A Purchase CEMA is a strategy for reducing your closing costs when buying or selling a condo or house in New York City. A Purchase CEMA is also known as a Purchase Consolidation Extension Modification Agreement.
The Purchase CEMA itself is the act of assigning a seller’s existing mortgage to the buyer. The CEMA reduces the amount of new loan money which must be originated, and this reduces two closing costs: the buyer’s mortgage recording tax bill and the seller’s New York State transfer tax bill.
Calculate the total buyer and seller closing cost savings from a Purchase CEMA Loan using Hauseit’s Interactive Purchase CEMA Savings Calculator.
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The greatest savings will accrue to the buyer in a purchase CEMA loan in NYC.
This is because the buyer will only have to pay the dreaded Mortgage Recording Tax on the new money borrowed in a purchase because the seller’s existing mortgage is assigned to the buyer’s lender at closing and amended to reflect the new terms of the buyer’s mortgage commitment.
This is significant because the mortgage recording tax is one of the most significant closing costs in NYC aside from the equally feared NYC Mansion Tax.
The Mortgage Recording Tax in NYC
Buyers are charged 2.05% of the borrowed amount for new mortgages below $500,000; the rate increases to 2.175% of the borrowed amount for new mortgages over $500,000 for 1-3 family residential units and individual residential condo units. Larger multi-family and commercial properties with new mortgages over $500,000 have to pay 2.8% on the borrowed amount.
Because the mortgage recording tax in NYC is only levied on new borrowings, the buyer will only have the pay the mortgage recording tax on the difference between the new mortgage and the seller’s existing mortgage principal.
Say that a buyer is purchasing a $1 million condominium unit and is using a purchase CEMA mortgage. In this example, the seller has a residual mortgage balance of $400,000. The buyer wants to finance at 80% loan-to-value (LTV) and will therefore need a total loan of $800,000. However, because the seller is able to transfer his existing $400,000 loan balance to the buyer, the buyer as a result only needs to take out a new mortgage of $400,000. The two loans are consolidated under the new borrower, but the buyer is able to pay mortgage recording tax on only $400,000 versus $800,000.
The savings are quite significant in this example for the buyer. The mortgage recording tax on $800,000 would be $17,400 while the mortgage recording tax on $400,000 would only be $8,200. Keep in mind that because the new loan was under $500,000, it was also taxed at a lower rate! That’s $9,200 in savings, or approximately 53% in mortgage recording tax avoided!
Sellers can benefit from a purchase CEMA loan as well by saving on New York State transfer taxes which are normally 0.4% of the sale price.1
Because the seller is assigning his mortgage principal to the new buyer, the seller will only be taxed on the home equity being transferred.
For example, if the seller is in contract to sell his home for $1 million and he has a residual mortgage principal balance of $400,000, he will only owe New York State transfer tax on his $600,000 of home equity instead of the entire $1 million.
In this example, the seller would only owe $2,400 of NYS transfer taxes instead of $4,000, or 40% in savings!
As great as this benefit is, keep in mind that the more costly NYC transfer tax is not affected by the use of a purchase CEMA loan.2
The NYC Real Property Transfer Tax (RPTT) is one of the biggest closing costs in NYC for sellers and can range from 1% to 1.425% of the sale price for residential transactions.
From our example $1 million transaction involving a purchase CEMA loan, you can see that the buyer receives the lion’s share of savings versus the seller.
In our example where the buyer is assuming an existing $400,000 mortgage and borrowing an additional $400,000 through a purchase CEMA mortgage, the buyer saves $9,200 in taxes while the seller only saves $1,600 in taxes. That means the buyer’s savings are 5.75 times the savings of the seller!
1The seller receives a reduction in their New York State transfer taxes through what’s called a “continuing lien deduction.” According to one real estate lawyer we spoken spoke with, this reduction in only possible on the first $500,000, which means a maximum benefit of $2,000 in tax credit.
2From what we’ve heard, it is extremely unlikely that you will be able to save on the NYC portion of transfer taxes. While a few real estate attorneys may think it is theoretically possible, most agree that is very unlikely.
Buyers should work with an experienced buyer’s broker who will be able to convince the seller to agree to a purchase CEMA.
After all, a purchase CEMA loan can only happen with the seller’s approval!
Furthermore, it’s critical to get the seller on-board as early as possible in a transaction to reduce any time drag on your closing date.
Sellers sometimes will resist agreeing to a purchase CEMA mortgage because they feel that they are still on the hook for the original mortgage.
However, an experienced buyer’s agent will be able to explain to the listing agent that this is simply not the case.
Your real estate agent will be able to explain that the seller is completely off the hook through a novation when the existing mortgage is assigned from the seller’s bank to the buyer’s bank.
Furthermore, the concept of novation is very standard and widely used in all sorts of markets, including ones as complex as the credit default swap market where contracts are novated all the time.
