Editor’s note: This three-part series focuses on changing forces and their impact on the relocation industry. Inman News targets three main aspects of change: rising fees and their effect on real estate professionals; the housing slowdown; and how an increasingly global economy is ramping up the relocation industry. (Read Part 1: Relocation fees reach breaking point for some agents and Part 3: Real estate firms cash in on globalization.)
A decline in U.S. real estate sales, a moderation in price appreciation and a rise in housing inventory together present a challenge for the relocation industry: Sell houses quickly in markets where houses are not selling quickly.
“The most pressing issue of the day is the softening of the real estate market, and directly how that correlates to corporations’ ability to relocate people smoothly and quickly,” said Scott Sullivan, senior vice president for GMAC Global Relocation Services, a full-service relocation company that serves corporations in 110 countries and manages about $1 billion annually in relocation-related transactions.
When the real estate market was booming there were fewer demands for extensive relocation benefits such as the guaranteed purchase of relocating employees’ homes if the homes did not sell within a specified period of time. Homes were selling quickly during that period, Sullivan said, and companies were “able to pare down the benefits in that market.”
Now, there is more demand to boost relocation benefits as an incentive for employees to move in a slowing housing market.
Business is booming in the relocation industry despite the market slowdown, though this success is at the expense of real estate professionals and other service providers who face rising fees for relocation transactions. Relocation business is no longer worth the cost for some real estate professionals, who say that rising fees may impact the quality of service consumers receive.
Also, the changing real estate market places pressure on relocation companies to offer more comprehensive services, and there is also a growing demand for international services as corporations extend their global reach.
The environment for relocation services “is changing and is changing quickly,” Sullivan said. “There is much more supply than demand. Homes are staying on the market longer. Home values are coming down. Of course the guaranteed buyout program is becoming much more en vogue.” In this market, he added, “The key question for corporations (should be), ‘Tell me what you’re going to do differently … to sell the homes faster.'”
Some relocation companies are dusting off a playbook from the last real estate downturn, he said. And relocation companies that offer a guaranteed purchase option for employees’ homes that don’t sell can expect to take ownership of more properties.
In October, GMAC Global Relocation Services released an advisory report on the impacts of the softening real estate market on the corporate relocation industry that cautions, “Longer inventory times and diminished transferee home appreciation can result in employee dissatisfaction, reluctance to relocate and increased relocation costs for the corporation. It is clear that the ‘business as usual’ approach will no longer work.”
The report also states that the state of the housing market has put “pressure on both the corporation to provide more financial support and the transferee to accept a lower price and a potential loss on a property. In many instances, the transferee simply cannot afford to accept the relocation and the corporation should have a business plan to address this. In other cases, the transferee will not be experiencing an actual loss but a “perceived loss due to a lower sale price than anticipated.”
And while corporations “reduced or eliminated various relocation benefits while the real estate market remained strong” — cutting back on mortgage interest differential, loss on sale and guaranteed buyout programs, for example — relocating employees are likely to seek out these same benefits given current market conditions, the report states.
Sullivan said, “People are not going to want to take the transfer if they feel they’re going to come out on the losing side, and most of that comes down to the real estate transaction. I think there is going to be truly a lot of stress, a little bit of pain and suffering, as companies start to hear more from transferees who are not going to take a new position unless the company really tries to provide some better protection.”
Relocation management companies may consider buyer incentives, unique advertising strategies and property auctions among the tools to help sell relocation properties, according to the GMAC advisory. Another GMAC advisory suggests that relocation companies can offer an incentive to transferees if the home sells within a specified marketing period, even if the home sells at a specified percentage below the appraised value. “Pay the home sale incentive at acquisition instead of waiting for the home sale to close,” the report suggests. Other incentives could include limited reimbursement of expenses or an allowance for home improvements prior to the home being listed for sale.
And “with competition for buyers increasing, some companies sweeten the deal by offering incentives to buyers for (relocation company-owned) homes. Most times the incentives won’t make or break the sale, but they can give a hesitant buyer a gentle push,” the report suggests.
Sandy Taraszki, executive director for the Worldwide ERC Coalition, a part of a membership organization for relocation professionals, agreed that the focus for the relocation industry has shifted based on the conditions in the U.S. real estate market.
“Given the current market conditions, it seems the real focus is getting buyers for properties so you don’t have homes sitting vacant. last year we were talking about commission compression — this year we’re talking about bonuses and incentives,” she said.
Judy Pogue, president of the relocation division for Real Living, a large real estate brokerage company, said that the slowing sales environment in some real estate market has led to an increase in the inventory of for-sale homes. And that means transferring employees may take longer to make a decision on what to buy — there are simply more properties to look at. “Most (relocation) policies will allow anywhere from four to seven days for house-hunting, and most (employees) will come in and use those four to seven days. Transferees are taking more time to find their home of choice.”
But the real estate market changes haven’t greatly impacted the company’s relocation services, Pogue said. “Most of our homes sell within the pre-marketing period.” Real Living does offer a home-purchase program in the event a relocating employee’s home does not sell in a specified period, and “Companies have not gotten more conservative regarding the number of people they provide the benefit to,” Pogue said. Whether the real estate market is booming or reeling, companies continue to move employees, she said.
Employees who feel they are not getting a fair deal from their relocation benefits are always free to pursue a home sale or purchase on their own, but may be giving up the entire package of relocation benefits in the process.
Employees may be more likely to use their relocation benefits in a slowing real estate market, said Jeff Arouh, a partner with the Holland &Knight LLP law firm in New York who has worked with relocation service providers. “When the market gets tough and the house has to be on the market a long time before it’s sold, the ability to utilize the relocation benefit is very beneficial to the company and to the employee,” he said. “As the market weakens you end up with more guaranteed purchase transactions.”
There are other changes to relocation benefits, too, that tend to accompany changes in the real estate market — “It all comes down to whether there will be greater costs to the employer rather than the relocation company,” Arouh said.
Sullivan of GMAC said real estate companies that handle relocation business should focus on setting a realistic price for relocation properties and in selecting agents who are skilled in working with relocating employees. “They need to really be putting their best people on the corporate relocatees,” he said. The cost to move employees “is going to be getting higher and higher,” he said.
To help prevent overpricing for properties in a relocation-related transaction, relocation companies may consider allowing the transferee to list a home within 5-7 percent of the appraised value of the property, according to an industry report by National Equity Inc., a global relocation management company.
“Companies should place limits on the listing price set by the transferee,” the report states. “It’s important to price the home right from the beginning – a house that is acutely overpriced will grow stale quickly. The longer it sits on the market, the more skeptical buyers become of the home’s worth.”
While the real estate market is slowing, Worldwide ERC reported that transfer volume has steadily increased. According to the “2006 Transfer Volume and Cost Survey,” survey participants projected a rise in transfer activity of 14 percent in 2006 compared to 2005.
But more organizations reported at least minor problems with employee reluctance to relocate (55 percent in 2006 compared to 46 percent in 2005). And about 16 percent of the participants in the latest survey said that slowing real estate appreciation was among the reasons that employees were reluctant to move.
***
Send tips or a Letter to the Editor to glenn@inman.com or call (510) 658-9252, ext. 137.
