make some quick cash on that stuff or owner finance it and turn it rental.

There’s a variety of different things. Just because you’re upside down, it doesn’t necessarily mean it’s a death sentence for the property. I know quite a few investors who have taken over the two properties where they were upside down initially because there was a low payment on the property. The PITI was substantially less than what market rent was, or the interest rate was extremely low compare, where they could finance the property put a lease option borrower into the property. I’m in Texas. We can’t do lease options beyond 180 days, it’s illegal. You can do a lease option to an investor, to an LLC. You can’t do it in an owner occupant. In other areas of the country, you can still do lease options left and right. As always, I would highly recommend you meet with your attorneys and legal counsel. Make sure you’re following proper laws in the state and city that you’re investing in.

Code Enforcement

Another aspect of things that I would do besides looking at options, besides looking at subject-tos, is talking to the code enforcement and code enforcement officers to find out the assets that they have trouble with that they’re glad to share that information with. Here’s a list of properties with code enforcement issue that’s public knowledge. It becomes a great place for you to do work and go forth from there. Going back to code enforcement, I’ve had some of my buddy investors who have targeted houses that were burned out. Why? Because they’re often already paid off because the insurance companies are coming and made a claim and paid it off. The homeowners may not want to go through the trouble of fixing the property up. I heard someone say they have moved on and gone somewhere else. At least for opportunities for you to come in, pick up a shell of a house very cheap and if you want to do some heavy rehabs or a full rebuild on the property, that leads for an opportunity for you as well.

Talk to the zoning board and see where the path of progress will be. Often, they would be able to tell you what they’re expecting things are going to. I reach out to the code enforcement people there as well. Sometimes they’re not the easiest to deal with because they’re dealing with finding people on a daily basis. If you see weed liens on different properties, you may want to take a look at. Oftentimes when the city puts a lien on a property, they file a weed lien. You could go down or jump on the county records and search for anybody for any weed liens or any demolition orders. You’ll often see some of that stuff at the county, and those are opportunities for properties that are obviously distressed.

One of the most effective sources we used when I was living here originally before I started moving out is I would use legal letters, but I would only use them, for one thing, every week. What was that? I would open up the paper and look at the obituary section. People pass on. People are dying, unfortunately. We have more people dying on a daily basis. We have more people getting old than being born. I heard a statistic stating that. The people are getting older day in, day out. They often have property, and a lot of times they don’t have a family that’s there to help them out with some things. Sometimes they do, but they’re not present to help with the property. If the note business died overnight, here’s where I would go. I would pull up the obituary section in the paper or online and track who passed away.

I will simply jump on the county appraisal district in the surrounding two or three counties and see if they own any property in the area and then I’ll send them a letter. If it was John Smith that passed, “Mrs. Smith, my name is Scott Carson, I would like to talk about potentially buying your property at this address.” It’s for their primary residence, or it is an investment property, whatever it is. I’m mailing to the mailing thing. This is a thing that I don’t usually expect to get a lot of immediate responses to. Sometimes you will, other times you won’t and you have to be prepared. It’s probably not going to be the borrower, because if the borrower passed and they call you, that’s one heck of a resurrection. I’ll tell you that, you don’t want to mess with that. That’s the power of God right there. What I’m getting is probably going to get phone calls a week, two weeks, 30 days out from either a family member, a spouse, a child or an attorney handling the estate. If people are passing and they don’t have a will in place, or maybe they have property, that may need work.

There are people calling you and say, “How do you know my father? How did you know my husband?” I’m sorry, I did not know your husband. I was simply mailing letters out to people in areas of the town that I’m looking to buy property in. This has resulted in some great deals. It’s also a true win-win because in most cases with probate properties, the family members don’t have the money to come and rehab. They don’t understand what it takes to get the property up to code or to re-fix it. They don’t have the time or the patience a lot of times. Your biggest issue is going to be dealing with borrowers who think the property’s worth something when realistically, it needs work. “It was full value, here’s what it looks like, but your property’s not full value. It takes a lot of uptake and things involved there.” I have found some great deals that way. That would be one of the things I would highly recommend. If you’re in an area and start dealing and you want to add a separate tool to your tool belt, that’s a great place.

