With some underwater homeowners reluctant to move, mobility providers apply a little ingeniuty.
By Katie Kuehner-Hebert
Freefalling home values caused by the housing meltdown have caused companies to make some amendments to their relocation policies. Providers are seeing—and responding—to a wave of change in the markeplace.
“It’s really been a creative environment for both relocation management companies and corporations to try to accommodate their employees,” says Scott Sullivan, executive vice president at Brookfield Global Relocation Services.
Accommodating transferring employees whose homes are severely underwater is becoming more and more common. Pre-decision assessments on house values are a critical piece of protocal to minimize expenses in the long run.
Clients are demanding more stringent due diligence of suppliers entering their homes, handling their household items, and safeguarding their personal information from identity theft.
Telecommuting is on the rise in some industries due to developments in technology. But the relocation industry is no stranger to technology. The last few years have welcomed innovation—like mobile apps—making moving more convenient and attractive to driven executives. And such innovation is key. Relocation providers have been dealt a tough hand over the last few years, but a great bit of ingenuity and resourcefulness have helped domestic and global relocation continue to move forward.
Getting Out From Underwater
The housing meltdown that began in 2008 reversed a decades-old trend of home value appreciation, says Viktor Reznicek, vice president, relocation and assignment services at Xerox Relocation & Assignment Services. As mortgage underwriting grew increasingly lax in the early 2000s, the demand for homes drove up home prices by 8 to 10 percent per year, Reznicek says. By October of 2008, the bottom fell out of the housing market, and average home values in some states fell by nearly 30 percent in a single year.
“There is still a massive inventory of foreclosed or soon-to-be foreclosed homes that are selling at 60 to 70 cents on the dollar, which is affecting the values of nearby homes that people are trying to sell,” he says.
While some markets are rebounding slightly, it’s still below the inflationary rate, says Craig Selders, president of Paragon Relocation. According to Case-Shiller, the total value of homes declined 3.7 percent from November 2010 to November 2011, for the 20 composite cities it tracks. In some areas, it is much worse: Atlanta declined 11.8 percent, Las Vegas 9.1 percent, and San Diego 5.4 percent.
As such, there is huge reluctance for employees to relocate, Selders says. Weak real estate markets around the U.S. are making it very difficult for people to move; the Wall Street Journal reports that 22 percent of U.S. homeowners—or 11 million Americans— have a mortgage that is worth more than their house.
“According to a study by the Wharton School, borrowers who are underwater are 33 percent less likely to move than those who are not,” Selders says. “We counsel our clients on areas of their policy which might provide better assistance to people relocating, such as reviewing their loss on sale provisions, reviewing temporary living policy, duplicate housing payments, or providing additional financial support.”
Lessening Loss on Sale
Most companies are now including loss on sale provisions in their relocation policies, which help cover the gap between the negative equity in their home and the price they can fetch if they sell their home when transferring, says Bill Mulholland, director of operations at American Relocation Connections. Clients tend to cap those programs, depending on how much they want that person in a new location or a new position.
“The housing market is not as high as it once was, but the job market is getting better, so we tend to see clients having to offer loss on sale in order for the candidates to make the move and at the end of the day the employer feels it’s worth it,” Mulholland explains.
Laurissa Norwick, vice president, domestic consulting and process management at TheMIGroup, says loss on sale provisions don’t always cover the gap, and in those cases, “employees still need to bring a check to the closing table, which is very difficult in today’s economy when not everyone has the available cash reserves.”
One of Xerox’s clients, Disabled American Veterans in Cold Spring, Ken., starting offering a loss on sale capped at $20,000, says Sandy Whitford, senior accountant. However, the actual cost could be as high as $38,000, as the employer also paid federal and states taxes on the payment to the transferee, because it was considered income. In fact, even the taxes paid on the total amount was also classified income and were taxed as well. As the economy began to improve, the organization dropped the cap to $10,000, but is still paying taxes on that amount.
Financial transparency is key. Disabled American Veterans also began to include a pre-acceptance policy, which provided transferees a relocation appraisal up front, Whitford says.
“Before they made a decision to transfer, they could see if they were underwater and even with the loss on sale, could still take the move in case they had to bring money to the table,” she says. “This saved us money as well, if they decided to not transfer.”
Fly Then Buy?
Many transferees have opted to leave their family behind and accept temporary assignments, because they could not sell their homes, Selders says. They have visited their families routinely and they rented in their new location, because they couldn’t afford to buy a new home.
Brookfield’s Sullivan says that he is seeing a significant shift between the number of homeowners and the number of renters needing relocating services within his firm’s client base. Ten years ago it was roughly 60 percent homeowners and 40 percent renters, but now that statistic is reversed—it’s 40 percent homeowners and 60 percent renters.
Lorraine Rutenberg, director, Americas HR mobility, relocation and payroll services at DHL Express (USA), Inc. in Plantation, Fla., says that with the advice of the express service’s relocation provider, Graebel Companies was able to tweak its relocation policies and save massive headaches – just as the company was restructuring its business to be mainly an international delivery service, relocating its domestic employees to new U.S. locations to only accept incoming international shipments.
“We partnered with Graebel to come up with a new policy related to how we marketed and priced our homes by proposing the DHL Formula,” Rutenberg says. “They gave us suggestions and came up with a formula in which we could price the homes right so they would sell. Our U.S. headquarters is in Florida, and the housing market here really took a huge dive.”
