Home Loss-on-Sale: Still a Major Issue in Relocation. Does Your LOS Policy Need Another Look? 2010 Worldwide ERC

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1 Home Loss-on-Sale: Still a Major Issue in Relocation Does Your LOS Policy Need Another Look? David Barlow, SCRP, SGMS SVP, Senior Consultant SIRVA Relocation Jill Burke, CRP, GMS Director, Policy Consulting SIRVA Relocation

2 Welcome & Learning Zone Speedsession Instructions Technical difficulties? Dial and follow the prompts. To submit a question 1. Click on the Q&A tab in the lower right-hand portion of your screen 2. Type your question into the dialog box at the bottom of the screen 3. Click the Send button

3 Learning Zone Speedsession: CRP Information If you are a CRP and would like to receive credit for this Learning Zone Speedsession, you must utilize the CRP Recertification Credit Form, which is available at:

4 Today s Presenters David Barlow, SCRP, SGMS SVP, Senior Consultant SIRVA Relocation Jill Burke, CRP, GMS Director, Policy Consulting SIRVA Relocation

5 Report 75% Nation s Top Metros Post Foreclosure Increases Rapidly Rising Inventory, Home Price Pressures in Store: Altos Research Study Shows Foreclosure Lowers a Property s Value by 27% Home Prices Tumble in Most Distressed Property Categories in June Home Prices Edge Up in June, but Appreciation Already Shows U.S. Housing Market is in Worse Shape Than You Think: Altos Research Double-Dip Recession Threatens to Shave 20% off Home Prices Existing-Home Sales Post Worst Showing in More than a Decade

6 What s Old is New Again Last year we said: things can t go on like this, and they didn t, they got worse. It s not what you pay a man, but what he costs you that counts. - Will Rogers Truer words were never spoken when it comes to housing prices and Loss-on-Sale costs

7 National S&P/Case Shiller Home Price Index 2010 Worldwide ERC

8 National S&P/Case Shiller Home Price Index

9 National S&P/Case Shiller Home Price Index

10 House Price Appreciation

11 FHFA Home Price Index Source: Federal Housing Finance Agency (FHFA)

12 State of Residential Real Estate Market While all real estate is local consider: Nearly 500,000 homes in foreclosure 475,000 homes in pre-foreclosure Over 14 million vacant homes (1 in 10) 4 million homes are listed for sale 12.5 months supply of existing homes

13 Housing Prices Why housing prices are not likely to rebound for some time: Labor market (unemployment & fear of) Household formation Foreclosures and shadow inventory Tight credit Sellers who can t sell their homes are not likely to buy

14 The New Reality Do we have a relocation opportunity for you! I can t sell my home for what I have invested in it. And I can t relocate unless the company makes up the difference.

15 The New Reality The transferee has a point a very good point The company wants him/her in a new place The company (most likely) moved them to current place The company is creating this devastating financial event The transferee can ride it out over time if they don t relocate and not sell their home now Request for company help on home-sale loss is justified and if the company does not assist, then more transferees just saying no to the relocation is expected

16 Home LOS Assistance It should come as no surprise Interval between relocations and the breakeven point has changed In down real estate markets, transferees need to stay in their homes longer to avoid a LOS How long they need to stay to achieve breakeven varies by location Loss-on-Sale may also result in: Delaying or postponing the relocation Trying to do the new job in the old work location Commute versus relocate Rent out old home and rent in new location

17 September Worldwide ERC MOBILITY Magazine Average Loss-on-Sale: $20,243 $30,671 52% change (largest change on record) Tax gross-up was up 34% (due mostly to gross-up on Loss-on-Sale) 33% of responding companies said they added a Loss-on-Sale benefit or increased the value of the benefit Most common change was raising the cap with $50,000 now most common

18 History of Loss-on-Sale (LOS) Programs Around a long time (~25 years) Started with senior level employees and gradually expanded to lower levels In normal real estate markets, LOS is most likely to happen in very short move intervals and with new construction (the typical nemesis) In down real estate times, intervals between moves do not necessarily need to be short While two to three years used to be safe, this is no longer true in most markets Some markets have seen four or more years of price appreciation wiped out Expect Loss-on-Sale to be the norm

