Relocation Buyout

Home sales are complicated right now. Sellers must find a way for their home to stand out in the crowded listing space that exists today. One tool SIRVA Mortgage utilizes, to make their SIRVA Relocation listings stand out, are mortgage financing incentives. A listing with “SPECIAL FINANCING OPTIONS” in the MLS jumps out to prospective buyers. However, it must be the right incentive to work.  And that is why…

Finding the right financing incentives to sell a house is in many ways just like courting a lady. It is more art than science and several things must take place in the right combination to be successful.

You must:

• Show interest
• Attract attention and curiosity
• Fit in with their interests
• Invite her friends
• Impress the parents

First, showing interest is critical whether getting a women’s attention or selling a house. Just as important is the speed at which you do it. Incentives should be put on as soon as the house is listed. The longer it takes to put an incentive on the more likely you have missed a buyer—the sooner the better.

Second, you will need to do something significant to attract attention. Cheap out and lose out. Significant does not mean expensive, it means quality attention getter. Being creative will add value and impress more than something commonplace.

Incentives should fit the interests of those you are seeking. Each home has a unique market that will attract buyers with certain needs. For example, maybe consider offering reduced closing costs for lower priced homes, lower interest rates for middle priced homes, temporary interest rate buydowns for higher-end homes or home improvement gift cards for the fixer-upper. Finding the right incentive can do wonders when trying to drive traffic into the home.Next, you should invite friends and all interested parties. Along with the transferee, the relocation counselor and realtor play a key role in making sure the home is listed correctly and with the right incentives. When everyone is involved, good things happen.Finally, you should impress the parents. The corporate client and the client contact are like the parents. By selling the home quickly, the costs of temporary housing, travel, duplicate housing and the possibility of going to a costly buyout are reduced. Additionally, the opportunity to earn a home sale bonus, if one is offered, increases along with the likelihood of a successful relocation. With the parents on board, success follows.

If you have questions on financing incentives please e-mail us at MortgageFacilitators@sirva.com , we would be happy to help. 

Unquestionably, reimbursement of brokers’ commissions and closing costs, in conjunction with the sale of a relocated employee’s home, creates taxable income. During the mid-1960s corporations created the first home purchase programs in an attempt to eliminate the creation of taxable income resulting from the reimbursement of these costs to the employee thus eliminating the creation of income as well as the cost to gross up that income to keep the employee whole.

In the typical home purchase program the employer, or a supplier retained by the employers (throughout this white paper, utilization of the word employer also refers to a relocation supplier retained by the employer), offers to purchase the employee’s home at “fair market value” as set by an appraisal process. The employer then allows the employee to test the market for a set period usually 30-60 days to see whether they can sell the home for more than the appraised buyout offer. If the employee elects to accept the buyout, then the employer (or relocation supplier) buys the home and closes with the transferee. Closing costs are not charged to the employee, as the employer is simply willing to take a deed for the home without any obligation incurred for such costs. The only exception to this is the first transfer tax (where it is assessed), which is the sole responsibility of the transferee. Further, if the employee lists the home for sale, he or she must have had the real estate broker sign an “exclusion clause,” so that the employee does not incur any obligation for real estate commission if the employee sells the home to the employer. Accordingly, no commission upon the sale from the employee to the employer is due.

If during the offer period the employee does find a buyer willing to pay more than the employer’s offer, the recommended procedure to maximize the tax benefits of using a compliant home sale program would be to use the Amended Value Sale process described below:

• Amended Value Sale: In an amended value sale, the employee informs the employer that a buyer is willing to pay more for the home and the employer (or relocation provider) then amends its fair-market-value offer up to the amount offered by that buyer.

If no buyer is procured by the employee, he or she will accept the offer from the employer. The employer then completes the sale with the employee and conducts a closing where prorations are made up to a certain date (generally the date at which the employee vacates the home). Thereafter, the employer attempts to resell the home and upon such resale all the costs of brokers’ commissions, closing costs and any losses on the resale of the home are incurred by that employer. read more.

To read the rest of the conversation, visit our resource library.

When localizing an expatriate, there are several compensation items that need to be considered. Here is a checklist to use a guideline:

1. Base salary. Should the employee be "re-priced" to the local market pay structure? Should a premium be offered for international experience? Many organizations move the employee to local salary levels. If there is an extreme difference in salary levels (either lower or higher), however, a phased-in approach is often carried out. On the other hand, oftentimes organizations justify paying an expatriate on a higher pay structure because of his/her international experience and business relationships with the home office.

