The House Handoff

By Mary E. Medland Apr 1, 2004
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HR Magazine, June 2004The buyer value option may help speed relocated employees on their way—but beware of tax liabilities.

Last year when a merger meant that The Sports Authority needed to move some 125 employees from Fort Lauderdale, Fla., to the Denver area, the company went looking for ways to make the move as enticing as possible. “We really wanted people to move, and we wanted everything to go as smoothly as possible,” says Jennifer Hinton, executive assistant/project coordinator at The Sports Authority.

To that end, the company offered its employees a buyer value option (BVO) home buyout—a program that enabled employees to sell their Florida homes to a third-party relocation company, which would, in turn, sell the home to a buyer that the employee had located.

Employees were able to wash their hands of many of the final details involved in home sales and to focus their efforts on finding and moving to new housing in Colorado. In addition, The Sports Authority was relieved of a huge administrative burden.

With BVO, the employer commissions a relocation company to juggle the packers, movers and other details of relocation, which include purchasing the employee’s home and handling the remaining details, such as closing costs, not to mention the closing itself, in the second sale to the new homeowner. After a fair market value is established and an employee locates a credible buyer, the employee then may sell the home to a third-party relocation company for the price (the “buyer value”) established by the outside offer.

“It worked wonderfully, and our employees did not have to worry as much about selling their homes,” says Hinton. “The BVO really let our associates find the new community they wanted to live in and get back to work.”

Of the 125 individuals who made the move—assisted by RE/MAX Relocation—only one home did not sell.

How It Began

The evolution of the BVO began during the 1980s, when companies began to seek out third parties to buy employees’ homes through “amended value” home buyout programs.

In the case of amended value corporate buyouts, a third party is charged with getting appraisals and inspections taken care of, making an offer to purchase at the value established by the appraisals and giving the seller a period of time—normally 60 days—to locate a buyer willing to pay more than the appraised amount.

But by the late 1990s, the real estate market was hot enough that some employers were willing to agree that if a buyer simply showed up and made an offer, that offer alone was a determinant of fair market value. Hence the term “buyer value option.”

“The BVO really takes advantage of a quick-moving market,” says H. Cris Collie, executive vice president of the Washington, D.C.-based Employee Relocation Council (ERC), a nonprofit association for the relocation industry. “But when the market slows down, as it inevitably will, then the BVO may not be the best way to get the employee moved as quickly as possible.”

BVO Benefits

In a typical BVO transaction, a third-party relocation company will assist in establishing a home’s value through at least one broker market analysis, which will likely be supported by the offer price of the potential buyer, says Thom Kessler, vice president of North American Sales at RE/MAX Relocation in Greenwood Village, Colo.

The market analysis will show what comparable homes in a neighborhood have sold for and enable one to realistically price the property—a key element in any home sale. Essentially all the employee has to do then is locate a potential buyer. After a viable potential buyer has been located, the third party steps in and takes over. The transferee does not have to be involved after selling the home to the relocation company and does not have anything to do with the closing.

Due to a 1972 Internal Revenue Service (IRS) ruling, resulting from a tax court case, when an employer is moving an employee and agrees to purchase a home at fair market value, there is no income attributed to the employee from avoiding payment of a real estate broker’s commission, which the employer pays. The same rationale extends to other transaction costs incurred by the relocation company when it sells the house.

Consequently, when the employer then sells the home to the ultimate purchaser, the sale expenses are not income to the employee since the employee no longer has any interest in the home.

The risk of homeownership does remain with the employee until a potential buyer is found. “However, we are actively involved in helping the employee identify a listing agent, and we work closely with that agent,” says Kessler. Working closely includes receiving a detailed weekly report of the activity related to the sale of the home.

The risk to the employer is limited unless the second sale does not work out. If “the closing on the second sale does not go through, there is a risk to the company,” says Kessler, adding that the industry average of BVO sales not being completed is 5 percent, although the average for RE/MAX Relocation is lower. “In the event that happens, the house becomes an inventory property for the employer.”

That means the third-party vendor continues to make mortgage payments and pay other carrying costs, which it bills back to the employer, while putting the house back on the market in the hope it will sell quickly for a good price.

Financial and Tax Benefits

In addition to relieving employers of the administrative details involved in buying and selling employee homes, BVOs are typically less expensive for employers than buying the home themselves.

“When all is completed, the third party is reimbursed in a number of ways,” says Ken Head, president of Milwaukee-based Cross Country Relocation Inc. “Often it is a nominal flat fee that we charge between $1,000 and $1,500.”

He also charges the employer the cost of expenses and collects a referral fee from a broker for hooking up the employee with a broker. The referral fee, says Kessler, is typically 25 percent of the agent’s commission.

BVOs also have a number of tax advantages. While at one time companies directly reimbursed relocating workers for the expenses of home sales, that was hardly an ideal method because “that money showed up as income on the employee’s W-2,” says Head. Of course, the employee then had to pay additional taxes to Uncle Sam, which often left the employer having to “gross up” the employee’s salary to cover those additional taxes. “With grossing up to cover taxes, a $20,000 relocation expense could rise to $33,000.”

“In reality, the primary reason that companies go with the BVO is the significant tax advantage,” says Kessler. “It eliminates the need for employers to ‘gross up’ on their reimbursement to the employee of commission and closing costs, because they are now paying those costs directly to the third party.”

The IRS has not ruled on the taxability of several home buyout relocation programs, including the BVO. However, Collie says that a company’s program should stand up under scrutiny if it follows 11 key elements and procedures ERC recommends. (See “Key Elements of a Buyout Program.”)

Indeed, keeping abreast of the tax considerations and understanding their ins and outs can be devilishly tricky.

“It’s very complex,” says Collie, an opinion echoed by both Kessler and Head.

As Kessler puts it, “I spend a lot of time explaining all of this to HR personnel... it’s very difficult to understand.”

“It’s amazing how few companies really understand how this all works,” says Head. “However, when they finally figure it out, the response is usually ‘How come no one has ever told us about this before?’”

Mary E. Medland is a freelance business writer based in Baltimore.
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