DHL’s initial policy only required two broker market analyses to set the sale price of the home, she says. The employee would list their house based on this information and anticipated they were going to get this price. DHL and Graebel revised the policy and added a third component—a relocation appraisal.
“This new formula provides a realistic view of what the house is worth in the marketplace and not an inflated number that a realtor would suggest,” Rutenberg says. “As a result, DHL did not end up with homes in inventory, because we priced right to sell. Setting realistic expectations for the employee up front helped us get buy-in from the employee and eased the stress of their relocation.”
As a result, DHL did not have to offer loss on sale because there was no gap between negative equity and the selling price of the homes, Rutenberg says. But the company did have challenges discouraging employees from purchasing when they moved to a new location. DHL offered an extended temporary housing so they could find somewhere to live, and encouraged them to rent at least a year before they bought in a new
Xerox recommends that clients give transferees incentive bonuses to sell faster, Reznicek says, as well as a buyer value option versus a guaranteed buyout, whereby the employee is responsible for finding a qualified buyer before the company buys the home.
American Relocation Connections is advising clients to put an interest rate differential in their relocation policies to prepare for the eventual rise in rates, Mulholland says. In fact, interest rates could be as high as 7 percent by 2014, according to the Federal Reserve. If mortgage rates go up by more than 2 percent, the client could opt to give the transferee money to buy down their interest rate, to keep it at a lower rate.
The provider is also recommending that clients implement policies for assumable mortgages as interest rates rise, he says. That way, transferees in the future could assume someone else’s mortgage at today’s historically low rates, as well as today’s low rates on private mortgage insurance (PMI), now at 1.25 percent. Within the next 12 months, PMI rates could rise to more than 2 percent.
Fortunately, the revised federal Home Affordable Refinance Program (HARP 2.0) has a provision that states that if a homeowner is making mortgage payments but is underwater, they can still refinance, Mulholland says.
“So they’ll be able to enjoy a 4 percent interest rate, even though the house is worth less than they owe,” he says. “This should stop the second wave of shadow inventory of foreclosures.”
Pre-assessment programs to identify appropriate policies and benefit programs is becoming increasingly critical to save costs, and can mean the difference between a successful relocation or a failed one, says Norwick of The MIGroup. Assessment tools are designed to aid in the development of a comprehensive domestic cost estimate based on the employee’s current real estate situation. They discover employee’s equity position and accurately identify home sale costs. Components include broker market analysis, desktop valuation, and appraisal.
“By identifying all costs upfront you ensure that there are no surprises six months into the move,” Norwick says. “It also helps you set employee expectations at the onset, ultimately minimizing exception requests and often resulting in cost savings to the organization.”
Pre-decisioning can help transferees decide the best option for them, and as such, companies should provide more of a menu-driven policy approach, Selders says. For example, somebody might be eligible for help on loss on sale, but instead they’ll ask for 60 days of temporary leave because they opted to keep their home, leave their family, and take a temporary assignment.
Pre-decisioning can also work in favor of the client company. Its not that uncommon for clients to have two different candidates vying for the same position. In this market, they can turn to their relocation provider for information to help decide which candidate may be the best for the company to move, Mulholland says.
“After market analysis, if candidate A’s house takes six to eight months to sell since its dramatically more expensive to sell, then the offer might go to candidate B,” he says. “Companies are looking at the entire picture before offering a relocation package.”
Importance of Privacy
Clients are demanding much stricter due diligence of suppliers than ever before, says Tim Callahan, chief operating officer at Graebel Companies and president at Graebel Relocation Services Worldwide.
“Relocation is a fairly invasive set of services, particularly when it comes to household goods moving,” Callahan says. “Clients want to make sure that suppliers are fully vetted, including conducting drug screening and background checks.”
There is also greater concern over the possibility of identity theft when providers share personally identifiable information of transferees, he says. An increasing number of U.S. companies that have global operations are complying with European privacy laws, which are much more strict that U.S. laws in that they mandate companies obtain permission from transferees before they share phone numbers and addresses, in addition to Social Security numbers, driver’s license numbers, credit card and bank account information.
Moving Toward the Future
Technology is pushing the market forward. Clients are “really hungry” for a higher level of data management—reporting and visibility of their data in real time, notes Graebel’s Callahan. And this goes way beyond spreadsheet reports. Organizations are seeking a dashboard to show real-time data and analytical side-by-side comparisons of key performance indications and service level agreements to evaulate measures of return on investment. More clients are also asking for mobile apps to check the status of their household goods and expense payments.
“The global economy over the last several years has caused many Fortune 500 companies to run very lean today and they don’t have huge relocation departments,” he says. “Consequently, these companies have outsourced the relocation management function, but they don’t want to lose visibility to the data and knowledge critical to performance.”
And the global economy is blurring the line between domestic and international assignment management functions. “Both are being management under a global umbrella, with merged responsibilities under one directional leadership,” Sullivan says. “We’re seeing a much greater interest from companies in having a relocation management company that can deliver global solutions, as both domestic and international responsibilities are now blended.”
Relocation companies have proved their resilience in the last few years and continue to overcome challenging market conditions.