Welcome to our latest episode! Today, we’re thrilled to have Scott Carson, aka “The Note Guy” on the podcast. Scott is an investor, entrepreneur, marketer, and the owner of WeCloseNotes.com. He has been an active real estate investor and entrepreneur since 2002, focusing on the niche of distressed mortgage notes. Since 2008, he has purchased over $1 billion in distressed notes on residential and commercial properties across the country and has helped thousands of real estate investors and entrepreneurs create wealth through his classes. He is also the host of the nationally syndicated “The Note Closers Show” podcast, which reaches millions of listeners across 130 countries.
In this insightful episode, Scott delves into his journey in real estate, sharing his transition from traditional real estate to non-performing notes and offering strategies for navigating this unique space. Scott explains how he works with borrowers to restructure loans, his approach to due diligence, and current trends in commercial and residential note investing. Whether you’re a seasoned investor or just getting started, Scott provides invaluable insights into how you can diversify your portfolio and create wealth through note investing.
Tune in now to learn more about how you can capitalize on non performing loans, for Scott Carson’s expert advice and strategies!
HIGHLIGHTS OF THE EPISODE
00:24 – Guest intro: Scott Carson
03:00 – How Scott transitioned into note investing
06:00 – What it means to buy distressed debt at a discount
10:00 – Current trends in commercial and residential note investing
13:00 – Working with borrowers to restructure loans
17:00 – Due diligence process in note investing
22:00 – Challenges and opportunities in today’s market
29:00 – How to get started in note investing with little capital
31:00 – Final thoughts and how to connect with Scott
If you found this episode substantial and want to dig deeper into real estate, or maybe you want to discover better investment opportunities, be sure to check out www.tempofunding.com.
CONNECTING WITH THE GUEST
Website: https://weclosenotes.com/
Linkedin: https://www.linkedin.com/in/1scottcarson/
Youtube: https://www.youtube.com/c/WeCloseNotes
Full Transcript:
Intro: Welcome to the BigMikeFund Podcast, where you’ll learn about advanced wealth building strategies from real estate investing to creating massive ROI and secure retirement profits. So pour yourself a cup of coffee, grab a notepad, and lean in. Because Big Mike has got the mic, starting now.
Mike Zlotnik: Welcome to the BigMikeFund Podcast. I’m the Big Mike, Mike Zlotnik, and today it is my pleasure and a privilege to welcome Scott Carson. Hey Scott.
Scott Carson: What’s up, Big Mike? Good to see you. Good to be here.
Mike Zlotnik: Good to see you too. Thanks for coming on the podcast. Let me go through a formal introduction. Scott has been an active real estate investor and entrepreneur since 2002, focusing on the niche distressed mortgage notes.
Since 2008, he has purchased over a billion dollars in distressed residential commercial properties all over the United States, sell thousands of real estate investors and entrepreneurs create wealth through his classes, helping his students close thousands of deals. That’s wonderful. He also hosts the podcast called the note closer show podcast and avid sports fan.
He spends his free time traveling, gardening, making memories. He lives in Austin, Texas, and he’s got cats, a few cats. So, I have a cat, you have a couple of cats, it’s pretty cool. Cats are cool. And if you’re a dogs fan, dogs are cool too. Cats are different. The big difference, but this is what I learned about dogs and cats.
And I don’t know dogs now, but when we’re here, dogs love you unconditionally. Cats, you have to win their admiration and usually you love cats more than they love you. But
Scott Carson: yeah, yeah, that’s, I would definitely agree that I’m more of a dog guy. Had a dog, Golden Lab for 17 years. She passed away a few years back, but my better half is more of a cat mom.
And I’m, I can say I’m officially a cat dad now with our, our couple of cats here. We were on a trip really seemingly and the two of the cats would not come out. Of course, we’re worried at where the cats at. They’re not coming out in two days. Are they starving? Are they surviving? Sure enough, they’re fine.
They made their appearance as soon as we got home. So yeah, that’s, that’s, I would totally agree to that. Cats, you have to earn their love, earn their respect. Dogs will love you no matter what. Just got to rub their belly and take them for a walk every once in a while.
Mike Zlotnik: That’s right. That’s, that’s, that’s the words of the wise. So Austin, you said that’s the, that’s, that’s home and you do a lot of notes. So let’s, dive straight into. Just a little bit about your notes education, helping folks buy notes, sell notes and other real estate. Just tell the audience a little bit more about you, kind of your genius zone, what you do and love to do.
Scott Carson: So I was like many real estate investors out there. I got started going to a local real estate club, you know, bought my first property. We ended up moving and renting out the first property. Was the worst landlord out there. I do not like being a landlord and was found myself in a distressed situation as I was laid off from my job at the time.
