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Vol. 48, No. 1
Companies get the final say in the house a relocated employee buys - or else they won't buy it
Employees who are being relocated typically say the most stressful challenges during the process boil down to two: selling one house and buying another.
Many companies reduce the stress of the first challenge by offering a “guaranteed buyout program.” These programs guarantee that when an employee is relocated, for example, from Houston to Chicago, the company will buy the Houston home from the employee and assume the risk of selling it.
But along the way, companies have discovered that many costly problems can arise from buying a relocated employee’s house and reselling it. Mold problems, water damage caused by improperly applied stucco, a high-maintenance feature such as a swimming pool—those are just a few of the characteristics that can make a house hard to resell.
So, companies are attempting to protect their investments up front by imposing the same restrictions found in a buyout program on the kinds of houses relocated employees can buy in the first place. Using the example above, the house a relocated employee buys now in Chicago may be one that the company would consider buying later if the employee is relocated again.
Around the country, human resource managers are advising relocating employees to avoid purchasing any property that doesn’t meet the company’s criteria for its buyout program. An employee who ignores the company’s recommendations would probably be prohibited from enrolling in a buyout program for a later relocation. If the employee is excluded from the program, he could not transfer the risks and burdens of selling his house, and, as a result, he might have to sell at a loss if the transaction had to be completed quickly or in a down real estate market.
It may sound “big brother” to have such influence over your transferred employee’s house purchase. But relocation itself is costly enough—about $60,000 for a home-owning employee whose house is in good condition and who is moving within the continental United States, according to the Employee Relocation Council (ERC), a Washington, D.C.-based organization of relocation specialists. “And the vast majority of those costs come from buying and selling the employee’s house,” adds Dick Mansfield, the ERC’s general counsel. Companies can’t afford to add on to those costs by spending more money making an undesirable house desirable.
Buyout programs are associated with the use of third-party relocation management firms, which most large companies hire to guide the moving process. Although some companies handle relocation details in-house through their human resource departments, that practice is becoming increasingly rare as HR chooses to outsource such activities.
But the HR department still has a key role to play since it’s responsible for telling the relocation firm what sort of restrictions it desires to be put in place. “We set the policy and tell them what we want,” says Kristy Palici, an HR director at Household International in Prospect Heights, Ill. “If there are any problems or if there are any employee exceptions to be given, it all goes through us.”
Risks and Restrictions
“Much of this process is centered around how much risk an employer is willing to take on a property they have never occupied,” says Merris Guidice, director of real estate at MSI Mobility Services International, a relocation firm in Newburyport, Mass.
To minimize risk, companies often refuse to approve the purchase of houses with characteristics such as those ruled out by aerospace giant Boeing Co. Its guaranteed-buyout restrictions, viewed as standard-setting in the relocation industry, pertain to:
“Many of these scenarios could cost a company so much time and money to remediate in order to sell the home,” says Guidice, that the company just refuses to accept the property for the buyout program.
The toxic mold example alone would give any employer pause. Multimillion-dollar awards have been handed down in cases brought by homeowners who have discovered their house had undisclosed black mold, which can cause illness and lead to structural damage that’s costly to repair. Even when a third-party relocation firm is employed, the employer assumes liability upon purchase.
The key “is to make sure that the employee is buying wisely, and not buying a property that is going to give trouble in the future if the employee is relocated again,” says David Barlow, senior vice president of client support services at Naperville, Ill.-based SIRVA Relocation and former head of global relocation for ChevronTexaco.
Aside from the standard restrictions, HR departments must make judgment calls to determine if a house qualifies for the buyout program.
For example, a relocated employee who decides to build a house rather than buy an existing one could require an extended stay in temporary quarters. Barlow says the vast majority of companies will not pay a housing allowance for such an arrangement. An employee who decides to build anyway would have to foot the bill for a place to stay during construction.
Location also can become a consideration. If the employee wants to buy a home far beyond a normal commute to his new workplace, the employer may become concerned that the distance would affect the employee’s willingness to work unusual hours from time to time. “If the new purchase creates an untenable commute, they are not going to go for it,” Barlow says. “It has to be reasonably close.”
In some instances, companies move employees from a relatively inexpensive real estate market (say, New Iberia, La.) to a higher-priced market (say, Alexandria, Va.). A company is unlikely to make up any difference in the cost of the home directly, but it might increase the employee’s salary or pay a moving bonus.
Overriding the Veto
Sometimes an employee will fall in love with a house and will want to buy it no matter what the company says. And that’s OK. But HR must let the employee know the ramifications, experts say.
For instance, a company usually pays for a pre-purchase appraisal before an employee buys a house in the new location. If the price appears too high but the employee goes ahead with the purchase, the company may decide it won’t reimburse the employee for the difference if he has to be relocated later on and has to sell that pricey house at a loss. Says Guidice: “The company will state right up front that if you go against their recommendation, you will not be covered under their home-sale program in the future.”
Another scenario is if a company’s relocation policy discourages the purchase of a house that has had a mold problem and an employee decides to buy it anyway. The company would most likely refuse to let the employee take part in the home sale program for a subsequent transfer, explains Katrina Jaehnert, a consultant with Runzheimer International, an employee mobility consultancy based in Rochester, Wis.
The company also should make clear the tax advantages the employee loses by opting out of the buyout program. In a guaranteed buyout program, the employee incurs no housing-sale costs. Under Internal Revenue Service rules, a company’s expenses in selling a relocating employee’s house are not counted as the employee’s taxable income as long as the home is sold by the employee to the company, which then sells it to another buyer, and a relocation service provider acts as the agent in both transactions.
Under a guaranteed buyout program, the risk of ownership passes from employee to employer. And because of this risk, experts say, employers have a vested interest in enforcing restrictions on the houses they buy from employees—as well as the types of houses they allow employees to purchase.
James Pethokoukis is a Chicago-based senior editor of U.S. News & World Report covering business and the financial markets.
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