You do have to be sensitive to the family. I totally agree with that. You don’t want to be insensitive on the phone with them. What you don’t want to do is say, “Let me come out and take a look at it immediately.” Be very sensitive, “I’m so sorry for your loss. I apologize. If there’s anything I can do, please let me know. I’m interested in potentially buying the property of your dad, husband or if somebody had other property you’re looking to move, I would love to take a look at and maybe help you out if you’re dealing with that.” Sometimes these deals may take a little while. They may need a month to get everything settled. They may need six months. Especially if there are multiple children and there’s not a will involve in a lot of times, then you’ve got some issues. You’ve got to work through, getting everybody to sign off on that.

That’s a process. The more cooks in the kitchen, the less chief to get the work done. That would be one thing that I would do. I wouldn’t be sending postcards. I’ll be sending out personal letters, “I would love to talk to you about buying your property,” or properties, if you came across multiple assets that they own and go from there. Occasionally you’ll get people that are upset. You have to understand, and you have to have a thick skin when it comes to doing that and marketing for that. There are people passing every day. There are people passing all the time. That would probably be the only direct mail that I would do besides mailing out to the code enforcement if I could track down the homeowners. One of the most interesting deals that I did early on in my real estate investing career, I was living in Round Rock, Texas. This is after I get rid of the bad assets and was living back in Round Rock. There’s this vacant property right around the corner from my house.

You’ve probably experienced as you’re driving by, you see an ugly house or house who needs some work and who owns it. Especially real estate investors out there, “We want to buy that house.” This is one of the questions I get from people all the time. I want to buy empty houses down the street. That’s not always going to work. I did a little research on this house, a nice-looking house corner lot, two-storey house. I tracked down and found the borrower’s name. That started in the searches. I jumped on White Pages. I jumped on Spokeo and found out that the borrower lived in a different city in a small South Texas town. I had to find who they worked with for as well. I couldn’t find a phone number to the address, but I could find the next-door neighbor to him in a small town. They had a phone number. I did two things. I sent two letters. I sent a letter to the borrower in a small town, and I also sent a letter to the next-door neighbor, “I’m trying to track down such and such. I’m told that they live next to you. Could you please pass on my information? I could talk to him about buying their house in Round Rock, Texas.”

NCS 424 | Notes

Notes: The more cooks in the kitchen, the less the chef gets the work done.

 

I found a working number. I called the neighbor and I said, “I’m Scott Carson, sorry to bother you at night. Do you live at such and such address and do you know such and such who lives next door?” The guy is, “Yes I do. I worked with the guy,” which I was, “That’s awesome. I don’t want to bother you, but I like to talk to him about buying his house in Round Rock, Texas.” He’s like, “I work in the night shift. What I’ll do is I’ll pass on your phone number or email address, and I’ll let you know what he says. I’ll have him give you a phone call.” Sure enough, next night I get a phone call and it’s the borrower on the phone. We’re talking back and forth. This poor guy had gotten divorced. In the divorce decree, he had to pay the mortgage but it was up to his wife to sell the property. His wife had moved out of the house. Probably his wife has moved on with somebody else. He got this nice house in Round Rock, Texas that was falling apart. It needs some work.

Divorce Attorneys

Nobody had lived there for over two years, and he was trying to get his wife to sign off on selling the property. She wouldn’t get around to it. Finally, since he was paying the mortgage, we were able to negotiate, because she was all worried that he would get something in the process. I had to negotiate with a very combative husband and wife spouse. One thing you might want to look is to talk to divorce attorneys. Divorce attorneys will often run into this as well for great leads for people that have houses that need to sell things. It’s another source for you to find if you’re looking from different deals if the note business ended overnight. Divorce attorneys, great place to find properties that are motivated to move and can get creative sometimes. We’ve dealt with our fair share of divorce not only on the note side but also previously on the note business doing that stuff. I did negotiate. I was able to negotiate a subject-to. The borrower’s like, “I’ll be at the house this weekend. I’m coming up. Why don’t you meet me there and we’ll talk?” In the same week, he called his wife. The ex-wife called me and we talked on the phone.

