One of the constant truths concerning the relocation industry is that there always is a new group of colleagues coming in as others move on. Many are just beginning their experience in this industry and a significant number will elect to make it their lives’ chosen work. Others will come into relocation and then continue on to pursue other endeavours. Hopefully, they all will look back favourably on their experiences and what they learned.

One thing is for certain, all of us at one time or another were brand new to relocation and had to assimilate quickly—trying to figure out the basics of relocation, while at the same time deciphering the numerous relocation terms and the nuances that make up our “knowledge bank.” At the end, we veterans have both the opportunity and responsibility to help our new colleagues understand just what this business is all about!

The Fundamentals

Perhaps nothing is more important in this process than understanding a few important fundamentals.

Question: How important is the relocation policy in determining the success of a company’s relocation program?

Answer: It is critical that the relocation policy your company has in place is “right.” What do I mean by “right?” This policy not only must be properly thought out, carefully written, and adhere to tax and legal rules, it also must help in the facilitation of what it is designed to accomplish. This includes ensuring that it represents and properly reflects your company’s goals and culture. In short, the overriding goal of a properly written relocation policy is to have in place a relocation process for your transferee that assures he or she will “do the right thing at the right time.”

The written relocation policy is, in effect, the foundation on which transferee relocations will be built. When the policy (and the processes in that policy) is not “right,” then the desired cost effectiveness is lost and, more important, the odds that the relocation will result in a satisfied transferee are reduced substantially.

It is entirely appropriate that you require your relocation service provider to benchmark your policy against relocation industry statistics, as well as other companies in your specific industry. Your provider should keep you abreast of “best practices” and recommend process improvements that will result in less company cost and, at the same time, higher service levels. This should be an expected and recurring consulting function provided by your relocation service provider.

Question: We seem to spend so much of our time dealing with transferee demands, which sometimes result in exceptions to policy. What can we do to better manage transferees and keep them happy?

Answer: The key is to properly manage transferee expectations—and to do so without apology or hesitation. How is that accomplished? The best way is to secure support from your management team and ensure they understand that the relocation policy should be fairly and equitably administered and that is not open to negotiation. It is necessary and critical to specifically state in your policy how exceptions will be handled and to set the bar high for approvals of major exceptions. Of course, your relocation service provider generally should be allowed to make small exceptions up to a set dollar limit, but over time, a policy with frequent exceptions becomes a non-policy.

Most important, the transferee needs to read the policy and fully understand that he or she is required to follow the process outlined (such as the use of network real estate agents). He or she also must understand that if he or she does not do so, then the relocation benefits will be affected—up to and including ineligibility. We sometimes forget that it is the company that is paying the relocation bill and not the transferee, and while the transferee is the end user of the relocation process, he or she should understand that it is in his or her best interest, as well as that of the company, to follow the outlined process.

A Homesale Primer

Question: How important is the homesale process—how is it described in policy and actually executed?

Answer: Nothing is more important in a relocation program than to have the homesale process outlined in the policy so it can be executed correctly. By correctly, I mean that it should be in compliance with the three major IRS Revenue Rulings (72-339, 82-204, and the recently released 2005-74) that directly affect the homesale process. You do not need to be an expert on each of these Revenue Rulings, but your relocation service provider, working with your tax and legal departments, ought to be. Further, your relocation service provider should review your policy and provide you and other stakeholders in your company with the assurance that your policy and process likely would pass an IRS audit.

In order to be in compliance with the above Revenue Rulings, it is important to understand and comply with the Worldwide ERC® “11 Key Elements and Procedures of an Amended Value Sale.” Your relocation service provider should assist you in this policy check-up. To be in compliance, you should make certain there are no phrases in your homesale policy such as “assign the sale,” “you will be reimbursed for closing costs,” or “the company will pay the closing costs for you or on your behalf.”

Question: I know that there are different homesale processes that companies use, but which one is the best?