So trying to make a couple mortgage payments on a private school teacher’s salary is not a good thing, especially when your tenants aren’t paying their rent to you. So luckily for me, we were able to get out of that bad situation, licked my wounds for a couple of years. And got into the, in the banking finance side, we both love finance, love numbers, and ended up starting a mortgage company with a buddy of mine here in Austin, Texas that worked with real estate investors.
We traveled the country on the Ron McGran circuit. Learned about creative financing. We’re both friends with ron and When everything hit the started hit the fan in 2008 I’ve been learning about you know, creative real estate investing and note investing in the debt side of the thing Not the just the owner finance side Most people when they think of note investing think of originating a note creating an owner finance transaction.
I’m a much more Nichier aspect of that because when I left the mortgage company in 2008, I started contacting the same lenders I was originating for To buy their debt because I knew they had non performing notes out there I mean it was a different time in 2008, but I started getting these lists sent to me of apartment complexes and other types of commercial properties That I could buy the debt at a big discount and started getting lists of non performing residential notes I could buy at a big discount.
I was like, oh, this is great I’m getting all these deals sent to me. I don’t have to do a lot of the normal work I mean they’re all across the country which I found just valuable. I mean, I can get deal flow that I haven’t do a lot of work. If I made a contact with one bank, it fed me deals every month and they were often at bigger discounts than what most people are paying.
So I said, heck with trying to do traditional real estate and there’s nothing wrong with it. Everybody’s got their niche. If you like that, you like that. And I love Austin, Texas is home here, but I don’t invest a lot here because it’s the fastest foreclosure state in the country. And distressed debt here isn’t as profitable as it is in other parts of the country.
So I’ve been buying distressed mortgages on residential commercial properties for about 20 years now. And I like being the bank. I call it the The sexy side of real estate investing when you’re buying the debt at a big discount. And then like our, our biggest goal is to, is not to rehab the property, but to kind of rehab the borrower.
Now that doesn’t mean sending them to the Betty Ford clinic to dry out, but sometimes you feel like you got to do that, have a little psychology or talk with that borrower and get them back on the right track in a lot of cases.
Mike Zlotnik: Yeah. I appreciate that, that wisdom. And of course if you are the, the landlord, you buy the notes at a discount, you have all kinds of optionality.
Scott Carson: Yeah,
Mike Zlotnik: what you can do, you can get the loan to reperform. If you have the right type of borrower, who is willing to even cut that balance on their mortgage, if they’re paying right you could obviously complete foreclosure, maybe negotiate in lieu. But at the end of the day, you’re getting to the asset at a discount. It’s like an option to buy at a discounted price in essence.
Scott Carson: Exactly. And I, we actually make more money keeping people in their houses or in the properties for the most part. It’s becomes the biggest bang for the buck because, you know, every state’s a little bit different. I mean, you can foreclose fast here in Texas in like 30 days in New York and take you three years on a short time.
You know what I mean? But if you, you know, you buy the debt at a discount, it’s kind of a fresh start for the borrower. Hey, what’s going on? What’s your country Western song? You know, did grandma get run over by a reindeer? Did your dog die? What caused you to not pay COVID, you know, job loss? You know, what can you pay?
What do you want to do? Do you want to stay or want to go? And that’s that’s the thing I like the most about 70 percent of the time we’re actually able to keep people in their houses or in their Building the other 30 percent of the time. It’s just it’s you know, they got to have that come to jesus I mean, hey, I just can’t afford this or it’s just not a a good situation now Especially like right what’s going on right now with all the different interest rates adjustments with commercial property So in those cases where it’s not a good thing Sometimes we do cash for keys or we try to say just do a friendly foreclosure You You just sign, sign the property over and walk away or sometimes we’ll give them cash to walk, just depends on, on the numbers and the deal.
So it’s, it is great to be able to be flexible with the different strategies. You know, biggest mistake I made as a new investor years ago was I tried to foreclose on everything. And that was the biggest mistake I made when I should have been like trying to work out more so with borrowers on the front end, but now, Hey, you learn from your lessons and your mistakes and you you’re a better investor the second, third, fourth time around, right?
Mike Zlotnik: Live and learn. And do you like working with lawyers or do you like working with people? And I mean lawyers are people too, but if you want foreclosure, you’ll be dealing much more lawyer conversations and it’s a very dry crowd versus if you’re a people’s person and you can deal with individual situations, you can certainly work out deals.
But let’s dive straight into what’s going on right now. So we’re recording this very late August, 2024. Residential real estate, most parts of the country, not everywhere, is doing relatively well. Although there’s been some corrections in Florida and Austin and Texas in the residential too. Oversupply, right?
