Inman columnist Bernice Ross posted an excellent article, in response to a Seller’s question, on what to do if your buyer is $5,000 short for the deal. As a New York real estate lawyer, I wanted to add my two cents as to a rather innovative way to close that gap.
New York is one of the only states that imposes a mortgage tax upon a purchaser. Depending on the county and the size of the mortgage, this tax can range anywhere from .8% to 2.8% of the purchase price. This tax can be fairly substantial and severely impact a purchaser’s buying ability. However, there is an exception to the implication of this mortgage tax and that is for continuing liens. Most real estate industry professionals are aware of this exception and refer to it by the document name, CEMA or MECA, which is a necessary part of the process. Also, they are often under the mistaken impression that it is only available in a refinance. Not so…you can effect a CEMA transaction on a purchase. The procedure is as follows: the Seller’s current Lender assigns the Note to the Purchaser’s new Lender and the remaining principal balance (”old money”) is combined with the “new” money, advanced by the Buyer’s Lender, to form a new mortgage in favor of the Purchaser’s Lender. There is no mortgage tax due on the “old money”. So, for example:
Buyer needs a mortgage of $400,000.00 to purchase a home in New York City for $450,000.00. Seller’s remaining principal balance is $300,000.00.
With CEMA Without CEMA
$100,000 x 1.8%= $400,000.00 x 1.8% =
$1,800 mortgage tax $7,200 mortgage tax Savings of $5,400.00!
Also, not only is a Purchaser exempt from paying mortgage tax on the continuing lien, the Seller is exempt from paying transfer tax on that amount as well for a net savings of $4,200.00 to Seller based on the example above.
Total monies saved in our example – a whopping $9,600.00!!! Now, the caveats: not every mortgage lender will assign the note, many charge a fee and there is a fee to prepare the CEMA documents and record them. However, these fees are often miniscule compared to the amount of potential savings. Also, it can take some time to get the assignment documents from the Seller’s Lender so this option needs to be investigated at the outset.
A CEMA is an excellent way to reduce substantial closing costs on both sides and make a deal happen, without other parties taking a cut in their hard-earned fees and commissions. It just takes a little knowhow and some time.
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Great. I have never seen a CEMA at a purchase closing. Something to keep in mind. Time permitting, finding your buyer an extra few grand at closing after fees and expenses seems a worthwhile endeavor.