You want transferred employees and new hires to hit the ground running, full of enthusiasm for the possibilities they have with your company in a new city. That can be hard for them to do when they still have ties to their former life — especially in the form of a home they need to sell.
Having home sale as part of your company’s relocation program can be an important benefit that makes the move more palatable to the employee, and it gets the company an employee who is, as they say, “boots on the ground and firmly planted in a new location.”
If the sale of a home hangs over someone at their new job, it can have negative consequences. Not being fully engaged at the new location because of the financial burden of a home sale will wear on an employee.
These home sale options are the most popular additions to relocation programs:
This is just what it sounds like: the employee sells his/her home and submits the closing costs for reimbursement. While theoretically this option seems easy to implement, it can be riddled with complications.
Reimbursement like this is considered income to the employee and is subject to standard payroll withholdings. Then, depending on company policy, the employee or the company ends up paying the taxes, either of which is a costly scenario.
Buyer Value Option:
To avoid the costly tax associated with direct reimbursement, a buyer value option (BVO) can often be a much less costly option for both employers and the employee. In this option, the employee markets the home until a buyer is found.
The relocation management company (RMC) used by the employer, such as Lexicon, then purchases the home on the company’s behalf and sells the home to the buyer. This two-step approach saves taxes for both the employee and the employer.
In a BVO program, the employee doesn't pay a real estate commission or closing costs when he sells the home to the RMC, which means that the employer doesn't have to reimburse the employee for these expenses. That's good from the employee’s standpoint because he or she would pay income tax on the reimbursement. Ultimately, the employer pays the commission and other closing costs when the home is sold to the buyer. These expenses are considered operating expenses rather than employee reimbursements, with more favorable tax consequences for the employer.
Your company's legal department should be consulted before adding or changing this option to ensure all tax and legal requirements are considered.
Guaranteed Buy Out:
The RMC orders two independent relocation appraisals of the property. The appraisal is an assessment based on several factors, including the health of the local market, recent sales of home in the same area and what the typical buyer would pay for that particular home within the next 120 days.
It’s important to note that a relocation appraisal differs from a bank appraisal. A bank appraisal’s goal is to justify a sale price, while a relocation appraisal determines what the typical buyer will pay for a property within the next 120 days. That’s an important distinction to keep in mind with the guaranteed buy out option.
The RMC will offer to buy the property for the average of the two appraised values. Employees are often required to list the property for a certain amount of time, typically between 30 and 120 days, before accepting the offer. Employees who chose to accept the offer can move on more quickly in their new location, which means a more productive employee and less stress, often a win-win for all involved. Another advantage for the employee, should the home sit on the market longer, is the company’s covering the carrying costs and basic maintenance and upkeep on the home until a buyer is found.
In all options described above, it’s important to work with an experienced relocation management firm who knows the most advantageous options for your specific programs. A custom approach is how Lexicon tackles these challenges for its customers. Because tax implications can differ from state to state, an experienced and well-versed team is a must.
Still confused? We have answers. For a free program review and more information on these and other home sale options, schedule some time with one of our experienced consultants.