That’s kind of been the issue. But commercials corrected significantly higher because of the higher for longer interest rates. And residential hasn’t seen that problem because a lot of mortgages were 30 year fixed. And supply is just limited because people just don’t want to forego an existing fixed rate mortgage.
So, you’re still seeing distress, I assume, in residential, but this is just a different type of distress. Not because the market corrected heavily, although, maybe again, some markets have corrected. Are you seeing interesting deals in commercial front where floating rate debt is squeezing owners and they are turning the keys over to the bank and then the bank is It’s calling you and say, Hey, I gotta move this paper. Just curious. What are you seeing?
Scott Carson: Yeah, we’re seeing all that. You’re seeing there’s, there was a gap, I would say about 12 months ago between what banks wanted to sell some of this floating rate debt at versus what we wanted to pay for it. It just didn’t make sense. There’s still a gap, but that gap has gotten thinner and thinner and thinner as time has gone on.
And these property owners bars have gone further in default. You know and cash flow is subsided. With rents not increasing to offset a lot of these losses. So we’re seeing a lot more stuff. The thing is, though, is that depending on how that loan is, is financed, whether it’s, you know, it’s got a first or second or mezzanine debt on it.
Sometimes we’re still at a gap because the banks may not want to let it go for them. They’ve got their numbers. Okay, great. We got you’ve got a number but i’ve still for me to take that over I’ve got to be at a better spot it all cost it all comes in two with what you’re paying for capital too What it costs for you on your fund and from your investors what you’re paying them On what the you know expected cash flow is and what the turnaround?
Cost can be if you do end up having to take that asset over or if you’re just on the debt side play But yeah, we’re seeing stuff. I mean you mentioned it when you’re on my show There was a big fund that was selling off a their stuff, billion dollar trades, or they’ve sold off a billion dollars in their notes at like 50 to 70 cents on the dollar on their commercial stuff.
Now, a big chunk of that was office space. It was trading at the bigger discounts of about 56 percent, but the multifamily stuff was trading at 70, 71, 69 percent of the underlying debt. And that was out just I think what two weeks ago in the real deal Advertised it
Mike Zlotnik: came out and it was interesting to hear that there was around 70 Average trade and maybe yeah office is worse than of course office
Scott Carson: And that’s that’s the thing is too it varies on where the asset’s at You know location location location how hard that market is hit, you know The sun belt’s been hit very hard on over saturation.
I say by You syndications and multifamily investors gobbling up stuff, I think overpaying for assets with the idea that they were gonna, you know, re gentify the asset, fix it up, keep that low interest rate and then turn around and sell it off in three years. Well, that hasn’t happened. And you’ve got ton, you know, got companies like Archbay Capital out of New York or the Tides Group out of LA that are literally just struggling not only in operations, but also like Archbay, they finance a lot of this stuff.
And the value of their portfolio is 50 cents of what it should be because all their stuff is now non performing and not performing assets. So it’s, it’s an interesting time. And it really all comes down to, I kind of joke about that in the, on the commercial side, you almost have to be a little like Sherlock Holmes on your due diligence aspect of things.
Sometimes the borrowers are good about providing the information, the cash flows, the rent rates, things like that, leases on their properties. Other times they’re not. And so you’ve got to try to figure out what’s going on with it. One of the most unique things though that we see a lot of is a lot of times when you’re buying debt and you’re dealing with a a servicing company on the loan, you’re going to have kind of like the beneath the kimono notes, servicing notes, what’s going on, what’s the issue, you know, with the asset, you know, The story behind this story, I guess you could say, what’s caused this, so that gives you a bit more insight that you may not see that if you’re just buying a traditional asset in a lot of cases.
And so that’s, that’s been really nice to see and understand that, hey, this bar really wants to work it out, they can bring some money to the table. So that helps us when our bidding, You know our due diligence on the front end to see if we can work that or like, hey, they you know They’re they’re they’re walking away from it or there’s a huge crime population, you know issue you know what’s making the news right now is they The 199 unit apartment complex in aurora that a new york investor bought four years ago That the city just shut it down for a roach and code violations, but they’re not, the city’s not talking about the Venezuelan gang that’s taken over the property. That’s made it impossible for the landlord to collect rents as well, too. So the bank on that one is very willing to sell that note at a very cheap price if you want to come in.
Mike Zlotnik: Yeah. Yeah. Of course you have to do what you just described is not only you have to do the no due diligence, you have to do the asset due diligence and.