I’m like, “It’s not worth what you think because it needs work. It’s made barely what’s owed on it. It needs about $15,000, $20,000 worth of work to get it up in sellable condition. Plus, you’ve got a couple of weed liens are going on the property. There are notices from the city.” She’s like, “You’re right. Whatever you can work out with my ex, I’ll sign off on it.” I met the borrower at the house. We walked through it. It needs some work. They let some stuff and it was dirty inside but it wasn’t trashed. The shower stall lights and towels that were falling off, and it had some older appliances. It definitely needs lawn mowing. I have my checklist of the things, closing costs, and value. When I talked, I deducted things off. It was a nice checklist that I could show them, “Here’s what it would cost basically to fix this up and get this to a place to sell it. You’re upside down on a property and I know you don’t have the $17,000 to come to this. Why don’t you let me do this? Why don’t you let me take over the property subject to, I’ll do some work on it, but I want to either start making the mortgage payments or you can owner finance it to me for exactly what you owe. We just do a wraparound mortgage.”

I took a little bit explaining to the guy, but about an hour and a half later, I walked out of the property with the key. I took over the property subject-to and he paid me $100. Why did he pay me $100? Because the yard needed mowing. I said, “I know a kid down the street that can come in and mow this really fast if you want to avoid a weed lien.” He pulled out $100 and gave it to me. It was one of the funniest things walking into a house I never have seen before. When I walked out, I had the key. I had an agreement to take over the payments and I had $100, which I paid the neighborhood kid $20 to mow the lawn and I pocket the $80. I know some people like to door knock on things. I don’t like door knocking. I don’t think it is a valuable use of my time. If you have a code enforcement list or you see other things like that, then that’s an effective aspect. Driving around, door knocking, you got to be careful. There are too many weirdos out there, too many times things can happen and things can go wrong for you.

Those are a couple of things to do. Let’s do a quick recap. I would target properties that I can take over subject-to. I would target property that’s either got equity or very low-interest-rate payments. I’d be very hesitant to go anything above value unless it’s the low-interest rate that I could do a wraparound mortgage and still make money on. Be very careful about this. There are people who get all that stuff and take subject-to, but not making any money. That’s not good at all. I would look at the path of progress, see where the values are going and put options on those assets. The land or other properties outside of town, talk to people. It’s cost you about $100 an asset, but you have nothing to lose an aspect of it. Check out the Code Enforcement Office for properties that have bad enforcement issues. I checked out the weed lienss, where the lawn’s not being mowed. There are issues with that. I would buy this property, and then I would knock to the next-door neighbors and see if I couldn’t track down the borrower’s information, if they knew the name specifically or any other phone numbers.

If the house is vacant, the next-door neighbors may know the owners still. They may have a phone number. They may have been asked to watch the property and if they see anything, they give me a phone call. People are friends. People pass brownies and especially in a good neighborhood. Often there will be kids or things, and people will know each other in the neighborhoods. Don’t be afraid to talk. You’d be very careful. I had been shot at a couple of times door knocking on next door neighbor’s houses. One time it happened in Gary, Indiana. I came out knocking and looking at a vacant property came across from an asset manager’s list of property. I saw a neighbor four houses down and up the back side of the block by the lawn. I walked down and talked to him. He was upset that I was in the neighborhood. He went into his garage pull out 44 Magnum, fired off a couple of rounds over my head.

I’ve had a car shot at before. I am driving through a neighborhood. I avoid rough areas if I can. Avoid your crime-ridden areas too because it’s often not usually good spot as well. Those are some of the crazy things. I would not waste my time sending out yellow letters to mass neighborhoods. I would not send out postcards to the foreclosure lists. That’s the lowest hanging fruit that everybody is going to be mailing out to me. I start getting yellow letters in the mail from people all the time. I make a phone call or two, nobody responds back. It’s unfortunate. Most investors don’t take their business seriously. That’s what I would do if the note business wasn’t around. I would target smaller banks that are hitting the foreclosure lists that may not have realtors up in the REOs. I would also target smaller banks in different parts of the country and say, “What do you have on your books and other areas, as I have relationships in this neck of the woods that I may be able to help.”

Negotiate With Funds

One of the things that I would do as well as I would try to negotiate, especially in some of these real estate funds that are buying the larger portfolios notes. They’re going to have stuff that’s on their books that they can’t get off their books because if they’re selling stuff off, they’re selling off the nicer, the top tier and the middle tier of assets. They’re often left with a big chunk of bottom tier assets. They are a bottom tier for a variety of reasons. It’s not always that they’re trashed out assets, which happens. They’re just lower valued stuff that they’ve taken on, it’s not worth their time. Oftentimes you can negotiate with these hedge funds and not banks. Banks aren’t going to do this. Real estate hedge fund, especially as you get to the last quarter of the year or the first quarter of the fiscal year, we’ve been able to use a non-exclusive option agreement. This goes back to an option, to begin with. An option agreement with the hedge fund for the whole list, for whatever they’re looking to sell it.

