Last year we published the “The Landlord Predicament,” a blog post and relocation whitepaper where we discussed the increase of transferees who are renting out their origin homes instead of selling because they are either upside down on their mortgage or because they feel their loss will decrease the longer they wait.
Unfortunately, the housing market has yet to show a lot of improvement and transferees are still opting to rent their homes. But, while leasing out the home may seem like a win-win situation for the transferee and the company, this is rarely the case. Landlords must handle a lot of costly and time-consuming issues including property maintenance, getting good tenants, collecting rent, insurance, taxes, liability and more. As such, HR managers who are negotiating relocations with transferees should understand the big picture when it comes to renting. Many of the issues discussed in our whitepaper are still relevant, however, here are some additional points that relocation managers should know in order to have a thorough discussion with candidates:
- Waiting out the market is a gamble – Just like any investment, when a transferee holds on to a property waiting for the value to improve, there is a risk that that the value might go down. Many of the transferees who took this chance in 2009 wound up losing even more money because either the value of the home plummeted, or the run costs have exceeded the initial loss on sale estimates.
- It’s a good time to buy up- A transferee who needs to sell in order to buy at destination, and wants to buy up, is in a good position to move forward. For example, let’s say the original home is worth $100,000 and loses 10 percent, and the new home is worth $200,000 and has also lost 10 percent. While the transferee lost $10,000 in the old home, they saved $20,000 from the normal market value of the new home. If the transferee can afford the new home, it’s a win. Conversely, those who are planning on downsizing may find that waiting out the market makes more sense.
- Consider the lender’s position – When the transferee took out the mortgage, they most likely signed an agreement that the property was going to be used as a primary residence. Lenders retain the right to inspect the property to ensure the home is being maintained as originally agreed. If the lender is not satisfied with the condition of the home, or the fact that the transferee no longer lives there, they have the right to “accelerate” the loan. In other words, the transferee would need to immediately pay it off or refinance the home.
- Insurance is costly– As noted in the “Landlord Predicament,” insurers set up pricing based on the fact that the owner lives in the property. Vacant or tenant occupied properties cost more to insure. In some instances, the owner will need to go to a different insurer to even get coverage for a rental property.
- Benefit timelines run out – Many employers’ relocation program benefits expire after a year as a matter of policy. For example, if belongings remain in the home for more than a year, tax exemptions for the shipment of household goods may expire.
- What about the short sale? – A short sale is a process whereby the lender accepts a lower amount than is owed on the property in order to avoid foreclosure process. Currently, this bank forgiveness is not considered taxable income, provided the home is the primary residence. If the transferee turns the property into a rental property, and then chooses to go through a short sale, the forgiven amount will be considered taxable income.
Considering the enormous amount of responsibility involved in being a landlord, it’s really important that both the transferee and the company understand the scope of renting from the very beginning. If renting is, in fact, the only viable solution, then relocation managers may want to consider offering some benefits, such as property management, to support the transferee so that they can get back to work quickly and with minimal interruption.
Photo credit: chardonnaypm
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