Today’s Market Magnifies the Benefits of CEMA Purchases

In a period where interest rates have sent residential real estate prices through the roof, creative deal structures often emerge to benefit all parties involved. One such procedure that’s gained prominence is the use of Continuation, Extension, and Modification Agreements (CEMAs). This innovative approach authorizes sellers to transfer their current unpaid loan obligations to the buyer, which results in the buyer's loan covering only the difference between the seller's outstanding loan and the agreed purchase price. Today, we will explore the intricacies and benefits of CEMA purchases as well as the common hurdle that scuppers these deals.

To begin with, we must highlight that these agreements require major contractual sophistication. The process goes as follows: 

1. Elements of the seller's current loan terms, such as the outstanding balance and interest rate,     must be evaluated. 

2. Then, the two parties must agree on a purchase price.

3. Rather than satisfying the existing mortgage, the buyer assumes the seller’s loan. This allows the buyer to take advantage of the favorable terms established prior.

4. After that, the buyer's loan amount is calculated as the difference between the seller's outstanding loan balance and the purchase price. The buyer is responsible for repayment of this reduced loan amount.

5. Contractual Agreements: Legal documents, including CEMA contracts and agreements, must be drawn up to formalize the arrangement. These documents outline the terms of the loan transfer and the responsibilities of each party.

From the buyer’s perspective, assumption of the seller’s existing loan waives the fees associated with originating a loan that covers the entire purchase price and grants access to more favorable interest rates and loan terms. The adjusted loan also diminishes the incidence on the New York City mortgage recording tax, which falls at 1.8% for loans under $500,000 and 1.925% for loans that exceed that figure.

For a property valued at $1,000,000, the NYC mortgage tax would tack on an additional $19,250 at closing. In a scenario where the seller has an unpaid loan obligation valued at $700,000, via a CEMA arrangement, an adjusted loan of $300,000 would only incur a $5,400 tax — that’s a $13,850 difference! These savings are typically split between the two parties, which would make $6,925 available for each side’s other costs and fees.

In addition to the mortgage-related savings detailed above, CEMA transactions provide a competitive edge in the market, as the opportunity to transfer existing loan terms can attract potential buyers and expedite the sales process.

Despite those advantages, some lenders are hesitant to transfer their loan obligations to other providers, which can present a roadblock to CEMA purchases. However, real estate professionals can elect to (1) collaborate with more amenable lenders and (2) hire experienced legal counsel to navigate this challenge.

As a whole, CEMAs are a strategic path for enhancing real estate transactions. As the current real estate landscape evolves, CEMA purchases stand as a testament to the creativity and adaptability of professionals within the industry. Here at the Law Office of Marc Scolnick, we have the experience needed to guide you through each step of the CEMA process. For more information, call us today at (718) 554-6445 for a FREE consultation.

This blog is intended to provide information generally and to identify general legal requirements. It is not intended as a form of, or as a substitute for, legal advice. Such advice should always come from in-house or retained counsel. Moreover, if this post in any way seems to contradict the advice of counsel, counsel’s opinion should control over anything written herein. No attorney-client relationship is implied by this blog.