Loss on Sale and Relocation Policy: Recommendations for Today’s Market
Loss on sale continues to be hot topic in the relocation industry. Over the past 12-18 months we have provided analysis and recommendations for many of our clients around Loss on sale assistance provisions for their relocation policies. While the majority of our clients have not adopted a formal policy element around Loss on Sale, they have developed specific guidelines to accommodate special situations or exceptions.
Historically, a loss on sale benefit was only included in a Senior Executive Level policy or for a specialized recruiting situation. However, we are to seeing an increase in consideration of this benefit for all transferring employees.
There are a variety of definitions of loss on sale or what is commonly referred to as "perceived loss on sale". Some transferring employees state that the loss on sale is the difference between the current loan balance(s) and the guaranteed offer amount. Many times this scenario shows that the employee truly is in a “loss” situation as the result of obtaining a cash-out first mortgage refinance or an equity loan/line of credit. In this situation the Company needs to determine if this definition would be classified as a loss on sale and, as such, receive the associated benefit.
Another example of "perceived loss on sale" would be when the employee contends that there is a loss on the value of the home that they should be compensated for. Even though they do not owe more than they will get for the home, they feel that, should the home have sold at a different time; they would have more equity and should be compensated for that "loss" of equity.
While these may sound rational to the transferring employee, a true loss on sale is the calculated difference between the appraised value offer or a buyer’s offer to purchase and either the employee’s purchase price or the employee’s purchase price plus all or some of the subsequent capital improvements. This difference, or some portion thereof, may be paid to the employee by the Company as a loss on sale benefit.
There is a split decision regarding whether or not to consider capital improvements in the calculation. This can sometimes be a very vague area of the policy subject to interpretation, which can prove to be challenging when applying the policy. Along with the challenge of defining capital improvements is the concern that the appraisal or purchase price is already taking into account the value of the improvements. By including capital improvements into a loss on sale calculation Company’s may, in fact, be compensating the homeowner twice.
Budgeting for a loss on sale may also be challenging. While benchmark studies show that not only do most companies limit the percentage of a transferee’s loss, they impose a dollar cap on the payments as well. The amount of the cap tends to vary. We have seen everything from $15,000 to $50,000+. Typically this benefit is not grossed up. Organizations should establish a loss on sale formula and make educated assumptions about how often you may be making these payments. For forecasting, we recommend using market data from frequently used origin(s) and destination(s) or actual numbers for a recent activity period. Another important component in the loss on sale budget calculation is the cost associated with exceptions granted to employees unable to sell their home. These may include extended temporary living, duplicate housing costs, household goods storage, return visits, and inventory costs.
Too often the impact of a loss on sale is not taken into consideration early on in the relocation process. Companies are not factoring in this consideration prior to offering relocation or recruiting a new candidate. Likewise, employees may accept an offer to relocate based on mis-information or perceptions about the housing market in the departure location. Once the true impact of the loss is made clear the employee could be well into their new role and the relocation process, leaving the employee in a position of great concern contemplating whether or not to continue with the relocation.
Posted on 03/9/2009 in Relocation Policy | Comments (1)
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