Feet on the ground. What’s going on? Is it legitimately an extremely difficult situation where you have Uncollectible rent and the whole thing is is insanely the value the collateral value is suppressed. To the nth degree versus, Pure liquidity pressure while the asset is still fundamentally solid and you could you could work with the borrower and do you, do you go even try to, are you allowed when you’re trying to buy a note?
I assume you’re allowed to go talk to the borrower, try to connect. I mean, most of these commercial. Let’s talk about commercial. So you’re dealing with commercial assets, multifamily, 200 doors, whatever, whatever, whatever the, can you go at least talk to the property management, whoever’s got feet on the ground, I assume you can do some clever due diligence, you can do secret shopper, all kinds of things, right?
Scott Carson: Yeah. On the residential side, you, you, you can do the same thing, kind of have a realtor knocking on the door. If it’s non performing and say, Hey, I want to buy the house here, you’re interested in selling. You can’t really talk to the bar in a residential property. Hey, I’m not, I want to buy your note. What can you do that’s a actually a violation of fair debt collection practices Unfortunately, it would seem it would make sense to do that.
But if you don’t own the note yet You don’t do that on the commercial side. Yeah, most of the time you’re gonna see You know financials and notes and what the borrowers tried to do hardship letters and then sending somebody out to actually walk the property to Inspect it, you know, one of the things that we used to do and still do occasionally is we’ll contact tenants call them Hey, i’m trying to reach the owner of the property or the property management Can you give me the number?
And, oh great, you know you know, how do you like living there? You know, what’s going on? And you’ll get people that will just dump, oh yeah, I got, you know, I got sewage flowing in my apartment, or there’s two, you know, units have burnt out that the apartment complex painted, but they didn’t fix. You know, you get all sorts of stuff that’s just kind of, you know, information that you just wouldn’t get looking at a spreadsheet or a PDF document.
Mike Zlotnik: Yeah, that’s, that’s, that’s, that’s very powerful where you can do real field due diligence and you, you can, you can discover, I guess, a lot more through, I mean, it’s part of due diligence. At the end of the day, if you’re buying, you know, commercial, when you’re buying an old due diligence has to be similar to the buying the property.
I mean, you’re buying underlying debt on the property, but you will, you will, Inherit all the good, the bad, the ugly of the property.
Scott Carson: Well, that’s the thing. It’s three, it’s really three phases of due diligence. It’s the property, make sure the value’s there. The borrower, what’s going on with that? You know, obviously the collateral file, making sure everything is fine in the loan docs, the servicing the, if that loan’s been sold a couple of times, making sure all the, the transfer docs and the title issues are, are good there.
And then of course, checking to see what’s on title. If you do take the property, do you want to, you know, buy that note and then. Take over the problems that are following you on title mechanics, liens, and stuff like that. Or, I mean, that’s when you, when you look at title reports, seeing what’s on there, that will often dictate your exit strategy.
Well, if we’re going to take this back, we’ve got to foreclose to clean up the title. So it gives us that equity if we end up selling it, you know, or we can offer if there’s mezzanine, go to the mezzanine lenders to listen, we’ll give you a 10 cents on the dollar for your position, or we’re going to foreclose and wipe you out.
Unless you want to do something else. So and of course if the borrowers thought bankruptcy that can be a good and bad thing. I’m not opposed. I actually think bankruptcies can be a good thing because it can be a way for Maybe not to wipe you out if you’re in the first link position But a good way to structure some of this back debt back payments and other stuff to make it a little bit easier for that borrower to maintain ownership of the property and still pay you along the way because You know, the bank gets paid.
If you’re in the first position, the only thing that’s gonna wipe you out would be taxes, which you gotta double check to make sure those paid or God. And that’s what insurance is for. But that’s a whole nother expense right now that people are running into, especially in Florida, Houston, other parts is insurance costs have added to that, as you were saying, a tidal wave.
Mike Zlotnik: Yeah, I appreciate that explanation and it makes a lot of sense. What kind of your target rate of return you’re looking by participating, trying to buy this stuff? Because basically it’s a strategy, it’s a niche. Business, you have to be a specialist and especially if you’re going into commercial notes, level of sophistication is much higher.
You’re not buying mom and pop residential note. It’s a very different, although both can be great opportunities, but you’re on a much bigger scale here. So what kind of target rates of return, how big of a discount and what, you know, after all the sludge and all the Issues you expect to have what are you trying to generate when you invest with capital?
Scott Carson: In today’s market with the amount of deal flow and distress we’re seeing we’re really trying to be in that double digit return On the commercial side, you know 10 12 percent or greater depending on the assets, of course Location foreclosure time frames that all dives into it whether it’s in a faster market like texas to foreclose or longer in florida, we don’t usually go beyond 12 States have a longer foreclosure time frame than that residential We’re looking for a 15 or higher on a non performer that we can get the bar back in track and keep it performing for a period of time.
