It’s the dreaded phone call. A person calls out of the blue to inform you that a client you
have had for 10 years is part of a relocation program, has become a transferee, and you now owe a giant referral fee on the listing or the buy side.
How can this even be? They are MY client. Or, at least they were before their company offered them a new position that provides relocation benefits.
But once your client has engaged with their employer to move on behalf of their job, they transform from a client into a transferee. Being a transferee means they are receiving benefits to move. And the benefits come with required compliance.
Even though remote work has become more prevalent, there are still many careers that require hands-on execution, which often involves relocation to a new city or country. And, more and more companies are determining that a hybrid model is the way to go, which means while there is some work at home, employees will need to be within a commutable distance to the office.
Relocating transferees may be receiving a myriad of benefits, including household goods,
moving services, temporary housing while they find a new home, car and pet moving,
legal and tax assistance, commission expense coverage, partner/family assistance, house
hunting trips, and a lump sum to cover miscellaneous expenses, among other types of
assistance. There are a lot of moving parts that involve a lot of suppliers.
The average cost to a corporation is over $80,000 to move a home-owning employee domestically. International moves can reach nearly a million dollars, depending on the length
of the assignment.
When an employer engages an employee and their family to make a move, they are
creating and funding the opportunity, so they expect compliance with the benefits
program. Compliance involves using specific providers that have pre-negotiated fees,
services, and discounts.
As a result, every broker must pay a referral fee on the real estate commission the company is funding to help offset the cost of the move. These providers have agreed to certain performance levels and have often been trained on exactly how to manage their portion of the move. If they do not perform, they can find themselves ineligible for further referrals.
And the employee (transferee) agrees to be compliant in return for the resources and financial assistance for the move. This compliance ensures that the expenses and risks can be held to a minimum.
You may be thinking that it is just a real estate transaction, so why would the risk be any higher than any other transaction? It all comes down to the money.
When an employee is reimbursed for expenses in a relocation, those expenses are considered taxable income to the employee. When you add up all the expenses in a move, the tax implication to the employee and the corporation can be significant.
The IRS and tax protection
In the 1972 Revenue Ruling 72-339, the IRS maintained that if an employer-sponsored
relocation home sale program is viewed as two separate sales — one from the employee to
the relocation company or employer, followed by another from the relocation company
or employer to a bona fide third-party buyer — then there are no payroll tax
consequences for the employee following the second sale.
In other words, the fee paid by the employer to the relocation company, and the employer-paid costs of selling and closing the second sale, would not be considered additional compensation to the employee.
On November 30, 2005, the IRS passed Revenue Ruling 2005-74 that ruled favorably on Amended Value Program residential real estate transactions managed by relocation management companies as employer agents. This ruling allows a third party,
also known as a relocation management company, to facilitate the sale of a property to
relieve the seller (employee/transferee) from being taxed on the reimbursement of the
commission amount from their employer.
The purpose of the very specific procedures when selling is to protect the relocating
employee’s benefits that are provided by the employee’s company in order to avoid the potential for adverse federal tax consequences to the employee — and subsequent gross-up
requirements to the corporation. It involves a complex two-part sale that needs to be
managed by parties that know how to stay in compliance.
There are organizations that relocate thousands of people annually, which can add up to millions of dollars in unnecessary tax penalties if the risk is not managed properly.
Customer satisfaction makes an entrance
Years ago, the relocation process was not an issue for the corporation. A transferee
was required to use the suppliers that were part of the program — no exception. Whatever real estate company they had as a partner was who the employee had to use.
Guidelines were followed, reports handled, and referral fees were paid. But transferees like to
have choices, so on occasion, they began to push back on the recommended broker or
agent.
As you know, having confidence and a connection with your clients is so important
to have a successful real estate transaction. It is still their personal family home, even if
someone else is paying the commission. They want the best agent and to sell for the
most money. The transferees wanted to collaborate with their preferred agents, and that
led to more satisfaction during a process that can be very stressful for a family.
So, corporations and relocation management companies, in an effort to generate more
employee satisfaction, began to let the transferee request a preferred agent. The challenge is that the agent and client may already have an active client/agent relationship. They may have already discussed selling their home with the agent or started to look at where they want to buy. The stipulation was that the agent must follow the required guidelines and pay the referral fees.
Exactly why are you getting into my business?
It’s easy to see why requested real estate agents would be incensed by the out-of-the-
blue call informing them about an exorbitant referral fee that is due on a longtime
client. It is nothing personal. It’s business.
The challenge with the preferred agent request is that when the relocation company is going over the pages of guidelines on the benefits package, many of the details are lost to the employee. And, they often jump the gun and begin to speak to an agent before they have been given their formal benefits package. Or worse, they go online and start clicking around on real estate websites.
The employee must comply with the elements of the package to be eligible to receive
financial relief. And when I say they must comply, I mean that their preferred agent must
comply, too. This means, depending on where you are in the process with them, you will
need to complete the Broker’s Market Analysis, weekly reporting, and very specific
processes to execute the actual sale process — which involves unusual steps to ensure the
transaction is IRS compliant.
Designated settlement services providers will also be required. If the property vacates before sale during a corporate buyout, you will have to property-manage the property. It’s a complicated process with lots of people making lots of demands.
It forces requested agents to abandon all the usual ways they manage the listing,
negotiations, sale, and closing process. It can be frustrating to have so many stakeholders
now involved. The relocation management company and likely your
relocation department staff will oversee the process.
The reason for this is that the corporation expects them to do that. The corporation doesn’t really care how it gets done; they just want it handled.
Be kind to your relocation department staff
You will hopefully go easy on your relocation department staff (if your company has a
department) when these situations arise. They are between a rock and a hard place. They
may get a lot of business from the corporation and the relocation management company. And, oftentimes they have had to sign master agreements that say the brokerage and agents will comply with these situations in order to be eligible to be a supplier.
The staff knows how hard you work to acquire and maintain your customer base. Just remember that it is nothing personal; they are not out to ruin your life and get in your business. They hate these situations as much as you do.
The key is to make peace with it, even though it is painful, and understand the
ramifications if you refuse to pay or comply with the guidelines. Your client (the
transferee) can be significantly impacted. The last thing you want to do is complain to
your client about the referral fee you have to pay.
Although the transferee knows that compliance is required, many relocation companies conveniently forget to tell the transferee that a referral fee will be due by the requested agent and their brokerage. So it may come as a surprise to the transferee, and fighting it won’t change the outcome. If the referral fee is not paid, the transferee’s benefits will likely be affected.
Why relocation matters
Many agents cringe when they hear the word relocation. They may only associate it
with big referral fees or a line of business that is out of reach for some.
But relocation offers people the opportunity to move into jobs that give them upward mobility. It helps the organization get the right talent into the right roles, which helps the company achieve its hiring and financial goals.
Successful organizations support the local economy by providing programs, services, and products we need in our everyday lives. Relocation is critical to our economy and to maintaining the quality of our lives.
Try to remember that when one of your clients becomes a transferee, their company is not only initiating the move, but they are also funding it. It’s not personal; it is all about moving business forward.
Teresa Howe, SCRP, SGMS, is a consultant with TRH Consulting, and has created and managed multiple referral companies for brokerages.