Sellers may also protest rightly so that they don’t want to delay closing because of a purchase CEMA loan.*
You can counter this argument by asking to at least let you try. An experienced real estate lawyer who has done purchase CEMAs before will argue on your behalf that your party will show up to the anticipated closing date regardless of whether you can get a purchase CEMA loan done in time or not. Essentially, the NYC closing process will not be hindered by you attempting to secure a purchase CEMA loan.
Furthermore, it really doesn’t hurt the seller at all to at least let you try. In fact, if you do get it done, there will be upside in savings for the seller!
*The additional work required to secure information, obtain permissions and execute extra paperwork for the banks will add approximately four to six weeks to the closing process. Therefore, buyers and sellers should begin the process as early as possible, ideally before the contract is negotiated or signed. The buyer should submit all requests for paperwork, like the seller’s mortgage file, as soon as a purchase contract is signed. The buyer should also get an estimate of additional closing costs as a result of a purchase CEMA mortgage from their lender and attorney as soon as possible.
Having a veteran listing agent is critical if you encounter more complex issues such as a purchase CEMA negotiation. First off, a novice real estate agent won’t even be able to tell you what a CEMA loan is.
Secondly, a green seller’s agent won’t be able to tell you that you can negotiate who gets the savings from a purchase CEMA transaction.
Do you remember that we said earlier that a purchase CEMA can only happen if the seller agrees? You can therefore use the power of your consent as leverage!*
Negotiating to split the savings half and half is a common starting point, though keep in mind what is reasonable will depend on the market demand for your property.
If there are multiple potential buyers for your property and you’re only giving the buyer 5 business days to sign the purchase contract, then you might be able to negotiate from a position of strength and demand 75% of the buyer’s savings. If however your property has been on the market for over 180 days and you finally just got an offer, then you might even consider letting the buyer retain all of the savings as an incentive for the buyer to go through with the deal! This is called an interested party contribution and any beneficiary of a transaction can contribute to help make a deal go through.
*Although a buyer cannot force a seller to assign his or her existing loan, the buyer’s lawyer can negotiate to add in a clause in the contract requiring the seller’s cooperation in executing a purchase CEMA loan. The purchase CEMA is really a modification of an existing contract that the seller has already signed, so absent a clause in the purchase contract with the buyer, the seller has no legal obligation to execute any modification. A purchase CEMA will require the seller’s lender to provide what’s called the “chain of assignments” to the buyer’s lender.
As of December 2017, most banks* in New York City will agree to do a purchase CEMA loan as long as they are active in the mortgage origination business.
Keep in mind that not all major lenders are active in the residential mortgage space and that priorities for banks can change by the minute. As an example, Capital One abruptly existed the residential mortgage market in NYC just last month in November 2017. This was surprising considering that they had just entered the market in recent years with an aggressive marketing effort in New York City.
Keep in mind that a CEMA mortgage refinance is even easier to approve if both the old loan and the new loan are with the same bank.
Most major lenders will not hesitate to do a CEMA if the new loan stays with them.
It’s interesting to note that the seller’s lender will not be able to tell whether a mortgage assignment request is for a purchase CEMA or a CEMA refinance. They will only be able to see which bank to assign the seller’s mortgage to!
Note: A purchase CEMA loan can only happen with the assistance of a seasoned buyer’s real estate attorney who has experience with CEMA transactions and the stewardship of an experienced mortgage broker or bank who is familiar with purchase CEMA mortgages!
*As of this writing, HSBC still does not usually agree to assign its mortgages out to other banks, although the word on the street is that their policy is slowly changing. HSBC is a well-known mortgage lender especially for international buyers and sellers. May 2018 update: We have just heard conflicting reports from an established real estate attorney that the only banks who consistently will agree to a purchase CEMA are Citi and Wells Fargo.
The most common advice you’ll hear regarding attempting a purchase CEMA when buying a sponsor unit is that the sponsor will receive the benefits of any savings as they will typically recoup the previous Mortgage Recording Tax they’ve paid.
However, you can make your offer more competitive to developers by offering to do a purchase CEMA loan and pass the savings onto the developer. The developer will be able to de-leverage their construction loan by assigning a portion of it away through your purchase CEMA.
While a developer will typically not agree to lower the contract price in return for your help, you may be able to receive concessions in closing costs or other items like contributions to the reserve fund, upgrades to furnishings etc.
With that said, everything is negotiable, especially when markets are soft.
We have seen instances where the sponsor has agreed to do a purchase CEMA through what’s known in industry parlance as a splitter loan.
For example, the sponsor’s original $40mm construction loan can be split off in smaller pieces and assigned to separate buyers. Remember that not all sponsors are entitled to recoup their original Mortgage Recording Tax.
It will obviously be harder for a sponsor to agree to this if they are entitled as it will obviously be more expensive for them. However, if the sponsor wasn’t entitled in the first place to recoup any Mortgage Recording Tax, then this is a free incentive they can use to market their projects.
Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.