The Purchase CEMA, another little secret. Shhh!
(Consolidation Extension Modification Agreement) is a little-known tactic which allows buyers and sellers to reduce, or even avoid, mortgage and state transfer taxes.
This trick can save buyers up to nearly 2% of their new mortgage on taxes ($20k per million).
And it can save sellers up to 0.65% of the sales price on their state transfer tax.
It's super easy, and yet very few people know to do it!
Example:
Toadstool is selling his castle for $2.5 million.
The new buyer, Luigi, is going to take out a loan for 80% ($2MM).
At closing, Luigi would typically pay a mortgage recording tax of 1.925% on that $2MM ($38,500) out of pocket.
HOWEVER - With a CEMA, which assigns the existing mortgage to the new mortgage, the difference between the two loan amounts ($500k) becomes the new amount on which the buyer has to pay mortgage tax
Mortgage Tax without CEMA - $38,500
Mortgage Tax with CEMA - $9,000
And if Luigi takes a loan that is the same size or smaller than the seller's current loan - No mortgage tax at all!
So now the buyer is stoked (often the seller will want to share in these savings).
But there is even more good news for the seller! NY state transfer tax (which you will recall from previous articles just increased on July 1 2019) would be 0.4% of this $2.5 million sale ($10k). With a CEMA, the amount of the outstanding mortgage can be deducted, so the seller will only pay transfer tax on 500k ($2k).
Another 8k in savings on closing costs!
Now For the DOWNSIDE
(You probably knew this was coming...)
- A CEMA can be denied if there are any issues with the seller's old loan docs or title.
- The seller's bank must be willing to assign its loan (all the big banks will, but some "mom and pop" banks won't).
- The seller must be on board, which usually means they will want half of the benefit. I have even seen these extra savings shared between the parties to revive a stalled negotiation!
- There are fees involved from the attorney, the title company, and the assigning bank. But given the price points we are dealing with here in New York, the savings will be worth it.
- CEMA is for real property only, i.e. condos and townhouses (not co-ops)
REMEMBER these 3 things
1. Hire a Manhattan-based attorney who does only real estate - all day, every day. Your lawyer cousin Vinny in Long Island will only complicate your life.
Actually, do this whether you are doing a CEMA or not - flat fee, drama free, will save time and money.
2. Your attorney should apply for CEMA the moment you have a signed contract. If you have experts guiding the process, it should be a quick approval that will not delay your closing - a common misconception.
3. These tax advantages are very often included in new development contracts as well, but typically the developers take the entire benefit for themselves with a clause buried deep in the sales contract. Since this may be another opportunity for negotiating a discount, never go into new development without your pro!!!
And with this juicy tid- bit of transactional insight, remember why having the RIGHT broker can make all the difference ($$$).
To talk more in person, please do not hesitate to give me a call.
Sincerely,
Teresa