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Buyer Value Option (BVO) VS Direct Reimbursement

Introduction: Corporations view the relocation of key employees as a central part of their company’s growth and their employee’s growth. Whether a new or ongoing employee, it’s important that companies can transfer their employees as part of new or different business needs.

When a transferee moves, there are many aspects to consider, including shipment of household goods, interim living, final move, and for homeowners- the selling and buying of their home. Costs associated with moving vary, and can be very expensive. Certain of the expenses associated with a move are considered income and therefore taxable, with companies typically paying the associated taxes (called gross up) due on behalf of the employee.

This paper is designed to discuss two of the various ways of handling the selling of the old location home by the transferee, and the ramifications of each.

Definitions:

Direct Reimbursement

The employee sells the residence directly to an outside party buyer. The employer then reimburses the employee for some or all of the costs of sale. Taxes for this reimbursement are also paid.

Buyer Value Option

The employee markets the house seeking a bona fide offer in the market place. Once such an offer is received, the relocation company will make an offer to purchase the home at the “buyer value” established by the outside offer. The employee then sells the residence to the relocation company, and the relocation company executes a contract with the third party buyer and sells to him/her. If properly managed this is not considered a taxable benefit to the employee and not subject to gross up taxes.

What are the costs associated with selling the home, and how do these vary based on the two options defined above?

Here’s the average costs associated with the sale of a $350,000 home, closing costs of 8% of home, and average tax gross up of 48%, and how they vary by the two options.

 

Cost Items

Direct Reimbursement

Buyer Value Option

Selling Expenses

$28,000

$28,000

Tax Gross Up

$13,440

0

Service Fee- Supplier

0

$1,000

Risk

0

$1,020*

Total Costs

$41,440

$30,020

*In a BVO program, there is a small (<2%) risk that the home sale with the buyer, once acquired by the relocation company, falls through and the third party company has to re-sell the home and incur additional costs.

In the above example, the company incurs a $11,420 savings on every home!

Are there any other benefits seen in a BVO program?

Yes, there are many additional benefits.

  • Most companies tie the BVO program in with a marketing assistance program also managed by the third party. This combination provides a quicker sale, at a higher price, saving costs in other areas such as temporary living and household goods storage.
  • The $41,000 also stays off the employee’s W-2, thus saving them from tax problems (i.e. phase outs)  due to excessive income during the year they move.
  • Since the third party is professionally managing the marketing and sale of the home, the employee is freed up to be more productive on their new job.
  • The company can receive regular updates regarding the marketing of the home.
  • The third party can also manage the employee’s home purchase, and in so doing be sure the employee doesn’t overextend in the new location before he/she knows what the final price will be in the old.
  • The employee views the company as caring and doing all they can to get the employees moved and settled. Over 80% of companies surveyed by the Worldwide Employee Relocation Council offer some variation of this type of assistance.

 

Conclusion

A BVO program is a much better option than direct reimbursement for companies looking to relocate key personnel, and provides numerous additional benefits at a lower cost to the company. Most companies have shifted to a BVO program as part of their overall benefit offering for a relocating homeowner. Oxxford Relocation Center stands prepared to work with our clients to create a program and policy that addresses all the needs of their relocating employees.

By Peter Hiro, CRP GMS, Executive Vice President – Business Development at Oxxford Relo.


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