That doesn’t mean you’re closing the whole thing. What I like to use with a non-exclusive option agreement is a $10 option agreement. It basically says, “Give me your price on these. Give me 30 days, let me be the only person to go on and try to market these deals for sale. Anything I make above your price, I get to keep.” That’s worked out well in the past. I worked with one hedge fund who sent me 75 assets on a tape that I’d seen them shop around. It wasn’t all ugly assets. There were some nicer assets that have a smaller value in it in different parts of the country. I used marketing skills to find investors in an area they’re looking for these properties, whether it’s jumping on Craigslist, Meetup.com or Google. There are many different ways that you connect with people across the country from where we’re at. You don’t have to be in that neck of the woods. That’s a great place to use it. If you don’t sell it, you walk away from it, no money out.

If they find somebody and then they close on it, I ask them to provide a copy of that contract because I would have first right of refusal to be able to take that property down is also in the option agreement. If you’ve been anywhere with our mastermind meetings or heard us talk and doing coaching call, stuff like that, I’ve shared that with our WCN Crew Membership, the option agreement, for people out there. I would probably focus on one aspect of that and see if they’re interested in selling that property off because they’re tired landlords. I don’t necessarily think I would approach them to see if they would buy notes from you because they’re landlords. They understand the rental game. They may not understand the note game aspect of things.

NCS 424 | Notes

Notes: Do not waste your time sending out yellow letters to mass neighborhoods. That’s the lowest hanging fruit out there.

 

We do see it, especially eviction leads when the borrower is out of state. They’re often tired of dealing with it, especially if they do it with themselves if they don’t have a property manager in place. Let’s face it, good property managers are very hard to find out there. Contacting the eviction leads, out of state borrowers is another lead list they can pull. We’ve got a buddy Steve Richter who provides a lot of data for people. Expired listing liens are one thing a lot of people are using.

That was a good list that we would work on to see bargaining, maybe let us take over properties subject-to or owner financing. They were either trying to sell a property, and it didn’t sell, so they fired the agent. Be careful because a lot of times with expired listings they’re getting bombarded by new realtors trying to get the listing. We would do something a little bit different instead of say, “We wanted to list your house.” We say, “We’d like to talk about potentially buying your house on terms.” My good buddy, Chris McClatchey loves working with expired listings of people that are having a hard time selling the house. I’ll give you full value, your full listing price but I want you to give it to me at 0% interest. Over time, that way your principal is reduced very rapidly by paying the down payment. We ended paying a whole lot less than you would if you financed the property. I’ve used that 0% interest rate when we do some loan mods with some of our borrowers.

Commercial Note Investing

“If you start paying on time, I’ll reduce your interest rate to 0%.” Every bit of principle goes towards the balance of the loan which is paid off faster. I bought the note at a discount. I’ve got a lot of room, a lot of flexibility. If I paid $20,000 for the note, I might recoup $100,000 over five years. That’s a great return on investment for me. It’s a great return. I don’t mind giving somebody 0% interest if they’re going to work with me for not paying on time. God forbid if anything happens, legislation-wise to eliminate the opportunity of us buying distressed debt. I’ve been doing it for over a decade. Closing on thousands of thousands of note deals performing, nonperforming, residential, commercial. Let’s talk a little about the commercial side of things because a lot of people out there liked the idea of commercial. They often don’t know how to get into it.

Commercial note investing is probably where I would spend most of my time. What happens when you have legislation take place? It’s usually to protect the consumer. It’s usually to protect the owner occupants. I doubt that they would pass something that would stop you from buying commercial loans, commercial notes. In that case, it’s often buyer beware, not borrower beware. If they did away with that in the residential side, I will jump in and focus 100% of my time on a commercial note space. Commercial notes, if you to realize, take a little bit more time for the most part. There is still a huge opportunity in a specific area of distressed notes that would still be good I believe even if that stuff happened. What am I talking about now? I’m not talking about your big $5 million class A apartment complexes. If you’re interested in buying apartment complexes, stay away from class A’s, no offense. They’re overpriced, and there are enough people chasing it.