Or if we have to foreclose and then sell the asset off that’s, that’s what we’re kind of looking for. Those targeted rates, it’s kind of what we’re looking for in the front end. And you know, we’re pretty conservative, you know, we, we expect to probably I’m probably around 10 to 20 percent of the offers actually that we put out.
So one out of five, one out of 10, just because there’s a amount, a huge amount of deal flow starting to come across the desk, you know, a lot of people that get into that, Oh, they got to do a deal and they do a skinny deal. And then they’re in trouble because the numbers don’t all work out for them. You got to be patient, you know, you’ve got to follow up.
You know, there’s been many deals that we’ve made offer six months ago. That the bank didn’t like, well, we’re following up with them on a monthly basis and we’re getting closer and closer, closer to the price that we want to pay, but the bank has become more desperate, especially the closer we get to the end of the year.
And when you look at banks too, they’ve got like, and we talked about when I had you in mind, reserves, they’ve got to have a reserve relationship or amount of reserves for every non performing note they have on the book. So as their reserves are getting squeezed, they’ve got to offset these non performing notes to, you know, bulk up their cash reserves in a lot of cases.
So that’s the thing. And. Pricing varies if you know how distressed a bank is by looking at their quarterly FDIC reports or what you can find out. That helps. If a bank’s got a ton of reserves and not a lot of distressed stuff, they’re not gonna sell that stuff off usually at too big a discount. But the more aggressive banks, more aggressive lenders that do have a huge portfolio are gonna be, You know, more enticing to bid on because they’re gonna take a bigger discount because they’ve got a track to cash.
I mean, if you look at there’s a florida Atlantic University released a report on three different things in the banking sector. It covered about 1000 different banks out there. Not fun, but just banks that talked about how a It ranked their commercial portfolios, how much of their portfolio was in commercial real estate and how overvalued that was towards the underlying value.
How many of them had negative deposits that were insured where they had, you know, a billion in deposit, but only half a million was secured by FDIC. And the third thing was unrealized investment losses. Which basically goes back to where they bought bonds and treasuries at low interest rates a couple years ago And now the interest have gone up there.
They’re less valued with this out of those thousand banks There’s about 94 That are not looking good. And now that 94 there’s really 23 That are negative in all three of those categories All right 94 that are negative about two to three of those categories But the biggest one being the commercial real estate portfolio being upside down And so there’s some bigger names on there like city chase.
I don’t expect those guys to go under but there’s Smaller institutions different parts of the country that are really struggling and those can be opportune opportunities if you know who to talk to and reach out to the bank to see what they have because oftentimes Reaching out to these asset managers.
They’ve got a portfolio that they’re managing and that’s what we do. Reach out to the banks and lenders and what do you have on your books you want to get rid of and let’s see if it makes sense and what we’re looking to buy in an area that we want to buy and an asset that we want to own or service.
Mike Zlotnik: Yeah. I appreciate the explanation. I’m sure the, the big banks are too big to fail. They are not good candidates. They will be given exceptions and additional capital from the federal reserve if they run into deep problems. The the real concern of the smaller banks, smaller banks that, I mean, we, we had a few failures year and a half ago when signature bank failed and Silicon Valley bank failed.
But the, the number of. Other or maybe large numbers of the other smaller banks with exposure to commercial real estate some of them floating zombies and their regulators, I guess giving them enough slack Maybe interestingly enough post election some things will start coming out who knows right because basically Right now it’s all don’t just don’t disturb what’s going on.
Well, it’s it’s it’s the pretend and extend mentality that we saw happening But I’m hearing something interesting. It’s sort of we talked a little bit about this and, you know, I just wanted to kind of just bring up this concept and just curious. So on commercial real estate, this is happening today.
The banks that are if they’re upside down, meaning that the mortgage amount is approaching or has already exceeded the value of the asset, they’re very nervous and concerned. So these, these folks typically reach out to the borrowers and they start asking for additional monies. Additional escrows, collateral, et cetera, et cetera.
But the closer you are to being upside down, the less motivation the owners have. So you can’t really squeeze them for much because they will have a very limited interest. The deals that do still have reasonable amount of equity behind them, maybe reduced, but reasonable. There’s a little bit of leverage there.
So I’m just curious, sort of from your experience, you’ve seen a lot of cooperation from the borrowers, or it’s more of a, you buy the note first. able to then have a more constructive discussion because it’s a tough situation when the equity is thin the borrowers don’t really have too many options to to get additional capital so it’s extend and pretend but work with the borrowers at the same time it’s so thin then even if you take the asset, you don’t, you don’t have a margin of safety or minimal marginal safety.
