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JUNE 2011
MOBILITYINSIGHTS Information from Cartus on Relocation and International Assignment Trends and Practices
The Home Sale Dilemma
According to recent research by Cartus (“Mobility’s Biggest Challenges,” October 2011) more than three in four companies have modified their policy or program in the past two years or are considering doing so.
The recent economic downturn was a rude awakening for many companies and homeowners. Today, the U.S. economy shows signs of improvement, but real estate continues to struggle, with some analysts talking of a double dip in the housing market. Whether the dip will occur is up for debate, but the reality is that homeowners are still dealing with the effect of slower home sales and lower overall prices. As has been widely discussed, many homeowners are in foreclosure or “underwater,” i.e., they own a house that is worth less than the mortgage amount. Because of this, many companies have been experiencing reluctance to relocate on the part of their employees and new hires for the past several years. Clearly, the economy and housing conditions have affected companies and their relocation programs, and companies are responding. According to recent research by Cartus (“Mobility’s Biggest Challenges,” October 2011) more than three in four companies have modified their policy or program in the past two years or are considering doing so. The majority of the changes have been related to home sale and range from increasing benefits to assist employees with the home sale (such as offering loss on sale) to decreasing benefits (such as providing Buyer Value Option sales rather than buyouts). The changes made depend on company culture and recruiting needs as well as budget/ cost containment initiatives. Because of the difficulties many homeowners are experiencing with selling their homes, companies are looking for alternatives to overcome reluctance to relocate and help move the employee along in the relocation process. In the Worldwide ERC 2011 U.S. Transfer Volume & Cost Survey, the top two reasons for employee reluctance to relocate are “slowed real estate appreciation/depressed housing market at the old location” and “old location home is in a negative equity situation.” When considering solutions to the home sale dilemma, it is helpful to first examine the common issues from a home seller perspective in this market. Such issues include: • Loss on sale (home is worth less than purchase price) • Capital improvement issues (the employee has made recent improvements that will not be recouped) • Negative equity/”underwater” (home is worth less than the mortgage amount – not necessarily a loss situation) • Perceived loss (home is worth less than if it had been sold a few years ago – no actual loss) • Extended marketing time (home will take a long time to sell/few buyers in the marketplace) • Home needs repairs in order to get it ready for sale Let’s look at possible solutions to each issue.
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MOBILITYINSIGHTS
Consider employee participation in the loss, company budget, gross up, and the rest of the home sale program before determining a cap.
Loss on sale (home is worth less than purchase price) When real estate markets were good, companies removed loss on sale from their mobility policies. Many companies have added loss on sale back into their programs, usually with caps for cost containment. Because there are many ways to structure loss on sale, consider employee participation in the loss, company budget, gross up (to gross up or not to gross up) and the rest of the home sale program before determining a cap. Companies will continue to struggle with the question of a loss on sale that is above the cap and whether or not it should be covered. The answer to this question lies in how badly the employee’s skill set is needed in the new location as well as the company’s ability to cover the amount of the loss. There is no right or wrong/black or white answer to that question. The flip side of offering loss on sale is, of course, not offering the benefit. Recruiting needs, employee traffic patterns, and company budget may dictate that loss on sale is not needed. If the company’s needs and mobility goals are met, no changes are needed. Some companies will have “pocket policies” (a pocket policy is one that is set and administered consistently when needed) to address loss on sale exceptions.
When it comes to capital improvements and loss on sale, the recommendations are clear: do not include capital improvements in the loss on sale policy.
The incidence of negative equity is increasing in some markets; companies are looking at each case before determining a course of action.
Capital improvement issues (the employee has made recent improvements that will not be recouped) When it comes to capital improvements and loss on sale, the recommendations are clear: do not include capital improvements in the loss on sale policy. The value of the improvements is included in the selling price (or appraised value) of the home. Unfortunately, this logic may be lost on the employee who just spent $30,000 upgrading his or her kitchen. Companies tend to address these issues for their critical transferees on a case-by-case basis. Standard loss on sale policy should not include capital improvements. Negative equity/”underwater” (home is worth less than the mortgage amount – not necessarily a loss situation) Strictly speaking, most companies do not cover negative equity situations. Some employees will be able to obtain approval from their lender for a short sale (the lender accepts an amount less than the full mortgage balance.) Companies may or may not provide assistance with this process. In some situations, the loss on sale payment will cover the negative equity amount. However, the incidence of negative equity is increasing in some markets; companies are looking at each case before determining a course of action. It is important to assess whether the employee is in a negative equity status through no fault of his/her own, or whether a second mortgage was obtained for the purchase of a new car, for example. Perceived loss (home is worth less than if it had been sold a few years ago – no actual loss) Since no actual loss has occurred, no loss on sale assistance is needed.
