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Taxpayers get bill for home sellers' safety net of relocation service

For thousands of Tampa Bay residents, plunging real estate prices have made it impossible to sell their homes and move elsewhere to find work or take better jobs.

But the market crash wasn't a problem for Department of Veterans Affairs employees like James Clark.

A chief pharmacist at the Bay Pines VA Medical Center, Clark enrolled in a program that enabled doctors and others transferring within the VA system to sell their homes to a relocation company if they couldn't find a buyer. So when Clark transferred to an Arkansas VA clinic in 2007, Cartus Relocation bought his Clearwater pool home for $542,500 and eventually resold it.

It was a good deal for Clark, who had paid $360,000 for the house in 2001. But it wasn't so good for taxpayers or the VA, which had to pay Cartus a fee of nearly $87,000 to handle the transaction.

The sale was one of several made in the bay area under a nationwide VA "Home Marketing Incentive Award Program'' that wound up costing much more than expected as home prices swooned.

Though relocation programs are common in the private and public sectors, "the problem arises when we're talking about the upper echelons of government and the very expensive properties that go along with it,'' says Peter Sepp, vice president of the National Taxpayers Union, a watchdog group.

"If the house won't sell, you know almost right way there's going to be a substantial loss to the taxpayers,'' Sepp says.

Federal agencies have offered relocation services since the '80s to ease the transfer of skilled, experienced employees from one part of the country to another. The services operate under "fixed-fee'' contracts in which the VA and other agencies pay relocation companies like Cartus a set fee to help employees sell their homes.

In 2002, the VA launched what was intended to be a cost-saving relocation program. Employees who found a qualified buyer within 60 days would get a bonus of up to 2 percent of the sale price, for a maximum of $8,000. The relocation company, which paid the closing costs and real estate commissions, got a fee equal to 11 percent of the sale price.

Employees unable to find a purchaser within 60 days could accept a buyout offer based on appraisals of the home's fair market value. In such cases, the VA paid the relocation company 18.2 percent of the sale price.

Initially, the money-saving program showed dramatic results. Before it started, nearly 60 percent of employees took buyouts. By 2004, with the real estate market soaring, the buyout rate had dropped to 42 percent as more and more sellers found buyers quickly and cashed in on the bonus.

But as the market slowed, buyout offers took on greater appeal.

In 2007, Dr. Daniel Paoli, a Bay Pines anesthesiologist, decided to transfer to the VA medical center in Grand Junction, Colo., because his family was looking for a smaller community with an outdoorsy lifestyle. In the two months their Seminole home was on the market, "we got only one offer, which was substantially less than what we were willing to take,'' says Paoli's wife, Lynn.

The couple, who had paid $234,800 for the house a decade earlier, accepted a buyout of $520,000 and were "very happy" — especially after learning that the price had sunk to $479,900 by the time Cartus Relocation resold the house soon afterward. But though the company took a $40,100 hit on the property, it received a fee of $87,341 — 18.2 percent of the sale price — from the VA.

Cartus took other losses in the Tampa area, including $121,500 on the Largo home of Dr. Jeffrey Kuch, who moved to North Carolina to help start a new VA clinic in Hickory; and $65,000 on the home of Clark, the Bay Pines pharmacist who transferred to the VA medical center in Fayetteville, Ark.

In those cases, too, Cartus' losses were at least partly offset by the higher fees it was entitled to under its VA contract.

Kuch did not respond to requests for comment, and Clark, who recently retired and has moved again, could not be located.

Ultimately, the fees Cartus received from the VA weren't enough to make up for what the company was losing in a down real estate market. Last year, Realogy, the New Jersey-based parent of Cartus, Coldwell Banker and Century 21, announced it was liquidating its fixed-fee government employee relocation business after losing almost $27-million on "at-risk'' homes. As of May 2008, Cartus was stuck with nearly 400 unsold houses across the country.

"Several relocation companies have gotten out of fixed-fee contracts because of some pretty onerous government requirements, like having to immediately pay off the mortgage when they bought the house,'' says Cris Collie, an expert on the relocation industry.

"That required substantial financial backing and in this credit market it's hard to get financial backing. They got out of the government business because the model wasn't working.''

After Cartus pulled out, the VA contracted with Prudential Relocation and pays it even more — 28 percent of the home's sale price. Other companies still dealing with the government charge fees as high as 35 percent "because it's more difficult to sell real estate now,'' Collie says.

Relocation programs have recently come under fire with revelations that the U.S. Postal Service, a semipublic agency that gets no operating money from taxpayers, paid $1.2 million for a lakefront home in South Carolina so an employee could move. A CNN investigation found that in 2007 and 2008 the service bought 13 other houses for more than $1 million each, typically selling them at a loss as the real estate market weakened.

CNN said the transactions were handled by Cartus, which had a "cost-plus'' contract that entitled it to full reimbursement for any loss incurred when it sold a house.

Among the sharpest critics of the relocation programs is Sen. Chuck Grassley, an Iowa Republican who helped goad the Postal Service, the Internal Revenue Service and other agencies into capping costs.

"Every expenditure of tax dollars has to be reasonable (and) it's not reasonable to pay six figures to move one government employee,'' Grassley has complained. "Yet several dozen agencies have done it dozens of times.''

Susan Taylor Martin can be contacted at [email protected]

Can't find a buyer? For a fee, they'll take care of it

Veterans Affairs and U.S. taxpayers had to pay hefty fees when employees unable to find buyers for their homes in a down market instead sold them to Cartus Relocation.

Taxpayers get bill for home sellers' safety net of relocation service 04/10/09 [Last modified: Tuesday, April 14, 2009 1:46pm]
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