I would be looking at your Class B, Class C, Class D that would have some ability for you to increase the property value moved from there. Besides apartments, let’s talk if I was to be focused on things, I would be totally focused on the sub-million-dollar properties or the sub-million-dollar notes that a lot of the banks have on their books, especially commercial assets because they have a lot of the stuff. The bank’s likes stuff with two commas in it. That’s not saying you can’t find a lot of great assets. There are a lot of great commercial properties we see across the country that we can pick up the debt at a pretty good discount that’s still got quite a bit of value. It’s a great property. It’s a great asset. It could be a mixed-use building. It could be a strip mall. It could be a small apartment complex. It could be a variety of different things. It could be a big box store, a small box store. There’s a lot of opportunity in that commercial market space. You have to know exactly what you’re doing. It’s not like residential, one coming in and pull comps on it. It’s a whole different animal when it comes to the commercial notes space.

That’s the thing you have to realize is you’ve to get the full comp, you’ve got to pull your own numbers, you’ve got to try to check cashflow. If it’s a vacant property, the value is dramatically reduced than if it’s an occupied property. Commercial is all based on cap rate and net operating income. If there are tenants in place and have to try to find the leases, find out what those are running at, what kind of cashflow is coming in? Is it occupied? Is there a potential for you to increase the occupancy rate? There are a lot of moving parts of this. I’ve got some friends that have moved into the self-storage space. It’s a great space. You have to be very careful when you’re looking at a self-storage property that’s not 100% occupied. You’ve got to check a five-mile radius or ten-mile radius in some cases to see what the average occupancy of your other self-storage facilities is. They’re all at 65%. You’re only going to stay at 65%.

You don’t want to be the person who ends up dropping rent rates and then the killing the market that way for profitability. You want to look at where your rents are compared to the market. “Do I have the opportunity to increase my rates? Are we oversaturated that’s why we’re not going to see an increase above 65%, 70%?” Those are things that you have to keep in mind when you’re looking at it because the banks will often try to sell you on, “If you get 100% occupied side, you’ve got a lot of upside to it.” “Sorry, Mr. Banker. Your commercial note isn’t as attractive as you think it is. Here’s why.”

Before you dive into commercial, you’ve got to learn to walk and crawl and bust your knee up on some residential stuff first. That’s my opinion to everybody out there. While you have the opportunity right now, learn the business, learn the systems. Commercial notes are a whole different ball game in the space. It may have great big checks, but you still want to have your bread and butter coming in from the nonperforming residential. If you like performing notes, great. Focus on the performing side of residential or in this, “If the note world dried up,” aspect of things. I doubt it would affect the commercial note space. I believe you’ll still be able to see a lot of great things available out there. Commercial lending, being able to take over the subject-to.

I would also immediately jump on Scotsman Guide. That’s one of my favorite websites for commercial notes. I would see who’s originating, who’s a portfolio lender, who’s holding on to assets in the portfolio, especially the market that took a dip south. We’re going to see that. We already see that in parts of the country. Your smaller balance commercial loans are clogging up a lot of the bank’s books, and then you move it off their decks. You’ve seen an opportunity coming and you see a lot of the empty big box stores being turned into workspaces or executive suite stuff. You see some hotels being converted to apartments. You see some apartments being condo-converted and being sold with owner financing if they’re individually metered. There are a variety of different ways. You can see some oddly shaped properties turning into self-storage because self-storage is flexible and very cheap to build out units as well on that aspect too.

Comments And Questions

We have a comment, “I had an offer for a carwash. It was hard finding the numbers and doing my due diligence. I walked away as an investor. I don’t have the experience yet.” Carwashes can either be profitable or they can be a big drain. I would highly recommend if you’re going to buy an asset and you don’t have any experience on it, reach out and talk to other people that have the same type of asset. Those are great individuals that may be looking to add another carwash or another thing to their portfolio, and they’d be willing to pay you as a bird dog fee. I would make one stipulation that they teach me how to carwash.

NCS 424 | Notes

Notes: Before you dive into commercial, you’ve got to learn to walk, crawl, and bust your knee up on some residential stuff first.

