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Sunday, June 22, 2008

Realtor's Fees Driving Relocation Costs

The slowing real estate market is bringing to the forefront a long-simmering problem for small-to-medium-sized companies. The majority of corporate relocation expense is now reimbursement for realtor's fees. That just feels wrong in so many ways.

For decades the best practice in relocation management, if your company is too small to buy the houses of the relocating candidates or employees, has been to reimburse realtor's' fees for the selling of their current house and closing costs on the purchase of a replacement in the new city. This is 6% on the selling side and 2% on the buying side, and assuming that the transferee purchases about the same priced home as the one they sold, that's a flat 8%. When this practice became industry-standard, a modest 1500 sq. ft. in a major city was priced around $95 - $125,000 and the expense to the company was usually no more than $10,000. Today, that same house is $325,000 - $400,000 unless you're in a premium neighborhood, in which case it could be as much as $700,000. Now the reimbursable real estate portion of the move is $30 - $40,000. Our relocations usually involve about 15,000 lbs of personal goods, and with all other benefits (house hunting trips, storage, misc. allowances for deposits, etc...) the real estate piece is typically no less than equal to all the other expenses put together, and in some cases its double all other expense.

We got around this for awhile during the recent real estate boom. We gave incentives for people to sell their own home, and sometimes increased the cash allowances as a reward for FSBO. Now that the market has slowed, people need professional help marketing their home and a realtor is a given. However, the slower market hasn't led to significantly lower home prices, as people have 80 - 120% mortgages and not only can't afford to lose equity, but in many cases can't pay off the bank without getting close to full price. The end result is that a 2000/2001 move that would cost us $32,000 now costs $52,000.

So what's the solution? I'm not sure because the issue is bigger than just corporate relocation. Remember, those same Realtors selling those same houses are now getting double the commission they once were due to the rising home values. However, their commissions have not dropped and my friends who are Realtors and see this as profiteering tell me that a realtor who drops their commissions can expect to not have their house shown by other Realtors. Its a closed market; you have to be licensed by state agencies controlled by Realtors, and the 6% commission is regulated informally by other Realtors.

The immediate action required is that managers need to start thinking about what positions are worth relocations. We need about $250,000 in incremental revenue to cover every relocation, so maybe the standard is that the person or position must generate that in order for us to not restrict hiring to the local area or letting the person home-office from their current location. Once a relocation need is established, the managers need to budget $50k for each anticipated full-service relocation (we have a Uhaul-level for some positions).

Finally, if there's a relocation expert out there whose found a solution, let's hear from you!

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