Relocation Cost Reduction – Harder Than You Think

I recently stumbled upon a white-paper by SIRVA on Breaking Through the Relocation Cost Reduction Paradigm: The Total Cost of Ownership Approach that I found quite intriguing. While they made a few points in the white-paper I’m not sure I agree with (although I will admit I’m not an expert in relocation services or the housing market), they made a very good point that I’m sure most companies are overlooking when they source relocation services. Relocation services fees are usually less than 3% of the total cost of employee relocation while home sale related costs are usually 41%. In other words, it doesn’t matter how much you save on the relocation service fees because if the house doesn’t sell fast at a competitive commission rate, it’s going to cost you a fortune in duplicate housing costs. Since your employee won’t be able to buy a new house until their old one sells, you’ll be paying their rent, electricity, water, etc. until it does.

Furthermore, if you look at the total relocation cost breakdown provided by the report:

  • 41% – Home Sale Costs
  • 14% – Household Goods (HHG)
  • 11% – New Home Purchase
  • 11% – Tax Liabilities
  • 6% – Temporary Accommodations (during move)
  • 6% – Miscellaneous Allowance
  • 3% – New Home Location
  • 3% – Service Fees
  • 2% – Final Move
  • 2% – Spousal Assist
  • 1% – Expense Management

You quickly see that this is really the only expense that matters. There’s no leeway on tax liabilities, and most buyer purchase costs are fixed. You might be able to save 10% on HHG and Temporary accommodations above and beyond what a frugal and cost-conscious consumer will save, but that will only knock 2% off the total relocation cost. And it’s quite clear that the other costs are too small for cost reductions to make much of an impact.

So how do you reduce home-sale costs? If you look at the TCO, which is duplicate housing costs plus commission and bonus, you might think the answer is to aggressively negotiate down temporary accommodation costs and commission and bonus fees, but negotiating on either cost could end up costing you dearly. If you cut a broker’s commission from 6% to 4%, then you make them hungrier for the highest selling price they think they can get. They’ll assess your employee’s property high, advise them to list high, and then advise your employee to hold out on accepting an offer until that number is hit. A home that could sell in 60 days at a more reasonable assessment (that your employee might be very happy with) might now take 180 days or more, even in a good market. And if you spend all your time negotiating down temporary relocation costs, you’re missing a key savings opportunity. The fact of the matter is that if your employee can sell their old house and buy a new house that they can move right in to during the week they will be relocating, you don’t have any duplicate housing costs (and duplicate housing cost reduction becomes a moot point).

Thus, the ultimate key to relocation savings is helping your employee sell their home and find a new one fast! Furthermore, not only are rate and fee reductions of little significance, but successful attempts to reduce certain fees can actually cost you more in the long run! Considering that SIRVA found that the average cost to relocate a homeowner has risen by 20% to $77,000 over the last two years, risking additional costs in the long run is not something you want to do.

So how do you help an employee sell their home fast? Well, as far as I can tell you have three options.

  1. Follow the white-paper’s recommendation, which is to find a very successful broker and incentivize them to sell quickly with an early sale bonus (since this will be significantly less than what it will cost to keep your employee in temporary housing for the six months it can easily take a house to sell in today’s market).
  2. Negotiate a sale agreement with a large brokerage firm that will buy the employee’s house at a price mutually agreed upon up-front if the house does not sell within a pre-defined timeframe.
  3. Buy the house from your employee at a mutually agreed upon assessed value so they can immediately buy a new house. (For example, the average of the assessed value from the tax authority, the assessed value from a national market assessment firm, and the assessed value from an independent local assessor.)

For companies that do a number of relocations on an annual basis, I think options (2) and (3) might actually be the best ones. Option (2) allows you to limit your total costs. Even though you’ll likely have to provide additional compensation to the employee with option (2), since most realtor’s will only agree to buy at xx% of current market value (and you can’t expect an employee to sell for less unless you agree to compensate them), you’ve limited your duplicate housing costs and total relocation cost. While option (3) does provide some risk that a drop in the housing market could cost you some dollars if the market deteriorates before you sell, it also offers you the ability to actually make money, especially if you do a significant number of relocations. If you do a significant number of relocations annually, you could hire a property specialist who would manage the outsourced agreements to the national realtor organization and property maintenance organizations with whom you’d be able to get much better deals with due to the sheer volume of houses you’d be sending their way. Plus, in a heated market, you could let the property sit on the market longer and make money as the cost of monthly lawn maintenance (which is considerably less than the cost of temporary housing) would be a small fraction of the additional profit you could make on the sale. It’s something to think about.

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