 

You want to learn, but you’ve got to realize making something is better than not making anything at all. Reaching out to other carwash companies and say, “Are you looking for another location? I may have a lead on something.” A few years ago, we saw a lot with gas stations. We saw a lot of hotels, motels. Hotels and motels, you’ve got to make the same thing. You’ve got to check your rack rate. You’ve got to check a lot of it. Is it a national chain? Is it flagged? What’s the situation? Does it have a lot of deferred maintenance? What’s the issue? A lot of the same thing you’ll be doing on the multifamily side. That’s why people like apartments because you’ve got to put your management on site and take it up.

Another thing that I’d probably look at too is I’m going to find a commercial asset that was distressed, but I couldn’t buy the note yet. I would maybe look at doing a master lease on the property. What’s a master lease? A master lease is where you come and negotiate a flat rate and it’s like a wrap around. You’re able to say, “I’ll pay you $4,000 a month regardless, and you’re going to make the income above that $4,000.” If you were able to rejuvenate the property, get it up to $6,000 or $8,000, you’re making a difference. Basically, you’re leasing the whole property, the whole hotel, the apartment complex out to the underlying borrower and they walk away. Master leases, not many people do them, but it’s still a great way to make some money on some crucial stuff.

We’ve been in this business for a while, so we often know a lot of experts in specific fields or specific niches that we’ve dealt with over the years. I know people that enjoy carwashes. I know people that hate carwashes. It also depends on what market you’re in and what markets these assets are in. Some could be good, some could be bad. When you’re looking at an asset, or you’re looking at markets, you’ve got to make sure that your choice of marketing is going to work in your neck of the woods. I live in Austin, Texas. We’re overpriced for the most part. It’s not saying that yellow letters don’t work. That’s not saying that postcards don’t work for most of the time. It’s just that it’s oversaturated. There’s not that much inventory here that’s available. We have a very strong real estate market here. We see less than three months of inventory on the MLS. We see a few distressed assets, but it’s not much. Those are overcrowded. What I do is I stopped buying in my backyard and start going outside of my backyard.

I first went to Dallas, then Houston or San Antonio. Then I moved beyond that into Florida, North Carolina. What I did was I want to spend some time there, learned the market, talk to people, spent some time there developing relationships. I talked with an individual in Dallas. He’s like, “I want to get to the note business and I want to do this and this in Dallas.” I’m like, “If you’re just going to look for nonperforming notes in Texas, you may want to save your money and go do something else.” He’s like, “What?” I was like, “No offense, you have to look at doing things outside of Texas to find deals on different markets.” If you were an engineer and you’re suffering from over-rentals-paralysis, no offense to any engineers out there, you have to realize that the distressed notes, there’s a whole lot of different strategies that can go into it. There’s a whole lot of strategies. By just having it on a spreadsheet isn’t going to help things. You have to understand it and do some common sense underwriting. A lot of people struggle with that. That’s what I told the guy. I was like, “You probably need to focus on one or two states to get things started. Get educated and learn how to do what you’re doing effectively and go from there.”

If you’re reading for the first time on the podcast, do yourself a favor, go to WeCloseNotes.com. Check out our videos. You’re always more than welcome to text the word, NOTES, to the phone number 72000. That will get you to opt into our system and send you over 80 hours of video and some of our coaching calls and also a nice informational spreadsheet. Text the word, NOTES, to 72000 to take advantage of that. It’s got a lot of information, a lot of education on that aspect of things. One of the biggest things I hear from people and it frustrates me is people say there are not enough deals out there.

When I hear people talking about not enough deals, it usually comes down to one thing and one thing only. It comes down to people won’t market for deals. They won’t take the time to market in the 21st century. As I always like to make the joke, Scotty is here to help beam you off. Marketing is what separates those that stay down here from those that excel. If you know how to market smartly, effectively, then you can often hit over a much larger audience for a lot cheaper than what you would for those that are buying postcards, dropping yellow letters, door knocking.

Marketing is what separates it. Every time I go to, whether it was in Tampa at the Tampa Note Meetup group or going to San Diego for the San Diego Note Meetup group or maybe back to Orlando for our lunch and learn. I know that’s one of the big questions, “Where are you finding deals?” These are the things that I preach all the time. Build your database, a list of asset managers especially targeting banks for notes, and reach out to them. Drop an email out once a month and once every two weeks maybe. Jump on LinkedIn and start contacting asset managers there. Jump on different mortgage licensing websites in your state.

