Here are tips on attending master commissioner sales and finding that great investment.
Many folks approach me asking for tips on going to the Master Commissioner sale in their respective county. Consequently, I am going to work on a series of tips for individuals who want to know more about an MC sale, what to expect, and how to find that hidden gem of an investment. So if you have specific questions about an MC sale, then please leave a comment or drop a line. I look forward to hearing from you. Here is tip #1:
What is the Master Commissioner?
So you have listened to the late night infomercials and are wondering how to get into investing through foreclosure sales. But you are not sure what goes on here in Kentucky and how foreclosed property gets sold. Here you go.
Kentucky is what’s called a “judicial” state, meaning the bank or other financial institution must go through the court system, file a foreclosure action, and get a judgment along with an order of sale, to be able to have the property transferred back to them. As many of you know, the note you sign when you buy a house or real property is the actual contract that obligates you to pay back the bank. The mortgage, on the other hand, is simply a lien against that house, building or real property, in favor of the bank as collateral if you should default on your note. That’s why sometimes only one spouse has to sign the note, but both spouses must sign off on the mortgage. We can go over that in another posting.
So, back to the foreclosure process here in the Kentucky. Once a judgment and order of sale has been entered by the court, a separate order gets entered which directs the Master Commissioner of the county to sell the property. Many of you have heard of sheriff’s sale, which is the entity in many states that is authorized by statute to sell foreclosed property. Here in Kentucky, the authorized entity with power to convey foreclosed property is called the Master Commissioner.
Each county has one and only one. (Except maybe Robertson, which may not have one since it is so small). The Master Commissioner is essentially a political animal. He or she is an attorney and member of the local bar. They are appointed by the circuit judge of the county, so they are usually well connected. It’s usually good to be the Master Commissioner and he or she is authorized by statute to convey foreclosed property from a debtor who has defaulted back to the bank or possibly some other third party entity.
I hope this helps to begin explaining the process. Again, send me an email or leave a comment to this post I will be happy to answer your questions. I look forward to hearing from you.
Ok, so we went over what an actual Master Commissioner is and what he or she does here.
For Tip #2, let’s discuss the difference between a “note” and a “mortgage”? The note is the actual contract that loans money to an individual. The individual agrees to pay back that money at a certain interest rate. There can be one, two, or more individuals on the note. So that is why sometimes you only see one spouse who has signed the note. Most banks will want as many people obligated on the note though, so it is more than willing to take several other co-signers, if it can get them to sign.
The mortgage on the other hand, acts as a lien against the collateral, in this case, the collateral is the real estate, home, or other building that the bank will take an interest in. If the debtor defaults, it is presumed that the bank will be made whole taking back its collateral and selling it off, to earn its money back from the note. Kentucky still has dower and curtesy rights, something I’ll go over in a later post. The short answer is that once an individual gets married, the spouse has an immediate interest in any property. That is why there can be one spouse on a note, but both spouses must sign a mortgage. That is also why you sometimes see a bank suing an “unknown” spouse.
For a mortgage to be enforceable, it must be recorded. Kentucky is generally a “race-notice” state, meaning that the first person or bank to record its mortgage at the county clerk’s office, takes first priority. Thus, it is a “race” to the courthouse to see who can file or record the lien first. Recording the lien in the county clerk’s office gives “notice” to everyone else that you have a lien, what that lien is, and how much you are owed. There are a few small exceptions to this rule, which I’ll go over in a later posting.
Every other entity that files a lien after that first lien just falls in line in order that they filed in. A piece of property can have numerous liens on it, such as a first and second mortgage, judgment liens, home equity lines, and many others. That’s why it is important for you to file a lien against a piece of property as quickly as possible. Recording the lien puts everyone on notice of your interest in the property.
Right now, with so many banks foreclosing on their notes and mortgages, they have a glut of real estate owned that they need to get rid of. A great time for the foreclosure investor.
Let’s discuss what happens pre-foreclosure.
For a foreclosure to begin, the debtor must go into default somehow. Usually, this means that they have stopped paying and are 60 – 120 days delinquent. There are numerous other ways listed in a note or mortgage for being in default. These include not keeping insurance on the property, not naming the bank or finance company as the loss payee, not paying your taxes and numerous other reasons. Read the fine print of your mortgage, you may be surprised the ways you can be delinquent.
