The modern-day war for talent has organizations reexamining how they recruit, develop, and retain their talent. Relocation programs continue to be an effective recruitment tool – offering not only career opportunities, but support and assistance as part of the experience. Offering home sale assistance within company policies, through a well-structured program, is a key differentiator that can help control costs, improve budget management, and support relocating employees.
The Buyer Value Option (BVO) is a powerful home sale relocation benefit that companies can offer to attract the best, most-qualified talent. A BVO home sale program balances the need for assistance to the transferring family with the corporate objective of keeping relocation costs to a minimum.
Features and Benefits of Buyer Value Option
What is a Buyer Value Option program? Simply stated, a Buyer Value Option or BVO is a company supported home sale program that provides professional assistance and support for transferring employees selling their homes. The employee is expected to find a buyer for his/her home and the offer from the buyer establishes the value of the home. This “buyer value” is the price that the company then offers their employee. The methodology for the determination of value is the main difference between a BVO and a Guaranteed Buyout Program, which is a home sale program whereby the guaranteed value is typically based on the average of two or more appraisals with a fixed acceptance period.
How does a BVO program work? As with many home sale programs, the employee is provided with home marketing assistance, which includes help with selecting a listing agent. The employee lists the home, and their Cornerstone Consultant provides expert marketing strategies. The goal of the program is to sell the home quickly and for the best possible price. When an independent buyer is found, Cornerstone presents an offer to the employee based on the terms of the offer from the independent buyer and closes with the employee. Cornerstone then signs a new listing agreement, draws a second contract of sale from Cornerstone to the independent buyer and closes that transaction.
BVOs provide several benefits for both the employee and company, including:
BVO Tax Benefits:
The IRS considers the reimbursement of home selling costs to be taxable income to the employee. Thus, companies can incur high tax assistance or gross up costs should they directly reimburse those expenses. However, certain home sale programs may result in exclusion of those costs. After their review of IRS regulations, most companies consider BVOs to be tax protected and a substantial cost savings.
For current input and guidance on tax regulations relating to home sale costs, please contact your company’s tax and legal advisor. BVO Increases Employee Productivity:
Once a relocating employee accepts a BVO offer, the risk of the sale transfers to the company. This inherent risk to the company is an important component of a properly structured BVO program. The IRS requires two separate sales, with the expenses from the second sale not affecting the expenses of the first sale. So, if the second sale falls through (and the incidence of fall-through is less than 1%), the first sale (to the employee) is unaffected. The employee does not have any further involvement in their home sale and can focus on their new job, as well as settling into a new home and community.BVO Enhances the Employee Experience:
As an added benefit, the employee does not attend the closing with the independent buyer; this is managed by Cornerstone. The employee’s closing with Cornerstone is remote, and equity is paid upon vacate or Cornerstone’s execution of the Contract of Sale, whichever is later. This process relieves the employee and their spouse/partner of the potentially large time and monetary commitment of attending a closing or arranging for personal representation at the closing.
Combined with the expert guidance from Cornerstone that gets the home sold quickly and at the best possible price, and the benefits of a competitive BVO program, the employee’s mobility experience becomes less stressful and more supportive.Important Tax Protection Perspectives
To help the relocation industry set proper procedures for tax protected home sale programs, Worldwide ERC, a mobility industry advisory organization, developed “Eleven Key Elements and Procedures.” These 11 steps must be followed to help ensure tax protection. Most companies consider Companies can choose to deviate slightly, but this may increase the risk that the IRS will challenge the tax advantage of the home sale program. Cornerstone recommends companies seeking to include a BVO program consult with their tax department or advisor.
Worldwide ERC recommends eventual conversion of the BVO program to a Guaranteed Buyout Program (sometimes referred to as a “sunset clause”). Companies with sunset clauses may provide a buyout after a certain defined marketing time, such as after 180 days, if the home remains unsold. Professional home marketing assistance along with required actions by the employee, such as adhering to initial list price parameters, can reduce the need to use the clause. Even with a sunset clause, however, the cost savings of a BVO can be considerable because a property that is marketed for an indefinite period results in a delayed relocation, lost productivity and possible increased costs due to duplicate housing, increased temporary living and storage costs.
Buyer Value Option Cost Comparison
The average cost of a BVO ranges from 8% to 8.5% of the selling price. Compare this to the average cost of directly reimbursing the employee with gross up, which can be 12.5% or more, depending on the gross up methodology as well as federal and state tax rates. An illustration of the potential cost savings is illustrated below:
| | Direct Reimbursement | BVO |
|---|
| Sale Price | $450,000 | $450,000 |
| Real Estate Commission (6%) | $27,000 | $27,000 |
| Closing and Carrying Costs (2%) | $9,000 | $9,000 |
| TOTAL COSTS | $36,000 | $36,000 |
| Tax Assistance (gross-up)(60%, includes tax on tax) | $21,600 | N/A |
| TOTAL COMPANY COSTS | $57,600 | $36,000 |
| SAVING TO CLIENT | | $21,600 |
BVO Cost Savings Versus Risk
Based on the Cost Comparison shown above, a BVO program with ten participating employees would generate approximate savings of $216,000 per year. The savings could be much more significant if home values are higher than the $450,000 used in the example above. A comparison of risk and reward must consider that the tax benefits are, for the most part, based on the employer’s unconditional purchase of the employee’s home and the employer’s assumption of beneficial ownership of the property until the sale to the outside buyer. Cornerstone takes every possible precaution to minimize the chance of a sale fall through; however, if a sale does not close, the employer would have beneficial ownership of the home.
As the owner of the property, the employer takes on the potential for a loss on sale as well as the ongoing carrying costs, statutory compliance, fire, storm and even “slip and fall” incidents; however, the home will be insured while in inventory.
Summary
Carefully constructed and executed home sale programs, such as a Buyer Value Option, provide efficiency and financial benefit of current tax regulations.
Company supported home sale programs are a substantial part of a comprehensive, competitive relocation program and, based on overall industry experience, provide returns that more than justify the increased risk. As talent shortages and recruitment trends change to meet the needs of the market, offering home sale assistance within company relocation policies will continue to remain a differentiator that entices employees to relocate, and help control costs, improve budget management, and support relocating employees.