19 Home LOS Home LOS has nothing to do with negative equity or a transferee s equity position in home Equity is an independent variable and the result of: Down payment amount Loan product (e.g. sub prime loan) Second mortgage Home equity line/loan Negative equity is where the outstanding obligations on the home exceed the net proceeds of the home sale Therefore, it is not accurate to call LOS programs Equity Protection Programs or any term in which equity or protection of equity is used

20 LOS (other than transferee) Companies routinely have a LOS when they sell homes acquired from transferees through any amended/appraised value process (AVO, AVX, BVO, BVX) This LOS is not only the difference in what they purchased and then sold the home for, but also: Carrying costs (mortgage, insurance, taxes) Repairs and maintenance Even in good real estate times, over 95% of homes sold out of inventory result in a loss to the company For traditional cost-plus customers, the client company incurs this loss For fixed-fee customers, the relocation service provider bears the loss

21 Transferee Home LOS Definition: Difference between net purchase price of home and net selling price of home Net in case non-customary closing costs were paid by transferee as purchaser for seller or transferee as seller paying closing costs on behalf of buyer Capital improvements may be added to the purchase price, when that occurs we call the net purchase price plus allowable capital improvements the new basis

22 Directed Offer is Not a Good Substitute Sometimes a directed offer is used when a company is trying to cover a transferee who is in a loss situation A directed offer is an amount paid for a transferee s home that is above fair market value (as determined by appraisal[s]) Directed offers do not create a safe harbor as both dollar difference between directed offer and fair market value as well as LOS payment are fully taxable as W-2 income to transferee

23 Directed Offers Create More Problems Denigrate purity of appraisal process Give credibility to notion that appraisal process can be manipulated from fair market value basis to one of what company will bear Creates transferee expectations that home-sale process is not a defined process but is negotiable on a case-by-case basis

24 LOS: A Better Approach When appraised value is less than what the transferee paid for the house, it is far better to consider LOS programs that are characterized by specific policy components within a framework. Resulting in: 1. Mathematical formula that quickly gets to heart of matter by taking out perception and equity and deals with relevant issue of actual loss 2. Defendable approach that allows company to set minimum threshold for benefit as well as maximum (cap) that will be paid out 3. Opportunity to share the loss with transferee or use pure stop loss approach (even if that is zero) 4. Option to tax assist or not tax assist benefit

25 LOS This LOS policy component is more likely to be: Captured as an identifiable cost of relocation and properly treated as W-2 wages Administered equitably Understood by transferees Consistent with desire to preserve integrity of home-sale appraisal process

26 An Early Warning System is Critical Pre-Decision processes/products should be strongly considered: Benefits to the company include: Helps minimize failed relocations, therefore reducing company costs Reduces or eliminates extended benefits historically given to employees who cannot afford to sell their home but have already committed to a relocation Provides early visibility into the need for Loss-on-Sale benefits Identifies where there is likely to be negative equity Relocation decisions can be made earlier in the process and other alternatives can be considered Benefits to the employees include: Allows an earlier decision on whether or not they can take the move before the process starts (lessens potential embarrassment) Allows employee to make decisions based on facts

27 Where to Start? What decisions need to be made regarding the home Loss-on-Sale benefit if revising an existing program or building a new one?

28 Should You Have This Benefit? Determiners: Short or long intervals between transfers Where your company locations are Pressure securing experienced new hires Ability to recruit locally and not have to relocate existing employees What company can afford

29 Who Should be Eligible for the Benefit All homeowners regardless of tier (based on salary grade) Only homeowners in highest tier(s) Homeowners who purchased within stated number of years before next transfer (e.g. two years) Current employees and not new hires Should new construction be penalized since this has historically been main problem area? Should just certain hard hit geographical areas be eligible? Key learning: One critical requirement should be that when transferee purchases and sells his/her home, he/she must follow all rules required in relocation policy

