As we head into the spring real estate season and recovery from the pandemic continues, we are seeing heavy real estate activity – mainly on the sale side – creating what we commonly refer to as a “seller’s market.” A “seller’s market” occurs when demand for homes outweighs the supply, placing the seller of a home in a favorable position. Often in a seller’s market, we experience not only multiple offers on a home but also offers exceeding the list price (and potentially even exceeding a price point that the location supports). In situations involving multiple bids, the offer value is inflated or increased in order to out-bid competitors and be awarded the contract to purchase the home.
Risks of a Seller’s Market
While this may seem like great news for sellers, a sales price over the list price can carry its own unique set of challenges for both companies and for the individuals they relocate, especially in the mobility field. While a fast sale for the highest value is favorable for a transferee, they may experience their own issues with finding and purchasing a property in the new location. The failure to quickly locate a new home can create the need for both temporary housing and storage, possibly beyond what policies allow. The lack of permanent housing in the destination can place added stress on the employee and the family.
For companies, the impact of the situation is more intense, especially when a tax-protected home sale program such as a Buyer Value Option or Guaranteed Buyout Offer is provided. In compliant, tax-protected home sale programs, the failure of the home to appraise at the contract value during the mortgage appraisal process places the company at risk for an increase in inventory properties. In a compliant program, the transferee’s home is acquired prior to the buyer’s mortgage appraisal being completed. If the home fails to appraise, the buyers will not be able to obtain a mortgage at the agreed-upon price, forcing one of the following three things to happen:
- The buyer agrees to come up with the difference between the lender or buyer’s appraised value and the sale price
- The seller reduces the sales price to that of the mortgage appraised value
- The buyer(s) chooses to walk away from the sale
If the buyer walks away or does not have the funds to make up the difference, the sale will fall through, and the home will revert to inventory if the home was already acquired. This will lead to not only additional carrying costs but the potential for a loss on sale for the company if the home was acquired from the transferee at a higher value than what it eventually sells for.
Year to date, Aires has seen more than 50% of our clients’ BVO, GBO, and Home Marketing sales in the U.S. and Canada exceed the list price, a sizable increase compared to 30% in 2020 and only 19% in 2019. So how do we combat this, keep inventory costs low, and avoid exceptions to policy while not impacting the transferee experience?
Aires offers several suggestions in order to assist you in controlling the potential dangers of the seller’s market and sale fall through:
- Place a maximum offer limit in your GBO and BVO policies (e.g., accepted offers may not exceed 105% of the home sale value).
- Offer the use of the direct reimbursement program if the transferee wishes to accept an offer exceeding policy limits. Tax gross up may or may not be provided since this is a personal decision to proceed outside of the program. This option reduces the risk of the company taking a loss.
- Require an addendum to the contract that addresses what will occur if the home fails to appraise, such as the buyer covering the variance. Negotiating the situation up front may help to avoid a sale fall through later.
In a non-compliant BVO or Amended Sale program, the situation differs because you are not tied to the guidelines set forth by the IRS and may simply adjust the timeframe for when you acquire the property to a time after the mortgage appraisal is completed. However, it is important to note that by doing this, the BVO home sale program may be considered non-compliant, and if audited by the IRS, you may potentially be fined for non-compliance.
For further information or questions, please reach out to your Aires’ representative.