
We all know that real estate is local. However—in our current real estate situation—we are seeing more markets continue to see a slip in home sales with only a few who are reporting an increase. The National Association of Realtors (NAR) reports areas such as Colorado Springs, Colo., Sacramento, Calif. and Spartanburg, S.C. are experiencing double-digit pending sales gains compared to a year ago with a significant percentage of these sales attributed to investors who are buying foreclosed properties. So while some markets have seen tremendous growth in home sales compared to last year, others have seen contract signings slashed by as much as 50 percent.
The current real estate market for the typical residential home is still very much a buyer’s market. Attractive interest rates, large inventories of homes for sale and lower-than-average sale prices make it a great time to buy. Sellers aren’t so fortunate. In fact, some areas have seen home values drop so low that typically willing transferees are hesitant to relocate because of loss-on-sale concerns or owing more on their properties than the current market value sales price.
According to a recent survey conducted by the Worldwide
ERC®, the number one reason employees are reluctant to relocate is a direct effect of the troubled real estate market. The survey indicated that more than 95 percent of respondents reported "slowed real estate appreciation at the old location," as the reason their employees are averse to moving. This is a stark contrast from last year when only 16 percent cited the real estate market as the reason for their reluctance. Instead, high housing costs, high cost-of-living and family resistance to move, were top concerns.
"Today, it’s an unfortunate fact that those true soldiers that have faithfully relocated every two to three years are cooling to the idea because of the economy and the fear that they will take a considerable home loss-on-sale," says David Barlow, SIRVA’s senior consultant.
Barlow advises companies that have not done so to consider implementing a loss-on-sale policy to remain competitive and to help their transferees with the reality of falling home values and sale prices. He also advises companies that already have a loss-on-sale policy to re-evaluate the loss-on-sale limit or cap to ensure it is sufficient in today’s difficult real estate market.
"In the past, $25,000 was a typical loss-on-sale cap, but today that figure is increasing and could approach $75,000," he explains.
Negative Equity a Grim Reality While many companies are struggling with situations where transferees are not willing to relocate because of a significant loss-on-sale, others are dealing with a less common but potentially even more difficult scenario— is trying to relocate employees who have negative equity in their home.
Barlow explains that SIRVA is seeing this problem grow from what used to be a very low percentage of relocation candidates, which is a definite sign of the times.
Negative equity comes into play when a home’s value is less than the amount of all outstanding debts against the home. This can happen if an individual takes out a line of credit, second mortgage or other loan on his or her home, which must be paid before the home can close. It can also happen if the home’s value has decreased below the value of the original mortgage. This can occur with low or no money down loan products that were prevalent in the last 5-10 years.
"If a transferee purchased a home for $350,000 two years ago, and in today’s real estate market that home is only worth and sells for $325,000, then the owner is looking at a $25,000 loss on sale," explains Barlow. "This situation would generally be covered in whole or in part by a loss-on-sale policy. However, if the same individual also took out a $50,000 home equity loan (in addition to a $300,00 first mortgage), then he or she is now on the hook for whatever portion the company does not cover in the loss-on-sale benefit. If the first mortgage and the line of credit is greater than the net proceeds of the sale of the home plus the loss-on-sale benefit then the homeowner is in a negative equity situation or is considered to be ‘upside down’.
"If the homeowner can’t repay this total debt at the home closing, the home can’t be sold. This is a significant issue in corporate relocation because all obligations have to be cleared when closing the sale of the home, and if the individual can’t clear the obligation and sell the home, the relocation can’t proceed."
SIRVA’s Solution SIRVA works closely with companies to minimize the risks of relocating individuals with negative equity. SIRVA counselors are trained to ask the right questions and uncover negative equity situations in the discovery phase, before the relocation is initiated.
"If we determine a relocation candidate will be in a negative equity situation then we can alert our clients who will then have to make some tough decisions," explains Barlow. "The best course of action may be to select another candidate."
Barlow says the last course of action a company should take is to settle the negative equity obligation for the employee in the form of a lump-sum payment.
"Our counsel has always been against paying the negative equity to the employee. Imagine the potential equity issues if an employee were to find out the company settled a colleague’s unique financial obligation. This could create more problems than it solves," he says. "Consider the similar transferee who did not take out an equity line who would—in effect—be penalized for his/her conservative financial management."
Instead, Barlow advises companies that absolutely have to relocate a high-value employee with negative equity to consider a loan—rather than just cutting a check—for the outstanding debt.
"Companies can give transferees the opportunity to pay the loan back or use it as a retention device, forgiving portions of the loan over time," adds Barlow. "Companies could also consider a temporary domestic assignment or home-retention allowance. Either would allow the company to relocate an individual with negative equity by not selling the home and thus not having to deal with the debt obligations during the relocation process.
Barlow emphasizes how important it is to identify negative equity transferees before relocations are initiated.
"This is one of the ways SIRVA’s consulting services can help companies execute their relocation programs while minimizing the risks of the current real estate market," he continues. "Our obligation is to work with clients to identify every possible course of action in order to make a relocation happen."* It’s no secret that the current real estate market has had a significant impact on the relocation industry. Companies have had to re-evaluate and update their corporate relocation policies to overcome the challenges of the current market.
Barlow doesn’t wager a guess on when the market will turn, but he expects companies will be working through the challenges of the current real estate market for some time to come.