A lot of times your state will publish a list of everybody who’s licensed to do business in that state that you can download. A lot of times they’ll give you the contact information. Those are some of the great things you can do you. Jim Morris mentions that you could go down the local county. The local county office won’t let you do it online but then search for homeowners by name or self-directed IRA owners by name at the county clerk. It’s a great way to find potentially distressed assets or people that are looking to fund your deals. That’s the other side of the equation. “Finding deals, how am I going to fund it?” It comes down to marketing for both of those things. Those are two of the most integral legs in your three-legged stool. It’s marketing for money, marketing for deals and then taking action and making offers. Those are a couple of things that I highly recommend.

If you’re reading to this for the first time or a regular audience, I’m going to ask you a question. How many deals have you made offers on? How many offers have you made in the last 30, 60, 90 days? If you’re brand new, it’s great. If you’re still learning, that’s great. Nothing wrong with that. Get your feet wet, get knowledgeable, but you’re going to learn more from making your first offers than you will anywhere else, any workshop, podcasts, video. You’re learning more about yourself and the business by making offers and taking action. That’s why when people ask me, “Scott, what would you do if the note market dried up?” I don’t sweat. I would have to make a pivot. I have to make a change. That’s okay. One thing that we all know is going to happen is that change is going to happen. We’re going to get older, and change is going to happen. Things are either going to get easier or they’re going to get harder. I doubt they’re going to get easier. You know how to market, you should not sweat if any type of market changes. If you know how to market in the market you’re interested in and no one’s going on, you won’t struggle. You’ll still find deals. It may not be getting a list of 1,000 assets direct from bank or 400 assets on a regular basis as we see in the note business, but there are still going to be opportunities.

He or she who is able to rotate or pivot the fastest often struggle the least because you’ll have the opportunities and you’d be ready to rock and roll. How do you figure out those opportunities? How do you find those opportunities? Network and go to your local real estate investment club. If you don’t have a real estate investment club, go to Meetup.com, type in real estate and look for meetup groups within twenty miles of your location. You can go to REIClub.com and check out there for some larger groups on there. REIClub.com have investor resources and real estate investment clubs. They’re listed by state across the country. There are many ways to get worked into your market or network into an outside market if you’re living in California or another area that you need to be invested in other areas. That’s the first thing you’ve got to do. Go to those Meetup groups. Go to those REIA clubs if you can. Schedule a time, fly out and enjoy the city, drive around the city at the same time and meet in a meetup group. You’ll often have an opportunity to build a pretty good team all at one shot with going in an investment club and funding either realtors there, contractors, property preservations, title companies, hard money lenders, all sorts of vendors at your local meetup group. That’s a great way to build a team in other areas outside of your backyard.

NCS 424 | Notes

Notes: Marketing is what separates those that stay down from those that really excel. If you know how to market smartly and effectively, then you can hit over a much larger audience.

 

Let’s do a quick recap. What would I focus on if the note business ended overnight? If something happened and I was not able to do what I do now. I would look at the path of progress for options on properties a mile to five miles out of town. I will take advantage of the increased value over five years of optional agreement. I would look at the subject-tos, whether it’s equity or very low-interest rates, either turning into rentals or turning into owner finance where I can arbitrage that deal. Third thing, I would talk to your zoning offices, your code enforcement offices primarily and seeing properties that are having zone or code violations and reach out to those homeowners.

The fourth thing is I would reach out to are deceased friends or obituaries to see if they own any property, drop them a letter and talking about, “I want to buy your property.” I would negotiate with either the people that are in charge of the estate or the family members and try to offer up cash offer and enclosed on a profit relatively quickly. That may often lead to not just one but multiple deals. I would also look at jumping in more on the commercial note space and looking at those commercial, just primarily the sub-million-dollar balanced assets. I would also target your smaller hedge funds for any stuff they may have on their books at the very end, either the REO side or stuff that they are looking to sell off that they don’t have the patience or the time to do.

Hopefully, that was a valuable episode for you. Thank you for the audience. Give me a shout out, make sure to put the #NoteClosersShow if you’re going to share this on Twitter or Facebook or any of your social media platforms out there. As always, check us online. Follow us on any platform. You can always listen to more of our past episodes by checking out any of the other podcasting platforms out there, iTunes, Stitcher, anything else out there. We’re just about everywhere. Other than that, go out and make something happen. We’ll see you all at the top.

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