As a Relocation Management Company (RMC), VERSA receives a lot of questions on the topic of real estate assistance, and more specifically, relocation home sale programs. This is because real estate remains a top concern for employees who are considering relocating for their jobs. If they currently own a home and need to purchase a new one fairly quickly in their new location, they need to be able to assess what their financial burden will be in doing so.
To assist with this process, many companies have established relocation home sale programs as an important relocation benefit for their employees who are homeowners. These programs are typically managed through a third-party RMC on behalf of the employer.
On the surface, the topic of relocation home sales is indeed a complex one, but it doesn’t have to be complicated.
In this article, we will demystify the relocation home sale process, and explain the differences between the various programs that are available, as well as the pros and cons of each.
What is a Relocation Home Sale?
In general terms, a relocation home sale is one in which the employee/homeowner receives assistance in the sale of their existing home, as part of their relocation benefits package, so that they are able to quickly move to their new location. That assistance usually includes payment or reimbursement of real estate commission and closing costs, but how that is carried out will depend on the home sale program that is utilized.
Relocation Home Sale Programs
Let’s examine each of the relocation home sale programs in detail.
BVO (Buyer Value Option)
The BVO is a relocation home sale program that allows the employee to list and market the home until an acceptable offer is received. Once the offer is received, the RMC purchases the property from the employee based on the sales contract amount. Then in a separate sales transaction, the RMC sells the property to the ultimate buyer. As such, this program calls for two distinct real estate transactions. The first is when the employee sells the property to the RMC, and the second is when the RMC sells the property to the buyer. This is considered an arm’s length transaction.
So, what is an arm’s length transaction? An arm’s length transaction in one involving an independent seller and an independent buyer, each with full knowledge of the property and the transaction, and with each party acting on their own and in their own best interest.
The reason why there are two separate transactions has to do with the tax implications associated with the sale of the employee’s home. If the employee sells the property directly to the buyer and then received reimbursements from the employer, the IRS would view that as taxable income. Thus, utilizing the BVO program reduces the tax liability for both the employer and the employee for the costs covered to pay for the real estate broker’s commission and the closing costs of the property.
It is important to note that in the event that the sale falls through for any reason once the employee has sold the property to the RMC, that there is a risk of the home being taken into inventory by the RMC until another buyer is procured. As such, this can be a costly expense.
AVO (Amended Value Option) / Guaranteed Buy-out
In an AVO relocation home sale program, a fair market value of the property is established via a formal appraisal of the property. The idea is that the employee will be given a guaranteed buy-out offer for the property that is at least equal to the fair market value if the property doesn’t sell within a specified timeframe. This could be anywhere from about 60 – 120 days. The hope is that the employee will be able to secure a bona fide buyer during that period, who is willing to purchase the property for an amount that is equal to the buy-out offer, or even higher. If a buyer is secured and the sales price is higher than the buy-out, the buy-out offer is then amended to match the sales price that the buyer is willing to pay.
If the employee is successful in finding a buyer, the property is then acquired for the amended amount. Then, in a separate sales transaction, the RMC sells the property to the ultimate buyer.
If the employee is unsuccessful in selling the home, then they have the option of taking the guaranteed buy-out offer, which is based on an appraised value of the property. Once the employee takes the buy-out offer, the property is then taken into inventory by the RMC. As previously mentioned, this can be costly.
Like the BVO home sale program, the AVO also involves two separate transactions. And again, this has favorable tax implications for both the employee and the employer, as opposed to the employer being directly reimbursed for home sale expenses.
The AVO and BVO home sale programs are essentially identical, except that with the AVO a formal appraisal is performed on the property to establish fair market value.
The direct reimbursement home sale program is one in which the employee is completely responsible for the sale of his or her home. Once the property has sold and closed, the employee submits the expenses incurred for real estate commission and closing costs, and is later reimbursed by the employer. Since the employee sells the home directly to the ultimate buyer, there is only one real estate transaction with this program.
This is definitely the simplest of the home sale programs, but it carries with it a much higher tax burden, because the funds that are reimbursed to the employee by the employer are considered taxable income by the IRS. Many employers then attempt to make the employee whole by grossing up the amount paid to the employee. This helps to offset the employee’s tax burden.
The benefit for the employer and/or RMC is that there is zero risk of the home coming into inventory in the event that the sale falls through.
Marketing the Property
All of these home sale programs require that the property be marketed in order to attract eligible buyers. This is best achieved when listing the property with a real estate firm and Broker or Realtor that has a strong market presence in your neighborhood or area. Not only that, but when marketing and selling a home that is going through either the BVO or AVO home sale program, the Realtor should be well-versed in relocation transactions.
The reason for this is that a relocation home sale transaction follows a very rigid process that must be strictly followed by all parties. If the Realtor is inexperienced or unfamiliar with that process, even the smallest mistake could be detrimental to the transaction.
Communication is equally important throughout the transaction. Typically, the listing agent works closely with the RMC and conveys all of the instructions and required documents to the buyer through the buyer’s agent for distribution. So, it has to be a tight loop in which all parties are kept abreast during each step of the transaction. As a best practice, RMCs prefer to work with real estate firms that have a full-time, dedicated Relocation Director and department that oversees the entire home sale process, working closely with the agent, the employee, and the RMC.
Needless to say, this would not be a good time for the Realtor to be learning about relocation home sales. Understanding the process requires intensive training, typically provided by the Relocation Department of the real estate brokerage firm. Therefore, RMCs prefer to work with the most highly trained relocation agents, so that we can all rest assured that the Realtor knows how to appropriately handle the transaction. We want to be absolutely sure that when the listing agent receives an offer on the property, correct protocol will be followed to the letter.
Choosing the Listing Agent
In a relocation home sale, the RMC typically engages two Realtors from two different firms to meet with the employee for the opportunity to be selected to list and market the property. Following each of those meetings, the Realtor is asked to provide the RMC with a Broker’s Market Analysis on the property.
RMCs typically employ the use of either Worldwide ERC’s Broker’s Market Analysis and Strategy Report, which enables the Realtors to conduct a diligent analysis of the employee’s property condition, competition, and future marketability. The broker uses the BMA to evaluate the location and condition of the subject property against current market conditions, looking at both competing listings in the subject property’s neighborhood, as well as comparable properties that have sold in the last six months. Based on this analysis, the broker is asked to estimate the subject property’s most likely sales price.
Once the BMAs are reviewed by the RMC and discussed with the employee, the listing agent is chosen. In the event that the most likely sales price of the two BMAs is too far apart, a third BMA by another Realtor may be required by the RMC.
Frequently Asked Questions
There are many frequently asked questions when it comes to relocation, many of which go beyond the ones pertaining to relocation home sales. To view our list of “Top 10 Relocating Frequently Asked Questions,” please click on the following link: FAQs.
At VERSA, we know that there are a lot of moving parts in every relocation (both literally and figuratively). So, it is our job and our goal to counsel each of our clients in order to determine the best solution for their needs. This means listening to them and answering all of their questions, and providing them with the information and resources that they need to make informed decisions.
Please contact us anytime with your relocation questions!