Unlocking Hidden Savings: The Condo Buyer’s and Seller’s Guide to CEMA


In the bustling world of New York real estate, where every dollar counts, it’s surprising that a money-saving strategy often overlooked by condo buyers and sellers exists. Known as a Purchase Consolidation Extension and Modification Agreement (PCEMA), or simply a “splitter,” this ingenious technique, borrowed from the realm of commercial real estate, can potentially save both parties thousands of dollars in transaction taxes. In this article, we’ll delve into the lesser-known world of PCEMAs and how they can be a game-changer for savvy condo buyers and sellers.

The PCEMA Unveiled

The Purchase Consolidation Extension and Modification Agreement, affectionately termed the PCEMA or splitter, offers a unique opportunity for both buyers and sellers in condo transactions. In essence, it allows a buyer to assume the seller’s existing mortgage, provided the seller is still paying it off. This maneuver can lead to substantial savings on transaction taxes and serve as a powerful negotiating tool.

Calculating the Savings

Typically, condo buyers are required to pay state taxes based on the total mortgage amount, known as the mortgage recording tax. However, a PCEMA changes the game. Buyers are only taxed on the “new money” they borrow from the bank, excluding the portion inherited from the seller’s mortgage.

For instance, if you’re purchasing a $1 million property with an $800,000 mortgage, you’d be subject to a 1.925 percent mortgage recording tax on the entire loan amount, totaling $15,400. However, with a PCEMA, assuming the seller’s $300,000 mortgage would mean you’d only pay taxes on the remaining $500,000 of your financing, reducing your tax bill to $9,625—an impressive savings of nearly $6,000.

Sellers can also benefit from a PCEMA through a mechanism known as a “continuing lien reduction.” Instead of paying transfer tax on the full sale price, sellers only pay taxes on the sale price minus the mortgage amount transferred to the buyer. This translates to significant savings, making PCEMAs attractive to both parties.

Who Can Utilize PCEMAs?

While PCEMAs hold significant potential, they’re not suited for every condo transaction. To leverage this strategy:

  • Both the buyer and seller must have mortgages, excluding all-cash buyers and mortgage-free sellers.
  • PCEMAs are most common in new construction condos where the developer sells portions of the underlying mortgage to buyers. Developers typically have legal teams experienced in handling PCEMAs.
  • The mortgage amount should generally exceed $400,000 to justify the associated fees.

Regrettably, PCEMAs are a no-go in co-op transactions due to the absence of mortgage recording taxes, but they can be employed in single-family house deals.

Setting Up a PCEMA

Implementing a PCEMA involves several steps:

  1. Seller’s Consent: Ensure the seller is willing to explore this option, as the outcome and savings may not be clear at the negotiation stage.

  2. Bank and Documentation Approval: Confirm with both your bank and the seller’s lender if they accept PCEMAs. Verify the availability and accuracy of the chain of assignments documentation, a critical aspect of the process.

  3. Negotiation and Closing: If all conditions align, formalize the arrangement in writing during the contract phase. Expect to complete additional paperwork at the closing.

Overcoming the Challenges

While PCEMAs offer substantial benefits, they do come with their fair share of challenges. Some banks may refuse to assign mortgages, and many real estate lawyers are hesitant due to the extra paperwork involved. Legal fees can also add up, ranging from $600 to $800, and the seller’s lender may impose additional charges.

Furthermore, PCEMAs can extend the timeline of a deal by approximately six weeks, which may not suit parties looking for a quick closing. To mitigate delays, proactive submission of paperwork by your attorney during the contract phase is essential.

In Conclusion

For condo buyers and sellers in New York, the Purchase Consolidation Extension and Modification Agreement (PCEMA) represents a valuable but often overlooked strategy for reducing transaction taxes and enhancing negotiation flexibility. While it may not be suitable for every scenario, the potential for substantial savings makes PCEMAs a powerful tool in the arsenal of those looking to maximize their real estate transactions in the bustling city. To explore the full benefits of a PCEMA, consult with a knowledgeable real estate attorney who can guide you through the intricacies of this money-saving technique.

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