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Companies find they need to revamp housing relocation policies in light of the real estate market downturn.
After more than a decade of soaring real estate markets that were worthy of celebration, homeowners awoke last year to a financial hangover. In the third quarter of 2006, home prices declined for the first time in 13 years, according to the National Association of Realtors (NAR) in Washington, D.C.
While experts say the housing market is simply returning to normal after several years of red-hot price appreciation, it’s a normalcy that is requiring relocating employees and their employers to make significant adjustments.
For example, homeowners today still believe “they’re going to get what their neighbor sold their house for” in 2005, says Rene Decker, an associate in charge of relocations at W.L. Gore & Associates, a company best known for its GORE-TEX fabrics. “You never want to think it’s your house. You always think it happens in other markets.”
The truth is that all areas of the country have seen home prices tumble—albeit to varying degrees. (See “Home values Sink.”)
Tumbling prices mean buyers can afford to be choosier, take longer to review their options and be more demanding on lengthy closing dates. As a result, employees’ homes now sit on the market for months instead of weeks. And employers anxious to speed up the process of moving the 74 percent of employees who own homes are re-examining the ways they offer corporate relocation assistance.
Such assistance comes in many forms -- mortgage buyout plans, home marketing assistance, temporary housing and loss-on-sale reimbursements.
Just two years ago, if companies had mortgage buyout programs on the books, few had to use them. But slowing home sales have sparked increased use of these programs.
The most common type of mortgage buyout is the guaranteed buyout (GBO) program. Under such programs, the company guarantees to buy an employee’s home if it doesn’t sell within a certain time period, such as 30, 60 or 90 days, says Elaine Smythe, vice president of sales at XONEX Relocation, headquartered in New Castle, Del.
To determine the purchase amount the company will offer the employee, two appraisals are ordered up front. Typically the company’s offer is the average of the two appraisals. So if the appraisals average $300,000, the employee knows he will receive $300,000 from the company—unless an outside buyer comes along before the deadline and offers to pay an equal or greater price.
(See "The Highs and Lows.")
If the company buys the employee’s home, it holds it in inventory until it can be resold. Houses that go into inventory generally cost corporations each month an amount equal to 1 percent to 1.5 percent of a home’s selling price, or thousands of dollars in carrying costs.
Those costs can add up in today’s slow market, as W.L. Gore can attest. “Before , we had two or three homes a year” that needed to be bought and put into inventory; “now it’s two to three a month,” says Decker of the Newark, Del.-based company.
In light of the hobbled housing market, W.L. Gore revamped its policy for 2007, Decker says. Previously, an employee would have to market a home for 60 days before W.L. Gore bought it and put it into inventory. That marketing period has been extended to 90 days to try to limit the company’s inventory. Like W.L. Gore, many other companies are experiencing increased inventory. A recent survey by Worldwide ERC found that 57 percent of companies surveyed had more homes in inventory than the year before. (See “Change in Employers’ Inventories of Employee Homes.”)
A second type of mortgage buyout—the buyer value option (BVO)—does not impose inventory risks on employers and could see increased usage in the slower housing market.
With BVOs, the company does not guarantee that it will buy employees’ homes. Instead, the program mandates that employees market the property until a buyer is found, says Smythe. Thus, employees take on the risk that a home may remain on the market for several months.
Appraisals are not required because the program focuses only on the buyer’s asking price. So, an employee might list his home at $300,000, while an outside buyer offers $295,000. At that point, a corporation’s in-house relocation program will buy the house from the employee for $295,000, then sell it to the outside buyer.
The corporation takes care of all the final paperwork and details of the transaction, Smythe says, allowing the employee to relocate more quickly. If a corporation does not have an in-house program, a third-party relocation firm buys the home on the corporation’s behalf, and the relocation firm handles all the final paperwork.
Piling on the Incentives
To help lower a corporation’s housing inventories or to move employees more quickly, some companies are getting creative.
One strategy is to implement marketing assistance policies, which pair employees with approved real estate professionals to prepare the home for sale, says Scott Sullivan, senior vice president of global sales and marketing of GMAC Global Relocation Services in Woodridge, Ill.
Realtors help establish a realistic price, suggest necessary repairs and stage the home through minor changes such as updating lighting, trimming bushes or eliminating clutter. All of this advice is included in the realtor’s commission.
Another alternative GMAC recommends is to offer condition incentives, such as reimbursing an employee’s expenses for repairs or granting an allowance—say, $1,000—so the employee can bring the property up to the best condition, he says.
This assistance is essential not only to keep the property out of a company’s inventory, but also to compete in today’s market. According to NAR, 3.75 million existing homes were for sale nationwide at the end of September, or a 7.3-month supply at today’s sale pace. This compares to 2.8 million houses, or a 4.6-month supply, a year earlier.
“With the amount of property on the market, buyers have so many more choices now. They’re really looking for the best value,” says Ellie Sullivan, director of consulting at Weichert Relocation Resources Inc., based in Morris Plains, N.J. “They don’t want something that is in disrepair or overpriced.”