2. Retirement benefits. Because retirement plans, social security and pensions do not cross national boundaries, this is often the most difficult item to transition. Often employees have expectations to remain on their home country retirement program, but unfortunately there is no typical solution to bridge the gap between country plans. Some basic alternatives include retaining the employee in a tax-qualified home country plan, simply transferring to the local plan or using an umbrella-funded plan.

3. Income taxes. Normally, the expatriate will simply transfer to the local tax system. This is not a problem for most of the world. American workers, however, are put in a difficult situation because they are taxed on a worldwide basis. Many organizations will continue the "tax equalization" process on an as-needed basis to prevent double taxation on American expatriates. Employees of other nationalities do not require such assistance.

4. Housing. It is recommended that organizations remain flexible regarding host country housing because many factors come into play when deciding how to handle housing for the expatriate. In many locations throughout the world, expatriate housing is vastly different than local standards and expectations. In some cases, it may be unreasonable to expect an expatriate to move into a local neighborhood or local style housing, e.g. Mumbai, Beijing, Jakarta, etc. Therefore, if the expatriate is moved to the local salary structure, a housing allowance may be needed to subsidize continued living in expatriate style housing. Other issues that arise with housing tax issues, family matters, property ownership laws, home search assistance and moving costs.

5. G&S differential/assignment incentives. In locations where assignees receive a G&S differential, the common practice is to immediately stop the allowance. Other options include a phase-out or lump-sum buyout, although it is rare for companies to continue to pay a G&S allowance beyond the effective localization date. Other assignment incentives such as mobility premiums, hardship allowances, etc. are also normally stopped upon conversion to local status.

6. Education for dependent children. After housing, this item is the most commonly subsidized cost after an expatriate is localized, especially if the local schools are inadequate based on international standards or if the host country language is an issue. To alleviate the problem, organizations should consider continuing education coverage, or pay a percentage of the education costs for one to two years.

7. Health care. Health care standards and costs vary greatly in different parts of the world and is a priority issue for most employees and their families. Normally, localizing employees will simply transfer into the local health care system, but concerns will arise if the health coverage in the new location is of a lower standard than in the home location. This will be a costly change for an employee coming into the United States, where typically the health care is more expensive. Because of their time spent in the host country, a localized employee will most likely be aware of the issues, and therefore be in a position to make appropriate decisions.

Finally, localization may subject the employee and the company to various employment laws and regulations that apply to employees hired by local companies. It is important to speak with a local employment counsel to understand the legal effects and ramifications of localization, including subjecting the company to stringent employment laws in some European countries.
Localizing expatriates can be a complicated process and is not as simple as transferring expatriates to a local compensation package. By having a strategic plan in place, companies can anticipate potential localization issues and make the process as efficient as possible.

Companies continue to report that their employees are increasing reluctant to relocate. While the usual factors of family and spousal employment are even more magnified in tough real estate markets, one additional factor may be the home sale program the company offers. When the transferee is provided with a “pure” BVO/BVX home sale program, there is no guaranteed home buyout offer. These BVO/BVX programs have generally worked well in good real estate times; but when so many sellers are chasing even fewer qualified buyers (as is now the case) these relocation programs become less successful.  Even when transferees do all the right things—prepare the property for sale and list it at or near the most probable sale price—they still struggle to find buyers. This creates more pressure for corporations to extend temporary living benefits.

In some cases, it may make sense for companies to consider converting BVO/BVX home sale programs to AVO/AVX programs with required mandatory marketing times (e.g. 90 or 120 days). Here the best of a BVO/BVX program is maintained with ample time to find an outside buyer but also with the added assurance that if a buyer cannot be found then a guaranteed buy-out offer can be generated. This can be thought of as an “emergency parachute,” which can be used to complete the sale of the home and thus the corporate relocation. Also keep in mind, AVO/AVX corporate relocation programs ensure compliance with the recent revenue ruling (2005-74) which approves the use of AVO/AVX programs while not specifically approving BVO/BVX programs.

Have you considered this or have you already switched to an AVO/AVX relocation program? Are your employees more willing to relocate?

In the past, employers offering corporate relocation services had to assure that a home buyout price paid to the employee was a fair market value, no more and no less. The use of broker market analyses to help establish an appropriate listing price and independent appraisals to establish the buyout price was an attempt to assure that the home buyout price represented a fair market price.

