(Drafted by ERC’s Law and Government Relations Committee)
Prepared by Worldwide ERC® Tax Counsel, Peter K. Scott
Peter K. Scott Associates
Current as of December, 2015
Amended Value Option
After the appraised value has been determined as outlined above, an offer made to EMPLOYEE, and during the period in which PURCHASER’s written offer is outstanding, EMPLOYEE, in order to determine market value more precisely, may seek a potential buyer ("POTENTIAL BUYER") who is willing to pay a price higher than the appraised value. As in the appraised value transaction, EMPLOYEE may choose to enter into a Listing Agreement with a real estate broker he/she selects, in which case EMPLOYEE must include in the Listing Agreement a provision to the effect that the broker will earn no commission if EMPLOYEE sells the home to PURCHASER (the "exclusion clause").
If such a POTENTIAL BUYER is found, PURCHASER will need to verify that his/her written offer is bona fide. If PURCHASER determines that the offer is bona fide, PURCHASER will then amend its appraised value offer to EMPLOYEE to reflect the value (This involves making any necessary adjustments to reflect the differences between the offer from POTENTIAL BUYER and the offer from PURCHASER so that the two offers may be compared on an all-cash basis. This comparison of terms is for the benefit of the employer and assures the reasonableness of the marketplace offers. For example, if EMPLOYEE offered to pay buyer’s points in exchange for a higher purchase offer, then an adjustment would be made to make the offers comparable on an all-cash basis) placed on the home in the arm’s length offer (the "amended value"). This offer from PURCHASER at the higher price is unconditional and is not contingent on any event.
In selling to PURCHASER in an amended value transaction, EMPLOYEE executes and returns to PURCHASER the Contract of Sale and related documents, modified to include the amended value amount in place of the appraised value. As with a sale at the appraised value, upon execution of the Contract of Sale, PURCHASER pays EMPLOYEE a portion or all of EMPLOYEE’s equity in the home (based on the amended value). When EMPLOYEE vacates the home, final equity and adjustments are computed (based on the amended value) and paid. Pursuant to the terms of the Contract of Sale, PURCHASER is the sole beneficial owner of the home and bears all of the burdens of ownership including the responsibility for all expenses related to maintaining and disposing of the home. EMPLOYEE bears no risk that POTENTIAL BUYER will not buy the home or that the home may ultimately sell for less than the amount PURCHASER paid to EMPLOYEE.
The Listing Agreement between the broker and EMPLOYEE is terminated pursuant to the exclusion clause which is an integral part of the Listing Agreement. Since EMPLOYEE has sold the home to PURCHASER, EMPLOYEE has no obligation to pay a commission to the real estate broker.
This structure of the amended value transaction does not permit EMPLOYEE to accept the offer from POTENTIAL BUYER. He/She may not enter into a contract nor sign any document with POTENTIAL BUYER. Accordingly, there is never a binding agreement between EMPLOYEE and POTENTIAL BUYER, either at the time PURCHASER amends its offer or thereafter.
PURCHASER enters into a Listing Agreement with the broker which reflects PURCHASER’s agreement to pay a real estate broker commission in connection with a sale of the home only if and at such time as a sale is in fact closed.
The offer by POTENTIAL BUYER to purchase the home is sent to PURCHASER. If POTENTIAL BUYER is still available and if his/her offer is acceptable to PURCHASER, it is then signed by PURCHASER.
EMPLOYEE exercises no control over PURCHASER’s sale to POTENTIAL BUYER or anyone else. If the anticipated sale by PURCHASER to POTENTIAL BUYER is not closed, this has no effect on PURCHASER’s obligation to pay EMPLOYEE the amended value offer for his/her home.