Usually, before the subprime meltdown, the foreclosure would be automatically assigned to a foreclosure attorney. Now, these days, the account first goes in “loss mitigation” and many of these departments are in-house for a loan company or servicer. Loss mitigation specialists are trying to work with the debtor and figure out what can be done. They may be able to qualify a debtor for a lower interest rate, lower rate of payment, tacking the delinquent months to the end and catching up the debtor current, or many other reasons. If you think you may be to work it out with your bank, you have to call them. You never know until you ask, present them with your financial situation, and see what the bank can do. You must be willing to call your bank and turn over some financial information. But many more banks are becoming much more creative to keep people in houses and not have to get the property back at a substantial loss.
Assuming that a loss mitigation deal cannot be worked out, the account goes to a foreclosure attorney. Once that attorney gets the case, they order a title search to determine what kind of liens are against the property. The attorney will learn a lot from this title search, such as the actual legal description of the property, what taxes are owed on it, what kind of tax liens are against the property, what other mortgages or liens are against it, if their client is in first position or quite possibly a lower position, and lots of vital information.
From this report, the attorney will prepare the complaint. The complaint is the actual petition that is filed in the circuit court. It must spell out how the bank holds a legal interest in the property. The complaint must also notify everyone or every entity that has an interest in the property as well. The bank has a legal duty to property notify all entities that a foreclosure action is being filed. Hence, the title report is very important as it spells out exactly all of the entities that may have an interest in the property.
A bank then files the complaint in court and sends notice to all of the other entities. This is called service. You must “serve” these entities either by actually having a sheriff or constable hand the complaint to the actual defendant, or by having it mailed via certified mail. This actually gives “notice” that a suit has been filed and gives the other parties a chance to respond. This response is called an “answer” to the lawsuit and the entity has 20 days in which to file its answer.
Next: more on who is the “Plaintiff” and who is the “Defendant”.
We’ve discussed what the Master Commissioner is here and what a note and mortgage are here. Let’s go over how the Master Commissioner actually gets the property and/or is ordered to sell the property.
As noted previously, Kentucky is a judicial state, meaning a foreclosure action must be filed in court and an order entered to sell it. How does this happen?
A complaint must be filed in the circuit court of the county where the property is located. Not to get all legalese or anything, but the circuit court has jurisdiction and the county where the property is located is the correct venue. So if the debtors or soon to be former owners have moved out, you don’t have to worry about filing wherever they are located.
The Plaintiff is the entity that files suit. The Plaintiff has to have a legal right to begin a foreclosure. In most cases, it is a bank that holds a note and mortgage against the property. It can also be a trust (more on securitization later), a servicer for the trust, or some other lien holder, whether it be a tax lien or a judgment lien.
The Defendant(s) can be numerous, depending on what is going on with the property. Most often the first defendants are the actual debtors. If the debtors are not the actual owners of the real estate (such as commercial property), then you have to add the owners of the real estate, the tenants and anyone else that has an interest in the property. You also have to add any tax lien holders, whether it is a federal, state, or local municipality, or a third party entity that has bought a tax lien.
Then you need to add any entity that holds a senior or junior mortgage, any other type of junior lien, or even unknown spouses, or unknown heirs, if one of the debtors is deceased.
As you can see, it can get pretty convoluted assuming what type of liens are recorded against a piece of property.
Next: how a foreclosure lawsuit gets to judgment.
Ok, so we have discussed getting a lawsuit started and what happens when a foreclosure is actually filed. The complaint has been filed, but how does the suit get to judgment? The bank must have all parties added to the suit. Any and all debtors, lienholders and/or taxing entities.
Once the complaint has been filed, the bank (or the party that filed suit), must get all parties served. This means that each party must have notice of the suit. Usually this is done by having the sheriff or constable deliver a copy of the complaint to each defendant personally. You can also have the defendants served by signing for certified mail. Even if the bank cannot find anyone, they can still proceed with getting service via a “warning order attorney.”
Once the bank has service on all of the parties, it can then file a motion for judgment. There are several different types of judgment, but the end result is the same. A motion is filed asking the court to enter judgment. This motion also includes an order of sale and an order referring the case to the master commissioner of the county. Once the court enters or grants this motion, the case is finally referred to the master commissioner.
Next: once the case is referred to the master commissioner . . .
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