| Case Study: Penny Wise, Pound Foolish | ||
|
VISION’S Client: A well-known consumer products company
Situation Analysis Our client’s homesale program has historically been the Buyer Value Option (BVO) program. The program allowed transferees to receive equity loans if they needed funds to purchase a home in the new location prior to the sale of the departure home. For many years, this program produced the cost performance the client was looking for and resulted in a high level of transferee satisfaction with the relocation program. However, with the downturns in most real estate markets across the country, it seems no one is happy with the BVO program as is illustrated in the story of “Bob’s” relocation.
Scenario
“Bob’s” home in Florida was listed and on the market for three months before he selected a home to buy in the Chicago area. During the same period the Florida real estate market experienced a decline of nearly seven percent, effectively eliminating the equity “Bob” had spent years building.
While the policy required Bob to comply with home marketing guidelines in his departure home list price and marketing strategy, Bob refused to follow the guidelines, yet still expected to receive an equity loan to complete his purchase in Chicago. VISION strongly recommended that our client not make the equity loan to Bob given the risk that Bob’s home might not sell quickly and for a price that would prevent Bob from repaying the loan. Our client experienced internal pressure from Bob’s boss (the hiring manager) to give the equity loan to Bob...and did so. Our client considered their equity loan policy to be conservative, offering only 75% of the estimated equity. Bob listed the home for $390,000; the most probable sale price was estimated at $364,500, which included downward forecasting adjustments. Bob received a $150,000 equity loan…the maximum allowable amount. VISION offered Bob aggressive marketing recommendations and support over the next several months...most of which was ignored. After many months without a price reduction and without an acceptable offer, Bob finally received an offer for $264,900….he was in a negative equity situation. Since the client’s policy, like most corporate relocation policies, did not reimburse for a negative equity situation, Bob tapped into his 401k fund to cover the deficit. You can avoid the “Bob” Syndrome. Better Practices VISION recommends that you consider including a delayed buyout with your BVO program, reserving equity loans for that stage of the process. A few things to consider: Allowing equity or bridge loans based on price opinions where no buyout exists, is making a loan against an unknown market value. Current volatility in real estate markets makes it possible that the loan will exceed the selling price. While IRS Revenue Ruling 2005-74 is silent on analysis of the BVO program, industry observers suggest that offering an eventual guaranteed buyout may reflect the intent to comply with the ruling’s favorable outlook on amended value programs. An extended and never-ending BVO program can sap other program cost areas… such as temporary housing, duplicate housing and household goods storage. An employee with lingering responsibilities for a home at departure may cost more than 50% of total compensation plus G&A, support and fringe benefits in lost productivity. How VISION Relocation Group® Can Help Contact us today for a complete review of your current relocation policies. The sole focus of your Consulting Services team at VISION is researching, analyzing and reporting on the latest trends in the global relocation and human resources industries. Your Consulting Services team will assist in implementing Better Practices for your policy type and relocation budget. To read more articles and white papers written by VISION's Consulting Services team, click here.
|
| |
|
|