Answer: First, it generally is advisable to avoid a program that just reimburses the transferee for the costs associated with the sale of the home, as doing so creates W-2 income, which is fully taxable to the transferee. It is for that reason that most companies (especially those that relocate employees in significant numbers) have adopted tax-compliant programs that usually are grouped into one of two homesale process categories. The first of these is called an appraised value offer/amended value (AVO) program, and is characterized by a guaranteed purchase offer (almost always determined through appraisals). The costs of these programs generally are a function of when the purchase offer is generated—immediately or later (e.g. 60 days from time of listing). The later the appraisals are ordered, the later the offer is available. Delaying these events results in less cost to the company, because the home has a higher probability of selling to an outside buyer and, therefore, is less likely to go into inventory.

The second general program is called a buyer value option (BVO) program. There is never a guaranteed offer in this process. Rather, the transferee secures an outside buyer in order to sell his or her home. Some­times a company will say that it has a BVO program unless the home does not sell, and then it will order appraisals and a guaranteed offer is generated. This is not a pure BVO, but rather an AVO program, which wisely delays the availability of a guaranteed purchase offer through the highly desirable requirement of mandatory homesale marketing.

An example of an excellent AVO homesale process is as follows:

Day 1 – Home marketing assistance/mandatory marketing begins after two BPOs or broker market analyses (BMAs) are ordered and a listing price is determined.

Day 60 – If the home is not yet under contract, two Worldwide ERC® appraisals are ordered, which are used to determine the guaranteed purchase offer. The offer is calculated using the average of the two appraisals—the appraisals must be within 5 percent or a third is ordered and the two closest are used.

Day 90 – Earliest date in which the guaranteed offer can be accepted.

Day 120 – Last day on which the guaranteed offer can be accepted.

Day 150 – Alternate last day on which the guaranteed offer can be accepted.

The program your company elects to adopt should be based on what has been offered to your employees in the past, what your company is willing to spend (BVO-type programs are less expensive than AVO-type programs), and the level of risk your company wishes to accept for things such as the cost of inventory properties.

Question: Is it advisable to limit the amount the transferee can list his or her home for by placing a cap on the listing price?

Answer: Not only is it advisable, but it is absolutely critical that the transferee not be allowed to over-list the home. The absence of a listing control in the policy is the single largest mistake I witness employers make, especially in today’s tough real estate market. A listing price control generally is set as a percentage cap based on one or more opinions of value.

For example, when the homesale process begins with two BPOs or BMAs to establish the home’s most probable sales price, the transferee is not allowed to list the home for more than 105 percent of the average of these two opinions. If the process begins with two appraisals (which is not recommended until later in the homesale process), then these are the values used. The industry has had many years of experience in home-listing controls, having introduced them more than 15 years ago. Controls started at approximately 110 percent, and then over time migrated to 107 percent, down to today’s standard of 105 percent. In light of the less favorable real estate markets, some companies enforce listing control caps of 104 percent, or even 103 percent.

Question: Is it correct to say that relocation service providers can provide alternatives to cost-plus traditional billing in conjunction with the homesale process? I understand that some companies have programs in place where these costs are fixed. I am not sure what that means.

Answer: The costs associated with the sale of the home generally can be handled in either a cost-plus environment (also called traditional) or what is called a fixed-fee arrangement. These are simply billing methods between the relocation service provider and the client, and both work the same as far as the transferee is concerned.

In the cost-plus traditional method, all the costs incurred with the sale of the home are passed back to the client. The relocation service provider has no direct financial risk in the cost to sell the property, as all the costs (including the cost of having that property in inventory) are the responsibility of the client.
In a fixed-fee homesale program, the cost associated with the sale of the home is a fixed percentage of the price the home sells for. If there is an amended value-type program in place, and the home does not sell, then the same fixed-fee percentage is applied to the guaranteed offer accepted by the transferee. In the fixed-fee method of billing, the relocation service provider takes the financial risk of the home including all the costs associated with the home coming into inventory. The home may cost more or less to sell then the fixed fee, but the actual percentage stays the same for all properties. Your relocation service provider should offer you both types of programs so you can weigh the option that is best suited for your company. If you are working with your purchasing/procurement group, then expect them to understand very quickly the difference between the two methods, as most companies do not buy products and services on a cost-plus basis.

