A purchase CEMA is like one of those Swiss Army utility knives that can seemingly do everything apart from driving your car to work. Well, ok I exaggerate but for sophisticated buyers who know how to use them and sellers who are willing to cooperate, they are an incredibly useful gadget to have in your real estate toolbox.
Here’s how they work: The buyer assumes responsibility for the seller’s existing mortgage on the property and borrows any new money required (i.e., the difference between the outstanding principal on the seller’s mortgage and the amount the buyer actually wants to finance). The buyer consolidates the two notes and two mortgages into one.
How does this help the buyer?
The main benefit is a substantial saving on the buyer’s Mortgage Recording Tax.
This is probably the biggest expense (bar the down payment) a buyer will encounter as part of their closing costs. Buyers are charged 2.05 percent of the borrowed amount for new mortgages below $500,000. The rate increases to 2.175 percent when the amount borrowed surpasses $500,000 for 1-3 family residential units and individual condos units. For larger multi-family and commercial properties with new mortgages over $500,000, the interest rate is 2.8 percent. In NYC, the mortgage recording tax only applies to new borrowings so the buyer will only have to pay mortgage recording tax on the difference between the new mortgage and the seller’s existing mortgage principle when a purchase CEMA is transacted.
For example, this can amount to a savings of $9,200 on a condo with a sales price of $1 million and a residual mortgage balance of $400,000, when the buyer finances at 80 percent LTV. Without a purchase CEMA the mortgage recording tax would be $17,400. However, the mortgage recording tax on $400,000 is $8,200. The savings come from the buyer assuming the original mortgage.
Why would a seller be willing to allow a buyer to assume their mortgage?
The sellers win because they get to save on their transfer taxes. In NY State this is 0.4 percent of the sales price. A property being sold for $1M with an outstanding principal balance of $400,000 will only be liable for taxes on $600,000 — the home equity being transferred — as opposed to $1 million. Thus, the NYS transfer taxes in this example would equate to $2,400 instead of $4000, around 40 percent in savings.
It’s worth noting, however, that the more costly NYC transfer taxes (1-1.425 percent of the sales price) are not affected by the use of a purchase CEMA loan.
Why would lenders and brokers promote this?
The real estate industry would get behind a Purchase CEMA because it is a great marketing tool to consumers, who stand to save thousands of dollars. Thus, more deals will get done and the industry as a whole will benefit.
Another Example of a Purchase CEMA
- Sales price: $1 million
- The seller has an existing unpaid principal of $500,000 and wishes to finance $800,000 of the purchase price
The buyer will do the following:
- Pay the seller $500,000 and assume the seller’s $500,000 mortgage to equal the sales price of $1 million
- Obtain a “new money mortgage” for $300,000
- Consolidate the seller’s $500,000 mortgage and the buyer’s new money mortgage into a single $800,000 loan with a new rate and term which is equal to the rate and term they would have otherwise received with a conventional $800,000 loan.
The consolidated mortgage results in a single lien against the property and the original underlying mortgage is no longer deemed a liability having been modified by a CEMA agreement.
How much do attorneys charge to do this work?
Obviously attorney’s fees can differ widely, often based on the size of the transaction, complexities, and location. It’s usual, though to expect a fee of $400 to $1000 for preparing a purchase CEMA.
Where problems arise in negotiating purchase CEMAs
Problems can arise because one or both parties may be inexperienced in purchase CEMAs and unaware of their benefits. Both parties need to be on board for this type of transaction to work. If a seller declines to let their mortgage be assumed because they think it’s some kind of scam and that they will still be liable, they may balk. This is when having a good seller’s attorney to explain things comes in.
How sellers can negotiate purchase CEMA’s to their advantage
Both parties save money with a purchase CEMA but a buyer saves around 5.75 percent more in mortgage taxes than a seller saves in transfer taxes. A seller can negotiate to split the savings equally. This is a useful strategy in a seller’s market but in a buyer’s market, all such bets are off!
Why purchase CEMA’s can be all-around winners in new developments
If a buyer is using a purchase CEMA when buying a new construction they will need a developer to be on board. In this instance the developer holds all the cards, A purchase CEMA will only be appealing to them if the buyer offers to pass on the savings to the developer. Why would a buyer do this? Because it’s a negotiating strategy. In lieu of passing on savings to the developer they might be willing to help out with the closing costs, contributions to the reserve fund or upgrades to furnishings etc. In a soft market, this strategy could have some pull for buyers.