Another option is to offer sales incentives that ensure the employee prices the house correctly, Ellie Sullivan says. For example, an employee may be asked to list his home for no more than 105 percent of the value. If the house sells within a certain amount of time, the employee receives a lump-sum payment, or a bonus equal to a certain percentage, which might range from 1 percent to 4 percent of the sale price. This bonus can sometimes appease employees who think their house is worth more than the sale price.
Assisting Key Players
GBO, BVO and marketing assistance policies are effective if the company can wait several months for the employee to relocate to his new position. But, if it is critical for the new hire or key employee to start right away, the company will have to use more-immediate assistance programs.
One option is to offer relocation reimbursement. However, this is sometimes reserved for executive-level employees.
Overall, 71 percent of HR professionals reported that their organizations cover relocation expenses as an extra benefit for executive-level employees, compared with 55 percent who do so for middle management and 23 percent for nonmanagement employees, according to the Society for Human Resource Management (SHRM) 2006 HR Practices in Executive-Level Compensation Survey Report. For all relocation packages, expenses included rental assistance (22 percent), assistance selling a previous home (20 percent), mortgage assistance (12 percent) and down payment assistance (11 percent), according to the SHRM 2006 Benefits Survey Report.
For instance, Dallas-based Tenet Healthcare Corp.—which has more than 68,000 employees at 66 hospitals—relocates two distinct groups of people. One is new hires such as nurses and technicians. For these individuals, the company primarily uses a lump-sum payment to facilitate moves. While the relocation assistance is “minimal,” new hires “might get a significant hiring bonus,” says Shelley Giles, director of relocation services. Usually 600 to 700 people in this group move each year.
However, the company also moves about 100 members of management annually. The health care provider relies on a BVO—much more so today than in years past—that is less expensive for the company and keeps the “employee happy as long as they sell the house,” Giles says. The company also has a GBO plan for executives.
If a manager’s or executive’s house is on the market and they find a house in the new location, they can take the money from the buyout to purchase a house in the new location. Tenet covers the costs, including mortgage interest, property tax, insurance, utilities, lawn care, etc., of the old home while it is on the market for up to four months, she says.
It hasn’t been much of an issue in the past with houses selling in 30 to 60 days. But that’s no longer the case, and Giles now hears “the question I never got a year ago: What happens when 120 days runs out?” If that happened, Tenet would do a GBO, though it hasn’t had to utilize the policy so far. “At the end of the day, we’re not going to leave them hanging out to dry,” she says.
David Barlow, vice president of consulting with the relocation company SIRVA Inc., agrees with Tenet’s strategy, adding that “companies still need to get people in the right place at the right time, so policies need to be reflective of that.”
Indeed, for key executives and critical new hires, some companies (38 percent) have loss-on-sale policies, which pay a key employee the difference between the purchase price and sale price of his home, says Ellie Sullivan. These policies can apply when a person purchased a house in the last year or two and the price has since slid, or if he has made major improvements and can’t recoup the costs.
Some experts warn that the cooling housing market could make home-owning employees more reluctant to relocate if they stand to lose too much money on what likely is their largest investment.
Scott Sullivan says that the larger housing inventory nationwide, combined with slower housing appreciation, “creates reluctance to relocate. People think twice before moving.”
If a company’s first choice for a new job doesn’t want to relocate, the company will have to move on to its second or third choice. That means the company runs the risk of “diluting the particular talent base,” says Barlow, who spent more than 30 years in HR with Chevron Corp.
And because the sale of their home is a top priority for relocating employees, a disappointment with the sale and move “colors their whole relocation experience,” he says.
So far, neither W.L. Gore nor Tenet has seen its employees or new hires hesitant to relocate. If that changes at these and other companies, HR professionals should make managers aware that employees may not want to move, or that it could take longer to get them in the new position and the relocation costs could be higher. What’s more, if someone is being moved in late 2007, the costs could carry over into the middle of 2008—and those costs are charged back to the individual departments.
When keeping managers abreast of the real estate market, HR professionals should keep watch on trends nationwide as well as regionally in the areas in which they relocate employees. (See “It’s Still Location, Location, Location.”) Changes in the market would mean more tweaks ahead in relocation policies.
Susan Ladika has been a journalist for more than 20 years, working in both the United States and Europe. Now based in Tampa, Fla., her freelance work has appeared in such publications as The Wall Street Journal-Europe
and The Economist.
Online sidebar: Its Still Location, Location, Location
SHRM reports: 2006 Benefits Survey
2006 HR Practices in Executive-Level Compensation Survey
Data: U.S. Economic Outlook: January 2007 (National Association of Realtors)
Existing Home Sales (National Association of Realtors)
Press Release: Third-Quarter Metro Home Prices & State Sales Confirm Market Transition(National Association of Realtors)
Article: Home Prices Down 1.2% in Third Quarter (Money magazine)
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