Caps and Lump Sums

Question: Is it a good idea to have caps on individual relocation benefits, such as the miscellaneous expense allowance (MEA), and would it also make sense to place a maximum cap on the entire cost of a relocation?

Answer: It is not wise to leave any specific area of a relocation component open-ended without a cap or limitation. Very few policies would read, “as much temporary living as you may need,” but rather would state, “not to exceed 60 days.” By that same token, it is equally important to have a cap on features such as the MEA.

If the MEA is calculated as a function of the transferee’s income (such as one month’s salary), then it is appropriate and advisable to state “one month’s salary not to exceed $10,000.” This is important because without this cap, the whole purpose of the MEA (namely to cover the incidental expenses associated with a relocation) is lost, as the higher-paid transferee receives far more than what he or she needs to cover these items, resulting in unnecessary costs for the company.

Now, the question as to capping the entire cost of the relocation is one that increasingly is being asked. While it may make perfectly good sense and seem intuitive to have an overall cap, the reality of the situation is that the cost of the homesale should not be capped. That is because the costs to sell the home, in a properly structured homesale program, are borne by the company and not the transferee, who agrees to sell the home without any obligation to incur real estate commission and closing costs (with the exception of the first state transfer tax, if there is one).

Because there are no costs that the transferee bears in the first step of the required two-step transaction, then an overall cap that includes these homesale costs would imply that the costs were being borne by the transferee and thus are taxable—the very thing that a properly structured homesale program should be designed to prevent. It is for that reason that caps should not include homesale costs. Having a cap on a homesale program may result in a non-compliant program, which would end up being much more costly to a company than if the program was not capped in the first place.

Question: What about using a lump sum for the entire relocation and not worrying about what it is spent on?

Answer: Certainly we are seeing a greater use of lump sums to cover one or more relocation features, but care must be used to not create lump sums that reduce the level of service and support that the transferee and his/her family needs. Moreover, a company taking this “one lump sum” approach elects to ignore (or does not understand) the tax benefits of a properly constructed homesale program under IRS Revenue Ruling 72-339, nor the exclusion from W-2 income of certain moving expenses (provided the distance and time requirements are met) provided for in Internal Revenue Code Section 217. With the possible exception of a transferee covered under the Sarbanes-Oxley (SOX) Act, lump sums should never include the cost to sell a home.

It does make sense, however, to consider using lump sums for specific relocation features that are taxable. Here, the approach can be to pay a lump sum for the househunting trip—in lieu of having to account for individual expenses and those pesky receipts that have no tax purpose. Or, another approach is to combine into one lump sum several taxable relocation components such as the househunting trip, temporary living, and even the MEA. The events that are covered by this lump sum still should be managed by the relocation service provider, as was done previously, with the only difference being that now instead of having to control each component separately (e.g., 60 days of temporary living), the overall lump sum allows the transferee the flexibility to spend the money in the areas he or she sees fit.

This not only reduces the number of requested exceptions, but also keeps costs in line as the lump sum is set equal to or less than what historically has been paid out in the previous unique and separate benefits categories. Furthermore, it provides a transferee with choice, which employees have come to expect, and is now very common in other human resource benefits (e.g. 401k plans).

Your relocation service provider should be able to provide you with a number of lump-sum options that are consistent with smart and proven best relocation practices.

An Unfinished Education

This is just a start to the questions you may have. I encourage you to look to your relocation service providers for continual guidance and insight. They should be proactive in providing you ongoing relocation information and updates and conducting policy process check-ups at least once every two years. It is through these interactions, as well as through the education programs provided by Worldwide ERC® and through regional relocation councils, that you will be able to enhance your own understanding of relocation and prepare yourself to help those who will follow in your path.

By David Barlow, SCRP, GMS

David Barlow, SCRP, GMS, is senior vice president-client support services for SIRVA Relocation, San Ramon, CA. He can be reached at +1 925 327 7361 or e-mail [email protected].

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