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MOBILITYINSIGHTS Extended marketing time (home will take a long time to sell/few buyers in the marketplace) There are several strategies that can be put in place to address the issue of extended marketing time. Consider the following marketing strategies: • List price parameters that ensure proper pricing from the outset • Home sale incentive that can encourage the employee to take less for the house in return for a quick sale • Buyer incentives that may differentiate the home from the competition • Updated Broker’s Market Analysis to recalibrate marketing strategy after a certain amount of time on the market. A variety of strategies can help improve the chances of a sale, but some cautions apply.
In addition, extending the time period for relocation may assist the employee (e.g., if the standard time frame is 12 months, consider an extension to 18 months). However, the employee must continue to market the home during the entire period so as not to jeopardize the excludability of certain moving expenses. It is important to note that other benefits, such as temporary living, may also be affected by extended marketing time. Companies should carefully determine the potential cost of extended temporary living as part of the totality of the relocation program. Implementing the suggested marketing strategies will help reduce temporary living time.
Some companies provide a fix-up allowance (usually without gross up) to cover some of the costs associated with readiness for sale.
While property management is often the best solution in cases where the employee will be returning permanently, or at least for a period of time, to the departure home, it becomes more problematic if the employee will be transferring again.
H o m e N e e d s R e p a i r s I n O r d e r To G e t I t R e a d y F o r S a l e Time and money are the two core issues behind getting a home ready for sale: the time to get things done and the money with which to do so. Companies should consider how quickly an employee has to report to the new location. If possible, giving ample notice to the employee may alleviate some of the pressure/burden of getting the home ready. In addition, some companies provide a fix-up allowance (usually without gross up) to cover some of the costs associated with readiness for sale. This allowance is not for maintenance or repairs, but is intended for market preparedness items such as neutralizing personalized décor. Alternative Strategies When housing markets started their decline, many companies, in an attempt to look for innovative ways to protect employees from the market impacts, began considering departure assistance that did not involve the sale of the home. Property management and/or a newer approach using direct subsidies were considered by some companies. The direct subsidy approach consists of a monthly payment to the employee to help cover all or a portion of the monthly homeownership cost. While certainly laudable, these approaches can lead to problems down the line, basically substituting one issue for another as companies and employees struggle with what to do next once the assistance ends. The thought process is simple: allow the employee to retain ownership of the home in the hope that the market will turn around in the future. However, while property management is often the best solution in cases where the employee will be returning permanently, or at least for a period of time, to the departure home, it becomes more problematic if the employee will be transferring again. Certainly, some employees may be willing to retain ownership and rent their homes for a period of time, but in some situations this assistance can ultimately become more expensive for the company than home sale and may leave the employee with a home he or she no longer needs or wants in a market that has not improved.
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MOBILITYINSIGHTS Among the questions that need to be asked are: how much assistance will be provided and for how long? If offering a subsidy, should it be $1,000, $2,000, or some other amount? Is it grossed up? If property management is used, is it formal or informal, vacant or occupied? Should the assistance continue for one year, three years, five years? How long is enough? What is fair? There is also the problem of consequences. How does the company support an employee who has a nightmare tenant who causes significant damage or must take time off from work to make repairs? And what happens when the assistance ends? This is especially worrisome since we have seen that housing markets are not recovering quickly. In some areas, estimates are that prices are not expected to rebound to their previous high levels for a decade or more. What will the employee do without further assistance once the benefit ends? The employee must also be considered if this type of strategy will be offered. Employees will need to understand the implications of owning a home in another location, both from a federal and state perspective. If they have residences in two states, which is considered the primary residence for tax and legal purposes? In addition, the employee needs to be aware of the issues that can arise in absentee landlord situations that can lead to lost productivity at work, such as late rental payments or repairs and maintenance. These can be especially problematic for those employees only receiving a direct subsidy or informal property management. It is strongly recommended that companies do a cost analysis and consider the long-term implications before starting down this path. Educating the employee and spouse/partner on the implications of this type of assistance is also crucial.
Managers of domestic U.S. programs are increasingly viewing candidate assessment as a necessity and, over and above that, including a financial assessment component in the exercise.
Many companies provide an upfront valuation of the departure home to help the candidate better determine if the move is financially feasible.
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In Summary: A Strategy That Helps In the mobility world, candidate assessment has been a common component of international assignments. However, managers of domestic U.S. programs are increasingly viewing candidate assessment as a necessity and, over and above that, including a financial assessment component in the exercise. This upfront tool provides the opportunity for informed decision-making on the part of both the company and the potential transferee. The company finds out a bit about the candidate’s situation and will know what to expect from a financial standpoint. The candidate has the opportunity to de-select based on the initial information provided. Some candidates find that the financial impact of the move is just too great; others can make the move with the knowledge of their own personal situation and the support the company will provide. The methodology for candidate assessment will vary by company, though many companies provide an upfront valuation of the departure home to help the candidate better determine if the move is financially feasible. Reluctance to relocate and home sale issues will continue into the future; however, there are strategies to overcome these issues. The best strategy is to be as informed as possible about a job candidate’s situation before the job offer is made and the relocation authorized. This allows both the company and the employee to understand the full implications of the move.
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