Due to the rapidly declining real estate market, a questionable trend has reared its ugly head—employers who are desperate to find a way to increase a transferee’s home buyout offer, without triggering a “direct offer” scenario, are now asking for relocation appraisals without forecasting. A directed offer requires the IRS to treat the buyout amount paid to the employee, in excess of the home’s fair market value, as income to the employee.

Standard corporate relocation practice calls for appraisals that attempt to determine a home’s anticipated sale price taking into account current marketing conditions (known as a forecasting adjustment). Forecasting in a declining market results in lower appraised values than those without forecasting adjustments—ignoring a forecasting adjustment will likely result in the appraised value being inflated.

The result is that the employer pays an amount to the employee that is higher than fair market value while having appraisals that appear to support the value by not using the forecasting adjustment process.

As was pointed out by Pete Scott, Worldwide ERC Tax Counsel, in the tax and legal update session at the San Antonio Worldwide ERC Conference, risks of ignoring the forecasting component include a rejection by the IRS of the appraisal as good evidence of fair market value; the appearance of a directed offer; a departure from standard policy that could result in a purchase price substantially higher than the sales price and income that is taxable as wages and subject to withholding/payroll taxes. There was substantial agreement among the members of the ERC Public Policy Committee in San Antonio as well as among appraisers attending the meeting that the practice should be discouraged.

This strange reversal of practice is driven by the need for employers to do whatever is possible to encourage employees to accept their corporate relocations, while not creating additional income to the employee. Employers, however, should not abandon standard practices or depart from their own former policies regarding appraiser instructions by ignoring forecasting.

According to the latest forecast by the National Association of Realtors® (NAR), over the next few months, existing home sales in the United States are expected to hold fairly steady, then rise later in the year and continue to improve in 2009. NAR reports existing home sales for 2007 totaled 5.65 million, but projects home sales to edge up to 5.70 million this year and reach 5.91 million in 2009, which is still well below the 6.48 million units sold in 2006.

New construction home sales will continue to decline. According to the Association, new-home sales were reported at 770,000 for 2007, and are projected to decline to 669,000 this year before rising to 730,000 in 2009, but well below the 1.05 million in 2006.

In an early January speech, Daniel H. Mudd, chief executive of the mortgage finance company Fannie Mae, said home prices would "perhaps begin to gain modestly" in 2010. However, The National Association of Realtors (NAR) has a more positive prognostication that by the end of 2008 or early in 2009 most markets will start seeing appreciation once again.      

SIRVA does suggest companies put the appropriate controls in place to reduce risk and manage program performance at both the departure and destination locations. The following 12 best practices will help companies provide the policy framework so that transferees price and market their homes so they have a greater probability of selling their homes to an outside buyer and not have them go into inventory.

• Use qualified agents:  Use a network of qualified brokers, such as those found in SIRVA's Preferred Broker Network, to ensure transferees receive the right expertise and the best value when selling their home in the current real estate market. Using a qualified and "relocation experienced" broker is critical because if a home is listed at an incorrect price or without adequate marketing support, it is unlikely to find a timely buyer at the optimal sales price.

• Require two broker price options/broker market analyses: Multiple broker price options will help establish the most accurate selling price, which is key to quickly selling a home. Because market activity steadily falls after the first few weeks a home is on the market, pricing realistically from the beginning will attract more potential buyers.

• Delay appraisals: Delay appraisals to provide the opportunity to market a home before incurring appraisal costs. This provides more data for appraisers to use in value determination, sets more realistic value expectations, and lowers home sale cost and risk.

• Support mandatory marketing periods: Require transferees to list their homes and market them effectively for a mandatory period of time (at least 60 days) in order to increase, not only the number of amended-value sales, but also the opportunities to generate outside sales with no appraisals needed.

• Establish list-price caps:  Establish list-price caps to prevent over-listing during the property's initial exposure to the market, which is one of the most common reasons a home sits on the market. Make sure that your company's policy language specifically states that a home may not be listed at more than 105% of the average of the two most-probable sales prices from the broker market analyses. More and more companies are now going to 104% or even 103%. The list price should also be adjusted based on changes in market conditions and/or receipt of the appraised value offer.

• Modify a BVO/BVX to AVO/AVX:  In down real estate markets, some homes simply will not sell-even when transferees do everything right. Offer a guaranteed buyout after 90, 120 or 150 days to ensure the home will not be on the market past a certain time frame. This will eliminate delays in a transferee's relocation schedule, diminish transferee frustration from not selling his or her home or even prevent a cancelled relocation.

The other six best practices will be posted later today, so stay tuned.