How Buyers and Sellers in NYC can BOTH save on Closing Costs

By Daniel Akerman, Realtor and Listing Specialist with Keller Williams Realty Landmark II.

The Best Kept Secret in NYC Real Estate

Did you know there’s a way that both the buyer AND seller of a property in NYC can save on closing costs without costing each other a dime? If you didn’t, don’t worry. Most real estate professionals and agents in NYC aren’t even aware of it. This article will cover the best kept secret in NYC real estate, which also happens to be a way the buyer and seller of a property can both save thousands on closing costs at no cost or disadvantage to the other party.

Among the many ways NYC real estate is unique and different from real estate everywhere else in the country is the existence of a little-known financing tool that allows some sellers to save thousands of dollars in transfer taxes at closing, while also saving the buyer thousands of dollars on mortgage recording tax. This tool is called a Purchase CEMA.

What Is A Purchase CEMA?

CEMA stands for Consolidation Extension Modification Agreement. And, while that name is confusing, the name holds a clue to how this tool actually works, which you’ll soon see.

In simple terms, a Purchase CEMA allows the seller of the property to assign their existing mortgage to the buyer, who then consolidates that loan with their own to make up the total loan amount. Still sounds confusing? Let’s dig in a bit more.

First let’s understand what happens at a normal closing. Normally, when a seller sells a property, the proceeds of the sale pay off their existing loan (handled at the closing table) and they must pay New York State transfer tax of 0.4% on the total sale price. And, in a normal purchase, the buyer will pay a Mortgage Recording Tax of 2.175% on their total loan amount (which would be 80% of the property value on a typical purchase with 20% down). The mortgage recording tax drops to 2.05% for loans under $500,000, which will become super important in our example later!

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Let’s say a buyer and seller agree on a price of $2,000,000 for the seller’s property. The seller still owes $1,150,000 on the property. The buyer, meanwhile, is putting down $400,000 cash (20%) and taking out a home loan for $1,600,000. In a normal closing, the seller would pay 0.4% in NYS Transfer Tax on the full $2,000,000 sale price – $8,000 – and the buyer would pay 2.175% in Mortgage Recording Tax on a $1,600,000 loan, which comes to $34,800.

However, if a Purchase CEMA is used, the seller would assign their $1,150,000 loan to the buyer, and only has to pay the NYS Transfer Tax on the remaining equity that’s being transferred. Since the buyer took on the $1,150,000 debt, the only equity being transferred is the remaining $850,000 of the property value. So, instead of paying NYS Transfer Tax on the full $2,000,000, the seller only needs to pay NYS Transfer Tax on $850,000, which comes out to $3,400. The seller has saved $4,600 in closing costs.

Similarly, Mortgage Recording Tax only applies to the amount of the new money being borrowed by the buyer. In this example, the buyer needs a total loan of $1,600,000 to buy the property. But the buyer’s bank allowed the buyer to take on the seller’s $1,150,000 existing loan and consolidate that amount into their total $1,600,000 loan. That means that only the remaining $450,000 actually originates from the buyer. And, in this example, the icing on the cake is that this also drops the buyer into the lower bracket for Mortgage Recording Tax, so instead of paying 2.175% on $1,600,000 – for a total of $34,800 – the buyer only needs to pay 2.05% on $450,000, for a total of $9,225 – a total savings of $25,575!

Both the seller and the buyer have saved on their closing costs at no expense to the other party – something very rare indeed in NYC real estate!

Who Can Use A Purchase CEMA?

The first thing to know about Purchase CEMAs is that they are only available in NYC. Secondly, a Purchase CEMA can only be used in the sale or transfer of “real property.” That means condos and 1- to 4-family homes. Co-ops aren’t eligible. (Co-ops aren’t considered real property, but shares in a corporation, so they can’t qualify for a Purchase CEMA. Sorry, co-op owners, you’re out of luck on this one.) Lastly, both the buyer and seller, and the buyer’s lender and seller’s lender, must agree to the Purchase CEMA.

This last item is important and can be one of the roadblocks in using a Purchase CEMA to lower closing costs. As the acronym implies, it’s a mortgage consolidation and assumption, and not all lenders will assign their loans, and not all lenders will assume a previously existing loan. Especially in the current environment where interest rates are changing so rapidly, it’s possible that banks representing buyers might be more hesitant to assume a seller’s loan that had a lower interest rate. In any case, both the seller’s bank and buyer’s bank have to be on board.

When To Use A Purchase CEMA

When it comes to using a Purchase CEMA, the old saying “just because you can, doesn’t mean you should” applies.

It’s best to use when both the buyer and seller are dealing with large loan amounts. It’s important for a seller to keep in mind that initiating the Purchase CEMA will have some fees and costs associated with it, so it’s important that the savings to be had exceed the costs by some margin. Therefore, it makes the most sense for the seller if they’re carrying a significant balance on the property. If a seller’s outstanding loan amount isn’t large enough, the fees associated with using a Purchase CEMA might exceed the actual savings to be had. Likewise, for the buyer, it makes the most sense when they are dealing with a large loan amount, and can significantly lower the loan they are originating by taking on a significant amount from the seller.

A Purchase CEMA also introduces complexity and time to the closing timeline, so if a speedy closing is of high importance to either the buyer or the seller, a Purchase CEMA may not be a good option.

A Purchase CEMA can also be a fantastic way for a seller to attract buyers in a challenging market. If you, as a seller, can get clearance ahead of time from your lender to perform a Purchase CEMA, and can use that in your marketing efforts, it can be just a little added benefit to attract buyers in a market where every little bit can count.

How To Negotiate A Purchase CEMA

First and foremost, whether you’re a seller or buyer, you need to have an agent who is aware of Purchase CEMAs and how they work. It will be more difficult to negotiate this into your purchase or sale if your agent isn’t even familiar with the product and how it works, and whether or not it will work for you in each offer situation.

Secondly, it is going to be something that works on a case-by-case basis since it’s highly dependent on the outstanding balance the seller is carrying on the property. If you’re a buyer buying a home that’s been in the seller’s family for decades and there is little to no outstanding balance on the home, it’s not going to be worthwhile to try to use a Purchase CEMA. If you’re a seller and the buyer is using a minimal loan, or wants to close quickly, a Purchase CEMA might not be in the cards. Again, a good agent who knows the right questions to ask and how to get the necessary information is going to be key.

One thing that often gets negotiated is for the savings to be split 50/50 between buyer and seller. Keen readers may have noticed above that the buyer stands to save far more than the seller in most scenarios, and may be asking “why in the world would a buyer give up a portion of their savings to the seller?” It’s a valid question, and the answer is: for the good of the deal. It’s important to note that for the buyer, it’s essentially “free money.” Sometimes, splitting the savings equally is a win-win that works best for the situation and allows the deal to get done. In all of these instances, having an expert agent, who understands the ins and outs of a Purchase CEMA and who is an experienced and skilled negotiator, will be key in getting the best arrangement possible for you, whether you are a seller or a buyer.

As a listing specialist and Brooklyn/Manhattan specialist on our team, Daniel Akerman has the experience, and knowledge to help sellers with Purchase CEMAs as well as all sorts of creative solutions to suit an individual seller’s situation. If you are considering selling your condo, single family home, or multi-family townhouse and would like to schedule an interview with Daniel or ask questions about Purchase CEMAs and other aspects of the sale process, you can reach out to him directly at daniel@queenshometeam.com

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