30 Should There be Minimum $ or % Loss Before Company Kicks-in? In other words, should there be a minimum loss that the transferee bears? Five current practices now in use before maximum benefit is reached: Company pays dollar for dollar (100%) from first dollar of transferee loss Company pays part of loss from first dollar of transferee loss Company requires minimum loss to occur before any payments are made (often called deductible or a stop loss ) Company pays part of loss after deductible Company pays dollar for dollar (100%) after deductible $30,671: average cost when provided per ERC (not including tax gross-up)

31 More on a Minimum or a Deductible Small losses are administratively burdensome Transferees generally should expect and can afford small losses Best example is to think of home-sale loss minimum as deductible like that in homeowner s insurance policy Minimums are seen from $0 to $5,000 Some companies use percentage of loss, these vary from 1% to 5% Loss-on-Sale dollars are best used for significant losses rather than incidental losses

32 Sharing Loss with Employees After deductible is met (and that can be zero) then who pays what percentage of loss to maximum? Since transferee is already out of pocket for deductible, many companies go to 100% payment up to the maximum If there is no deductible (or a low one), some companies share the loss, for example: 75% for company and 25% for employee 75% for first $25,000, 50% for next $25,000 and 25% for next $25,000 Amount of minimum (deductible) and maximum must be considered in determining if loss is to be shared

33 All Companies Should Have Maximum Benefit Cap But what amount should that be? Cap (maximums) are critical to limit exposure Cap may depend on minimum or deductible and if loss is shared The higher the deductible or percent shared, the higher the maximum should be What the cap amount depends upon Where losses are (e.g. California) How much the company wishes to spend Is the amount tax assisted? Caps range from $10,000 to $150,000 with $50,000 being most common

34 Should Capital Improvements be Added to the Purchase Price? Two schools of thought: 1. Capital improvements to home are expenditures that (like purchase price) are entitled to be recovered in sale 2. Capital improvements if properly done should be reflected in whole or in part in the sale price Some companies follow IRS guidelines on capital improvements Other companies only allow Specified improvements Set percentage of allowed improvements (e.g. 50%) Depreciation schedule (e.g. swimming pools)

35 Should the LOS benefit be Tax Assisted? 75% of companies do tax protect the amount If it is not tax protected, then deductibles (minimums) and maximums may need to be changed or percent shared Full tax assistance will add another 60% or more to bill $50,000 to transferee then goes to over $80,000 of cost to company Tax protection is generally recommended even if maximum needs to be reduced

36 SIRVA Survey Data Capital Improvements Depreciation Company Cap % Gross-up Yes 12% Yes - 3% $7,500 - $19,000 6% Yes 76% No 88% No 97% $20,000 - $24,999 15% No 24% $25,000 to $29,999 15% $30,000 to $49,999 9% $50,000 to $59,999 26% $60,000 to $100,000 12% No cap 4% Other (use %, not a $ cap) 13%

37 LOS Formula Examples There are many different LOS formulas. In choosing one, there are no rights and wrongs but rather what is best for your company.

38 First Dollar Coverage at 100% up to Maximum of $50,000 Home Purchase Price $300,000 Home Selling Price $275,000 Loss-on-Sale ($25,000) Amount covered up to the maximum of $50,000 $25,000

39 First Dollar Coverage up to a Maximum of $50,000 but Loss is Shared Home Purchase Price $300,000 Home Selling Price $275,000 Loss-on-Sale ($25,000) Company covers 75% of loss up to a maximum of $50,000 ($25,000 x 75%) $18,750 Transferee responsible for balance of loss $6,250

40 Percentage Deductible of 5% off Purchase Price with Maximum of $50,000 Home Purchase Price $300,000 Less 5% Deductible (off original purchase price) ($15,000) New Basis Price $285,000 Home Selling Price $275,000 Loss-on-Sale (after deductible) ($10,000) Company covers up to a maximum of $50,000 $10,000

41 Flat Deductible of $5,000 off Purchase Price with Maximum of $50,000 Home Purchase Price $300,000 Less $5,000 Deductible (off original purchase price) ($5,000) New Basis Price $295,000 Home Selling Price $275,000 Loss-on-Sale (after deductible) ($20,000) Company covers up to a maximum of $50,000 $20,000

