The Dangers of Missing Proceeds Distribution

(A guest post from the Ilumni Institute)

Attention Divorce Attorneys,

Don’t forget to include proceeds division and distribution directives in sale-of-house orders!

In addition to enforceability and protecting your clients' interests, here are a few of the issues divorce REALTORS® see when there are no orders or agreement regarding proceeds:

• Sale sabotage: When parties living in the house have no idea if, when, or how much money they will have when the house sells, as listing agents, we are often "ghosted." Once the house is listed, showings are declined, access to inspectors and appraisers is denied, and the overall sale is stalled. This frequently occurs because there is uncertainty and fear due to lack of funds to secure new housing.
• Misunderstanding/Contract breach: Every client who sells their house must line up new housing. More often than not, the funds to do so come from the proceeds of the sale. And in the flurry of the chaos that their lives have become, the clients may have overlooked the fact that the proceeds may not be distributed to them immediately upon sale, and instead will be disbursed to an attorney's trust account. Or perhaps the proceeds must be used to first pay off a litany of debts such as support judgments or other joint debts. There are numerous case scenarios where a party goes under contract on the purchase of another property, only to find out that they cannot, in fact, purchase something else because their sale funds are tied up. In addition to devastating disappointment, clients in this situation can find themselves liable due to breach of purchase contract.
• Closing delays: Once a contract is accepted, title (or escrow) is opened. Within a few days, closing instructions are drawn up; included within the packet of documents is a “proceeds disbursement” form. If there is a disagreement or lack of clarity around where the funds go, it will need to be sorted out prior to closing. Depending on the level of conflict and whether the court needs to be involved or not, there may be significant delays, which can also put the parties in breach of contract. After all, for every sale, there is usually a buyer who’s got a moving van loaded, a house they must vacate, contractors and furniture deliveries lined up, utilities set to transfer, and mail forwarded — not to mention interest accruing daily if their loan has been funded. So, a seller delay for something that should have been handled weeks ago doesn't fly with buyers who have held up their end of the deal.

Without an order or agreement, the closing process can evade busy counsel, and without a close eye on these timelines, the parties may instruct the closing officer to distribute funds directly to their accounts, bypassing attorney trust accounts or other joint debts being paid.

Perhaps the most alarming scenario is when only one party is on title. The titled party is the principal in the real estate transaction. Title officers and brokers can be bound by fiduciary duties and real estate industry governance to obey the principal and distribute funds pursuant to their instructions (aka, their own bank account). They may slice out the other party altogether—even with a court order to the contrary!

It's also worth noting that title frequently cannot (or will not) hold funds after closing. They are governed by oversight and have compliance issues when funds are held for any length of time. A family law dispute over proceeds distribution isn't looked at favorably.

Appointing a CDRE as the listing agent on a case is an effective way to ensure orders match distribution instructions, but that duty must be outlined clearly in an order, since a typical REALTOR’S® role does not extend that far.

When you are appointed on a case, for example, be sure to obtain a copy of the court order and inquire about proceeds distribution on day one. If there is no agreement, seek clarification from the parties and counsel until there is one—and work closely with your closing officer to ensure there are no discrepancies between the order and the instructions.

Feel free to reach out if you have any questions about proceeds distribution or anything else related to the real estate aspect of your cases.

650-550-8646

Shannon Rose
CDRE, SRES, CDPE, CLHMS, GPS
DRE# 01422955
Los Gatos, CA
1-650-550-8646
DivorceRealtor@RoseGroupRE.com