Chicago Relocation
 

Home Sale Programs

May 19, 2014

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John D’Ambrogio

By: Steven John, CRP, GMS is SVP, Client Services for RELO Direct, Inc.

Sometime in the early 1960s, American corporations discovered that employers could save significant dollars on relocation tax assistance by acting as an intermediary in the home sale process, purchasing the home from the employee and reselling it to the ultimate buyer. Through these home sale programs, employers avoided reimbursable commission, carrying, and transfer payments and were relieved of the obligation to gross-up such payments, thus reducing relocation costs. Very quickly, third party relocation management companies (RMC) were formed to act as the intermediary in the programs.

With today’s home values and tax rates, employers can save $15,000 – $20,000 in tax assistance expense on each home. As home sale programs gained momentum, two varieties emerged: Guaranteed Buyout (GBO) and Buyer Value Option (BVO).

Guaranteed Buyout (GBO) – Also referred to as an Appraised Value program, a GBO uses a relocation appraisal to establish the value of the employee’s home. Often, two appraisals are made and the value is set at the average of the two. The RMC makes an offer to purchase the home from the employee at the appraised value. The employee accepts the offer and the RMC takes title to the property. This sale transaction occurs without sales commission or other costs, resulting in zero taxable reimbursements to the employee, and zero tax assistance expense to the employer.

The RMC then works to resell the property to a third party. The sales commission and other expenses of this second sale are paid for by the employer, but since the employee is out of the picture, it is a simple business expense and not a taxable reimbursement.

Generally, GBO programs are further modified to provide for a short (60 – 90 days) marketing period before the appraised value purchase offer is made. This allows time for the employee to find a third party buyer and potentially sell the home for more than the appraised value. If a buyer is found, the RMC will purchase the home from the employee at a price equal to the offer made by the third party buyer. The appraised value is “amended” to equal the offer made by the third party buyer and the RMC purchases the home at the amended value. The RMC then sells the home to the third party resulting in the same tax favorable outcome as the appraised value sale.

Buyer Value Option (BVO) – The Buyer Value Option program is based on the same premise as the GBO program. Two home sale transactions are created to shield the employee from receipt of taxable reimbursements, saving the employer additional tax assistance expense. The difference in the BVO program is that no appraisals are made. Instead, the home is marketed by the employee and when a third party buyer is found, the offer price made to employee by the RMC is equal to the third party buyer’s offer price. Thus, the value of the home is the “buyer value”. The home is sold by the employee to the RMC at that price, the RMC then sells the home to the third party.

Each program has advantages and disadvantages. The GBO program can be accomplished quickly and allows the employee to move to the new destination and become productive in his/her new role as soon as possible. Employers risk potential carrying costs and capital losses on homes purchased under this method, which are not resold quickly.

BVO programs protect the employer from the risks and costs of home ownership. Long employee marketing times can sometimes bring hidden costs, though, in the forms of unproductive transferees and additional temporary living and travel costs.

Home sale programs save employers millions of dollars each year. Which program you choose depends on your real estate market, tolerance for risk, and the competitive talent landscape in your industry.

 

Steven can be contacted at sjohn@relodirect.com