Leaving Thousands of Dollars on the Table?
Even the most saavy buyer and seller in New York City may not realize a hidden saving that can cost them thousands in unnecessary recording taxes. And better brokers are versed in this loophole and will alert clients of the potential.
Here is how it works. In New York City, there is a tax when a mortgage is recorded against real estate. For example, if a purchaser borrows $1,000,000 from a bank, at closing, that purchaser will have to pay 1.925% of the face value of the mortgage to record it. And the bank, of course, requires that it be recorded. So in addition to all the other closing costs, the borrower will have to pay $19,250 for the privilege of recording his mortgage with the county clerk.
But a provision in the law permits the bank holding a mortgage on a property being sold to “assign” its rights in the mortgage to a successor bank. Not to be confused with assumption of a note, which it’s not, an assignment (technically known as a purchase CEMA) simply changes the name of the secured party – the bank – an permits the new bank to step into the mortgage without the new borrower having to pay a new recording tax. In addition, the seller on the property benefits from a continuing lien deduction which reduces his NYS transfer taxes on the sale. For a $1,000,000 mortgage properly assigned, the seller would save $4,000!
Of course, this only works if several factors are in place, but the potential savings make it worth the time to check. The seller must have a mortgage, the buyer must be financing, and both the seller’s bank and the buyer’s bank must consent to the assignment. There are fees in connection with the process, but if the mortgage is large enough, the savings vastly outweigh the expenses. On the example above, the total savings are $23,250 on a million dollar loan, and with fees typically around $1,500 to $2,000 in total, there is a lot to be saved by going through this exercise. The key is to start early in the process, and use an attorney that knows how to structure it. Waiting until the week before the closing won’t work, as the assignment paperwork takes several weeks to create and must be ordered well in advance so as not to delay the closing.