Scott Carson: No, and we see that like if there is a little bit of equity or not, you know, negative zero to none equity banks are trying to get lenders trying to get 80 cents on the dollar of that. And that can make sense. In some places and other days, that’s too hot
Mike Zlotnik: for you to, to buy the note.
Scott Carson: Yeah.
Or they want par and that’s the thing I always been laughing at. I guess, Oh, we’ll only take par. I’m like, it makes no sense for me to pay full value for your non performing note. I’ll just wait six months. You know, if you want this off, exactly, you’re gonna be more stressed and they’re gonna have people telling you that you got to sell it at a fire sale.
That’s, that’s the thing is it’s, you know, if there’s negative equity, that’s where we’re seeing the bigger discounts, you know, 60 50, some in cases, depending on where the asset class, how distressed the area is that kind of stuff, how hard hit, you know, we all know office space has been hit or we saw some debt trades on office space.
Where the underlying people that bought the debt went and got fined and refinanced and took the properties and converted them to multifamily spaces, which is, it’s a, it’s a very hard, not a short timeframe, two, three year thing. Well, they’re all getting foreclosed on because the three year time for the banks are foreclosing on now their new lenders are foreclosing on because these aren’t operating not making things happen on completed properties.
And I’m just like, why are these banks, these lenders foreclosed? And when they knew this was going to be that maybe they want to own the asset now maybe they think they can actually It makes this cash flow better for them. I don’t know. It’s it’s a it’s really I don’t you know When I was a young kid, there’s a book series.
I like called choose your own adventure You know, you’d read a few pages have two questions flip to page 12 for question a or 15 and go that route It really kind of feels a little bit like that without knowing what the answer is in some cases On some of these assets, but that’s why I mean due diligence makes so much sense there’s a service that we use called cred iq their website cred.
Iq that Is tapped into a lot of these major servicing companies. And is really providing a lot of the background information, the actual servicing notes, who the sponsors are, who’s on the LLCs. And then, when you’re doing your skip trace from the borrowers, you can kind of see what else, you know, do the borrowers or the sponsors have more money, or what else are they involved in?
Can they borrow from Peter to pay Paul? And go that route. So those are, there’s some tools like that, that help us really identify opportunities on a bigger scale that we can kind of pinpoint in on things that we like asset class size, specific asset classes and, and, and distress levels of distress as well.
Mike Zlotnik: Understood. So how do you work with investors today? So one comment that you made, and I, I, Didn’t think it was super exciting, but I mean, I mean this with all due respect. You said you’re targeting rate of return, double digit. Well, double digit is almost given, right? Nobody’s nobody’s ever done this business for single digit returns, double digits.
But he says something like 12%. I mean, I assume it’s, it’s a bare bones minimum. And, and if you’re actively doing this stuff there’s gotta be. Rates of return significantly higher than that because the way the theory works is like this. I don’t know if you have a fund or not, or you’re working with investors.
Normally, if you have a strong established strategy and you have operation and you already have a fund, you target to investors, passive investors. That low double digit returns 10 to 13%. Let’s call it that. That is very common in the space where passive investors participate. Now, if you’re active, you need to be generating rates of return meaningfully higher than that because you have to justify your own fees and your own performance fees, acquisition fees, management fees, etc. So the rates of return typically in these deals Have to be I assume in high teens into 20s plus, right?
Scott Carson: They they are they totally are In a lot of the stuff that’s distressed. I have the distress of some stuff that we’re buying The reason we target a little bit lower aspect is sometimes the borrowers do perform Sometimes the bars do come to the table.
And so if they reperform And pay off the mortgage or not pay off the mortgage, bringing the back due. It’s a, it’s a nice rate for a year or two, but then it’s not so attractive right after you’re there after 12 months long cases, cause it’s a performing not that cases. So if it’s a performing process, it’s going to be a little bit lower rate, but Hey, it’s, it’s performing.
That’s a good thing. The non performing stuff is the bigger, obviously it’s bigger yields depending on we pay for it. I’m a big under promise and over deliver aspect guy when it comes down to it. But yeah, we’re looking for that. minimum, you know, mid teens, 15 percent on a base level just to even get the ball rolling.
A lot of cases we can often deliver a high return because our goal is if we’ll hold that note for a period of time and get it reperforming for 12 or 18 months. Well, now we can turn around and resell that note. In 18, 24 months down the road, we bought it at 50 cents. Maybe we’re solid 80 since now.
