It's hard to believe that condo buyers or sellers would ever skip a chance to save money on a deal for an apartment, but a classic trick—one that investors often use in the world of commercial real estate—is still flying under the radar of everyday New Yorkers.
Sometimes called a splitter, it's officially known as a Purchase Consolidation Extension and Modification Agreement, or Purchase CEMA. It works like this: if the seller is still paying off her mortgage, and the buyer needs to get a mortgage himself, the buyer can take on the seller's loan, potentially saving both sides thousands of dollars in transaction taxes. It can also be a smart card to play in negotiations—a way for the parties to cut costs without the seller lowering the price.
So why isn't everyone doing it? Well, it's a complicated, lawyer-intensive transaction and it only works in certain situations. "It is a little bit more work for everybody but overall there’s a large amount of savings," explains Larry Trinkwald, an attorney with real estate law firm Katz & Matz.
Check out our primer, below, and see if it's right for you:
HOW MUCH CAN I SAVE?
Normally, buyers have to pay a state tax on the full dollar figure of any mortgage, known as a mortgage recording tax. With a CEMA, however, a buyer is only required to pay the tax on the so-called "new money," the funds that they borrow from the bank, and not the portion that they take on from the seller.
For instance, if you're buying a $1 million dollar property and taking out an $800,000 mortgage, you'd be taxed on the full amount of the loan at a rate of 1.925 percent, totaling $15,400. (For sales under $500,000, the mortgage recording tax rate is 1.8 percent.) But if the seller assigns you their $300,000 mortgage, you'd only pay taxes on the remainder of your financing—$500,000—reducing your bill to $9,625, a savings of nearly $6,000.
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Meanwhile, the seller will save on a portion of their New York state transfer tax, too, via something called a "continuing lien reduction." Jerry Feeney, a real estate attorney who regularly works out CEMAs for clients, explains this as such: if you're the seller assigning off your $300,000 mortgage on a $1 million property, instead of paying transfer tax on the full sale price, you'll only pay taxes on $700,000, or the sale price minus the amount of the mortgage that's getting handed over to the buyer. State transfer tax amounts to $2 per every $500 of the apartment's value, says Feeney. So to calculate your potential savings, just figure out what the tax would have been on the value of your mortgage by dividing it by 500 and multiplying it by 2. For the $300,000 loan, that'd be $1,200. For the final sale, your transfer taxes will come to $2,800 instead of $4,000. Since the savings are so much more significant on the buyer's side, buyers will often offer to throw some of the saved money the seller's way to coax them into a deal.
WHO CAN DO IT?
At a minimum, both parties must have a mortgage—so no all-cash buyers and no sellers who've paid off their home loans.
Beyond that, the arrangement is most common in new construction condos where the building's developer (the sponsor) sells off portions of the loan it used to build the project (the underlying mortgage) to buyers. This is also easier because the developer already has a legal team in place to handle the "splitter."
It also depends on how big each party's mortgage is. Fees for lawyers, banks, and so on can get high (more on this later). "Usually a mortgage of over $400,000 is when this deal starts to be worthwhile, otherwise the fees just eat up the savings," says Feeney.
Also, CEMAs are a non-starter in co-ops, where, because of the structure of ownership, mortgage recording taxes don't apply. They do work with single-family houses, however.
HOW DO I SET IT UP?
"The first step in all this is to make sure that the seller wants to do this," says Corey M. Gindi, a real estate attorney with AGMB. Because of all the different factors involved, "it’s not necessarily a known quantity at the negotiation stage if it will work and what the savings will be," says Feeney. Still, float the idea with the seller early on, he suggests, and when you first go into contract, have a written stipulation that both parties will cooperate.
If you're buying a sponsor unit, you may want to bypass the listing broker, says broker Mike Akerly of the Aguayo team at Halstead Property Development Marketing, since they may not know much about these deals. (Indeed, brokers we chatted with on the subject had heard of CEMAs, but never actually helped facilitate them.) Instead, take your query to the development's project manager, who may well have instructions from the sponsor to set up a CEMA if a buyer requests one.
After that, you'll have to find out if both your bank and the seller's accept this type of deal, and whether documentation on the apartment known as the chain of assignments is available and accurate. There are more problems with this than you'd think. For example, Feeney tells us, if the sellers had a CEMA from the prior owner, they'll need the complete chain of assignments "duly executed and recorded" in order to support the new mortgage. If everything's a go, you'll sign a little extra paperwork at the closing, and walk away with a new apartment and extra money in the bank.
WHAT ARE THE OBSTACLES?
Unfortunately, there are plenty. Some banks won't assign mortgages, and plenty of real estate lawyers hesitate to dive into the extra paperwork. "[CEMAs] are a pain in the ass to do, so people don't want to," says Feeney. "Lawyers have a lot on their plate and this is one more moving part to worry about." If this is something you're interested in pursuing, consider your lawyer's stance on CEMAs before you commit to hiring him or her.
And then there are the fees. Lawyers will charge extra for the service, generally between $600 and $800, according to Feeney. The seller's lender (and sometimes the lender's lawyer) will charge fees on top of that. The total cost will generally add up to a few thousand dollars (hence why you'd only want to do this when there are big ticket savings at stake). "The buyer will pretty much always reimburse the seller for fees on their end, and this factors into early negotiations," Katz & Matz's Trinkwald says.
Between securing information, permission, and extra paperwork from banks, a CEMA can also add around six weeks of extra time to a deal, not exactly appealing if both parties are looking to close in a hurry. To work around this, Feeney advises, your attorney should submit all requests for paperwork as soon as you go into contract, so that by the time closing rolls around, your splitter—if it's successful—will be a done deal.