42 Percentage Deductible of 25% off of Loss Itself with Maximum of $50,000 Home Purchase Price $300,000 Home Selling Price $275,000 Loss-on-Sale ($25,000) Transferee 25% deductible ($25,000 x 25%) $6,250 Company covers up to a maximum of $50,000 $18,750

43 Flat Deductible of $2,500 off of Loss Itself with Maximum of $50,000 Home Purchase Price $300,000 Home Selling Price $275,000 Loss-on-Sale ($25,000) Transferee $2,500 deductible $2,500 Company covers up to a maximum of $50,000 $22,500

44 Deductible of $2,500 and Shared Coverage up to Maximum of $50,000 Home Purchase Price $300,000 Home Selling Price $275,000 Loss-on-Sale ($25,000) Transferee $2,500 deductible $2,500 Balance of loss ($22,500) Company covers 75% of loss up to a maximum of $50,000 ($22,500 x 75%) $16,875 Transferee responsible for balance of loss $5,625

45 Deductible of $5,000 and Shared Coverage up to Maximum of $50,000 (With All Capital Improvements Added) Home Purchase Price $300,000 Allowable Capital Improvements $25,000 New Home Purchase Price Basis $325,000 Home Selling Price $275,000 Loss-on-Sale ($50,000) Transferee $5,000 deductible $5,000 Balance of loss ($45,000) Company covers 75% of balance up to a maximum of $50,000 ($45,000 x 75%) $33,750 Transferee responsible for balance of loss $11,250

46 Percentage Deductible of 5% off Purchase Price with Maximum of $50,000 Home Purchase Price $950,000 Home Selling Price $885,000 Loss-on-Sale ($65,000) Employee covers 5% of loss $3,250 Loss-on-Sale (after deductible) ($61,750) Company covers up to a maximum of $50,000 $50,000 Transferee responsible for balance of loss $11,750

47 Should Loss-on-Sale and a Home-Sale Incentive Bonus both be Provided Yes, as they are both used for different reasons Loss-on-Sale is to help the transferee cover the loss on the home due to current market conditions Home-sale bonus provided as an incentive to the transferee to accept an outside offer on the home Home carrying costs in inventory ranges from 1% to 1.5% per month; think of this cost versus the cost of a home-sale bonus If absolutely necessary, state in policy that the employee cannot receive more dollar assistance than the cap on the Loss-on-Sale amount

48 Loss-on-Sale and Home Sale Incentive Bonus Calculation Home Purchase Price $500,000 $500,000 Home Selling Price $430,000 $430,000 Loss-on-Sale ($70,000) ($70,000) Company covers up to a maximum of $50,000 $50,000 $50,000 Remaining loss ($20,000) ($20,000) Eligible for 2% home-sale bonus ($430,000 x 2%) $8,600 Not eligible for both benefits Transferee loss or gain ($11,400) ($20,000)

49 Loss-on-Sale and Home Sale Incentive Bonus Calculation Home Purchase Price $300,000 $500,000 Home Selling Price $275,000 $430,000 Loss-on-Sale ($25,000) ($70,000) Company covers up to a maximum of $25,000 $25,000 $25,000 Remaining loss 0 0 Eligible for 2% home-sale bonus ($275,000 x 2%) $5,500 Not eligible for both benefits Transferee loss or gain +$5,500 0 Monthly carrying costs in inventory $275,000 x 1.25% = $3,438. Is it worth $2,062 (or more) to know the home will not be in your inventory? Cap the home-sale incentive bonus. Cap the two benefits together at the higher of the two caps (assuming both benefits are capped)

50 Some Good Questions Remain Should we have a policy based on certain real estate markets a geography based program? If there was a new home tax credit should this be deducted from LOS? Why do we pay transferees when they sell at a loss but ignore the fact that they are buying a real deal as a result of someone else s loss?

51 Additional Materials Available by Request Benchmark on Loss-on-Sale programs Loss-on-Sale Policy Matters

52 Learning Zone Speedsession: CRP Information If you are a CRP and would like to receive credit for this Learning Zone Speedsession, you must utilize the CRP Recertification Credit Form, which is available at:

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