And that’s a nice, nice profit two, three years down the road and get paid off. So, yeah, I mean, we’ve got a fund we’ve been working on for a little while, depending on the asset we work with individual investors to, as well on the trades. So it’s a variety, kind of a mixed aspect of different what’s coming across our desk on any given day.
Mike Zlotnik: So Most of your investors buy notes for you or they invest in your fund?
Scott Carson: Yeah, they invest it. Well, we have good students So we have students that we’ve taught how to do that. They’re buying for themselves or people that hey, I don’t want to do this myself. I’d rather just invest with you So they’re ready to check and be part of our fund.
Mike Zlotnik: Gotcha. So how would folks reach out? I mean, I have a couple more questions, but It’s it’s it’s the time in the show. We’re asking I would hold of you
Scott Carson: Weclosednotes. com or you can email me directly at scott at weclosednotes. com. Pretty easy to do. You know, we love to visit with folks, figure out what their, you know, what their experience is, what they’re looking to do.
Sometimes it’s a fit, sometimes it’s not a fit. So it’s a always glad to talk with folks because there’s a lot of ways to get started, even if you don’t have a big chunk of change. That’s why we started teaching people how to do this because you can often find smaller deals, one off deals that work well for you or your IRA. Or if you wanna do something a little bit bigger, there’s some some opportunities in the field right now.
Mike Zlotnik: Yeah, yeah, I appreciate it. So, weclosenotes. com is the way to reach out. Final few questions. Good book to recommend. Do you have any, any good reading? Any suggestion?
Scott Carson: Just any book? I’m a big fan of, you know, any books. You’re talking about note investing, or specific real estate, or any favorite book?
Mike Zlotnik: I mean, you can ask me, I’ll give you ten good books, right? There’s no right or wrong, so I’ll give you, like, examples of books that come to mind. They could be unrelated books, like, Richard Weiser, Happier. Or, Sometimes You Win, Sometimes You Learn. You just come up with a title. So,
Scott Carson: Makes you happy. So one book that I think everybody needs to read is outwitting The Devil. It’s Think and Grow Rich, outwitting the Devil. It was written by Napoleon Hill back in 1938. It was never released back then because it’s a conversation of Napoleon Hill sitting down with the devil, theoretically asking questions and how he’s able to keep people from achieving their success.
And the manuscript was discovered by Don Green, who’s the president of the Napoleon Foundation, and gave it to Sharon Lecter, co author of Rich Dad, Poor Dad, who’s a friend of mine. And Sharon read the manuscript and said, okay, I’ll rewrite the book, but I’m gonna leave 90 percent of the same, but I’m only going to add a paragraph at the end of each chapter on what I thought Napoleon would take things in today’s world.
So it’s really a great book, talk about how to stay focused, how to avoid the shiny object syndromes and how sometimes we’re tempted with that shiny object syndrome to get us off path and drift away. And those that are the most successful, no matter what you’re doing. are the ones that are more focused and say no to distractions and say yes to what they want to focus on, what they want to accomplish.
So that’s one of the books I’ve probably given away, I don’t know, 40, 50, 60 copies of that over the years because I just think it’s one of the most, most impactful books out there. Of course, The Thing to Grow Rich, you can’t go wrong with that. Tribes by Seth Godin is another one I highly recommend.
And then of course you know, there’s so many different real estate investing books out there. If you have a niche, Learn about that niche. That’s, that’s one of the best advices I can give to field. Go research, listen to podcasts. Not every niche is created equal. Some niches work better in other places than they work in other areas.
So just dive in and learn. Don’t try to be a jack of all trades when it comes to real estate investing, because then you’ll be a master of none.
Mike Zlotnik: Yeah, for sure. I mean, for active folks that, that is the right advice that they have to find their specialty and be really good at this. And for passive investors they just got to find enough of these active folks as, as Dr.
Neal podcast, I’m writing a book and one of the most basic elements, how do you invest in real estate? If you only have two primary theories, right? Do you have active investing? You are the. active specialist, whatever the trade, whatever the location, whatever a specialty or a passive one. And even as a passive one, you just got to find the right active ones you want to invest with or invest in. That’s the first step. And then you obviously level that with the right diversification. So
Scott Carson: it’s also, if you’re invested in different funds, know what that fund is investing in, you know, the, the great questions in your book, the top 10 questions. knowing what that, you know, that manager, the person with the fund is doing in understanding that asset class and how that asset class performs, especially in today’s world is important. So you ask the right questions to make sure you’re in the right fund that you, so you can be passive with less risk.
Mike Zlotnik: Yeah, I absolutely agree with you. It’s a, you know, it’s an evolution. This is a passive investor evolution. We’ve seen this and I’m not gonna spend much longer. It becomes a very interesting discussion.
But there’s been a lot of let’s call it volatility challenges in the last few years with passive investors. Many wonderful folks written checks, into challenging situations. It’s not not easy and You know, we’ve had challenges with our deals and funds to the market the market has been incredibly difficult So folks that write a check need to also think about risk tolerance, risk profile, strategy, upside, downside, and again, recency bias.
I’ve talked about this quite a bit. Now a lot of people are dealing with recency bias. They are heavily discouraged. From you investing because a lot of deals they’ve invested in or operators or even chasers. I mean, it literally it’s so crazy and I’ll, I’ll kind of wrap up which we, this is intended to be super positive.
I think there are great opportunities ahead and, and folks who have recency bias difficulties with a bunch of deals, not going well. And it’s something not easy to overcome. It’s something that psychologically takes time to manage. By the end of the day. You gotta move on or most people should, should move on at least understand what you got, and if you got a bunch of difficult situations, accept it and deal with it, move forward because it happened and the world of investing is, you know, I’m writing the book The journey of becoming an extraordinary investor.
And there’s so many things that I thought through as part of the book, it is not simple or easy to always select great deals that will be difficult deals. You will get unlucky even with the best due diligence, and there will be periods of time when everything you touch turns to gold. And everything, the periods of time where everything you touch unfortunately runs into trouble.
So another reminder that you have to diversify in time too. So folks who don’t diversify in time, They do discover sometimes there are very bad periods of time when the market just goes south in whatever. Could be stock market, could be gold, could be silver, could be bitcoin, could be real estate. It just happens.
These are periods of time of extreme volatility and things go in the wrong direction. And even if you don’t like Wall Street, only like real estate. Or if you only like stocks don’t like real estate There’s a valid argument for every portfolio to be diversified enough That no single asset class no single operator.
No single strategy can cause massive problems This is the whole beauty of of the right diversification Is to do enough of it that you know, no single event And can knock you off your feet and you can’t get up again. So it’s kind of a, as I’ve been writing this book, I’ve been thinking through the process because we’ve seen this and it’s a tighter way to get real estate industry.
And now the crazy part, all those people who are sitting on sidelines. Now is the time. Be greedy when others are fearful, and the fear factor is high today. It was completely the reverse a couple of years ago. People were knocking on our door 21, 22. Take my money, put it somewhere, right? And that’s the problem, that it was at that point low fear, And that’s the time to be careful. And now the fear is high. That’s the time to get a little more
Scott Carson: grittier. Exactly. He’s had, he’s pulled it out. He’s had his power powder scene dry for a while. He’s starting to put it back to work in a lot of cases. So,
Mike Zlotnik: He’s sat on cash for a long time, he’s not shy to sit on cash, and he’s proven his theories that he has very, it’s almost unique, not many people can do this, and him and Charlie Munger, by the way, one of the books I mentioned, I’m going to mention this again, worth reading Richard Weiser, Happier, Charlie Munger is quoted there, and those investors It’s a collection of thoughts on some of the experiences on some of the best investors of the world of all times.
What they do is not often most of us can do. Most of us cannot do what Warren Buffett does. Right. For the reason that most people will not sit in cash, this much cash, with this much discipline. And not only that, most of those people will not see the opportunities Warren Buffett will see. So it’s kind of one of those things where there’s nothing wrong with what Warren Buffett does and a number of other best investors in the world, but it’s not for everyone.
For most people, just normal, prudent diversification is the way to go, rather than go find these absolutely asymmetric opportunities where you have so much confidence and upside, then write gigantic checks at the right time, right? Meanwhile, sit on cash and wait for it.
Scott Carson: Exactly, exactly. Well, that’s the great thing about what you’re doing, Mike. I love, I love your podcast. Been listening to the episodes. If you guys are listening to this out there right now, make sure you do Mike a big favor. You hit the subscribe button and you go on over and leave them a five star review. We as podcasters love to hear that, see that from our audience. And as much work as we put into this, that’s a small favor you can do for Mike.
So he didn’t ask me to tell you that, but go do that for the Big Mike Fun Podcast. Leave a review, five star, and tell him that you love him. Scott, you’re too kind and I greatly appreciate you. Thank you so much.
Scott Carson: Thank you, Mike.
Mike Zlotnik: And once again, your website,
Scott Carson: WeCloseNotes.com. Easy. Perfect.
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Thank you for listening to The BigMikeFund Podcast. To receive your copy of Mike’s how to choose a smart real estate fund book, head to BigMikeFund.Com or visit Amazon and type Mike Zlotnik.
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